# Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2014-25503 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** November 3, 2014 - **Citation:** 79 FR 65300 ## Text BUREAU OF CONSUMER FINANCIAL PROTECTION 12 CFR Part 1026 [Docket No. CFPB-2014-0009] RIN 3170-AA43 Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z) AGENCY: Bureau of Consumer Financial Protection. ACTION: Final rule; official interpretations. SUMMARY: The Bureau of Consumer Financial Protection (Bureau) is amending certain mortgage rules issued in 2013. The final rule provides an alternative small servicer definition for nonprofit entities that meet certain requirements and amends the existing exemption from the ability-to-repay rule for nonprofit entities that meet certain requirements. The final rule also provides a cure mechanism for the points and fees limit that applies to qualified mortgages. DATES: Effective dates: The final rule is effective on November 3, 2014, except amendatory instruction 5, which is effective August 1, 2015. For additional discussion regarding the effective date of the rule, see section VI of the SUPPLEMENTARY INFORMATION below. Applicability dates: The amendments to § 1026.43 and commentary to § 1026.43 in Supplement I to part 1026, other than amendatory instruction 5, apply to transactions consummated on or after November 3, 2014. FOR FURTHER INFORMATION CONTACT: Pedro De Oliveira, Counsel; William R. Corbett, Nicholas Hluchyj, and Priscilla Walton-Fein, Senior Counsels, Office of Regulations, at (202) 435-7700. SUPPLEMENTARY INFORMATION: I. Summary of the Final Rule In January 2013, the Bureau issued several final rules concerning mortgage markets in the United States (2013 Title XIV Final Rules), pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Public Law 111-203, 124 Stat. 1376 (2010). 1 The Bureau clarified and revised those rules through notice and comment rulemaking during the summer and fall of 2013. The purpose of those updates was to address important questions raised by industry, consumer groups, and other stakeholders. On April 30, 2014, the Bureau proposed several additional amendments to the regulations adopted by the Bureau in the 2013 Title XIV Final Rules to revise regulatory provisions and official interpretations primarily relating to the Regulation Z ability-to-repay/qualified mortgage requirements and servicing rules, and sought comment on additional issues. The proposal was published in the Federal Register on May 6, 2014. See 79 FR 25730 (May 6, 2014). 1 Specifically, on January 10, 2013, the Bureau issued Escrow Requirements Under the Truth in Lending Act (Regulation Z), 78 FR 4725 (Jan. 22, 2013) (2013 Escrows Final Rule), High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X), 78 FR 6855 (Jan. 31, 2013) (2013 HOEPA Final Rule), and Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z), 78 FR 6407 (Jan. 30, 2013) (January 2013 ATR Final Rule). The Bureau concurrently issued a proposal to amend the January 2013 ATR Final Rule, and a final rule related to the proposal was issued on May 29, 2013. See 78 FR 6621 (Jan. 30, 2013) (January 2013 ATR Proposal) and 78 FR 35429 (June 12, 2013) (May 2013 ATR Final Rule). On January 17, 2013, the Bureau issued the Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X), 78 FR 10695 (Feb. 14, 2013) and the Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z), 78 FR 10901 (Feb. 14, 2013) (collectively, 2013 Mortgage Servicing Final Rules). On January 18, 2013, the Bureau issued the Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity Act (Regulation B), 78 FR 7215 (Jan. 31, 2013) (2013 ECOA Valuations Final Rule) and, jointly with other agencies, issued Appraisals for Higher-Priced Mortgage Loans (Regulation Z), 78 FR 10367 (Feb. 13, 2013) (2013 Interagency Appraisals Final Rule). On January 20, 2013, the Bureau issued the Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z), 78 FR 11279 (Feb. 15, 2013) (2013 Loan Originator Final Rule). Specifically, the Bureau proposed three amendments to Regulation Z: • To provide an alternative definition of the term “small servicer,” which would apply to certain nonprofit entities that service for a fee loans on behalf of other nonprofit chapters of the same organization. A “small servicer” is exempt from certain requirements that apply to servicers under the Bureau's Regulations Z (12 CFR part 1026) and X (12 CFR part 1024). The Bureau proposed this change in Regulation Z, but the change would also affect several provisions of Regulation X, which cross-reference the Regulation Z small servicer definition. • To amend the Regulation Z ability-to-repay requirements to provide that certain non-interest bearing, contingent subordinate liens originated by nonprofit creditors will not be counted towards the credit extension limit that applies to the nonprofit exemption from the ability-to-repay requirements. • To provide a limited, post-consummation cure mechanism for loans that exceed the points and fees limit for qualified mortgages, but that meet the other requirements for being a qualified mortgage at consummation. The Bureau is issuing a final rule with respect to these proposals. With respect to the proposals related to nonprofit servicers and the nonprofit exemption from the ability-to-repay rule, the Bureau is finalizing those provisions as proposed, with minor technical revisions to the nonprofit servicer provision. The Bureau is generally finalizing the points and fees cure provision as proposed but with certain modifications to address concerns raised by commenters. The proposal sought comment on issues related to a possible cure for the debt-to-income ratio limit that applies to certain qualified mortgages and to the credit extension limit that applies to small creditor exemptions and special provisions in certain of the regulations adopted by the Bureau in the 2013 Title XIV Mortgage Rules. Those issues are not addressed in this final rule. The Bureau is considering comments submitted on those issues and whether to address those issues in a future rulemaking. II. Background In response to an unprecedented cycle of expansion and contraction in the mortgage market that sparked the most severe U.S. recession since the Great Depression, Congress passed the Dodd-Frank Act, which was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress established the Bureau and generally consolidated the rulemaking authority for Federal consumer financial laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), in the Bureau. 2 At the same time, Congress significantly amended the statutory requirements governing mortgage practices, with the intent to restrict the practices that contributed to and exacerbated the crisis. 3 2 See, e.g., sections 1011 and 1021 of the Dodd-Frank Act, 12 U.S.C. 5491 and 5511 (establishing and setting forth the purpose, objectives, and functions of the Bureau); section 1061 of the Dodd-Frank Act, 12 U.S.C. 5581 (consolidating certain rulemaking authority for Federal consumer financial laws in the Bureau); section 1100A of the Dodd-Frank Act (codified in scattered sections of 15 U.S.C.) (similarly consolidating certain rulemaking authority in the Bureau). But see Section 1029 of the Dodd-Frank Act, 12 U.S.C. 5519 (subject to certain exceptions, excluding from the Bureau's authority any rulemaking authority over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both). 3 See title XIV of the Dodd-Frank Act, Public Law 111-203, 124 Stat. 1376 (2010) (codified in scattered sections of 12 U.S.C., 15 U.S.C., and 42 U.S.C.). Under the statute, most of these new requirements would have taken effect automatically on January 21, 2013 if the Bureau had not issued implementing regulations by that date. 4 To avoid uncertainty and potential disruption in the national mortgage market at a time of economic vulnerability, the Bureau issued several final rules in a span of less than two weeks in January 2013 to implement these new statutory provisions and provide for an orderly transition. Those rules included the January 2013 ATR Final Rule and the 2013 Mortgage Servicing Final Rules. Pursuant to the Dodd-Frank Act, which permitted a maximum of one year for implementation, the January 2013 ATR Final Rule and the 2013 Mortgage Servicing Final Rules had effective dates of January 10, 2014. 4 See section 1400(c) of the Dodd-Frank Act, 15 U.S.C. 1601 note. Concurrent with the January 2013 ATR Final Rule, on January 10, 2013, the Bureau issued proposed amendments to the rule (the January 2013 ATR Proposal), which the Bureau adopted on May 29, 2013 (the May 2013 ATR Final Rule). 78 FR 6621 (Jan. 30, 2013); 78 FR 35429 (June 12, 2013). The Bureau issued additional corrections and clarifications to the provisions adopted by the Bureau in the 2013 Mortgage Servicing Final Rules and the May 2013 ATR Final Rule in the summer and fall of 2013. 5 This final rule concerns additional revisions to the new rules. The purpose of these updates is to address important questions raised by industry, consumer groups, or other stakeholders. 5 78 FR 44685 (July 24, 2013) (clarifying which mortgages to consider in determining small servicer status and the application of the small servicer exemption with regard to servicer/affiliate and master servicer/subservicer relationships); 78 FR 45842 (July 30, 2013); 78 FR 60381 (Oct. 1, 2013) (revising exceptions available to small creditors operating predominantly in “rural” or “underserved” areas); 78 FR 62993 (Oct. 23, 2013) (clarifying proper compliance regarding servicing requirements when a consumer is in bankruptcy or sends a cease communication request under the Fair Debt Collection Practice Act). III. Comments On May 6, 2014, the Bureau published a proposal in the Federal Register to amend certain aspects of the Regulation Z ability-to-repay/qualified mortgage requirements and servicing rules. See 79 FR 25730 (May 6, 2014). The comment period closed on June 5, 2014. 6 In response to the proposal, the Bureau received more than 40 comments from consumer groups, creditors, industry trade associations, and others. As discussed in more detail below, the Bureau has considered these comments in adopting this final rule. 6 The proposal also sought comment on additional issues relating to qualified mortgage debt-to-income ratio overages and the credit extension limit for the small creditor definition. The comment period for those aspects of the proposal closed on July 7, 2014. As noted above, the Bureau is not addressing those issues through this final rule. IV. Legal Authority The Bureau is issuing this final rule pursuant to its authority under TILA, RESPA, and the Dodd-Frank Act. Section 1061 of the Dodd-Frank Act transferred to the Bureau the “consumer financial protection functions” previously vested in certain other Federal agencies, including the Board of Governors of the Federal Reserve System (Board). The term “consumer financial protection function” is defined to include “all authority to prescribe rules or issue orders or guidelines pursuant to any Federal consumer financial law, including performing appropriate functions to promulgate and review such rules, orders, and guidelines.” Section 1061 of the Dodd-Frank Act also transferred to the Bureau all of the Department of Housing and Urban Development's (HUD's) consumer protection functions relating to RESPA. Title X of the Dodd-Frank Act, including section 1061 of the Dodd-Frank Act, along with TILA, RESPA, and certain subtitles and provisions of title XIV of the Dodd-Frank Act, are Federal consumer financial laws. 7 7 Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws,” the provisions of title X of the Dodd-Frank Act, and the laws for which authorities are transferred under title X subtitles F and H of the Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA); Dodd-Frank section 1400(b), 12 U.S.C. 5481(12) note (defining “enumerated consumer laws” to include certain subtitles and provisions of Dodd-Frank Act title XIV); Dodd-Frank Act section 1061(b)(7), 12 U.S.C. 5581(b)(7) (transferring to the Bureau all of HUD's consumer protection functions relating to RESPA). A. TILA Section 105(a) of TILA authorizes the Bureau to prescribe regulations to carry out the purposes of TILA. 15 U.S.C. 1604(a). Under section 105(a), such regulations may contain such additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, as in the judgment of the Bureau are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance therewith. A purpose of TILA is “to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit.” TILA section 102(a), 15 U.S.C. 1601(a). In particular, it is a purpose of TILA section 129C, as added by the Dodd-Frank Act, to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive, or abusive. 