# Appraisals for Higher-Priced Mortgage Loans > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2013-30108 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** December 26, 2013 - **Citation:** 78 FR 78520 ## Text DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 34 [Docket No. OCC-2013-0009] RIN 1557-AD70 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 12 CFR Part 226 [Docket No. R-1443] RIN 7100-AD90 BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB-2013-0020] RIN 3170-AA11 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: Supplemental final rule; official staff commentary. SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively, the Agencies) are amending Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation. This final rule supplements a final rule issued by the Agencies on January 18, 2013, which goes into effect on January 18, 2014. The January 2013 Final Rule implements a provision added to TILA by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act or Act) requiring appraisals for “higher-risk mortgages.” For certain mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the January 2013 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. On July 10, 2013, the Agencies proposed amendments to the January 2013 Final Rule implementing these requirements. Specifically, the Agencies proposed exemptions from the rules for transactions secured by existing manufactured homes and not land; certain streamlined refinancings; and transactions of $25,000 or less. DATES: This final rule is effective on January 18, 2014. Alternative provisions regarding manufactured home loans in amendatory instructions 3b and 5f (12 CFR 34.203(b)(8) and 12 CFR part 34, appendix C, 34.203(b)(8) entry OCC), 12 CFR 226.43(b)(8) Board, and 12 CFR 1026.35(c)(2)(viii) CFPB, are effective July 18, 2015. FOR FURTHER INFORMATION CONTACT: OCC: Robert L. Parson, Appraisal Policy Specialist, at (202) 649-6423, G. Kevin Lawton, Appraiser (Real Estate Specialist), at (202) 649-7152, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special Counsel, Legislative & Regulatory Activities Division, at (202) 649-5490, Krista LaBelle, Special Counsel, Community and Consumer Law Division, at (202) 649-6350, or 400 Seventh Street SW., Washington, DC 20219. Board: Lorna Neill or Mandie Aubrey, Counsels, Division of Consumer and Community Affairs, at (202) 452-3667, Carmen Holly, Supervisory Financial Analyst, Division of Banking Supervision and Regulation, at (202) 973-6122, or Kara Handzlik, Counsel, Legal Division, at (202) 452-3852, Board of Governors of the Federal Reserve System, Washington, DC 20551. FDIC: Beverlea S. Gardner, Senior Examination Specialist, Risk Management Section, at (202) 898-3640, Sandra S. Barker, Senior Policy Analyst, Division of Consumer Protection, at (202) 898-3615, Mark Mellon, Counsel, Legal Division, at (202) 898-3884, Kimberly Stock, Counsel, Legal Division, at (202) 898-3815, or Benjamin Gibbs, Senior Regional Attorney, at (678) 916-2458, Federal Deposit Insurance Corporation, 550 17th St, NW., Washington, DC 20429. NCUA: John Brolin, Staff Attorney, 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. 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. FHFA: Robert Witt, Senior Policy Analyst, at 202-649-3128, or Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of General Counsel, (202) 649-3078, Federal Housing Finance Agency, 400 Seventh Street SW., Washington, DC 20024. SUPPLEMENTARY INFORMATION: I. Summary of the Final Rule As discussed in detail under part II of this SUPPLEMENTARY INFORMATION , section 1471 of the Dodd-Frank Act created new TILA section 129H, which establishes special appraisal requirements for “higher-risk mortgages.” 15 U.S.C. 1639h. The Agencies adopted a final rule on January 18, 2013 (January 2013 Final Rule; 78 FR 10368 (Feb. 13, 2013)) to implement these requirements (adopting the term “higher-priced mortgage loans” (HPMLs) instead of “higher-risk mortgages”). The Agencies believe that several additional exemptions from the new appraisal rules are appropriate. Specifically, the Agencies are adopting exemptions for certain types of refinancings and transactions of $25,000 or less (indexed for inflation). The Agencies are also adopting a temporary exemption of 18 months (until July 18, 2015) for all loans secured in whole or in part by a manufactured home. Starting on July 18, 2015, transactions secured by a new manufactured home and land will be exempt from the requirement that the appraisal include a physical inspection of the interior of the property; transactions secured by an existing (used) manufactured home and land will not be exempt from the rules; and transactions secured solely by a manufactured home and not land will be exempt from the rules if the creditor gives the consumer one of three types of information about the home's value, discussed in more detail below. The Agencies are not adopting the proposed definition of “business day” that would have differed from the definition used in the January 2013 Final Rule. A revision to the exemption for “qualified mortgages” is adopted that is similar to the proposed revision, as well as a few proposed non-substantive technical corrections. A. Exemption for Extensions of Credit of $25,000 or Less The Agencies are adopting without change the proposed exemption from the HPML appraisal rules for extensions of credit of $25,000 or less, indexed every year for inflation. B. Exemption for Certain Refinancings The Agencies also are adopting an exemption from the HPML appraisal rules for certain types of refinancings with characteristics common to refinance products often referred to as streamlined refinances. Consistent with the proposal, the final rule exempts a refinancing where the holder of the credit risk of the existing obligation remains the same on the refinancing. The final rule includes revised terminology and additional examples in Official Staff Commentary to clarify the meaning of this requirement. In addition, the periodic payments under the refinance loan must not result in negative amortization, cover only interest on the loan, or result in a balloon payment. Finally, the proceeds from the refinance loan may only be used to pay off the existing obligation and to pay closing or settlement charges. C. Exemption for Transactions Secured in Whole or in Part by a Manufactured Home All loans secured in whole or in part by a manufactured home will be exempt from the HPML appraisal rules for 18 months, until July 18, 2015. For loan applications received on or July 18, 2015, the following changes will apply: Transactions secured by a new manufactured home and land will be exempt from the requirement that the appraisal include a physical inspection of the interior of the property, but will be subject to all other HPML appraisal requirements. Transactions secured by an existing (used) manufactured home and land will not be exempt from the rules. Transactions secured solely by a manufactured home and not land will be exempt from the rules if the creditor gives the consumer one of three types of information about the home's value: • The manufacturer's invoice of the unit cost (for a transaction secured by a new manufactured home). • An independent cost service unit cost. • A valuation conducted by an individual who has no financial interest in the property or credit transaction, and has training in valuing manufactured homes. 1 An example would be an appraisal conducted according to procedures approved by the U.S. Department of Housing and Urban Development (HUD) for existing (used) home-only transactions. 1 As discussed further in the section-by-section analysis, the Agencies are adopting the definition of “valuation” at 12 CFR 1026.42(b)(3): “ `Valuation' means an estimate of the value of the consumer's principal dwelling in written or electronic form, other than one produced solely by an automated model or system.” D. Effective Date The temporary exemption for manufactured home loans and the exemptions for certain refinancings and loans of $25,000 or less will be effective on January 18, 2014, the same date on which the January 2013 Final Rule will become effective. The Agencies find under 5 U.S.C. 553(d)(1) that these provisions may be made effective less than 30 days after publication in the Federal Register because these provisions “grant[] or recognize[] an exemption or relieve[] a restriction.” 5 U.S.C. 553(d)(1). The modified exemptions for loans secured by manufactured homes will be effective on July 18, 2015. II. Background In general, TILA seeks to promote the informed use of consumer credit by requiring disclosures about its costs and terms, as well as other information. 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. 2 15 U.S.C. 1604(a). 2 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. 15 U.S.C. 5519; 15 U.S.C. 1604(i). For most types of creditors and most provisions of TILA, 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 January 2013 Final Rule, the new appraisal section of TILA addressed in the January 2013 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 by OCC regulations and the Board's Regulation Z (for creditors overseen by the OCC and the Board, respectively). See 12 CFR parts 34 and 164 (OCC regulations) and part 226 (the Board's Regulation Z); see also § 1026.35(c)(7) and 78 FR 10368, 10415 (Feb. 13, 2013). The Bureau's, the OCC's, and the Board's versions of the January 2013 Final Rule and corresponding official interpretations are substantively identical. The FDIC, NCUA, and FHFA adopted the Bureau's version of the regulations under the January 2013 Final Rule. 3 3 See NCUA: 12 CFR 722.3; FHFA: 12 CFR part 1222. The FDIC adopted the Bureau's version of the regulations, but did not adopt a cross-reference to the Bureau's regulations in FDIC regulations. See 78 FR 10368, 10370 (Feb. 13, 2013). The Dodd-Frank Act 4 was signed into law on July 21, 2010. Section 1471 of the Dodd-Frank Act's Title XIV, Subtitle F (Appraisal Activities), added 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: 4 Public Law 111-203, 124 Stat. 1376 (Dodd-Frank Act). • Obtaining a written appraisal performed by a certified or licensed appraiser who conducts an appraisal that includes a physical inspection of the interior of the property and is performed in compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), and the regulations prescribed thereunder. • 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 that extends 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 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” 5 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— 5 See Dodd-Frank Act section 1401; TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5) (defining “residential mortgage loan”). 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). • 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 “jumbo” loans ( i.e., 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 “jumbo” loan ( i.e., 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. III. Summary of the Rulemaking Process The Agencies issued proposed regulations for public comment on August 15, 2012, that would have implemented the Dodd-Frank Act higher-risk mortgage appraisal provisions (2012 Proposed Rule). 77 FR 54722 (Sept. 5, 2012). This rule was open for public comment for 60 days (until October 15, 2012). After consideration of public comments, the Agencies issued the January 2013 Final Rule on January 18, 2013. The Final Rule was published in the Federal Register on February 13, 2013, and is effective on January 18, 2014. See 78 FR 10368 (Feb. 13, 2013). The preamble to the January 2013 Final Rule stated that the Agencies would consider exemptions for three additional types of transactions that commenters requested the Agencies consider: (1) smaller dollar loans; (2) streamlined refinance loans; and (3) loans secured by “existing” (used) manufactured homes. On July 10, 2013, the Agencies issued proposed amendments to the January 2013 Final Rule the 2013 Supplemental Proposed Rule to exempt these transactions from the HPML appraisal requirements. (2013 Supplemental Proposed Rule; 78 FR 48548 (Aug. 8, 2013)). The 2013 Supplemental Proposed Rule sought comment on whether any of these exemptions should be conditioned on the creditor meeting an alternative standard to estimate the value of the property securing the transaction and providing that information to the consumer. Comment also was sought on the appropriate scope of, and possible conditions on, the exemption in the January 2013 Final Rule for loans secured by new manufactured homes. The 2013 Supplemental Proposed Rule was open for public comment for 60 days (until Sept. 9, 2013). To inform the Agencies in drafting the January 2013 Final Rule as well as the 2012 Proposed Rule, the Agencies conducted a series of public outreach meetings in January and February of 2012. 6 Agency staff conducted additional public outreach in the first half of 2013 to inform the Agencies in drafting the 2013 Supplemental Proposed Rule. In addition to reviewing public comments on the 2013 Supplemental Proposed Rule, Agency staff conducted limited public outreach in September and October to inform the Agencies in drafting this final rule. 7 6 Information about these meetings is available at http://www.federalreserve.gov/newsevents/rr-commpublic/industry_meetings_20120210.pdf. 7 Information about these meetings is available at http://www.federalreserve.gov/newsevents/rr-commpublic/industry-meetings-20131001.pdf. A. January 2013 Final Rule 1. Loans Covered To implement the statutory definition of “higher-risk mortgage,” the January 2013 Final Rule used the term “higher-priced mortgage loan” or 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 used the term HPML to refer generally to the loans that could be subject to the January 2013 Final Rule because they are closed-end credit and meet the statutory rate triggers, but the Agencies separately exempted several types of HPML transactions from the rule. 8 The term “higher-risk mortgage” generally 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. 