15 U.S.C. 1639b(a)(2). Section 105(f) of TILA authorizes the Bureau to exempt from all or part of TILA a class of transactions if the Bureau determines that TILA coverage does not provide a meaningful benefit to consumers in the form of useful information or protection. 15 U.S.C. 1604(f)(1). That determination must consider: • The loan amount and whether TILA's provisions “provide a benefit to the consumers who are parties to such transactions”; • The extent to which TILA requirements “complicate, hinder, or make more expensive the credit process for the class of transactions”; • The borrowers' “status,” including their “related financial arrangements,” their financial sophistication relative to the type of transaction, and the importance to the borrowers of the credit, related supporting property, and TILA coverage; • Whether the loan is secured by the consumer's principal residence; and • Whether consumer protection would be undermined by such an exemption. 15 U.S.C. 1604(f)(2). TILA section 129C(b)(3)(B)(i) provides the Bureau with authority to prescribe regulations that revise, add to, or subtract from the criteria that define a qualified mortgage upon a finding that such regulations: Are necessary or proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of the ability-to-repay requirements; are necessary and appropriate to effectuate the purposes of the ability-to-repay and residential mortgage loan origination requirements; prevent circumvention or evasion thereof; or facilitate compliance with TILA sections 129B and 129C. 15 U.S.C. 1639c(b)(3)(B)(i). In addition, TILA section 129C(b)(3)(A) requires the Bureau to prescribe regulations to carry out such purposes. 15 U.S.C. 1639c(b)(3)(A). B. RESPA Section 19(a) of RESPA authorizes the Bureau to prescribe such rules and regulations, to make such interpretations, and to grant such reasonable exemptions for classes of transactions, as may be necessary to achieve the purposes of RESPA, which include RESPA's consumer protection purposes. 12 U.S.C. 2617(a). In addition, section 6(j)(3) of RESPA authorizes the Bureau to establish any requirements necessary to carry out section 6 of RESPA, and section 6(k)(1)(E) of RESPA authorizes the Bureau to prescribe regulations that are appropriate to carry out RESPA's consumer protection purposes. 12 U.S.C. 2605(j)(3) and (k)(1)(E). The consumer protection purposes of RESPA include responding to borrower requests and complaints in a timely manner, maintaining and providing accurate information, helping borrowers avoid unwarranted or unnecessary costs and fees, and facilitating review for foreclosure avoidance options. C. The Dodd-Frank Act Section 1405(b) of the Dodd-Frank Act provides that, “in order to improve consumer awareness and understanding of transactions involving residential mortgage loans through the use of disclosures,” the Bureau may exempt from disclosure requirements, “in whole or in part . . . any class of residential mortgage loans” if the Bureau determines that such exemption “is in the interest of consumers and in the public interest.” 15 U.S.C. 1601 note. 8 Notably, the authority granted by section 1405(b) applies to “disclosure requirements” generally, and is not limited to a specific statute or statutes. Accordingly, Dodd-Frank Act section 1405(b) is a broad source of authority for exemptions from the disclosure requirements of TILA and RESPA. 8 “Residential mortgage loan” is generally defined as any consumer credit transaction (other than open-end credit plans) that is secured by a mortgage (or equivalent security interest) on “a dwelling or on residential real property that includes a dwelling” (except, in certain instances, timeshare plans). 15 U.S.C. 1602(cc)(5). Moreover, section 1022(b)(1) of the Dodd-Frank Act authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.” 12 U.S.C. 5512(b)(1). Accordingly, the Bureau is exercising its authority under Dodd-Frank Act section 1022(b) to prescribe rules that carry out the purposes and objectives of TILA, RESPA, title X of the Dodd-Frank Act, and certain enumerated subtitles and provisions of title XIV of the Dodd-Frank Act, and to prevent evasion of those laws. The Bureau is amending rules that implement certain Dodd-Frank Act provisions. In particular, the Bureau is amending provisions of Regulation Z (and, by reference, Regulation X) adopted by the Bureau in the 2013 Mortgage Servicing Final Rules (including July 2013 amendments thereto), the January 2013 ATR Final Rule, and the May 2013 ATR Final Rule. V. Section-by-Section Analysis Section 1026.41 Periodic Statements for Residential Mortgage Loans 41(e) Exemptions 41(e)(4) Small Servicers The Bureau's Proposal The Bureau proposed to revise the scope of the exemption for small servicers in § 1026.41(e)(4)(ii) and incorporated by cross-reference in certain provisions of Regulation X. The proposal would have added an alternative definition of small servicer in § 1026.41(e)(4)(ii)(C), which would apply to certain nonprofit entities that service for a fee only loans for which the servicer or an associated nonprofit entity is the creditor. The proposal also would have made conforming changes to § 1026.41(e)(4)(ii) and (iii) and associated commentary. Currently, Regulation Z exempts small servicers from certain mortgage servicing requirements. Small servicers are defined in Regulation Z § 1026.41(e)(4)(ii), and Regulation X also relies on this same definition. Regulation Z exempts small servicers from the requirement to provide periodic statements for residential mortgage loans. 9 Regulation X exempts small servicers from: (1) Certain requirements relating to obtaining force-placed insurance; 10 (2) the provisions relating to general servicing policies, procedures, and requirements; 11 and (3) certain requirements and restrictions relating to communicating with borrowers about, and evaluation of loss mitigation applications. 12 9 12 CFR 1026.41(e) (requiring delivery each billing cycle of a periodic statement, with specific content and form). For loans serviced by a small servicer, a creditor or assignee is also exempt from the Regulation Z periodic statement requirements. 12 CFR 1026.41(e)(4)(i). 10 12 CFR 1024.17(k)(5) (prohibiting purchase of force-placed insurance in certain circumstances). 11 12 CFR 1024.30(b)(1) (exempting small servicers from §§ 1024.38 through 41, except as otherwise provided under § 1024.41(j), as discussed in note 12, infra). Sections 1024.38 through 40, respectively, impose general servicing policies, procedures, and requirements; early intervention requirements for delinquent borrowers; and policies and procedures to maintain continuity of contact with delinquent borrowers). 12 See 12 CFR 1024.41 (loss mitigation procedures). Though exempt from most of the rule, small servicers are subject to the prohibition of foreclosure referral before the loan obligation is more than 120 days delinquent and may not make the first notice or filing for foreclosure if a borrower is performing pursuant to the terms of an agreement on a loss mitigation option. 12 CFR 1024.41(j). Current § 1026.41(e)(4)(ii) defines the term “small servicer” as a servicer that either: (A) Services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the servicer (or its affiliate) is the creditor or assignee; or (B) is a Housing Finance Agency, as defined in 24 CFR 266.5. “Affiliate” is defined in § 1026.32(b)(5) as any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq. (BHCA). 13 Generally, under current § 1026.41(e)(4)(ii)(A), a servicer cannot be a small servicer if it services any loan for which the servicer or its affiliate is not the creditor or assignee. However, § 1026.41(e)(4)(iii) provides exceptions, which include mortgage loans that are voluntarily serviced by the servicer for a creditor or assignee that is not an affiliate of the servicer and for which the servicer does not receive any compensation or fees. 14 13 Under the BHCA, a company has “control” over another company if it (i) “directly or indirectly . . . owns, controls, or has power to vote 25 per centum or more of any class of voting securities” of the other company; (ii) “controls . . . the election of a majority of the directors or trustees” of the other company; or (iii) “directly or indirectly exercises a controlling influence over the management or policies” of the other company (based on a determination by the Board). 12 U.S.C. 1841(a)(2). 14 Section 1026.41(e)(4)(ii) also excludes from consideration reverse mortgage transactions and mortgage loans secured by consumers' interests in timeshare plans for purposes of determining whether a servicer qualifies as a small servicer. Prior to issuing the proposal related to this final rule, the Bureau learned that certain nonprofit entities may, for a fee, service loans for another nonprofit entity that is part of the same larger network of nonprofits. These nonprofits are separately incorporated but operate under mutual contractual obligations to serve the same charitable mission, and use a common name, trademark, or servicemark. Such entities likely do not meet the definition of “affiliate” under the BHCA due to the limits imposed on nonprofits with respect to ownership and control. Accordingly, these nonprofits likely do not qualify for the small servicer exemption because they service, for a fee, loans on behalf of an entity that is not an affiliate as defined under the BHCA (and because the servicer is neither the creditor for, nor an assignee of, those loans). Groups of nonprofit entities that are associated with one another in the described manner may consolidate servicing activities to achieve economies of scale necessary to service loans cost-effectively, and such cost savings may reduce the cost of credit or enable the nonprofit to extend a greater number of loans overall. However, because of their corporate structures, such groups of nonprofit entities may be unable to qualify for the small servicer exemption, unlike their for-profit counterparts. To address these concerns, the Bureau proposed to revise the scope of the small servicer exemption in Regulation Z § 1026.41 that is also applicable to certain provisions of Regulation X. The Bureau believed that the ability of such nonprofit entities to consolidate servicing activities may be beneficial to consumers—to the extent servicing cost savings are passed on to consumers or lead to increased credit availability—and may outweigh the consumer protections provided by the servicing rules to those consumers affected by the proposal. The Bureau was concerned that, if nonprofit servicers are subject to all of the servicing rules, low- and moderate-income consumers may face increased costs or reduced access to credit. Although the servicing rules provide important protections for consumers, the Bureau was concerned that these protections may not outweigh the risk of reduction in credit access for low- and moderate-income consumers served by nonprofit entities that would qualify for the proposed § 1026.41(e)(4)(ii)(C) exemption. Furthermore, the Bureau believed these nonprofit entities, because of their scale and community-focused lending programs, have other incentives to provide high levels of customer contact and information—incentives that warrant exempting those servicers from complying with the periodic statement requirements under Regulation Z and certain requirements of Regulation X discussed above. Accordingly, the proposal would have added an alternative definition of small servicer that would apply to nonprofit entities that service loans on behalf of other nonprofits within a common network or group of nonprofit entities. Specifically, proposed § 1026.41(e)(4)(ii)(C) would have provided that a small servicer is a nonprofit entity that services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities, for all of which the servicer or an associated nonprofit entity is the creditor. Proposed § 1026.41(e)(4)(ii)(C)( 1 ) would have defined the term “nonprofit entity,” for purposes of proposed § 