9 Specifically, consistent with TILA section 129H, a loan is an HPML under the January 2013 Final Rule if the APR exceeds the APOR by 1.5 percentage points for first lien conventional or conforming loans, 2.5 percentage points for first lien jumbo loans, and 3.5 percentage points for subordinate lien loans. 10 8 As noted further below, 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). 9 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. 10 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 TILA, the January 2013 Final Rule included an exemption for “qualified mortgages,” as 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). 11 15 U.S.C. 1639c. For revisions to this exemption, see § 1026.35(c)(2)(i) and accompanying section-by-section analysis below. 11 78 FR 6408 (Jan. 30, 2013). In addition, the January 2013 Final Rule excludes from its coverage the following classes of loans: (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. 2. Requirements That Apply to All Appraisals Performed for Non-Exempt HPMLs Consistent with TILA, the January 2013 Final Rule allows a creditor to originate an HPML that is not exempt from the January 2013 Final Rule 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 visit of the interior of the property. Also consistent with TILA, the following requirements also apply with respect to HPMLs subject to the January 2013 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 business days before consummation. 3. Requirement To Obtain an Additional Appraisal in Certain HPML Transactions In addition, the January 2013 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 loan will finance the purchase of the consumer's principal dwelling and there has been an increase in the purchase price from a prior acquisition that took place within 180 days of the current purchase. TILA section 129H(b)(2)(A), 15 U.S.C. 1639h(b)(2)(A). In the January 2013 Final Rule, using their exemption authority, the Agencies set 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. Finally, in the January 2013 Final Rule the Agencies expressed their intention to publish a supplemental proposal to request comment on possible exemptions for streamlined refinance programs and smaller dollar loans, as well as loans secured by certain other property types, such as existing manufactured homes. See 78 FR 10368, 10370 (Feb. 13, 2013). Accordingly, the Agencies published the 2013 Supplemental Proposed Rule. B. 2013 Supplemental Proposed Rule Based on comments received on the 2012 Proposed Rule and additional research and outreach, the Agencies believed that several additional exemptions from the new appraisal rules might be appropriate. Specifically, in the 2013 Supplemental Proposed Rule, the Agencies proposed exemptions for transactions secured by an existing manufactured home and not land, certain types of refinancings, and transactions of $25,000 or less (indexed for inflation). The Agencies solicited comment on these proposed exemptions, as well as on the scope and possible conditions on the exemption in the January 2013 Final Rule for loans secured by a new manufactured home (with or without land). In addition, the Agencies proposed a different definition of “business day” than the definition used in the Final Rule, as well as a few non-substantive technical corrections. 1. Proposed Exemption for Transactions Secured Solely by an Existing Manufactured Home and Not Land The Agencies proposed to exempt transactions secured solely by an existing (used) manufactured home and not land from the HPML appraisal requirements. The Agencies sought comment on whether an alternative valuation type should be required. The Agencies proposed to retain coverage of loans secured by existing manufactured homes and land. The Agencies also proposed to retain the exemption for transactions secured by new manufactured homes, but sought further comment on the scope of this exemption and whether certain conditions on the exemption might be appropriate. 2. Proposed Exemption for Certain Refinancings In addition, the Agencies proposed to exempt from the HPML appraisal rules certain types of refinancings with characteristics common to refinance programs that offer “streamlined” refinances. Specifically, the Agencies proposed to exempt an extension of credit that is a refinancing where the owner or guarantor of the refinance loan is the current owner or guarantor of the existing obligation. The periodic payments under the refinance loan could not have resulted in negative amortization, covered only interest on the loan, or resulted in a balloon payment. Further, the proceeds from the refinance loan could have been used only to pay off the outstanding principal balance on the existing obligation and to pay closing or settlement charges. 3. Proposed Exemption for Extensions of Credit of $25,000 or Less Finally, the Agencies proposed an exemption from the HPML appraisal rules for extensions of credit of $25,000 or less, indexed every year for inflation. 4. Effective Date The Agencies' Proposal The Agencies intended that exemptions adopted as a result of the 2013 Supplemental Proposed Rule would be effective on January 18, 2014, the same date on which the January 2013 Final Rule will become effective. The Agencies requested comment on a number of conditions that might be appropriate to require creditors to meet to qualify for the proposed exemptions. The Agencies stated that, if the Agencies adopted any conditions on an exemption, the Agencies would consider establishing a later effective date for those conditions to allow creditors sufficient time to adjust their compliance systems, if necessary. The Agencies requested comment on the need for a later effective date for any condition on a proposed exemption. Public Comments Most public commenters did not directly address whether the implementation date for any conditions on proposed exemptions should be extended beyond January 18, 2014. Four State credit union trade associations, a national credit union trade association, two State banking trade associations, a small mortgage lender, and a community banking trade association supported delaying the implementation date for all of the HPML appraisal requirements. Two credit union trade associations recommended that, if conditions were placed on exemptions in the final rule, the Agencies should delay the implementation date to allow creditors sufficient time to adjust their systems to comply with the conditions. One commenter stated that the uncertainty regarding potential amendments to the January 2013 Final Rule made it difficult to prepare for compliance by the January 18, 2014 implementation date. Some commenters stated that the difficulty of complying with the rules by January 2014 was compounded by the multiple mortgage rules recently issued by the Bureau that are also due to become effective in January 2014, and one pointed out further that several of these rules were amended after being finalized in January 2013. The small mortgage lender noted that creating and implementing compliance programs is resource intensive, and that it is more difficult for small businesses to implement such programs than for large lenders. These commenters suggested that the Agencies delay the implementation date by varying amounts of time, from six to 18 months. As discussed in the section-by-section analysis of § 1026.35(c)(2)(ii), several commenters focused on the implementation date of HPML appraisal rules for loans secured by manufactured homes. Manufactured housing industry commenters—two lenders and a State trade association—believed that the Agencies should delay issuing final rules on valuations for covered manufactured home loans until further study on manufactured housing valuations. The manufactured housing lenders noted that requiring appraisals in manufactured housing lending would be a significant change for the manufactured housing industry, requiring time to negotiate contracts with appraisal management companies and to develop new disclosures that contain the appraised value, among other changes. The State manufactured housing industry trade association commenter recommended that the Agencies issue a more concrete proposal regarding manufactured housing valuations and that the effective date be at least two years after the publication of final rules. As also discussed further in the section-by-section analysis of § 1026.35(c)(2)(ii), a national association of owners of manufactured homes, a consumer advocate group, two affordable housing organizations and a policy and research organization believed that appraisal rules applicable to transactions secured by manufactured homes (both new and existing) and land should be effective “quickly” to facilitate the development of appropriate appraisal methods for these transactions by increasing the demand for appraisals. They suggested that rules eliminating any exemptions in the January 2013 Final Rule ( i.e., the exemptions for loans secured by new manufactured homes, with or without land) should go into effect six months after the general effective date of January 2014, if possible, and in any event no later than January 2016. These commenters also recommended that loans secured solely by a manufactured home and not land be subject to a temporary exemption until no later than January 2016. In the intervening time, the commenters suggested that the Agencies convene a working group of stakeholders to develop standards for appraising manufactured homes. Final Rule The Agencies are adopting an effective date of January 18, 2014 for most provisions of this supplemental final rule, to correspond with the effective date of January 18, 2014 for the January 2013 Final Rule, which is prescribed by statute. Specifically, the Dodd-Frank Act requires that regulations required under Title XIV of the Dodd-Frank Act, which include the HPML appraisal provisions, “be prescribed in final form before the end of the 18-month period beginning on the designated transfer date,” which was July 21, 2011. 12 Accordingly, the Agencies issued the January 2013 Final Rule within 18 months of the designated transfer date, on January 18, 2013. 13 The Dodd-Frank Act also requires that regulations required under Title XIV “take effect not later than 12 months after the date of issuance of the regulations in final form.” 14 Twelve months after the date of issuance of the HPML appraisal rules is January 18, 2014. Thus, the January 2013 Final Rule, as amended by this supplemental final rule, must go into effect on January 18, 2014, and will apply to applications received by the creditor on or after that date. 12 Designated Transfer Date, 75 FR 57252 (Sept. 20, 2010). 13 Sections 1400(c) and 1471 of the Dodd-Frank Act, in title XIV. 14 Section 1400(c) of the Dodd-Frank Act, in title XIV. The Agencies have authority to exempt certain classes of loans from the HPML appraisal rules if the exemption is determined to be “in the public interest” and to “promote[] the safety and soundness of creditors.” TILA section 129H(b)(4)(B); 15 U.S.C. 1639h(b)(4)(B). As discussed further in the section-by-section analysis of § 1026.35(c)(2)(ii), the Agencies believe that a temporary exemption of 18 months for transactions secured by a manufactured home meets these two exemption criteria. The temporary exemptions for loans secured by a manufactured home will go into effect on January 18, 2014, the effective date of the 2013 January Final Rule. Modified exemptions for certain types of manufactured home transactions will be effective on July 18, 2015, and applicable to applications received by the creditor on or after that date. IV. Legal Authority TILA section 129H(b)(4)(A), added by the Dodd-Frank Act, authorizes 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). V. Section-by-Section Analysis For ease of reference, unless otherwise noted, the SUPPLEMENTARY INFORMATION refers to the section numbers that will be published in the Bureau's Regulation Z at 12 CFR 1026.35(c). As explained in the January 2013 Final Rule, separate versions of the regulations and accompanying commentary were issued as part of the January 2013 Final Rule by the OCC, the Board, and the Bureau, respectively. 78 FR 10367, 10415 (Feb. 13, 2013). No substantive difference among the three sets of rules was intended. The NCUA and FHFA adopted 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 adopted the rules as published in the Bureau's Regulation Z at 12 CFR 1026.35(a) and (c), but did not cross-reference the Bureau's Regulation Z. Accordingly, in this Federal Register notice, the revisions to the January 2013 Final Rule adopted by the Agencies in this supplemental final rule are separately published in the HPML appraisal regulations of the OCC, the Board, and the Bureau. No substantive difference among the three sets of revised rules is intended. Section 1026.2 Definitions and Rules of Construction 2(a) Definitions 2(a)(6) Business Day The Agencies' Proposal The term “business day” is used with respect to two requirements in the January 2013 Final Rule. First, the January 2013 Final Rule requires the creditor to provide the consumer with a disclosure that “shall be delivered or placed in the mail not later than the third business day after the creditor receives the consumer's application for a higher-priced mortgage loan” subject to § 1026.35(c). § 1026.35(c)(5)(i) and (ii). Second, the January 2013 Final Rule requires the creditor to provide to the consumer a copy of each written appraisal obtained under the January 2013 Final Rule “[n]o later than three business days prior to consummation of the loan.” § 1026.35(6)(i) and (ii). The Agencies proposed to define “business day” for these requirements to mean “all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.” § 1026.2(a)(6). The Agencies proposed this definition for consistency with disclosure timing requirements under both the existing Regulation Z mortgage disclosure timing requirements and the Bureau's proposed rules for combined mortgage disclosures under TILA and the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. 