1026.41(e)(4)(ii)(C), to mean an entity having a tax exemption ruling or determination letter from the Internal Revenue Service (IRS) under section 501(c)(3) of the Internal Revenue Code of 1986 (IRC). See 26 U.S.C. 501(c)(3); 26 CFR 501(c)(3)-1. Proposed § 1026.41(e)(4)(ii)(C)( 2 ) would have defined “associated nonprofit entities” to mean nonprofit entities that by agreement operate using a common name, trademark, or servicemark to further and support a common charitable mission or purpose. The Bureau also proposed technical changes to § 1026.41(e)(4)(iii), which would have addressed the timing of the small servicer determination and also excludes certain loans from being counted toward the 5,000-loan limitation. The proposed changes would have added language to the existing timing requirement to limit its application to the small servicer determination for purposes of § 1026.41(e)(4)(ii)(A) and inserted a separate timing requirement for purposes of determining whether a nonprofit servicer is a small servicer pursuant to § 1026.41(e)(4)(ii)(C). Specifically, that requirement would have provided that the servicer is evaluated based on the mortgage loans serviced by the servicer as of January 1 and for the remainder of the calendar year. In addition, the Bureau proposed technical changes to comment 41(e)(4)(ii)-2 and proposed to add comment 41(e)(4)(ii)-4 to parallel existing comment 41(e)(4)(ii)-2 (that would have addressed the requirements to be a small servicer under the existing definition in § 1026.41(e)(4)(ii)(A)). Specifically, new comment 41(e)(4)(ii)-4 would have clarified that there would be two elements to satisfying the nonprofit small servicer definition in proposed § 1026.41(e)(4)(ii)(C). First, the comment would have clarified that a nonprofit entity must service 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities. For each associated nonprofit entity, the small servicer determination would be made separately without consideration of the number of loans serviced by another associated nonprofit entity. Second, the comment would have explained that the nonprofit entity would have to service only mortgage loans for which the servicer (or an associated nonprofit entity) is the creditor. To be the creditor, the servicer (or an associated nonprofit entity) would have to be the entity to which the mortgage loan obligation was initially payable (that is, the originator of the mortgage loan). The comment would have explained that a nonprofit entity would not be a small servicer under § 1026.41(e)(4)(ii)(C) if it services any mortgage loans for which the servicer or an associated nonprofit entity is not the creditor (that is, for which the servicer or an associated nonprofit entity was not the originator). The comment would have provided two examples to demonstrate the application of the small servicer definition under § 1026.41(e)(4)(ii)(C). The Bureau also proposed, along with some other clarifying and technical changes, to revise existing comment 41(e)(4)(iii)-3 to explain that mortgage loans that are not considered pursuant to § 1026.41(e)(4)(iii) for purposes of the small servicer determination under § 1026.41(e)(4)(ii)(A) are also not considered for determining whether a servicer (together with any affiliates) services 5,000 or fewer mortgage loans or for determining whether a servicer is servicing only mortgage loans that it (or an affiliate) owns or originated. Finally, the Bureau proposed a new comment 41(e)(4)(iii)-4 to explain that mortgage loans that are not considered pursuant to § 1026.41(e)(4)(iii) for purposes of the small servicer determination under § 1026.41(e)(4)(ii)(C) also would not be considered for determining whether a nonprofit entity services 5,000 or fewer mortgage loans, including any mortgage loans serviced on behalf of associated nonprofit entities, or for determining whether a nonprofit entity is servicing only mortgage loans that it or an associated nonprofit entity originated. The comment would have provided examples to illustrate the rule. For the reasons discussed below, the Bureau is adopting § 1026.41(e)(4)(ii)(C) and (iii) and the accompanying commentary as proposed, with minor technical revisions. Comments The Bureau received comments on the proposed amendment to the small servicer definition from a nonprofit servicer, consumer groups, credit union trade associations, and a mortgage trade association. Commenters generally favored the proposed provision, but they suggested certain revisions to the proposed nonprofit small servicer definition and expressed concerns about possible evasion. In the proposal, the Bureau sought comment on whether the definition of a nonprofit entity should contain additional criteria regarding the nonprofit's activities or the loan's features or purposes. Consumer group commenters expressed concern that the proposed definition of nonprofit entity might allow evasion. These groups urged the Bureau to add language and clarification to avoid abuse by dishonest nonprofits. These commenters stated that some entities may cease to comply with section 501(c)(3) of the IRC, but could still have a tax exemption ruling or determination letter from the IRS until the IRS formally revoked its status. The commenters stated that a nonprofit would remain eligible for the exemption despite blatant evidence that the entity was not a bona fide nonprofit. These commenters urged the Bureau to require the nonprofit entity to be a bona fide nonprofit operating in compliance with IRC section 501(c)(3). Consumer group commenters also expressed concern with proposed comment 41(e)(4)(ii)-4, which would provide that each associated nonprofit entity may service no more than 5,000 loans under the nonprofit small servicer definition. These commenters requested that the Bureau publicly state that it would monitor use of the exemption to prevent abuse by servicers that service more than 5,000 loans. Credit union trade associations generally supported expansion of the small servicer exemption. However, they requested the exemption be expanded further to exempt credit unions. They noted that Federal and State chartered credit unions are typically designated as tax-exempt under IRC sections 501(c)(1) and (14), respectively. In support of such an expansion, one credit union trade association noted that some credit unions that would otherwise qualify for the existing small servicer definition under § 1024.41(e)(4)(ii)(A) are disqualified because of ownership stakes in credit union service organizations (CUSOs). Final Rule For the reasons set forth below, the Bureau is adopting as proposed § 1026.41(e)(4)(ii) and (iii) and associated commentary. The Bureau finds that the potential benefits to consumers that may result from nonprofit entities consolidating servicing activities outweigh the consumer protections provided by the servicing rules to the affected consumers. The Bureau believes that the entities that qualify for the exemption under the nonprofit small servicer definition have other incentives to provide high levels of customer contact and information, which lends further support to the exemption. The Bureau considered comments requesting the addition of a bona fide qualifier to the nonprofit small servicer definition but has not adopted this approach in the final rule. A bona fide requirement is unnecessary because the nonprofit small servicer definition is more limited than the existing small servicer definition and is narrowly tailored to prevent evasion. Specifically, the nonprofit small servicer definition would require that a nonprofit entity service only loans for which it or an associated nonprofit entity is the creditor. This is in contrast to the existing small servicer exemption under § 1026.41(e)(4)(ii)(A), which applies to entities that service loans for which it or an affiliate is the creditor or assignee. To satisfy the nonprofit small servicer definition, an associated nonprofit entity must be the creditor on the loan. In addition, to meet the nonprofit small servicer definition, the “associated nonprofit entities,” as defined in § 1026.41(e)(4)(ii)(C)( 2 ), must by agreement operate using a common name, trademark, or servicemark to further and support a common charitable mission or purpose. As such, nonprofit entities that operate in a manner that is inconsistent with the group's common charitable purpose—or a group of associated nonprofits that operates without a charitable purpose—would not satisfy the nonprofit small servicer definition. Although the final rule does not include a bona fide nonprofit qualifier, the Bureau will monitor use of the nonprofit small servicer exemptions and consider any changes to the definition, as appropriate. The Bureau has not expanded the nonprofit small servicer definition to cover credit unions designated as tax-exempt under IRC sections 501(c)(1) and (14), as requested by some credit union and credit union trade association commenters. 15 The Bureau believes that credit unions and their affiliates are likely to have greater capacity to comply with the full mortgage servicing rules than those nonprofit entities that are covered by the nonprofit small servicer definition. The commenters did not provide any data to support an expansion of the exemption to credit unions. 15 The Bureau previously considered, but declined to adopt, a broad exemption for credit unions in adopting the original small servicer definition in § 1026.41(e)(4)(ii)(A) in the 2013 Final Mortgage Servicing Rule. See 78 FR 10901, 10976 (Feb. 14, 2013). Subsequently, in clarifying the small servicer definition in the July 2013 Mortgage Servicing Final Rule, the Bureau considered concerns that affiliate relationships between certain credit unions and credit union service organizations (CUSOs) may prevent the credit unions and CUSOs from qualifying for the small servicer exemption, but declined to adopt such an exemption because the comments were beyond the scope of the rulemaking. See 78 FR 44685, 44694 (July 24, 2013). The Bureau finds that a broad exemption for credit unions is outside the scope of this rulemaking as well. Legal Authority The Bureau is adopting an exemption from the periodic statement requirement under TILA section 128(f) for certain small servicers pursuant to its authority under TILA section 105(a) and (f) and Dodd-Frank Act section 1405(b). For the reasons discussed above, the Bureau finds that the exemption is necessary and proper under TILA section 105(a) to facilitate TILA compliance. The purpose of the periodic statement requirement is to ensure that consumers receive ongoing customer contact and account information. As discussed above, the Bureau finds that nonprofit entities that qualify for the exemption have incentives to provide ongoing consumer contact and account information that would exist absent a regulatory requirement to do so. The Bureau also finds that such nonprofits may consolidate servicing functions in an associated nonprofit entity to provide more cost-effectively this high level of customer contact and otherwise to comply with applicable regulatory requirements. As noted, the Bureau is concerned that the current rule may discourage consolidation of servicing functions. As a result, the current rule may result in nonprofits being unable to provide high-contact servicing or to comply with other applicable regulatory requirements due to the costs that would be imposed on each individual servicer. Accordingly, the Bureau finds that the nonprofit small servicer definition facilitates compliance with TILA by allowing nonprofit small servicers to consolidate servicing functions, without losing status as a small servicer, to service loans more cost-effectively in compliance with applicable regulatory requirements. In addition, consistent with TILA section 105(f) and in light of the factors in that provision, the Bureau finds that requiring nonprofit entities servicing 5,000 or fewer loans (including those serviced on behalf of associated nonprofits, for all of which that servicer or an associated nonprofit is the creditor) to comply with the periodic statement requirement in TILA section 128(f) would not provide a meaningful benefit to consumers in the form of useful information or protection. The Bureau finds that these nonprofit servicers have incentives to provide consumers with necessary information, and that requiring provision of periodic