2601 et seq. (2012 TILA-RESPA Proposed Rule). See § 1026.19(a)(1)(ii) and (a)(2); see also 77 FR 51116 (Aug. 23, 2012) ( e.g., proposed § 1026.19(e)(1)(iii) (early mortgage disclosures) and (f)(1)(ii) (final mortgage disclosures). Under existing Regulation Z, early disclosures must be delivered or placed in the mail not later than the seventh business day before consummation of the transaction; if the disclosures need to be corrected, the consumer must receive corrected disclosures no later than three business days before consummation (the consumer is deemed to have received the corrected disclosures three business days after they are mailed or delivered). See § 1026.19(a)(2)(i)-(ii). For these purposes, “business day” is defined as quoted previously. One reason that the Agencies proposed to align the definition of “business day” under the January 2013 Final Rule with the definition of “business day” for these disclosures was to avoid the creditor having to provide the copy of the appraisal under the HPML rules and corrected Regulation Z disclosures at different times (because different definitions of “business day” would apply). The proposed definition of “business day” also was intended to align with the definition of “business day” for the timing requirements of mortgage disclosures under the 2012 TILA-RESPA Proposal. See proposed § 1026.2(a)(6). The 2012 TILA-RESPA Proposal would have required the creditor to deliver the early mortgage disclosures “not later than the third business day after the creditor receives the consumer's application.” Proposed § 1026.19(e)(1)(iii). The 2012 TILA-RESPA Proposal would have required the final mortgage disclosures to have been provided “not later than three business days before consummation.” Proposed § 1026.19(f)(1)(ii). For these purposes, “business day” would have been defined as the Agencies proposed to define “business day” in the 2013 Supplemental Proposed Rule. The Agencies stated in the 2013 Supplemental Proposed Rule that, if the Bureau adopted this aspect of the 2012 TILA-RESPA Proposal, then adopting the proposed definition of “business day” for the final HPML appraisals rule would ensure that the HPML appraisal notice and the early mortgage disclosures have to be provided at the same time (no later than three “business days” after the creditor receives the consumer's application). The Agencies further stated that this would also ensure that the copy of the HPML appraisal and the final mortgage disclosures would have to be provided at the same time (no later than three “business days” before consummation). The proposal to align these timing requirements was intended to facilitate compliance and reduce consumer confusion by reducing the number of disclosures that consumers might receive at different times. Public Comments The Agencies received fourteen comments on the proposed revision to the definition of “business day,” with most commenters supporting the revised definition. A community banking trade association, an individual, two State banking trade associations, a mortgage banking trade association, four State credit union trade associations, one national credit union trade association, and a financial holding company believed that revising the definition for consistency with other disclosure timing requirements—particularly those of the combined mortgage disclosures under the 2012 TILA-RESPA Proposed Rule—would reduce regulatory burden and facilitate compliance. The State banking trade associations and the financial holding company believed that making these disclosure requirements consistent with the timing for other mortgage disclosures could also result in better awareness and understanding of disclosures by consumers and reduce consumer confusion. One of the State banking trade associations also believed that the proposed definition provided more certainty for creditors than the definition of business day in the January 2013 Final Rule, which refers to days on which a creditor's offices are open to the public for carrying on substantially all of its business functions. See § 1026.2(a)(6). A State credit union trade association, a national credit union trade association, and a community bank commenter, however, opposed the proposed revised definition of business day, instead favoring the definition in the January 2013 Final Rule. The national credit union trade association and community bank commenter stated that many credit unions and community banks are not open for most or any of their business functions on Saturdays. They argued that including Saturday as a business day would increase their regulatory burden. Final Rule As noted, the term “business day” is used with respect to two requirements in the January 2013 Final Rule. See §§ 1026.35(c)(5)(ii) and (c)(6)(ii). The amendments to the January 2013 Final Rule adopted in this rule add a third use of the term “business day.” As discussed more fully in the section-by-section analysis of § 1026.35(c)(2)(ii)(C), transactions secured solely by a manufactured home and not land that are consummated on or after July 18, 2015, will be exempt from the HPML appraisal rules if the creditor obtains and gives to the consumer a copy of one of three types of valuation information “no later than three business days prior to consummation of the transaction.” § 1026.35(c)(2)(ii)(C). For two reasons, the Agencies are not adopting the proposed definition of “business day” and instead are retaining the definition of “business day” adopted in the January 2013 Final Rule: “a day on which the creditor's offices are open to the public for carrying on substantially all of its business functions.” § 1026.2(a)(6). First, the Agencies' goal is to provide consistency with the timing requirements of other mortgage disclosures. Most public commenters who supported the Agencies' proposed amendment to the definition of “business day” used in the January 2013 Final Rule did so on the basis of favoring consistency with the timing requirements of other mortgage disclosures, particularly the combined TILA-RESPA early and final mortgage disclosures. The proposed definition, however, would result in inconsistency because the Bureau did not adopt the definition of “business day” that includes Saturdays and excludes enumerated Federal holidays for the early mortgage disclosures and final mortgage disclosures proposed in the 2012 TILA-RESPA Proposed Rule. Instead, the definition of “business day” referring to days on which the creditor's offices are open to the public will be used for the timing requirement for those disclosures. 15 For the reasons discussed in the 2013 Supplemental Proposed Rule, the Agencies believe that the timing requirement for creditors to give consumers the disclosure required after application should be aligned with the TILA-RESPA early disclosures and that the timing requirement for creditors to give consumers copies of appraisals and other valuation information should generally be aligned with the timing requirement for the TILA-RESPA mortgage disclosures. 15 See Bureau's 2013 TILA-RESPA Final Rule (issued Nov. 20, 2013) at p. 147 et seq., available at http://files.consumerfinance.gov/f/201311_cfpb_final-rule-preamble_integrated-mortgage-disclosures.pdf. Second, the Agencies heard from commenters that many credit unions and community banks are not open for most or any of their business functions on Saturdays. As adopted, the final rule will address these concerns. Section 1026.35 Requirements for Higher-Priced Mortgage Loans 35(c) Appraisals for Higher-Priced Mortgage Loans 35(c)(1) Definitions The Agencies are adopting three new definitions for purposes of the HPML appraisal rules in § 1026.35(c)—“credit risk,” “manufacturer's invoice,” and “new manufactured home”—and re-numbering definitions adopted in the January 2013 Final Rule accordingly. 35(c)(1)(ii) Section 1026.35(c)(1)(ii) defines “credit risk” for purposes of § 1026.35(c) to mean the financial risk that a loan will default. The Agencies are adopting a definition of “credit risk” to provide greater clarity regarding certain aspects of the exemption for certain refinance transactions, discussed in more detail in the section-by-section analysis of § 1026.35(c)(2)(vii). Under § 1026.35(c)(2)(vii), a covered HPML refinance is eligible for an exemption if one of several criteria are met, including that either (1) the credit risk of the refinance loan is retained by the person that held the credit risk on the existing obligation or (2) the refinance loan is owned, insured or guaranteed by the same Federal government agency that owned, insured or guaranteed the existing obligation. See § 1026.35(c)(2)(vii)(A) and comment 35(c)(2)(vii)(A)-1. 35(c)(1)(iv) Section 1026.35(c)(1)(iv) defines “manufacturer's invoice” to mean a document issued by a manufacturer and provided with a manufactured home to a retail dealer that separately details the wholesale (base) prices at the factory for specific models or series of manufactured homes and itemized options (large appliances, built-in items and equipment), plus actual itemized charges for freight from the factory to the dealer's lot or the home site (including any rental of wheels and axles) and for any sales taxes to be paid by the dealer. The invoice may recite such prices and charges on an itemized basis or by stating an aggregate price or charge, as appropriate, for each category. This definition is adopted from the definition of “manufacturer's invoice” in HUD regulations regarding Title I loans insured by the Federal Housing Administration (FHA) that are secured by a new manufactured home and not land, at 24 CFR 201.2. The Agencies believe that defining the term “manufacturer's invoice” to mirror the definition in HUD regulations is appropriate for consistency; the January 2013 Final Rule defines the term “manufactured home” by referencing HUD regulations. See § 1026.35(c)(1)(iii). The only aspect of the HUD definition of “manufacturer's invoice” not adopted in the final rule is a provision requiring manufacturer's certification. The Agencies do not have data regarding how often manufacturer's invoices outside of the Title I program include the manufacturer's certification prescribed in HUD regulations at 24 CFR 201.2 that apply to the Title I program. Thus, the Agencies are concerned that requiring this certification at this time might create unanticipated compliance challenges. The final rule defines “manufacturer's invoice” to ensure that creditors understand § 1026.35(c)(2)(viii)(B)( 1 ), which goes into effect on July 18, 2015. Under § 1026.35(c)(2)(viii)(B)( 1 ), a covered HPML secured by a new manufactured home and not land is exempt from the HPML appraisal requirements of § 1026.35(c) if the creditor provides the consumer with a copy of a manufacturer's invoice for the manufactured home securing the transaction. Further details regarding this provision and other valuation-related documents that a creditor could give the consumer to qualify for the exemption are discussed in the corresponding section-by-section analysis. 35(c)(1)(vi) Section 35(c)(1)(vi) defines “new manufactured home” to mean a manufactured home that has not been previously occupied. The Agencies believe that adopting a definition of “new manufactured home” will help prevent confusion among creditors of manufactured home transactions. The final rule differentiates between loans secured by new and existing (used) manufactured homes in the application of certain requirements, so a clear definition is intended to facilitate compliance. See § 1026.35(c)(2)(viii). 35(c)(2) Exemptions The Agencies are adopting new Official Staff Commentary to § 1026.35(c)(2). Specifically, comment 35(c)(2)-1 clarifies that § 1026.35(c)(2) provides exemptions solely from the HPML appraisal requirements in Regulation Z (§ 1026.35(c)(3) through (6)). The comment states that institutions subject to the requirements of title XI of FIRREA and its implementing regulations that make a loan qualifying for an exemption under section 1026.35(c)(2) must still comply with the appraisal and evaluation requirements under FIRREA and its implementing regulations. The Agencies are adopting this comment to ensure that creditors subject to FIRREA are aware that, for any HPML they originate that qualifies for an exemption from the HPML appraisal requirements in § 1026.35(c), they would still be required to obtain an appraisal or evaluation in conformity with FIRREA title XI requirements. 16 These requirements are implemented in Federal banking agency regulations and further explained in the Interagency Appraisal and Evaluation Guidance. 17 Comment 35(c)(2)-1 also underscores that the HPML appraisal requirements were not intended to override existing Federal appraisal rules applicable to institutions regulated by Federal financial institutions regulatory agencies. 16 At least one commenter requested that the Agencies clarify that FIRREA requirements would not apply to loans exempt from the HPML appraisal rules. The opposite is true. 17 See OCC: 12 CFR parts 34, Subpart C, and 164; Board: 12 CFR part 208, subpart E, and part 225, subpart G; FDIC: 12 CFR part 323; NCUA: 12 CFR part 722. See also 75 FR 77450 (Dec. 10, 2010). 35(c)(2)(i) The Agencies' Proposal Qualified mortgages “as defined in [TILA] section 129C” are exempt from the special appraisal rules for “higher-risk mortgages.” 15 U.S.C. 1639c; TILA section 129H(f)(1), 15 U.S.C. 1639h(f)(1). The Agencies implemented this exemption in the January 2013 Final Rule by cross-referencing § 1026.43(e), the definition of “qualified mortgage” issued by the Bureau in its 2013 ATR Final Rule. See § 1026.35(c)(2)(i). The Bureau's rules define “qualified mortgage” pursuant to the authority granted to the Bureau to implement the Dodd-Frank Act ability-to-repay requirements. See, e.g., TILA section 129C(a)(1), (b)(3)(A), and (b)(3)(B)(i), 15 U.S.C. 1639c(a)(1), (b)(3)(A), and (b)(3)(B)(i). To align the regulation with the statute, the Agencies proposed to revise the appraisal rules' exemption for qualified mortgages to include all qualified mortgages “as defined pursuant to TILA section 129C.” 15 U.S.C. 1639c. In addition to authority granted to the Bureau, TILA section 129C grants authority to HUD, the U.S. Department of Veterans Affairs (VA), the U.S. Department of Agriculture (USDA), and the Rural Housing Service (RHS), which is a part of USDA, to define the types of loans “insure[d], guarantee[d], or administer[ed]” by those agencies, respectively, that are qualified mortgages. TILA section 129H(b)(3)(B)(ii), 15 U.S.C. 1639h(b)(3)(B)(ii). The Agencies recognized that HUD, VA, USDA, and RHS may issue rules defining qualified mortgages pursuant to their TILA section 129C authority. Therefore, the Agencies proposed to expand the definition of qualified mortgages that are exempt from the HPML appraisal rules to cover qualified mortgages as defined by HUD, VA, USDA, and RHS. 15 U.S.C. 1639c. Public Comments Commenters on the revision to the qualified mortgage exemption were: a State credit union trade association, a national appraiser trade association, a State banking trade association, a mortgage banking trade association, a manufactured housing lender, a national association of owners of manufactured homes, a consumer advocate group, two affordable housing organizations, and a policy and research organization. All of these commenters supported the proposed revision. The State banking trade association and State credit union trade association emphasized that the definition of qualified mortgage in the final rule should include all types of qualified mortgages, including balloon payment qualified mortgages. The mortgage banking trade association favored expanding the definition of “qualified mortgage” to include qualified mortgages as defined by HUD, VA, USDA, and RHS based on a belief that qualified mortgages as defined by these agencies will be subject to stringent product requirements and other consumer safeguards. The manufactured housing lender also favored such an expansion based on a belief that these agencies' loan programs provide credit options for underserved consumers in lower income groups. The Final Rule In § 1026.35(c)(2)(i), the Agencies are adopting an exemption similar to the proposed exemption for qualified mortgages. In the final rule, the exemption for qualified mortgages applies to either: • A loan that is a “covered transaction” under the Bureau's ability-to-repay rules—namely, a loan subject to the ability-to-repay rules of the Bureau in § 1026.43 ( see § 1026.43(b)(1) (defining “covered transaction”))— and that is also a qualified mortgage under the Bureau's ability-to-repay requirements in § 1026.43 or, for loans insured, guaranteed, or administered under programs of HUD, VA, USDA, or RHS, a qualified mortgage under the applicable rules of those agencies (but only once such rules are in effect; otherwise, the Bureau's definition of a qualified mortgage applies to those loans); or • A loan that is not a “covered transaction” under the Bureau's ability-to-repay rules, but meets the qualified mortgage criteria established in the rules of the Bureau or, for loans insured, guaranteed, or administered under programs of HUD, VA, USDA, or RHS, meets the qualified mortgage criteria under the applicable rules of those agencies (but only once such rules are in effect; otherwise, the Bureau's criteria for a qualified mortgage applies to those loans). The expanded exemption adopted by the Agencies includes qualified mortgages defined by the Bureau in any of its regulations, such as loans described in § 1026.43(e) as well as § 1026.43(f). Thus, qualified mortgages exempt from the HPML appraisal rules include loans subject to the Bureau's ability-to-repay rules that: • Meet the general criteria for a qualified mortgage under § 1026.43(e)(2). • Meet the special criteria for a qualified mortgage under § 1026.43(e)(4). 18 18 These include loans that are eligible, based solely on criteria related to the consumer's ability to pay, to be purchased or guaranteed by Fannie Mae or Freddie Mac and loans eligible to be insured or guaranteed by HUD, VA, USDA, or RHS. To be qualified mortgages, these loans also must meet the following general criteria for a qualified mortgage: (1) provide for regular periodic payments (§ 1026.43(e)(2)(i)); (2) have a term of no more than 30 years (§ 1026.43(e)(2)(ii)); and (3) not exceed thresholds for total points and fees set out in § 1026.43(e)(3) (§ 1026.43(e)(2)(iii)). See § 1026.43(e)(4)(i)(A). The qualified mortgage status of loans eligible for purchase by Fannie Mae or Freddie Mac expires starting on January 11, 2021. The qualified mortgage status of loans eligible to be insured or guaranteed by HUD, VA, USDA, or RHS expires on the effective date of a rule issued by each of these respective agencies defining “qualified mortgage” for their own programs. On Sept. 30, 2013, HUD published proposed rules defining “qualified mortgage” based on its authority under TILA section 129C(b)(3)(B)(ii)(I). 15 U.S.C. 1639c(b)(3)(B)(ii)(I); 78 FR 59890 (Sept. 30, 2013). • Meet the criteria for small creditor portfolio loans in § 1026.43(e)(5). • Meet the criteria for temporary balloon-payment qualified mortgages in § 1026.43(e)(6). • Meet the criteria for balloon-payment qualified mortgages under § 1026.43(f). The Agencies believe that the statutory provision exempting “qualified mortgage[s], as defined in section 129C” evidences Congress's intent to exempt all loans with the characteristics of a qualified mortgage from the HPML appraisal rules. TILA section 129H(f)(1); 15 U.S.C. 1639h(f)(1). As discussed above, TILA section 129C encompasses qualified mortgages defined by the Bureau pursuant to its authority to do so, as well as qualified mortgages defined by HUD, VA, USDA and RHS for loans in their respective programs. See TILA section 129C(a)(1), (b)(3)(A), and (b)(3)(B)(i), 15 U.S.C. 1639c(a)(1), (b)(3)(A), and (b)(3)(B)(i) (authority of the Bureau) and TILA section 129C(b)(3)(B)(ii), 15 U.S.C. 1639c(b)(3)(B)(ii) (authority of HUD, VA, USDA, and RHS). Additionally, the amended qualified mortgage exemption language is intended to ensure that loans that meet the qualified mortgage criteria of the Bureau, HUD, VA, USDA, or RHS, as applicable, but are exempt from the Bureau's ability-to-repay rules in § 1026.43, are afforded an exemption from the HPML appraisal rules as well. In the Bureau's ability-to-repay rules, “qualified mortgage” is a designation only for “covered transactions,” which are loans subject to the ability-to-repay requirements of TILA section 129C(a), implemented in § 1026.43(c). 19 15 U.S.C. 1639c. The Bureau excluded certain transactions from the scope of the rules, including loans originated as part of certain programs, such as a program administered by a Housing Finance Agency, or loans originated by certain entities, such as a Community Development Financial Institution (CDFI). See § 1026.43(a)(3). Under the Bureau's ability-to-repay rules, these loans are not considered to be “covered transactions” and are therefore not eligible to be qualified mortgages under the Bureau's ability-to-repay rules. This is the case even if the loans meet the criteria for a qualified mortgage in the Bureau's rules. 19 In the 2013 ATR Final Rule, “covered transaction” is defined to mean “a consumer credit transaction that is secured by a dwelling, as defined in § 1026.2(a)(19), including any real property attached to a dwelling, other than a transaction exempt from coverage under [ § 1026.43(a) ]” (emphasis added). “Qualified mortgage” is defined as “a covered transaction” that meets certain criteria. § 1026.43(e)(2). Under the proposed exemption—for “qualified mortgages as defined pursuant to 15 U.S.C. 1639c”—loans exempted from the Bureau's ability-to-repay requirements would not be eligible for the qualified mortgage exemption from the HPML appraisal rules because, technically, they are not “defined” as qualified mortgages under Bureau rules. Such excluded loans would include: • Loans made as part of a program administered by a State housing finance agency (HFA); 20 20 See § 1026.43(a)(3)(iv). • Loans made by a creditor designated as a CDFI, a creditor designated as a Downpayment Assistance through Secondary Financing Provider, a creditor designated as a Community Housing Development Organization, and a creditor that is a 501(c)(3) organization and meets certain other criteria; 21 and 21 See § 1026.43(a)(3)(v)(A)-(D). • Loans made pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008. 22 22 See § 1026.43(a)(3)(vi). As discussed above, the Agencies believe that, by exempting qualified mortgages in the statute, Congress intended to exempt from the requirements those loans that have the characteristics of a qualified mortgage. The Agencies believe that if the HPML appraisal rules exempted only “qualified mortgages as defined pursuant to 15 U.S.C. 1639c,” the rules would apply to transactions that Congress did not intend to subject to the appraisal requirements. By contrast, the final rule, which exempts “a loan that satisfies the criteria of a qualified mortgage,” ensures that all transactions intended to be exempt from the HPML appraisal requirements are excluded from coverage. In addition, this exemption ensures that transactions with the terms and features of a qualified mortgage are not treated differently when made by or through programs of entities that fall outside the scope of the Bureau's ability-to-repay rules in § 1026.43 than when made by other creditors. Thus, the final rule avoids the anomalous result that an HPML made through the program of an HFA, for example, would be subject to the HPML appraisal rules, whereas an HPML with the exact same terms and features made by a private creditor would not. Accordingly, comment 35(c)(2)(i)-1 explains that, under § 1026.35(c)(2)(i), a loan is exempt from the appraisal requirements of § 1026.35(c) if either: • The loan is—(1) subject to the Bureau's ability-to-repay requirements in § 1026.43 as a “covered transaction” (defined in § 1026.43(b)(1)) and (2) a qualified mortgage pursuant to the Bureau's rules or, for loans insured, guaranteed, or administered by HUD, VA, USDA, or RHS, a qualified mortgage pursuant to the applicable rules prescribed by those agencies (but only once such rules are in effect; otherwise, the Bureau's definition of a qualified mortgage applies to those loans); or • The loan is—(1) not subject to the Bureau's ability-to-repay requirements in § 1026.43 as a “covered transaction,” but (2) meets the criteria for a qualified mortgage in the Bureau's rules or, for loans insured, guaranteed, or administered by HUD, VA, USDA, or RHS, meets the criteria for a qualified mortgage in the applicable rules prescribed by those agencies (but only once such rules are in effect; otherwise, the Bureau's criteria for a qualified mortgage applies to those loans). Comment 35(c)(2)(i)-1 further explains that loans enumerated in § 1026.43(a) are not “covered transactions” under the Bureau's ability-to-repay requirements in § 1026.43, and thus cannot be qualified mortgages (entitled to a rebuttable presumption or safe harbor of compliance with the ability-to-repay requirements of § 1026.43, see, e.g., § 1026.43(e)(1)). These include an extension of credit made pursuant to a program administered by an HFA, as defined under 24 CFR 266.5, or pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008. See § 1026.43(a)(3)(iv) and (vi). They also include extensions of credit made by a creditor identified in § 1026.43(a)(3)(v). The comment clarifies that, nonetheless, these loans are not subject to the appraisal requirements of § 1026.35(c) if they meet the Bureau's qualified mortgage criteria in § 1026.43(e)(2), (4), (5), or (6) or § 1026.43(f) (including limits on when loans must be consummated) or, for loans that are insured, guaranteed, or administered by HUD, VA, USDA, or RHS, in applicable rules prescribed by those agencies (but only once such rules are in effect; otherwise, the Bureau's criteria for a qualified mortgage apply to those loans). The comment includes the following example: Assume that HUD has prescribed rules to define loans insured under its programs that are qualified mortgages and those rules are in effect. Assume further that a creditor designated as a Community Development Financial Institution, as defined under 12 CFR 1805.104(h), originates a loan insured by the Federal Housing Administration, which is a part of HUD. The loan is not a “covered transaction” and thus is not a qualified mortgage. See § 1026.43(a)(3)(v)(A) and (b)(1). Nonetheless, the transaction is eligible for an exemption from the appraisal requirements of § 1026.35(c) if it meets the qualified mortgage criteria in HUD's rules. Finally, the comment clarifies that nothing in § 1026.35(c)(2)(i) alters the definition of a qualified mortgage under