statements would impose significant costs and burden. Specifically, the Bureau finds that the nonprofit small servicer definition will not complicate, hinder, or make more expensive the credit process—and is proper without regard to the amount of the loan, to the status of the consumer (including related financial arrangements, financial sophistication, and the importance to the consumer of the loan or related supporting property), or to whether the loan is secured by the principal residence of the consumer. In addition, consistent with Dodd-Frank Act section 1405(b), for the reasons discussed above, the Bureau finds that exempting nonprofit small servicers from the requirements of TILA section 128(f) is in the interest of consumers and in the public interest. As noted above, Regulation X cross-references the definition of small servicer in § 1026.41(e)(4) for the purpose of exempting small servicers from several mortgage servicing requirements. Accordingly, in amending the small servicer definition in Regulation Z, the Bureau is also effectively amending the current Regulation X exemptions for small servicers. For this purpose, the Bureau is relying on the same authorities on which it relied in promulgating the current Regulation X small servicer exemptions. Specifically, the Bureau is exempting nonprofit small servicers from the requirements of Regulation X §§ 1024.38 through 41, except as otherwise provided in § 1024.41(j), see § 1024.30(b)(1), as well as certain requirements of § 1024.17(k)(5), pursuant to its authority under section 19(a) of RESPA to grant such reasonable exemptions for classes of transactions as may be necessary to achieve the consumer protection purposes of RESPA. The consumer protection purposes of RESPA include helping borrowers avoid unwarranted or unnecessary costs and fees. The Bureau finds that the nonprofit small servicer definition would ensure that consumers avoid unwarranted and unnecessary costs and fees by encouraging nonprofit small servicers to consolidate servicing functions. In addition, the Bureau relies on its authority pursuant to section 1022(b) of the Dodd-Frank Act to prescribe regulations necessary or appropriate to carry out the purposes and objectives of Federal consumer financial law, including the purposes and objectives of title X of the Dodd-Frank Act. Specifically, the Bureau finds that the nonprofit small servicer definition is necessary and appropriate to carry out the purpose under section 1021(a) of the Dodd-Frank Act of ensuring that all consumers have access to markets for consumer financial products and services that are fair, transparent, and competitive, and the objective under section 1021(b) of the Dodd-Frank Act of ensuring that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation. With respect to §§ 1024.17(k)(5), 39, and 41 (except as otherwise provided in § 1024.41(j)), the Bureau is also adopting the nonprofit small servicer definition pursuant to its authority in section 6(j)(3) of RESPA to set forth requirements necessary to carry out section 6 of RESPA and in section 6(k)(1)(E) of RESPA to set forth obligations appropriate to carry out the consumer protection purposes of RESPA. Section 1026.43 Minimum Standards for Transactions Secured by a Dwelling 43(a) Scope 43(a)(3) The Bureau's Proposal The Bureau proposed to amend the nonprofit small creditor exemption from the ability-to-repay rule that is set forth in § 1026.43(a)(3)(v)(D). To qualify for this exemption, a creditor must have extended credit secured by a dwelling no more than 200 times during the calendar year preceding receipt of the consumer's application and meet certain additional requirements. The proposal would have excluded certain subordinate-lien transactions from the 200-credit extension limit. For the reasons set forth below and in the proposal, the Bureau is finalizing this provision as proposed. Currently, § 1026.43(a)(3)(v)(D) provides an exemption from the ability-to-repay rule if the creditor and the loan meet certain criteria. First, the creditor must have a tax exemption ruling or determination letter from the IRS under section 501(c)(3) of the IRC. Second, the creditor may not have extended credit secured by a dwelling more than 200 times in the calendar year preceding receipt of the consumer's application. Third, the creditor, in the calendar year preceding receipt of the consumer's application, must have extended credit only to consumers whose income did not exceed the low- and moderate-income household limit established by HUD. Fourth, the extension of credit must be to a consumer with income that does not exceed HUD's low- and moderate-income household limit. Fifth, the creditor must have determined, in accordance with written procedures, that the consumer has a reasonable ability to repay the extension of credit. As noted in the proposal, the Bureau has heard concerns from some nonprofit creditors about the treatment of certain subordinate-lien programs under the nonprofit exemption from the ability-to-repay requirements. These creditors expressed concern that they may be forced to curtail their subordinate-lien programs or more generally limit their lending activities to avoid exceeding the 200-credit extension limit. In particular, these entities indicated concern with the treatment of subordinate-lien transactions that charge no interest and for which repayment is generally either forgivable or of a contingent nature. In light of these concerns, the Bureau proposed to amend § 1026.43(a)(3)(v)(D)( 1 ) to exclude certain subordinate liens from the 200-credit extension limit determination. Specifically, the Bureau proposed to add § 1026.43(a)(3)(vii), which would have provided that consumer credit transactions that meet the following criteria would not be considered in determining whether a creditor meets the credit extension limit in § 1026.43(a)(3)(v)(D)( 1 ): (1) The transaction is secured by a subordinate lien; (2) the transaction is for the purpose of downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies, property rehabilitation assistance, energy efficiency assistance, or foreclosure avoidance or prevention; (3) the credit contract does not require payment of interest; (4) the credit contract provides that the repayment of the amount of credit extended is (a) forgiven incrementally or in whole, at a date certain, and subject only to specified ownership and occupancy conditions, such as a requirement that the consumer maintain the property as the consumer's principal dwelling for five years, (b) deferred for a minimum of 20 years after consummation of the transaction, (c) deferred until sale of the property securing the transaction, or (d) deferred until the property securing the transaction is no longer the principal dwelling of the consumer; (5) the total of costs payable by the consumer in connection with the transaction at consummation is less than 1 percent of the amount of credit extended and includes no charges other than fees for recordation of security instruments, deeds, and similar documents, a bona fide and reasonable application fee, and a bona fide and reasonable fee for housing counseling services; and (6) in connection with the transaction, the creditor complies with all other applicable requirements of Regulation Z. Proposed comment 43(a)(3)(vii)-1 would have clarified that the terms of the credit contract must satisfy the conditions that the transaction not require the payment of interest under § 1026.43(a)(3)(vii)(C) and that repayment of the amount of credit extended be forgiven or deferred in accordance with § 1026.43(a)(3)(vii)(D). The comment would have further clarified that the other requirements of § 1026.43(a)(3)(vii) need not be reflected in the credit contract, but the creditor must retain evidence of compliance with those provisions, as required by the record retention provisions of § 1026.25(a). In particular, the creditor must have information reflecting that the total of closing costs imposed in connection with the transaction are less than 1 percent of the amount of credit extended and includes no charges other than recordation, application, and housing counseling fees, in accordance with § 1026.43(a)(3)(vii)(E). Unless an itemization of the amount financed sufficiently details this requirement, the creditor must establish compliance with § 1026.43(a)(3)(vii)(E) by some other written document and retain it in accordance with § 1026.25(a). Proposed § 1026.43(a)(3)(vii) and the accompanying comment would have largely mirrored a provision and accompanying comment that was adopted as part of the Bureau's rule integrating the pre-consummation disclosure requirements of TILA and RESPA (2013 TILA-RESPA Final Rule), effective August 1, 2015. See 78 FR 79729 (Dec. 31, 2013). That provision, which was adopted in both Regulation X, at § 1024.5(d) (by cross-reference), and Regulation Z, at § 1026.3(h), provides a partial exemption from the disclosure requirements for loans that meet criteria that largely mirror those in proposed § 1026.43(a)(3)(vii). As noted in the proposal, that exemption was intended to describe criteria associated with certain housing assistance loan programs for low- and moderate-income persons. The Bureau believed the same criteria for the partial exemption from the 2013 TILA-RESPA Final Rule would describe the class of transactions that might appropriately be excluded from the 200-credit extension limit in the ability-to-repay exemption for nonprofits and that defining a single class of transactions for purposes of § 1024.5(d), § 1026.3(h), and § 1026.43(a)(3)(vii) might facilitate compliance for creditors. Comments The Bureau received comments on the proposed revisions to the nonprofit creditor exemption from consumer groups, credit union trade associations, and one nonprofit creditor. Commenters generally favored the proposed provision but raised concerns about the scope and interpretation of the provisions. The nonprofit creditor commenter generally supported the proposal but requested certain revisions and clarifications. First, the commenter expressed concern with the requirement in proposed § 1026.43(a)(3)(vii)(D) that, to be excluded from the 200-credit extension limit, the credit contract provide that repayment be forgiven or deferred. Specifically, that commenter expressed concern that a subordinate lien that defers repayment, but for less than 20 years, does not meet the criteria for the exclusion from the credit extension limit under proposed § 1026.43(a)(3)(vii)(D)( 2 ). The commenter did not indicate whether its exemption status or the status of any other nonprofit creditor might be jeopardized if this provision were finalized, nor did it provide a specific justification for loosening the deferment period. Second, the nonprofit creditor requested that the repayment criteria be revised or commentary added to clarify that the provisions in the credit contract may provide for repayment where a borrower defaults on or refinances an accompanying first-lien mortgage without jeopardizing the loan's exemption status. Third, the nonprofit creditor commenter expressed concerns that the 200-credit extension limit discourages expansion and consolidation among nonprofit creditors. The commenter stated that the existing extension limit complicates mortgage sale transactions to its banking partners, but did not suggest any specific number of credit extensions that would be an appropriate limit for the nonprofit creditor exemption. Consumer group commenters generally supported adoption of the proposal but two consumer group commenters suggested that the Bureau should occasionally examine subordinate liens to ensure that any fees charged are bona fide. Credit union trade association commenters suggested that the Bureau expand the nonprofit exemption to include both Federal and State credit unions. Final Rule For the reasons discussed in the proposal, and in light of the comments received, the Bureau is adopting the revision to § 1026.43(a)(3)(v)(D), the addition of § 1026.43(a)(3)(vii), and comment 43(a)(3)(vii)-1 as proposed. The Bureau considered whether to relax the deferment period required by § 1026.43(a)(3)(vii)(D)( 2 ) but has not adopted such a change in the final rule. The Bureau believes that relaxing the deferment period may create a risk of consumer harm with respect to the excluded subordinate liens. As noted in the