regulations of the Bureau, HUD, VA, USDA, or RHS. 35(c)(2)(ii) The Agencies' Proposal In the 2013 Supplemental Proposed Rule, the Agencies proposed an exemption from the HPML appraisal rules for extensions of credit of $25,000 or less. This threshold amount was based on the Agencies' consideration of an appropriate threshold in light of comments to the 2012 Proposed Rule, as well as data reported under the Home Mortgage Disclosure Act (HMDA), 15 U.S.C. 2801 et seq. The Agencies also proposed to adjust the threshold for inflation every year, based on the percentage increase of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Proposed comments 35(c)(2)(ii)-1, -2, and -3 provided additional guidance on the proposed exemption. The Agencies expressed the belief that the expense to the consumer of an appraisal with an interior inspection could be significant and unduly burdensome to consumers of HPMLs of $25,000 or less that are not qualified mortgages. Thus, an appraisal requirement could hamper consumers' use of smaller home equity loans. The Agencies also stated their concern that a requirement for an appraisal with an interior inspection may pose a burdensome cost for consumers who seek to purchase lower-dollar homes using HPMLs that are not qualified mortgages; these tend to be low- to moderate-income (LMI) consumers who are less able to afford extra costs than higher-income consumers. The Agencies stated the view that the exemption can facilitate creditors' ability to meet consumers' smaller dollar credit needs, and that this could in turn promote the soundness of an institution's operations by supporting profitability and an institution's ability to spread risk over a variety of products. The Agencies noted that public comments on the 2012 Proposed Rule suggested that the reduction in costs and burdens associated with this exemption might benefit smaller institutions in particular. To inform the proposal, the Agencies also relied on data on mortgage lending in 2009, 2010, and 2011 reported under HMDA. The Agencies noted that, for example, an appraisal including an interior inspection for a subordinate lien home improvement loan might be burdensome on a consumer, without sufficient offsetting consumer protection or safety and soundness benefits. Therefore, the Agencies examined the mean and median loan sizes for subordinate lien home improvement loans in 2009, 2010, and 2011. Based in part on this HMDA data, the Agencies believed $25,000 was an appropriate threshold. See 78 Fed. Reg. 48547, 48564 (August 8, 2013). At the same time, in light of the views expressed by consumer advocates, the Bureau had concerns that, as a result of borrowing so-called “smaller” dollar home purchase or home equity loans, some consumers may be at risk of high loan-to-value (LTV) ratios, including LTVs that lead to going “underwater”—owing more than their home is worth. The Bureau believed that receiving a written valuation might be helpful in informing a consumer's decision about whether to obtain the loan by making the consumer better aware of how the value of the home compares to the amount that the consumer might borrow. As a result, the Agencies requested comment in the 2013 Supplemental Proposed Rule regarding whether certain conditions should be placed on the proposed smaller dollar loan exemption. Public Comments Public Comments on the 2012 Proposed Rule In the 2012 Proposed Rule, the Agencies requested comment on exemptions from the final rule that would be appropriate. In response, several commenters recommended an exemption for smaller dollar loans. These commenters generally believed that appraisals with interior inspections for these loans would significantly raise total costs as a proportion of the loan and thus potentially be detrimental to consumers. The commenters were concerned that requiring an appraisal for smaller dollar HPMLs would result in excessive costs to consumers without sufficient offsetting benefits. Some asserted that applying the HPML appraisal rules to smaller dollar loans might disproportionately burden smaller institutions and potentially reduce access to credit for their consumers. Comments to the 2012 Proposed Rule varied widely regarding the appropriate threshold for a smaller dollar loan exemption. Suggested thresholds ranged from $10,000 or less up to $125,000 for certain transactions. The Agencies did not finalize a smaller dollar loan exemption in the January 2013 Final Rule, instead choosing to propose a smaller dollar loan exemption in the subsequent 2013 Supplemental Proposed Rule. The Agencies did not receive comments on the 2012 Proposed Rule from consumers or consumer advocates. However, in informal outreach conducted by the Agencies after the January 2013 Final Rule was issued, a consumer advocacy group expressed the view that LMI consumers obtaining or refinancing loans secured by lower-value homes may have a particular need for the protections of the HPML appraisal rules. They also expressed the view that requiring quality appraisals for smaller dollar loans, and requiring that they be provided to the consumer, can help prevent the kinds of appraisal fraud that can lead to consumers borrowing more money than is supported by the equity in their home or taking out loans that are otherwise not appropriate for them. Public Comments on the 2013 Supplemental Proposed Rule In the 2013 Supplemental Proposed Rule, the Agencies sought comment on a proposed exemption for loans of $25,000 or less, and whether a threshold higher or lower than $25,000 was appropriate. The Agencies encouraged commenters to include data to support their views. Twenty-nine commenters addressed the threshold for the smaller dollar loan exemption: nine State credit union trade associations, three credit unions, one national credit union trade association, two community banks, one community banking trade association, one financial holding company, two State banking trade associations, one mortgage banking trade association, one consumer advocate group, three affordable housing organizations, one policy and research organization, one national association of owners of manufactured homes, one State manufactured housing association, one small mortgage lender, and one individual. No commenters on this proposed exemption opposed including an exemption from the HPML appraisal requirements for smaller dollar loans. Eight commenters believed that the Agencies should either retain or reduce the $25,000 threshold. A national association of owners of manufactured homes, two affordable housing organizations, a consumer advocate group, and a policy and research organization generally recommended that, if the Agencies adopted the exemption, the exemption threshold should be no more than $25,000. They believed that a large percentage of the transactions affected were likely to be manufactured home transactions, although they urged the Agencies to apply the exemption equally to manufactured homes and site-built homes. A State banking trade association also supported an exemption for extensions of credit of $25,000 or less, citing increased costs and burdens associated with obtaining appraisals with interior inspections. An individual commenter urged the Agencies to reduce the threshold to $10,000, believing a $25,000 threshold could lead to significant monetary risk for consumers, particularly LMI consumers. All of the other commenters urged the Agencies to raise the threshold for the exemption. Eight State credit union trade associations, three credit unions, one national credit union trade association, one State manufactured housing association, and one small mortgage lender suggested that the threshold be raised to $50,000. Generally, these commenters supported the increase because they believed that the cost of an appraisal for transactions of lower amounts did not correspond to a meaningful benefit. They also supported regulatory relief to creditors. A credit union stated that a threshold under $50,000 may result in less lending to LMI consumers because lenders would not be willing to make the loans. A State credit union association stated that lenders may not make loans if the threshold is below $50,000 because the cost of originating and processing loans under that amount already exceeds origination fees, without a requirement for an appraisal with an interior inspection. Another credit union noted that it obtains evaluations, rather than appraisals, for transactions below $50,000. 23 23 Regulations applicable to national credit unions generally require a credit union to obtain an “evaluation” rather than an appraisal for transactions with a value of $250,000 or less. See 12 CFR 722.3(a)(1) and (d). Several commenters suggested other thresholds. A State credit union trade association commenter suggested that the threshold should be raised to $100,000 or, at a minimum, to $75,000. The commenter stated that requiring costly appraisals on smaller dollar HPMLs disproportionately hurts LMI consumers and consumers in rural areas, where appraisals can be costly and the wait time for appraisals, according to a member survey, is generally one-and-a-half to three months, but can be up to six months. A community banking trade association believed that, for loans below $100,000, the cost of an appraisal is high relative to the cost of the loan, but the credit risk to the bank is low. One community bank suggested a threshold of $35,000, noting that the average size of loans secured by a manufactured home (and not land) that are made by the bank is under $35,000. Another community bank believed that $40,000 was an appropriate threshold and expressed concerns about the cost of appraisals, especially in rural areas. A few commenters suggested thresholds that are the same as those in other mortgage rules, asserting that this alignment would reduce regulatory burden. A mortgage banking trade association stated that the threshold should be $100,000 because the Bureau's ability-to-repay rule permits creditors to apply higher points and fees for loans below $100,000. 24 Two of the commenters suggesting a $50,000 threshold asserted that doing so would make the exemption consistent with a threshold in the Bureau's Regulation Z rules under the Home Ownership and Equity Protection Act of 1994 (HOEPA) for different interest rate triggers. 25 24 See § 1026.43(e)(3). 25 See § 1026.32(a)(1)(i)(B), effective January 10, 2014. See also 78 FR 6856 (Jan. 31, 2013) (2013 HOEPA Final Rule). The suggestions of some commenters focused on excluding subordinate lien transactions from the rule. A State credit union association believed $50,000 was an appropriate threshold because it would exclude from coverage of the HPML appraisal rules many subordinate lien transactions. This commenter believed that appraisals for subordinate lien loans taken concurrently with first lien loans were unnecessary because often an appraisal will have been performed for the first lien transaction. The commenter also believed that most home improvement loans are more than $25,000, so the proposed threshold could hinder the use of smaller home equity loans. The commenter asserted that the expense of the appraisal with an interior inspection could considerably raise the total costs of financing the home improvement loan. In addition, a State banking association and a financial holding company recommended exempting home equity loans from the rule. The financial holding company noted that, in the calculation to determine HPML status, the spread between APR and APOR is smaller for first lien loans than for subordinate lien loans (1.5 percentage points above APOR and 3.5 percentage points above APOR, respectively), and objected to an appraisal requirement for first lien home equity loans in particular. This commenter recommended that the Agencies raise the APR-APOR spread to 3.5 percentage points for all home equity loans. The State banking association argued that first lien home equity loans present very little credit risk. The Agencies also sought comment on whether the threshold for the smaller dollar loan exemption should be adjusted periodically for inflation and whether the adjustments should be annually or some other period. A small mortgage lender and a State banking trade association expressed support for the annual adjustment. The small mortgage lender noted that this approach was consistent with other provisions in Regulation Z. 26 26 See § 1026.3(b) (exempting from Regulation Z loans over the applicable threshold dollar amount, adjusted annually); § 1026.32(a)(1)(ii) (setting the points and fees trigger for high-cost mortgages, adjusted annually). Conditioning an exemption. In addition, the Agencies requested comment on whether conditions should be imposed on the smaller dollar loan exemption. The Agencies specifically asked whether the smaller dollar loan exemption should be conditioned on the creditor providing the consumer with an alternative estimate of the collateral value. A national association of owners of manufactured homes, two affordable housing associations, a consumer advocate group, and a policy and research organization believed that, if the Agencies adopted the exemption, consumers should be given at least the manufacturer's invoice for new manufactured home transactions, even if they fall under the threshold. These commenters believed that providing the invoice would be low cost, and yet would provide an important check on overvaluation. Another affordable housing organization believed that creditors in manufactured home transactions of $25,000 or less should be required to obtain replacement cost estimates performed by a trained, independent appraiser from a nationally-published cost service. See also section-by-section analysis of § 1026.35(c)(2)(viii). A community bank commenter