proposal, the exclusion is narrowly tailored to accommodate subordinate-liens that both reduce a consumer's monthly mortgage obligations and allow the consumer to control whether and when repayment is triggered, for at least 20 years. Reducing that period where the consumer controls repayment increases risks to consumers. The 20-year deferment requirement also serves to discourage use of the exclusion as a means of evasion of the ability-to-repay rule. Moreover, the nonprofit commenter did not assert that the 20-year deferment period required by § 1026.43(a)(3)(vii)(D)( 2 ) would presently or foreseeably jeopardize its exemption status (or the exemption status of any other nonprofit creditor). Finally, as noted above, § 1026.43(a)(3)(vii) largely mirrors a provision that was adopted as part of the Bureau's 2013 TILA-RESPA Final Rule. The Bureau does not, at this time, believe there is a basis for amending the exclusion from that rule and is concerned that maintaining two separate exclusion regimes would create undue regulatory burden. In addition, the Bureau considered whether the rule or commentary should specify that the credit contract may provide for repayment where a consumer defaults on or refinances an accompanying first-lien mortgage. However, the Bureau does not believe that such a provision is necessary. The exclusion criteria do not bar such provisions, nor would such provisions be inconsistent with the proposed criteria. The Bureau is concerned that revising § 1026.43(a)(3)(vii) or adding commentary expressly to permit such standard contract terms could call into question the effect of other standard contract terms providing for acceleration, such as for nonpayment of property taxes, on a loan's status under the exclusion. As a result, addressing these provisions might necessitate amending the commentary to cover a much more exhaustive list of what is prohibited or permitted. The Bureau also considered the request that it increase or remove the 200-credit extension limit from the § 1026.43(a)(3)(v)(D) nonprofit exemption altogether. The Bureau has determined that it would be inappropriate to do so because it believes that nonprofit creditors that originate more than 200 dwelling-secured transactions in a year (excluding the transactions described in § 1026.43(a)(3)(vii)) generally have the resources necessary to comply with the TILA ability-to-repay requirements. In the absence of information that suggests that the rationale behind the extension limit is no longer appropriate, the Bureau has not increased the extension limit. As noted above, consumer group commenters suggested that subordinate liens should be examined occasionally to determine whether any charges imposed are bona fide. The Bureau intends to monitor the mortgage market to ensure that the nonprofit creditor exemption does not become a means for evasion of the ability-to-repay requirements. As also noted above, some commenters suggested that the nonprofit creditor exemption be expanded to cover State and Federal credit unions. The Bureau notes that, in adopting the nonprofit creditor exemption in the May 2013 ATR Final Rule, the Bureau considered, but declined to adopt, an exemption for entities that are designated nonprofit organizations under sections 501(c)(1) and (14) of the IRC. See 78 FR 35429, 35468 (June 12, 2013). Commenters did not present any information that would suggest that the Bureau should reconsider its decision in the May 2013 ATR Final Rule. Thus the Bureau lacks a sufficient basis to adopt an expanded exemption as requested by the credit union trade associations. Legal Authority The current § 1026.43(a)(3)(v)(D) exemption from the ability-to-repay requirements was adopted pursuant to the Bureau's authority under section 105(a) and (f) of TILA. Pursuant to section 105(a) of TILA, the Bureau generally may prescribe regulations that provide for such adjustments and exceptions for all or any class of transactions that the Bureau judges are necessary or proper to effectuate, among other things, the purposes of TILA. For the reasons discussed above, the Bureau concludes that the amendment to the § 1026.43(a)(3)(v)(D) exemption from the TILA ability-to-repay requirements is necessary and proper to effectuate the purposes of TILA, which include the purposes of TILA section 129C. The Bureau concludes that the amendment to the exemption ensures that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay by helping to ensure the viability of the mortgage market for low- and moderate-income consumers. The Bureau believes that the mortgage loans originated by nonprofit creditors identified in § 1026.43(e)(4)(v)(D) generally account for a consumer's ability to repay. Without the amendment to the exemption, the Bureau concludes that low- and moderate-income consumers might be at risk of being denied access to the responsible and affordable credit offered by these creditors, which is contrary to the purposes of TILA. The amendment to the exemption is consistent with the purposes of TILA by ensuring that consumers are able to obtain responsible, affordable credit from the nonprofit creditors discussed above. The Bureau has also considered the factors in TILA section 105(f) and concludes that, for the reasons discussed above, the amendment to the exemption is appropriate under that provision. For the reasons discussed above, the Bureau concludes that the amendment to § 1026.43(a)(3)(v)(D) would exempt extensions of credit for which coverage under the ability-to-repay requirements does not provide a meaningful benefit to consumers (in the form of useful information or protection) in light of the protection that the Bureau believes the credit extended by these creditors already provides to consumers. The Bureau concludes that the amendment to the § 1026.43(a)(3)(v)(D) exemption is appropriate for all affected consumers, regardless of their other financial arrangements and financial sophistication and the importance of the loan and supporting property to them. Similarly, the Bureau concludes that the amendment to the § 1026.43(a)(3)(v)(D) exemption is appropriate for all affected loans covered under the exemption, regardless of the amount of the loan and whether the loan is secured by the principal residence of the consumer. Furthermore, the Bureau concludes that, on balance, the amendment to the § 1026.43(a)(3)(v)(D) exemption will simplify the credit process without undermining the goal of consumer protection, denying important benefits to consumers, or increasing the expense of (or otherwise hindering) the credit process. 43(e) Qualified Mortgages 43(e)(3) Limits on Points and Fees for Qualified Mortgages The Bureau's Proposal The Bureau proposed to permit a creditor or assignee to cure an excess over the qualified mortgage points and fees limit under defined conditions. Those conditions included that the creditor originated the loan in good faith as a qualified mortgage, that the creditor or assignee refunds the overage within 120 days of consummation, and that the creditor or assignee maintains and follows policies and procedures for post-consummation review of loans and refunding to consumers of such points and fees overages. For the reasons discussed below, the Bureau is finalizing the proposed cure provision but is making certain adjustments to address concerns raised by commenters. Section 1411 of the Dodd-Frank Act added TILA section 129C(a) to require a creditor making a residential mortgage loan to make a reasonable and good faith determination (based on verified and documented information) that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan. 15 U.S.C. 1639c(a). TILA section 129C(b) further: Provides that the ability-to-repay requirements are presumed to be met if the loan is a qualified mortgage; sets certain product-feature and underwriting requirements for qualified mortgages (including limits on points and fees); and gives the Bureau authority to revise, add to, or subtract from these requirements. 16 Section 1026.43(e)(3), which implements the statutory points and fees limits for qualified mortgages, provides that the up-front points and fees charged in connection with a qualified mortgage must not exceed 3 percent of the total loan amount, with higher thresholds specified for various categories of loans below $100,000. Pursuant to § 1026.32(b)(1), points and fees are the “fees or charges that are known at or before consummation.” The current rule does not provide a mechanism for curing points and fees overages that are discovered after consummation. 16 See TILA section 129C(b)(3)(B)(i). TILA section 129C(b)(2)(D) requires the Bureau to prescribe rules adjusting the 3-percent points and fees limit to “permit lenders that extend smaller loans to meet the requirements of the presumption of compliance.” As noted in the proposal, the Bureau understands that some creditors seeking to originate and some secondary market participants seeking to purchase qualified mortgages may establish buffers, set at a level below the applicable points and fees limit in § 1026.43(e)(3)(i), to avoid inadvertently exceeding those limits. Creditors may simply refuse to extend mortgage credit to consumers whose loans would exceed the buffer threshold (even though such loans, if under the applicable Regulation Z points and fees limit, would otherwise be qualified mortgages), due to the creditors' concerns about the potential liability attending loans originated under the general ability-to-repay standard, the ability to sell those loans into the secondary market, or the risk of repurchase demands from the secondary market if the applicable qualified mortgage points and fees limit is later found to have been exceeded. Alternatively, creditors may charge more for loans exceeding the buffer threshold (even if those loans are under the applicable Regulation Z points and fees limit for qualified mortgages). The proposal noted the Bureau's concerns that access to credit might be negatively affected where such buffers are established. Because of these concerns about access to credit, the Bureau proposed § 1026.43(e)(3)(iii), which would have provided that, if the creditor or assignee determines after consummation that the total points and fees payable in connection with a loan exceed the applicable limit under § 1026.43(e)(3)(i), the loan is not precluded from being a qualified mortgage, provided: (1) The creditor originated the loan in good faith as a qualified mortgage and the loan otherwise meets the requirements for a qualified mortgage in § 1026.43(e)(2), (e)(4), (e)(5), (e)(6), or (f), as applicable; (2) within 120 days after consummation, the creditor or assignee refunds to the consumer the dollar amount by which the transaction's points and fees exceeded the applicable limit under § 1026.43(e)(3)(i); and (3) the creditor or assignee, as applicable, maintains and follows policies and procedures for post-consummation review of loans and refunding to consumers amounts that exceed the applicable limit under § 1026.43(e)(3)(i). In conformance with proposed § 1026.43(e)(3)(iii), the Bureau also proposed to amend § 1026.43(e)(3)(i) to add the introductory phrase “[e]xcept as provided in paragraph (e)(3)(iii) of this section.” That conforming change would have specified that the cure provision in § 1026.43(e)(3)(iii) is an exception to the general rule that a covered transaction is not a qualified mortgage if the transaction's total points and fees exceed the applicable limit set forth in § 1026.43(e)(3)(i). Proposed comment 43(e)(3)(iii)-1 would have provided examples of evidence that a creditor originated a loan in good faith as a qualified mortgage and examples of evidence that a loan was not originated in good faith as a qualified mortgage. Proposed comment 43(e)(3)(iii)-2 would have provided guidance on the policies and procedures requirement. In addition to these specific proposals, the Bureau requested comment on whether a post-consummation points and fees cure should be permitted, and whether different, additional, or fewer conditions should be imposed upon its availability. Comments Industry commenters, including trade associations, large and small creditors, and secondary market purchasers, unanimously supported permitting a cure for points and fees overages. Industry commenters noted that the complex nature of the points and fees calculation and the potential liability associated with non-qualified mortgages have caused some creditors to impose operational buffers on points and fees that are well under the limits in the rule. These commenters also noted that it is not uncommon for investors and originators to disagree on the interpretation of parts of the points and fees calculation, which may impede the sale of some loans in the secondary market. One large industry trade association cited the definition of “bona fide discount point,” which depends in part on whether “the interest rate without any discount” exceeds a certain threshold, as an area of industry uncertainty in the points and fees calculation that could lead to different interpretations. Industry commenters stated that creditors that are uncertain of the qualified mortgage status of loans near the applicable points and fees limit may overprice the risk of the loan, passing on the costs of legal uncertainty to the consumer. Those commenters stated that, as a result, consumers receive loans on less favorable terms than they would otherwise receive or may be ineligible for credit. These commenters stated that the points and fees cure would provide creditors the opportunity to achieve precise compliance after consummation, which in turn would allow creditors to approve more loans, or provide loans at a lower cost to, consumers at the boundaries of the points and fees limits under the rule. Industry commenters also generally stated that the proposed cure provision would incentivize robust post-consummation quality control and audit procedures in a way that would benefit both creditors and consumers. Creditors would benefit by being afforded the opportunity to achieve precise compliance and allow loans to flow smoothly into the secondary market, while consumers would benefit by receiving cure payments. A nonprofit commenter that promotes asset-building policies for low- and middle-income families also supported the proposed points and fees cure. This commenter noted that, for smaller loans subject to the tiered points and fees limits, any change in total costs agreed to at or near consummation may cause the loan to cross from one limit tier to another. Some consumer group commenters, including two large national consumer groups, strongly opposed the proposed cure provision. These commenters generally stated that the proposal would do more harm to consumers than good and was unnecessary, contrary to Congressional intent, and without evidentiary foundation. Consumer group commenters that generally opposed the cure provision stated that it could incentivize inaccurate pre-consummation points and fees calculations. For example, these commenters warned that loan originators and processors could face pressure to close loans and to overlook problems before closing in the belief that they can be cured post-consummation. To these commenters, the cure would encourage the lending industry to be less vigilant, less accurate and, for some, less honest, in marketing, disclosures, and underwriting practices. Consumer group commenters also objected to the proposal's provision allowing a cure by refunding nothing more than the overage to the consumer. Some consumer group commenters argued that the cure is unnecessary because of the regulations' limited impact on access to credit. Two large national consumer group commenters stated that the qualified mortgage points and fees limits are not actually restricting access to credit or increasing the cost of credit. Those commenters cited a lack of data to support the Bureau's assertions about the effect of the points and fees limits on access to credit. The commenters stated that, if it had such data, the Bureau should adjust the qualified mortgage standards rather than permit a cure. The commenters argued that the mortgage industry restricts or expands access to credit based on perceptions of credit risk and profitability and not on the impact of consumer protection rules. The commenters asserted that, although current concerns are about access to credit, creditors will loosen their standards in order to increase their market share—just as they did before the recent financial crisis. Some consumer group commenters also noted that the Dodd-Frank Act was adopted to prevent the type of irresponsible lending that led to the financial crisis, and that each exception the Bureau adds to the qualified mortgage rule weakens the restraints the Dodd-Frank Act imposed. These commenters argued that the cure will harm consumers by depriving them of otherwise available legal remedies. Consumer group commenters also stated that the secondary market had already taken action to address repurchase concerns. The commenters noted that, to the extent that credit is tight due to the risk of repurchase demands from the secondary market, the government-sponsored enterprises (GSEs) have announced a set of revised quality review policies and a right to fix documentation problems that will reduce creditors' exposure to repurchase demands. Other consumer group commenters, including a large national nonprofit, generally supported the cure but urged the Bureau to include greater protections for consumers in the final rule. Similarly, the consumer groups that generally opposed the cure commented that, if the Bureau adopts a points and fees cure provision, it should provide greater consumer protections. These commenters made several suggestions to increase consumer protections in the final rule, including: A sunset date for the right to cure; cutting off the right to cure upon notice from the consumer of an overage and other similar events; and requiring creditors or assignees to provide a cure payment that is more than the overage itself. These suggestions are discussed more fully, below. Final Rule For the reasons discussed below, the Bureau is adopting the cure provision for points and fees overages in § 1026.43(e)(3)(iii) and (iv). The Bureau is finalizing the cure provision substantially as proposed but with some modifications based on comments received. The final cure provision provides bright-line rules to incentivize creditors to ease current points and fees buffers (and, in turn, increase access to responsible, affordable mortgage credit) while, at the same time, limiting the ability and incentives for creditors to engage in careless pre-consummation points and fees calculations or otherwise misuse the cure. In addition to certain clarifying changes, the final rule makes the following adjustments from the proposal: • Sunsets the cure after January 10, 2021; • Eliminates the condition that the creditor originate the loan in “good faith” as a qualified mortgage (discussed below in the section-by-section analysis of § 1026.43(e)(3)(iii)(A)); • Increases the cure period from 120 days to 210 days after consummation (discussed below in the section-by-section analysis of § 1026.43(e)(3)(iii)(B)); • Cuts off the ability to cure upon one or more of the following occurrences: The consumer's institution of a legal action in connection with the loan; the creditor, assignee, or servicer's receipt of the consumer's written notice that the loan's points and fees exceeded the qualified mortgage limit; or the consumer becoming 60 days past due on the legal obligation (discussed below in the section-by-section analysis of § 1026.43(e)(3)(iii)(B)); and • Requires the creditor or assignee to also pay interest to the consumer on the dollar amount by which the points and fees exceed the qualified mortgage limit, for the period from consummation until the cure payment is made to the consumer (discussed below in the section-by-section analysis of § 1026.43(e)(3)(iv)). The cure will only be available for transactions consummated on or after the effective date of this final rule and on or before the sunset date. The Bureau concludes that the cure provision will ease current market uncertainties and, as a result, may increase consumers' access to affordable credit in the near term. As explained in the proposal, the calculation of points and fees is complex and can involve the exercise of judgment that may lead to inadvertent errors with respect to charges imposed at or before consummation. Where a creditor originated a loan with the expectation of qualified mortgage status, the Bureau believes the consumer likely received the benefit of qualified mortgage treatment by receiving lower overall pricing. For this reason, the Bureau concludes that a cure provision, if appropriately limited, could reflect the expectations of both consumers and creditors at consummation and could increase access to credit for consumers seeking loans at the margins of the points and fees limits. A limited cure provision should also promote consistent pricing within the qualified mortgage range by decreasing the market's perceived need for higher pricing at the margins of the points and fees limits. The cure provision should also promote stability in the market by limiting the need for repurchase demands that may otherwise be triggered without the cure. In addition, the Bureau notes that the cure provision will encourage some creditors to undertake or strengthen rigorous post-consummation review of loans and consequently result in consumers receiving cure payments that would not have been received absent a cure provision. At the same time, and as stated in the proposal, the Bureau expects that, over time, creditors will develop greater confidence in compliance systems and also with originating loans that are not qualified mortgages under the general ability-to-repay standard. As this occurs, creditors should be able to relax internal buffers on points and fees that are predicated on the qualified mortgage threshold and to provide consistent pricing for qualified mortgages that are at the margin of the points and fees limits. Additionally, the risk of repurchase demands based on points and fees overages should decrease with experience. For these reasons, the cure provision finalized in § 1026.43(e)(3) contains a sunset date of January 10, 2021. This sunset date is also the general sunset date for the temporary qualified mortgage definition for loans eligible for purchase or guarantee by the GSEs or certain Federal agencies pursuant to § 1026.43(e)(4). As creditors' confidence increases and market conditions stabilize, creditors should become less reliant on points and fees buffers. The Bureau concludes that this sunset will provide sufficient time for creditors to develop confidence in compliance systems for regulatory requirements and for economic and market conditions to stabilize. As noted above, consumer group commenters argued that the cure provision could encourage the lending industry to be negligent or reckless. The Bureau notes that the final cure provision has been carefully calibrated to incentivize creditors to ease current buffers (which should in turn increase access to responsible, affordable mortgage credit), while limiting the ability and incentives for creditors to abuse the cure. The Bureau acknowledges that a cure provision could allow some creditors to conduct inaccurate pre-consummation points and fees calculations and that the cure provision would operate to limit legal remedies for some consumers who might later bring ability-to-repay claims. However, the Bureau concludes that the safeguards described more fully below, such as limiting the cure period to a short and finite period after consummation, cutting off the ability to cure upon the occurrence of certain events (including the consumer filing a lawsuit in connection with the loan), and requiring creditors to pay interest on the points and fees overages, will appropriately limit the incentives and opportunity for misuse of the cure. Market forces (such as repurchase demands), concerns about litigation risk, and the costs of administering a post-consummation cure, will also limit the extent to which creditors may be incentivized to misuse the cure provision. The Bureau also believes that, in most cases, the cure provision will align the loan terms with the expectations of the creditor and the consumer: The creditor likely believed the loan was a qualified mortgage when it originated the loan and, assuming buffers that affect pricing at the margins are removed, the consumer likely received more affordable qualified mortgage pricing because of the creditor's belief that the loan was a qualified mortgage. If a cure