asserted that consumers should receive a copy of the valuation used by the creditor as a condition to the exemption. A small mortgage lender suggested that a government-provided tax assessment would be an appropriate valuation to provide to consumers. This commenter argued that because municipalities already use tax assessments to determine property value for tax and insurance purposes, the assessments have been proven to be sufficiently reliable. The commenter contended that requiring more costly valuation methods as a condition of the exemption might prompt creditors to determine that the exemption is unduly burdensome and stop making these smaller dollar loans. An affordable housing organization suggested that, as a condition to the exemption (as well as other exemptions), creditors should be required to provide any valuation used to determine the security for the loan and suggested that creditors should be given flexibility to choose the appropriate valuation for the transaction. At the same time, the commenter recommended that a creditor should be required to obtain replacement cost estimates from a trained, independent appraiser and to provide these estimates to a consumer. The Agencies did not receive comments on a number of additional comment requests, including requests for information about the risks that smaller dollar loans could lead to high LTV loans; specific data on the costs and burdens associated with the exemption, especially for smaller institutions; and data on the extent to which creditors anticipate originating HPMLs of $25,000 or less that are not qualified mortgages. The Final Rule The Agencies are adopting the exemption for HPMLs for extensions of credit of $25,000 or less as proposed and renumbering it § 1026.35(c)(2)(ii). The Agencies are also adopting the proposal to adjust the threshold annually, based on the percentage increase of the CPI-W. Official Staff Commentary for § 1026.35(c)(2)(ii) is also adopted as proposed. Comment 35(c)(2)(ii)-1 explains that, for purposes of § 1026.35(c)(2)(ii), the threshold amount in effect during a particular one-year period is the amount stated in this comment for that period. Specifically, comment 35(c)(2)(ii)-1.i. provides that from January 18, 2014, through December 31, 2014, the threshold amount is $25,000. Comment 35(c)(2)(ii)-1 further provides that the threshold amount is adjusted effective January 1 of every year by the percentage increase in the CPI-W that was in effect on the preceding June 1. The comment also states that, every year, the comment will be amended to provide the threshold amount for the upcoming one-year period after the annual percentage change in the CPI-W that was in effect on June 1 becomes available. In addition, the comment states that any increase in the threshold amount will be rounded to the nearest $100 increment. The comment provides the following example: if the percentage increase in the CPI-W would result in a $950 increase in the threshold amount, the threshold amount will be increased by $1,000. However, if the percentage increase in the CPI-W would result in a $949 increase in the threshold amount, the threshold amount will be increased by $900. Comment 35(c)(2)(ii)-2 clarifies that a transaction is exempt under § 1026.35(c)(2)(ii) if the creditor makes an extension of credit at consummation that is equal to or below the threshold amount in effect at the time of consummation. Finally, comment 35(c)(2)(ii)-3 explains that a transaction does not meet the condition for an exemption under § 1026.35(c)(2)(ii) merely because it is used to satisfy and replace an existing exempt loan, unless the amount of the new extension of credit is equal to or less than the applicable threshold amount. The comment provides the following example: assume a closed-end loan that qualified for a § 1026.35(c)(2)(ii) exemption at consummation in year one is refinanced in year ten and that the new loan amount is greater than the threshold amount in effect in year ten. The comment states that, in these circumstances, the creditor must comply with all of the applicable requirements of § 1026.35(c) with respect to the year ten transaction if the original loan is satisfied and replaced by the new loan, unless another exemption from the requirements of § 1026.35(c) applies. See § 1026.35(c)(2) and § 1026.35(c)(4)(vii). For the reasons discussed in the 2013 Supplemental Proposed Rule as described in “The Agencies' Proposal,” the Agencies believe that the exemption finalized in § 1026.35(c)(2)(ii) is in the public interest and promotes the safety and soundness of creditors. As discussed in the 2013 Supplemental Proposed Rule, the Agencies believe that the burden and expense of imposing the HPML appraisal requirements on HPMLs of $25,000 or less that are not qualified mortgages outweigh potential consumer protection benefits in many cases. As discussed above, no commenters objected to an exemption, and many commenters generally agreed with the Agencies' assessment of the costs versus the benefits of appraisals for these loans. Commenters also noted that the cost of the appraisals would be even higher in rural areas, due to the scarcity of appraisers and the potential for added time to locate and engage an appraiser. As noted, the Agencies received a number of comments on the 2013 Supplemental Proposed Rule suggesting that the Agencies should raise the amount of the threshold. These commenters cited the cost of the appraisals and at least one commenter provided some information about the percentage of HPMLs made by the lender that are smaller dollar, but overall very little data was offered to support the various threshold suggestions. For example, despite the Agencies' requests for data, no commenters provided data indicating that a significant number of the smaller dollar loans they originate would not be qualified mortgages and thus would be subject to the HPML appraisal requirements absent an exemption. To inform the threshold determination, the Agencies again examined HMDA data. According to 2012 HMDA data, increasing the proposed threshold could substantially increase the proportion of HPMLs that would be exempted from the rule. For example, a $25,000 exemption would exempt 55 percent of conventional subordinate lien home improvement HPMLs from coverage and 37 percent of conventional subordinate lien home purchase HPMLs. In comparison, a $50,000 exemption would exempt 87 percent of conventional subordinate lien home improvement HPMLs and 70 percent of percent of conventional subordinate lien home purchase HPMLs. 27 The Agencies believe that increasing the threshold from $25,000 to, for example, $50,000, would exempt too large a proportion of HPMLs, such that the exemption would violate the intent of the statute to subject both first and subordinate lien loans to the appraisal requirements. The Agencies believe that a threshold of $25,000 appropriately exempts from the rule those smaller dollar loans that would benefit from the exemption, such as smaller dollar home improvement loans. Moreover, the Agencies believe creditors are generally better able to absorb losses that might be associated with a loan of $25,000 or less than loans of higher amounts. 27 See Federal Financial Institutions Examination Council (FFIEC), HMDA, http://www.ffiec.gov/Hmda/default.htm. As discussed under “Public Comments,” some commenters suggested exempting loans based on lien status or whether the loan is a home equity loan. For example, a State credit union association advocated for a threshold that would exclude most subordinate lien loan from the rules. A State banking association and a financial holding company recommended exempting home equity loans from the rule, particularly first lien home equity loans. The financial holding company noted that, in the calculation to determine HPML status, the spread between APR and APOR is smaller for first lien loans than for subordinate lien loans (1.5 percent above APOR and 3.5 percent above APOR, respectively). This commenter recommended that the Agencies raise the APR-APOR spread triggering HPML status to 3.5 percentage points for all home equity loans, whether first lien or subordinate lien. The Agencies believe that an exemption based on a monetary threshold rather than an exemption based on a loan's lien status or loan purpose (home equity versus home purchase, for example) is necessary to protect consumers and more consistent with the statute. The statute clearly indicates that HPMLs secured by a consumer's principal dwelling should be covered, whether home purchase or home equity, and whether first lien or subordinate lien. See TILA section 129H(f), 15 U.S.C. 1639h(f). In addition, the differing APR-APOR spreads for first lien and subordinate lien loans were set by statute. See id. Both first lien and subordinate lien home equity loans reduce equity in a consumer's home and can put consumers at financial risk; the Agencies believe that limiting this risk to consumers for both types of loans is appropriate. The Agencies also believe that consistency of the rule across these loan types will facilitate compliance. Regarding comments that the threshold should match those in other mortgage rulemakings, the Agencies decline to do so because the other mortgage rules are not comparable to the appraisal requirements. The $50,000 threshold in the 2013 HOEPA Final Rule referred to by two commenters relates to which APR-APOR spread applies in determining whether a loan is “high-cost.” 28 Specifically, the $50,000 threshold is relevant only if the loan is secured by a first lien on a dwelling that is personal property. This threshold was intended to capture a very specific type of loan for an exemption from an entirely different set of rules. The Agencies therefore question the basis for applying the same threshold in establishing an exemption from the HPML appraisal rules. 28 See § 1026.32(a)(1)(i)(B) as amended by 78 FR 6962 (Jan. 31, 2013). For similar reasons, the Agencies believe that setting the threshold at $100,000 to align with the $100,000 tier for permitting higher points and fees for qualified mortgages, as one commenter suggested, is not appropriate. See § 1026.43(e)(3). The smaller dollar loan thresholds in that rule were crafted in the context of ensuring a consumer's ability to repay a mortgage, not for purposes of determining whether an appraisal should be performed for a particular transaction. Moreover, the $100,000 threshold is only the highest loan amount of five tiers of loan amounts for which higher points and fees are permitted at varying levels. For the reasons discussed above, therefore, the Agencies are maintaining the proposed $25,000 threshold in the final rule. The Agencies also are adopting the proposal to adjust the threshold for inflation every year, based on the percentage increase of CPI-W. As noted, commenters supported an annual adjustment for inflation. Also, as discussed in the 2013 Supplemental Proposed Rule, inflation adjustments for other thresholds in Regulation Z are also annual, so the adjustment will provide for consistency across mortgage rules. Conditions on the exemption. The Agencies are finalizing the smaller dollar loan exemption with no conditions. Some commenters suggested providing alternative valuations to consumers as a condition to the smaller dollar loan exemption, including providing the consumer with an estimate of the value of the collateral property that the creditor relied on in making the credit decision. However, the Agencies believe that for HPMLs of $25,000 or less that are not qualified mortgages, the added burden or cost of a condition could deter lenders from making these loans, which could harm consumers. In addition, the Agencies believe that an unconditional exemption for transactions of $25,000 or less will be simpler and easier for creditors to apply, thus facilitating compliance and enhancing the utility of the exemption. One reason that the Agencies are not raising the exemption above $25,000 is the Agencies' concern that conditioning the exemption might then be necessary to ensure that the exemption both promotes the safety and soundness of creditors and is in the public interest. In the Agencies' view, arguments that neither an appraisal nor an alternative valuation need be obtained or provided to the consumer become increasingly less persuasive for transactions over $25,000, as larger amounts tie up greater amounts of home equity and losses become less easily absorbed by creditors. The Agencies deem it best not to add complexity by conditioning the exemption and believe that no conditions are needed at the level of $25,000 or less. 35(c)(2)(iv) The Agencies are adopting a new comment to clarify the exemption in § 1026.35(c)(2)(iv) for “a transaction to finance the initial construction of a dwelling.” Specifically, new comment 35(c)(2)(iv)-2 clarifies that the exemption for construction loans in § 1026.35(c)(2)(iv) applies to temporary financing of the construction of a dwelling that will be replaced by permanent financing once construction is complete. The exemption does not apply, for example, to loans to finance the purchase of manufactured homes that have not been or are in the process of being built, when the financing obtained by the consumer at that time is permanent. The comment cross-references § 1026.35(c)(2)(viii), which sets out the HPML appraisal rules applicable to transactions secured by manufactured homes. The Agencies are adding this comment in response to public comments on the 2013 Supplemental Proposed Rule suggesting that manufactured home loans where the unit has not been constructed are similar to temporary construction loans exempt under § 1026.35(c)(2)(iv) and should be exempt on the same basis. The Agencies understand that manufactured home loans in this situation generally are permanent financing, and therefore the same rationale for exempting temporary construction loans, expressed in the January 2013 Final Rule, would not apply to those loans. 