is effectuated, the consumer will also receive a monetary cure payment for the points and fees overage. For these reasons, the Bureau concludes that allowing a points and fees cure as structured in this final rule will benefit consumers. Legal Authority The Bureau is adopting the points and fees cure provision in § 1026.43(e)(3) pursuant to its authority under TILA section 129C(b)(3)(B)(i) to promulgate regulations that revise, add to, or subtract from the criteria that define a qualified mortgage. In addition, because revised § 1026.43(e)(3) permits creditors to cure non-compliance with the general qualified mortgage points and fees limits up to 210 days after consummation, the Bureau also adopts revised § 1026.43(e)(3) pursuant to its authority under section 105(a) and (f) of TILA. Each of these authorities is discussed in turn below. For the reasons discussed herein, the Bureau concludes that revised § 1026.43(e)(3) is warranted under TILA section 129C(b)(3)(B)(i) because the limited post-consummation cure provision is necessary and proper to ensure that responsible, affordable mortgage credit remains available to consumers in a manner consistent with the purposes of section 129C of TILA, and also necessary and appropriate to facilitate compliance with section 129C of TILA. For example, the Bureau concludes that the limited post-consummation cure provision will facilitate compliance with TILA section 129C by encouraging rigorous, post-consummation quality control loan reviews that will, over time, improve the origination process. Pursuant to section 105(a) of TILA, the Bureau generally may prescribe regulations that provide for such adjustments and exceptions for all or any class of transactions that the Bureau judges are necessary or proper to effectuate the purposes of TILA. For the reasons discussed below, the Bureau concludes that exempting the class of qualified mortgages that involve a post-consummation points and fees cure from the statutory requirement that the creditor make a good faith determination that the consumer has the ability to repay “at the time the loan is consummated” is necessary and proper to effectuate the purposes of TILA. The Bureau concludes that a limited post-consummation cure of points and fees overages will preserve access to credit to the extent it encourages creditors to extend credit to consumers seeking loans with points and fees up to the applicable limit under the rule. Without a points and fees cure provision, the Bureau believes that some consumers might be at risk of being denied access to responsible, affordable credit to the extent some creditors will not make loans near the points and fees limits due to concerns about inadvertently exceeding that limit, or will make more expensive loans near the limit. This would be contrary to the purposes of TILA, which include ensuring that responsible, affordable mortgage credit remains available to consumers. See 15 U.S.C. 1639b(a)(1). The Bureau also concludes that a limited post-consummation cure provision will facilitate compliance with TILA section 129C by encouraging rigorous, post-consummation quality control loan reviews that will, over time, improve the origination process. The Bureau has considered the factors in TILA section 105(f) and concludes that a limited points and fees cure provision is appropriate under that provision. The Bureau concludes that the exemption, as limited by the final rule, is appropriate for all affected consumers, specifically, those seeking loans at the margins of the points and fees limits whose access to credit may be affected adversely without the exemption. Similarly, the Bureau concludes that the exemption is appropriate for all affected loans covered under the exemption, regardless of the amount of the loan and whether the loan is secured by the principal residence of the consumer. Furthermore, the Bureau concludes that, on balance, the exemption will not undermine the goal of consumer protection or increase the complexity or expense of (or otherwise hinder) the credit process. While the exemption may result in consumers in affected transactions losing some of TILA's benefits, potentially including some aspects of a foreclosure legal defense, the Bureau concludes such potential losses are outweighed by the potentially increased access to responsible, affordable credit, an important benefit to consumers. The Bureau concludes that is the case for all affected consumers, regardless of their other financial arrangements, their financial sophistication, and the importance of the loan and supporting property to them. 43(e)(3)(iii) 43(e)(3)(iii)(A) The Bureau's Proposal As noted above, proposed § 1026.43(e)(3)(iii)(A) would have required, as a condition of curing a points and fees overage, that the loan was originated in good faith as a qualified mortgage and the loan otherwise meets the requirements of § 1026.43(e)(2), (e)(4), (e)(5), (e)(6), or (f) ( i.e., the requirements to be a qualified mortgage), as applicable. The Bureau also proposed comment 43(e)(3)(iii)-1, which would have provided examples of evidence that a loan was originated in good faith as a qualified mortgage, and examples of circumstances that would evidence that a loan was not originated in good faith as a qualified mortgage. The Bureau proposed to limit the cure provision to loans originated in good faith as a qualified mortgage to ensure that the cure provision is available only in cases of inadvertent errors in the origination process and to prevent creditors from misusing the cure provision by intentionally exceeding the points and fees limits. However, the Bureau sought comment on whether the good faith element of proposed § 1026.43(e)(3)(iii)(A) is necessary in light of the other proposed limitations on the cure provision. The Bureau also sought comment on the proposed examples in comment 43(e)(3)(iii)-1. For the reasons discussed below, the final rule does not contain an express requirement that the loan was originated in good faith as a qualified mortgage. Rather, as finalized, § 1026.43(e)(3)(iii)(A) requires, as a condition of curing a points and fees overage, that the loan otherwise meets the criteria for a qualified mortgage in § 1026.43(e)(2), (e)(4), (e)(5), (e)(6), or (f), as applicable. Comments Industry commenters argued for removal of the “good faith” requirement for exercising a points and fees cure. These commenters argued that a good faith standard is too subjective and likely to create grounds for expensive litigation. They also stated it is unnecessary because of other limitations on the cure provision, among other reasons. First, industry commenters stated that the subjective nature of good faith would have the unintended consequence of limiting industry's use of the points and fees cure. They noted that the good faith requirement cannot be satisfied by objectively reviewing a loan file post-consummation. One GSE commenter noted that the good faith requirement would require an assignee to maintain copies of the creditor's business records, which may present evidentiary issues if introduced in court by an assignee in future litigation. Second, industry commenters argued that the good faith requirement could lead to expensive litigation. For example, one large industry trade association argued that, even if a creditor had acted in good faith, because good faith may be a jury question, it would be difficult to get claims dismissed. The commenter argued that the same is true with respect to the two examples of good faith in the proposed commentary. Whether a creditor had appropriate policies and procedures, or whether a loan was priced as a qualified mortgage, may be a jury question, thus prospective litigation costs (and other risks) would militate against reducing current buffers. Third, industry commenters argued that the good faith requirement is unnecessary to discourage bad behavior by a creditor. These commenters stated that assignees' contractual remedies provide sufficient incentives for good behavior by creditors. They also argued that the good faith requirement is unnecessary in light of the cure provision's other requirements, including that the loan otherwise comply with all applicable qualified mortgage provisions. These commenters also noted the availability of other methods of ensuring the cure provision is not abused, such as bringing actions for unfair or deceptive acts or practices. Fourth, industry commenters requested that, if the good faith requirement is retained, the commentary should provide more definitive statements as to what constitutes good faith. For example, one GSE commenter stated that avoiding subjective terms such as “consistent” or “contemporaneously” would be useful. Similarly, one large bank trade association argued that stating that a particular factor “is” evidence of good faith rather than merely saying it “may be” evidence of good faith would provide greater clarity and certainty that the good faith standard was met. A GSE commenter also noted that it is unclear what percentage of loans originated by the creditor should be reviewed to determine consistency ( i.e., whether review of all loans is required or whether some lower percentage is sufficient). Two State industry trade associations stated that the term “contemporaneously” would not take into account the different types of loans and loan features that affect pricing more than proximity in time. The consumer group commenters who generally opposed a points and fees cure stated that if the final rule permits a cure it must require good faith both in the loan's origination as a qualified mortgage and in exercising the cure itself. These commenters stated that, without a good faith requirement for the cure, creditors and assignees could selectively cure loans only when they feared a challenge to the creditor's compliance with the ability-to-repay rule or when the creditor wanted to sell a loan on the secondary market. These commenters argued that the final rule should make clear that curing some loans selectively, or otherwise using the cure provision to cut off a consumer's attempt to seek a remedy, indicates the mortgage holder is attempting to evade compliance, rather than making a good faith attempt to comply, with the qualified mortgage rule. Consumer group commenters also noted that allowing creditors to exercise the right to cure for loans that were not originated in good faith as qualified mortgages would defeat the consumer protection purpose of the ability-to-repay rule. Several such commenters suggested that the magnitude of the points and fees error is relevant to determining whether the loan was originated in good faith as a qualified mortgage; the larger the amount of the overage, the less likely it is that the loan was originated in good faith as a qualified mortgage loan. Consumer group commenters were also concerned that, absent a good faith requirement, the cure would become a license for careless underwriting. Final Rule Section 1026.43(e)(3)(iii)(A) of the final rule provides that, as a condition of exercising the cure, the loan must meet the requirements of § 1026.43(e)(2), (e)(4), (e)(5), (e)(6), or (f), as applicable. The final rule does not expressly require that the loan was originated in good faith as a qualified mortgage. As noted above, the Bureau largely expects creditors and assignees to use the cure provision in cases of inadvertent errors in the origination process. In addition, the Bureau concludes that meeting the other requirements to be a qualified mortgage is a sufficient proxy for the loan being originated with the expectation of qualified mortgage status, and eliminating the good faith requirement provides a bright-line rule that gives certainty to creditors and assignees. The final rule contains additional mechanisms to prevent creditors from misusing the cure provision, such as cutting off the ability to cure before the consumer becomes seriously delinquent on payments; upon the institution of an action by the consumer related to the loan; or upon notice of the points and fees overage from the consumer. The Bureau is not finalizing comment 43(e)(3)(iii)-1 as proposed, because it is not adopting the good faith requirement as part of the cure provision. As discussed, the Bureau intends the cure to provide certainty to the market until it has gained experience with the qualified mortgage rules and