35(c)(2)(vii) The Agencies' Proposal The Agencies proposed to exempt from the HPML appraisal rules certain types of refinancings with characteristics common to refinance programs offering “streamlined” refinances. Specifically, the Agencies proposed to exempt an extension of credit that is a refinancing where the “owner or guarantor” of the refinance loan was the “owner or guarantor” of the existing obligation. In addition, the regular periodic payments under the refinance loan could not have resulted in negative amortization, covered only interest on the loan, or resulted in a balloon payment. Finally, the proceeds from the refinance loan would have to have been used solely to pay off the outstanding principal balance on the existing obligation and to pay closing or settlement charges. As discussed in the 2013 Supplemental Proposed Rule, the Agencies believe that this exemption would be in the public interest and promote the safety and soundness of creditors. Background In an environment of historically low interest rates, the Federal government has supported streamlined refinance programs as a way to promote the ongoing recovery of the consumer mortgage market. Notably, the Home Affordable Refinance Program (HARP) was introduced by the U.S. Treasury Department in 2009 to provide refinance relief options to consumers following the steep decline in housing prices as a result of the financial crisis. The HARP program was expanded in 2011 and is currently set to expire in at the end of 2015. Federal government agencies—HUD, VA, and USDA—as well as government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have developed streamlined refinance programs to address consumer, creditor and investor risks. 29 These programs enable many consumers to refinance the balance of those mortgages through an abbreviated application and underwriting process. 30 Under these programs, consumers with little or no equity in their homes, 31 as well as consumers with significant equity in their homes, 32 can restructure their mortgage debt, often at lower interest rates or payment amounts than under their existing loans. 33 29 Under existing GSE streamlined refinance programs, Freddie Mac and Fannie Mae purchase and guarantee streamlined refinance loans for consumers under HARP (whose existing loans have LTVs over 80 percent) as well as for consumers whose existing loans have LTVs at or below 80 percent. 30 See Fannie Mae Single Family Selling Guide, chapter B5-5, section B5-5.2 (Refi Plus® and DU Refi Plus® loans); Freddie Mac Single Family Seller/Servicer Guide, chapters A24, B24, and C24 (Relief Refinance® Loans); HUD Handbook 4155.1, chapters 3.C and 6.C (Streamline Refinances) and Title I Appendix 11-3 (manufactured home streamline refinances); USDA Rural Development Admin. Notice 4615 (Rural Refinance Pilot); and VA Lenders Handbook, chapter 6 (Interest Rate Reduction Refinance Loans, or IRRRLs). Creditworthiness evaluations generally are not required for Refi Plus, Relief Refinance, HUD Streamline Refinance, or IRRRL loans unless borrower monthly payments would increase by 20 percent or more. See HUD Handbook 4155.1, chapter 6.C.2.d; Fannie Mae Single Family Selling Guide, chapter B5-5, section B5-5.2 (Refi Plus and DU Refi Plus loans); Freddie Mac Single Family Seller/Servicer Guide, chapters A24, B24, and C24; VA Lenders Handbook, chapter 6.1.c. 31 For example, HARP supports refinancing through the GSEs for borrowers whose LTV exceeds 80 percent and whose existing loans were consummated on or before May 31, 2009. See http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx. 32 See, e.g., Freddie Mac 2011 Annual Report at Table 52, reporting that the majority of Freddie Mac funding for Relief Refinances in 2011 was for borrowers with LTVs at or below 80 percent. This report is available at http://www.freddiemac.com/investors/er/pdf/10k_030912.pdf. 33 Over two million streamlined refinance transactions occurred under FHA and GSE programs in 2012 (including both HPML and non-HPML refinances). According to public data recently reported by FHFA, 1,803,980 streamlined refinance loans occurred under Fannie Mae or Freddie Mac streamlined refinance programs. See FHFA Refinance Report for February 2013, available at http://www.fhfa.gov/webfiles/25164/Feb13RefiReportFinal.pdf. The Agencies estimate, based upon data received from FHA during outreach to prepare this proposal, that the FHA insured 378,000 loans under its “Streamline” program in 2012. Valuation requirements of “streamlined” refinance programs. The streamlined underwriting for certain refinancings often does not include an appraisal that conforms with USPAP or a physical inspection of the property. One reason for this is that, in currently available streamlined refinance programs, the value of the property securing the existing and refinance obligations does not determine borrower eligibility for the refinance. Generally, the principal concern under streamlined refinance programs is not whether the creditor or investor could in the near term recoup the mortgage amount by foreclosing upon and selling the securing property. The immediate goals for these loans are to secure payment relief for the borrower and thereby avoid default and foreclosure; to allow the borrower to take advantage of lower interest rates; or to restructure their mortgage obligation to build equity more quickly—all of which reduce risk for creditors and investors and benefit consumers. The credit risk holder of the existing obligation might obtain a valuation other than an appraisal for the refinance to estimate LTV for determining the appropriate securitization pool for the loan. LTV as determined by this valuation can also affect the terms offered to the consumer. Sometimes an appraisal is required when the property is not standardized, or the credit risk holder of the existing obligation and the refinance loan does not have what it deems to be sufficient information about the property. Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac each have streamlined refinance programs: Fannie Mae DU (“Desktop Underwriter”) Refi Plus TM and Refi Plus TM and Freddie Mac Relief Refinance®-Same Servicer/Open Access. Under these programs, Fannie Mae must hold both the old and new loan, as must Freddie Mac under its program. An appraisal is not required when the GSEs are confident in an estimate of value (usually based on their respective proprietary automated valuation models (AVMs)), which is then provided to lenders originating loans under these programs. 34 34 For GSE streamlined refinance transactions purchased in 2012 at LTVs of above 80 percent, AVM estimates were obtained for approximately 81 percent and appraisals (either interior inspection or exterior-only) were obtained for approximately 19 percent. For GSE streamlined refinance transactions purchased in 2012 at LTVs of 80 percent or below, AVM estimates were obtained for approximately 87 and appraisals (either interior inspection or exterior-only) were obtained for approximately 13 percent. HUD/FHA. The HUD “Streamline” Refinance program administered by the FHA permits but generally does not require a creditor to obtain an appraisal. 35 The Agencies understand that almost all FHA streamlined refinances are done without requiring an appraisal. 36 The FHA program does not require an alternative valuation type for transactions that do not have appraisals. 35 See, e.g., HUD Handbook 4155.1, chapter 6.C.1. 36 According to data from FHA, in calendar year 2012, only 1.1 percent of FHA streamline refinances required an appraisal. VA and USDA. VA and USDA programs do not require appraisals. The VA and USDA streamlined refinance programs also do not require an alternative valuation type for transactions for which an appraisal is not required. Private “streamlined” refinance programs. The Agencies also understand that some private creditors offer streamlined refinance programs for their borrowers that meet certain eligibility requirements. In the 2013 Supplemental Proposed Rule, the Agencies sought comment and relevant data on how often private creditors obtain alternative valuation estimates in these transactions ( i.e., streamlined refinances outside of the government agency and GSE programs discussed previously) when no appraisal is conducted. 37 The Agencies did not receive comment on this issue. 37 In general, FIRREA regulations governing appraisal requirements permit the use of an “evaluation” (or in the case of NCUA, a “written estimate of market value”) rather than an appraisal in same-creditor refinances that involve no new monies except to pay reasonable closing costs and, in the case of the NCUA, no obvious and material change in market conditions or physical adequacy of the collateral. See OCC: 12 CFR 34.43 and 164.3; Board: 12 CFR 225.63; FDIC: 12 CFR 323.3; NCUA: 12 CFR 722.3. See also OCC, Board, FDIC, NCUA, Interagency Appraisal and Evaluation Guidelines, App. A-5, 75 FR 77450, 77466-67 (Dec. 10, 2010). Public Comments Public Comments on the 2012 Proposed Rule A number of commenters on the 2012 Proposed Rule recommended that the Agencies exempt streamlined refinancings. Some of these commenters expressed a view that the Dodd-Frank Act's “higher-risk mortgage” appraisal rules were not appropriate for refinancings designed to move a borrower into a more stable mortgage product with affordable payments. Commenters pointed out, among other things, that these types of refinancings can be important credit risk management tools in the primary and secondary markets, and can reduce foreclosures, stabilize communities, and stimulate the economy. GSE commenters indicated that in many cases loans originated under Federal government streamlined refinance programs do not require appraisals and asserted that doing so would interfere with these programs. Consumer advocates did not comment on the 2012 Proposed Rule, but in subsequent informal outreach with the Agencies for the 2013 Supplemental Proposed Rule, they expressed concerns about not requiring appraisals in HPML streamlined refinance programs. They expressed the view that a quality appraisal that also is required to be made available to the consumer can be a tool to prevent fraud in refinance transactions. They also pointed out instances in which an appraisal on a refinance transaction revealed appraisal fraud on the original purchase transaction. In the 2013 Supplemental Proposed Rule, the Agencies invited further comment on these and any related concerns, and appropriate means of addressing these concerns as part of this rulemaking. The Agencies did not receive additional comments on this issue as part of the 2013 Supplemental Proposed Rule, the relevant public comments on which are summarized below. Public Comments on the 2013 Supplemental Proposed Rule Commenters were generally supportive of exempting streamlined refinances from the HPML appraisal requirements. These included comments from a credit union, a State credit union trade association, a national mortgage banking trade association, and a national real estate trade association. The commenters stated that the exemption would encourage and enable many consumers to refinance the balance of their mortgages through an abbreviated underwriting process that will save them time and money and help them restructure their debt and lower their interest rate or mortgage payment. The State credit union association commenter stated that an appraisal is not necessary for these types of transactions as the value of the home is not the factor driving the restructuring transaction. The national real estate trade association asserted that the cost of the appraisal would increase the costs to the consumer, especially in rural areas where there are fewer appraisers, with no offsetting benefit to the consumer. Three national appraiser organizations opposed the proposed exemption for streamlined refinances and urged the Agencies not to adopt it in the final rule. Two of these commenters asserted that a key component of a consumers' decision to refinance their loan is the market value of their home. A third national appraiser organization believed that the proposed exemption was unnecessary and inconsistent with what this commenter viewed as the Dodd-Frank Act's emphasis on risk management, particularly for HPMLs. The Agencies solicited comment on the circumstances in which an originator's assumption of “put back” risk on a refinance loan raises safety and soundness concerns, even where the owner or guarantor on the refinance loan remains the same. Two national appraiser organizations and a State HFA offered comments related to this question. The appraisal organizations commented that where a loan involves new risk to either government agencies or the taxpayers, an appraisal should be required. Generally, where new risk results from a transaction, an appraisal with an interior inspection should be required. These commenters added that, if the risk is already known or exists ( i.e., is not new risk), an exterior inspection appraisal might be sufficient. The State HFA commented that the scope of the same “owner or guarantor” requirement should be expanded to include Federally-insured or -guaranteed streamlined refinancing transactions. The group suggested that the proposed language focused on the secondary market for mortgage loans rather than the Federal entities bearing the risk at the loan level. The Agencies understand that this State HFA has programs in which a Federally-insured or -guaranteed loan (such as by FHA or VA) might be refinanced and placed in a mortgage revenue bond guaranteed by the HFA. The State HFA expressed concerns that under this arrangement, the loan might not meet the same “owner or guarantor” criteria of the proposed refinance exemption because the HFA would be a new guarantor at the secondary market level. However, the State HFA pointed out that the refinance loan continues to be insured by FHA or guaranteed by VA at the loan level. A State credit union organization believed that exempting refinances in which the “owner or guarantor” of the refinanced loan also is the “owner or guarantor” of the existing loan would reduce time and transaction costs. A State banking trade association commented in the context of balloon mortgages that streamlined refinances with the same “owner and guarantor” typically have lower costs than a refinance with another creditor. The national trade association that represents creditors believed that the language of the proposal requiring that the “owner or guarantor” be the same would exclude loans that are originated by the servicer or subservicer on the original obligation, and requested clarification to allow those entities to originate streamlined refinances and still be eligible for the exemption. As noted under “Background,” the Agencies also sought information on the valuation practices of private creditors for refinanced loans where the private owner or guarantor remains the same and the loans are not sold to a GSE or insured or guaranteed by a Federal government agency. Two national organizations representing appraisers commented that when refinanced loans are not sold to the GSEs or insured or guaranteed by a government agency, creditors are likely to order appraisals with interior inspections because of the increased risk to the creditor. Five commenters—three State credit union associations and two State banking trade associations—supported the proposed exemption for streamlined refinances but requested that the Agencies remove the proposed prohibition on balloon payments. These commenters believed that balloon mortgages can be an affordable option and serve an important role in helping consumers retain their homes. For similar reasons, one of the State credit union associations also supported eliminating the proposed prohibition on interest-only payments. A State banking trade association urged the Agencies to consider including Balloon Payment Qualified Mortgages 38 in the proposed expanded definition for qualified mortgages, arguing that these types of mortgages undergo rigorous underwriting procedures similar to those required under the general qualified mortgage provisions. 39 38 See § 1026.43(e)(6) and (f). 39 § 1026.43(e)(2). In addition to the restrictions on exempt refinancings that the Agencies proposed, one State bank commenter recommended that the proceeds from the refinance be used to pay both principal and accrued interest since the majority of refinance loans today include the accrued interest of the refinanced loan into the new loan amount. This commenter stated that including accrued interest would not adversely affect the consumer and could be beneficial if the consumer does not have the cash to pay the amount. An affordable housing organization commenter stated that any streamlined refinance resulting in higher payments, higher interest rates or longer loan terms for the consumer should not be exempt. This commenter also believed that previously refinanced loans should not be exempt to prevent an accumulation of high fees from eroding the consumer's equity. A State credit union association commenter opposed limiting the amount of points and fees that may be financed on an exempt refinance transaction. This commenter pointed out that a points and fees test applies to “high-cost” mortgages in Regulation Z 40 and asserted that it is not necessary to include point and fee caps as part of HPML appraisal rules. This commenter also argued that to do so would create more regulatory confusion for consumers and financial institutions. 40 See § 1026.32(a), implementing TILA section 103(aa), 15 U.S.C. 1602(aa), as amended by section 1431 of the Dodd-Frank Act (revising the points and fees triggers for determining whether a loan is a “high-cost mortgage.” See also § 1026.43(e)(3), implementing TILA section 129C(b)(2)(A)(vii), 15 U.S.C. 1639c(b)(2)(A)(vii) (limiting points and fees that may be charged on a “qualified mortgage”). Two commenters—a national mortgage banking association and an affordable housing organization—suggested that one of the criteria for an exempt refinance transaction should be a consumer benefit. The national mortgage banking association commenter recommended that the Agencies adopt the benefits test used by the GSEs for HARP loans, which requires that the new loans put borrowers in a better position by reducing their payments or moving them from a risky loan structure. 41 Similarly, the affordable housing organization commenter stated that only streamlined refinance transactions clearly lowering the consumer's risk should be exempt. On the other hand, a State credit union association commenter opposed introducing additional limits on the exemption, such as requiring that the borrower have made timely payments for a specified period or that the consumer “benefit” from the transaction in some way defined in the regulations. 41 See Fannie Mae Selling Guide, B5-5.2-02, DU Refi Plus and Refi Plus Underwriting Considerations (9/24/2013). The Agencies also requested comments on whether the exemption for refinance loans should be conditioned on the creditor obtaining an alternative valuation and providing a copy to the consumer three business days prior to closing. The Agencies further asked whether obtaining and providing an alternative valuation would better position the consumer to consider alternatives, and whether consumers seeking to refinance their existing first lien loan typically need or want to consider alternatives to refinancing. Lastly, the Agencies generally requested comment and data on whether a condition on the exemption is necessary. Four commenters—a State credit union association, a national community bank trade association, a national mortgage banking association, and a financial holding company—affirmatively opposed requiring creditors to obtain an alternative valuation to qualify their refinance loans for the refinance exemption from the HPML appraisal rules. Commenters stated that doing so would hinder the refinancing process and increase the time and expense of these transactions unnecessarily. These commenters did not believe that a significant benefit exists in giving an alternative valuation when consumers are not increasing the amount of their debt or changing the collateral. Comments from a State bank and a State credit union association suggested that if an alternative valuation were required, creditors should be able to rely on an existing appraisal to the extent permitted by existing Federal appraisal regulations and the interagency appraisal guidelines, 42 which allow for using an existing appraisal prepared for another financial institution. A credit union commenter and a State credit union association commenter suggested that if an alternative is required, a “drive-by” appraisal or comparable market analysis to ensure that the home still stands and is in reasonable condition is prudent when modifying or restructuring debt to reduce foreclosures and further delinquencies. 42 See OCC: 12 CFR 34.45(b)(2) and 12 CFR 164.5(b)(2); Board: 12 CFR 225.65(b)(2); FDIC: 12 CFR 323.5(b)(2); NCUA: 12 CFR 722.5(b)(2). Three national appraiser organizations and an affordable housing organization recommended that, at minimum, an alternative valuation to an appraisal with an interior inspection should be required so that consumers are better informed. The appraiser group commenters recommended that creditors obtain replacement cost estimates or other less costly services provided by appraisers, such as desktop appraisals. One appraiser group generally asserted that the consumer should be made aware of what type of valuation service was performed and by whom. No commenters provided data relevant to whether requiring an alternative valuation as a condition of the proposed refinance exemption would be necessary or beneficial. In the 2013 Supplemental Proposed Rule, the Agencies recognized that estimates of value may not always be required by Federal law or investors. For example, some creditors are not subject to the appraisal and evaluation requirements that apply to Federally regulated financial institutions 43 under FIRREA and, therefore would not be required to obtain a FIRREA-compliant valuation on a “no cash out” refinance. Thus, the Agencies requested comment on the extent to which either appraisals or other valuation tools such as AVMs or broker price opinions (BPOs) are used in connection with streamlined refinances—by non-depositories not covered by FIRREA in particular. Only one commenter, a national appraiser organization, responded to this question, stating that BPOs are not used in refinance transactions and, in fact, are illegal in many states. Moreover, this commenter pointed out that GSEs and other government agencies prohibit using BPOs in refinancing, and use their own AVMs to waive appraisal requirements when appropriate. 43 See 12 U.S.C 3350(7) (defining “financial institution” for purposes of FIRREA and implementing regulations). The Final Rule The Agencies are adopting the exemption for certain refinancings proposed in the 2013 Supplemental Proposed Rule with modifications to some of the criteria for an exempt refinance transaction, described in the section-by-section analysis below. Consistent with the 2013 Supplemental Proposed Rule, the Agencies decline to adopt an exemption for all refinance loans, as a few commenters on the 2012 Proposed Rule suggested. The appraisal rules in TILA Section 129H apply to “residential mortgage loans” that are higher-priced and secured by the consumer's principal dwelling. TILA section 129H(f), 15 U.S.C. 1639h(f). The term “residential mortgage loan” includes refinance loans. 44 Accordingly, the Agencies believe that an exemption for all HPML refinances would be overbroad. For example, in refinance transactions involving additional cash out to the consumer, consumer equity in the home can decrease significantly, increasing risks, so the Agencies do not believe an exemption from this rule would be appropriate. 44 “The term `residential mortgage loan' means 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 . . ..” TILA section 103(cc)(5), 15 U.S.C. 1602(cc)(5). As stated in the 2013 Supplemental Proposed Rule, the Agencies believe that a narrower exemption for certain types of HPML refinance loans, generally consistent with the program criteria for streamlined refinances under GSE and Federal government agency programs, is in the public interest and will promote the safety and soundness of creditors. The Agencies recognize that, by reducing the risk of foreclosures and helping borrowers better afford their mortgages, streamlined refinancing programs can contribute to stabilizing communities and the economy, both now and in the future. Streamlined HPML refinance transactions can help borrowers who are at risk of default in the near future, as well as those who might not default in the near term but could benefit by refinancing into a lower rate mortgage for considerable cost savings over time. The Agencies also recognize that streamlined refinancing programs assist credit risk holders to manage their risks. Originating HPML refinances that are beneficial to consumers can be important to creditors to ensure the continuing performance of loans on their books and to strengthen customer relations. For investors in these loans, the streamlined refinances can reduce financial risks associated with potential defaults and foreclosures. As a general matter, the purpose of the exemption for certain refinance transactions is to facilitate transactions that can be beneficial to borrowers even though they are HPMLs. When the consumer is not obtaining additional funds to increase the amount of the debt (other than the costs related to the refinancing), and the entity that will hold the credit risk of the refinance loan is already the credit risk holder on the existing loan, the benefit from obtaining a new appraisal may be insufficient to warrant the additional cost. The Agencies believe that an exemption from the HPML appraisal rules for certain HPML refinances can ensure that the time and cost generated by new appraisal requirements are not introduced into certain HPML transactions—namely, those that are not qualified mortgages but are part of programs designed to help consumers avoid defaults and improve their financial positions, as well as help creditors and investors avoid losses and mitigate credit risk. Definition of “Refinancing” Consistent with the proposal, § 1026.35(c)(2)(vii) in the final rule defines a “refinancing” to mean “refinancing” in § 1026.20(a). Also consistent with the proposal, the definition of “refinancing” under § 1026.35(c)(2)(vii) does not require that the creditor remain the same for both the refinancing and the existing obligation. 45 As noted in the 2013 Supplemental Proposed Rule, this is a departure from the definition of “refinancing” under § 1026.20(a); commentary to that provision clarifies that a “refinancing” under § 1026.20(a) includes “only refinancings undertaken by the original creditor or a holder or servicer of the original obligation.” See comment 20(a)-5. By contrast, the exemption in § 1026.35(c)(2)(vii) allows a different creditor to extend the refinance loan, as long as the credi [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%3A2013-30108. Public record. Not legal advice.