points and fees calculations in particular. Good faith—or its absence—may be clear in some situations, but in other situations it may only be determined based on an analysis of the facts and circumstances of the particular case. The Bureau recognizes that such case-by-case determinations would not provide the certainty that the cure provision is intended to provide. This uncertainty could deter creditors and assignees from relying on the cure provision and, instead, incentivize creditors to maintain current points and fees buffers. To the extent creditors do not rely on the cure provision, its intended purpose of increasing access to credit or decreasing the cost of credit would not be realized. Moreover, the Bureau expects that secondary market forces may impose many of the same restraints as the good faith requirement would have imposed. Consumer group commenters argued that, without the good faith requirement, the cure provision could lead to careless or willful pre-consummation points and fees overages. However, the Bureau believes that if the loan must meet all other qualified mortgage requirements at consummation, the final rule should largely prevent creditors from engaging in careless calculations and limit use of the cure to loans that were originated with the expectation of qualified mortgage status. The Bureau further concludes that concerns about litigation risk, repurchase demands, and the administrative costs associated with curing points and fees overages will discourage creditors from conducting inaccurate pre-consummation calculations or intentionally exceeding the applicable points and fees limit for qualified mortgages. In addition, and as explained more fully below in the section-by-section analysis of § 1026.43(e)(3)(iii)(B), the Bureau is adopting other safeguards to ensure that creditors and assignees have the proper incentives not to engage in careless or willful pre-consummation overages. These safeguards include cutting off the right to cure when the consumer files a lawsuit in connection with the loan, when the consumer gives written notice of the points and fees overage, or when the consumer becomes 60 days past due on the legal obligation. Additionally, the final rule requires that the cure payment to consumers include interest in addition to the overage amount, to guard against abuse of the cure provision. See the section-by-section analysis of § 1026.43(e)(iv). Finally, the Bureau notes that a repeated pattern of inappropriate underwriting could be viewed as a potential violation of other Federal consumer protection laws. The Bureau intends to monitor the use of the cure provision for potential abuses and will consider changes to the rule to prevent abuses, as appropriate. The Bureau considered but is not adopting an approach that takes into account the magnitude of the points and fees overage because the Bureau does not believe the magnitude of an overage alone indicates an intent to abuse the cure provision. Moreover, the Bureau believes creditors are sufficiently motivated to avoid large points and fees overages because they generally seek to avoid HOEPA's 5 percent points and fees threshold. See § 1026.32(a)(1)(ii). As noted, this final rule contains more targeted safeguards to prevent abuse of the cure provision. The Bureau also considered comments from consumer groups who urged that the rule require the cure to be executed in good faith and who expressed concern that the cure provision could allow creditors and assignees to selectively cure overages only after problems develop with the loan. These comments are addressed in the section-by-section analysis of § 1026.43(e)(3)(iii)(C), below. 43(e)(3)(iii)(B) The Bureau's Proposal As noted above, proposed § 1026.43(e)(3)(iii)(B) would have required the creditor or assignee, within 120 days after consummation, to refund the overage amount ( i.e., the dollar amount by which the transaction's points and fees at consummation exceeded the applicable limit under paragraph § 1026.43(e)(3)(i)) to effect a points and fees cure. The proposal solicited comment on whether the rule should provide a longer or shorter cure period and, if a longer period, whether additional cure limitations should apply beyond those in the proposal. For example, the Bureau solicited comment on whether a cure should be permitted where a consumer has already instituted an action or provided the creditor or assignee with written notice of the error. For the reasons discussed below, the Bureau is adopting § 1026.43(e)(3)(iii)(B) with modifications that extend the cure period to 210 days after consummation and automatically terminate the cure period upon certain events. Comments Although one large creditor and one trade association supported the proposed 120-day cure period, most industry commenters argued in favor of extending that period. Several trade associations recommended increasing the number of days after consummation, including one State trade association that favored a period up to one year after consummation. Most of those commenters supported a cure period of at least 180 days after consummation to allow many creditors to maintain existing systems for review. To supplement the proposed 120-day cure period, a large creditor, a GSE, and two trade associations recommended also permitting cure within a certain period ( e.g., 60, 120, or 270 days) after the purchase of the loan on the secondary market. Those commenters generally argued that the proposed cure period is too short to allow assignees opportunities for loan compliance review; for example, the GSE commenter, which favored a period extending 270 days after loan purchase, stated that its average time between consummation and a completed loan review in 2013 was approximately nine months—and that this timeframe might increase due to additional testing related to the January 2013 and May 2013 ATR Final Rules. Industry commenters also supported extending the cure period from the time the error is discovered. Two GSEs recommended 120 days after discovery, while three trade associations endorsed a cure period of 60 days after discovery, not to exceed one year from consummation. The GSEs noted that TILA section 130(b) and current § 1026.31(h) of Regulation Z already have cure periods that extend from the time that an error is discovered. One of the GSEs also advocated allowing a loan to be cured so long as the creditor or assignee provides notice to the consumer within the cure period, with the actual cure payment coming within a reasonable time ( e.g., 30 days) after that notice. One trade association suggested that, to encourage more cure payments to consumers, a cure should be permitted even if the overage is discovered after the standard cure period, so long as the consumer has not already instituted a legal action and the creditor or assignee makes a larger cure payment. Some commenters also suggested different forms of payment, which could have some implications for the timing of the cure payment. A GSE commenter advocated for having the cure payment made to the consumer through a check or an automated clearing house (ACH) transfer to the consumer's checking or savings account. A regional trade association commenter urged that consumers and creditors should have an option to directly apply the cure payment to the relevant loan obligation. Consumer group commenters supported the proposal to limit the cure period to a fixed period after consummation. Those commenters favored the proposal over a time period based on discovery of the overage, citing drawn-out uncertainty and additional litigation that a discovery-based period would cause. The consumer group commenters stated that a cure period running from discovery of the error, rather than from consummation, would allow creditors or assignees to intentionally cure only loans in which problems have arisen by claiming that the overage had been discovered only then. Because the cure affords creditors and assignees qualified mortgage protection where there was a defect in the points and fees calculation at the time of consummation, consumer group commenters also stated that the cure period should automatically terminate upon certain events (“cut-off events”) to preserve consumers' potential ability-to-repay claims. These commenters noted that TILA's cure provision has similar cut-off events. 17 Consumer group commenters recommended that the cut-off events should include a consumer defaulting on the loan. The commenters viewed a default within the first few months after consummation as strong evidence that the loan may have violated ability-to-repay underwriting requirements. Consumer group commenters also advocated other cut-off events, broadly including various means for consumers to assert legal remedies regarding the loan, e.g., filing a lawsuit, exercising a right of rescission, and complaining to a regulator. Consumer group commenters specifically recommended that cut-off events include a consumer or regulator notifying a creditor or assignee of a points and fees error; the commenters noted that, if a consumer or regulator discovers the error before the creditor or assignee cures, that is a possible indication that the creditor or assignee lacks robust loan review procedures or is attempting to exploit the cure provision in bad faith. 17 The general TILA section 130(b) cure provision applies to TILA violations. Given that TILA does not require all loans to be qualified mortgages, TILA section 130(b) is not directly applicable to the qualified mortgage points and fees limit. The Bureau also received some comments from industry groups regarding cut-off events. A GSE commenter argued that, for consumers struggling to make payments on their loans, cut-off events may deprive them of an opportunity to review their loans for points and fees overages and potentially receive a cure payment that could assist them in making loan payments. A trade association argued that cutting off the cure upon the consumer's notice of a points and fees error would encourage every consumer to send such notices automatically for every loan to strengthen their litigation claims. Final Rule The Bureau is adopting § 1026.43(e)(3)(iii)(B) with modifications extending the cure period to 210 days after consummation and automatically terminating the cure period upon certain enumerated events. As finalized, § 1026.43(e)(3)(iii)(B) provides that the cure is only available if the creditor or assignee makes the cure payment described in § 1026.43(e)(3)(iv) to the consumer within 210 days after consummation and prior to the occurrence of any of the following events: (1) The consumer's institution of an action in connection with the loan; (2) the creditor, assignee, or servicer receiving the consumer's written notice that the transaction's total points and fees exceed the applicable limit under § 1026.43(e)(3)(i); or (3) the consumer becoming 60 days past due on the legal obligation. The cure payment amount under the final rule is discussed below in the section-by-section analysis of § 1026.43(e)(3)(iv). The Bureau concludes that limiting the cure to a short and specific period after consummation, and automatically terminating that cure period upon certain events, will provide certainty to the market and increase access to credit, while also curbing the potential for abuses of the cure provision. For example, the limited cure period will discourage creditors from intentionally or recklessly originating loans with high points and fees and then waiting as long as possible to see if certain loans become riskier—with the expectation that, if they do, the creditor will use the cure provision selectively to help avoid legal liability on those loans. With a limited cure period, such a scenario becomes riskier and less attractive to creditors. At the same time, the Bureau recognizes that, if the cure period is too limited, creditors and assignees will be deterred from relying on the cure provision in lieu of maintaining current buffers near the qualified mortgage points and fees limits, which would hinder the intended effect of increasing access to affordable credit. The Bureau concludes that a cure period limited to 210 days after consummation will address the concerns of many industry commenters. Prior to the proposal, the Bureau's initial outreach to industry stakeholders suggested that a 120-day period after consummation would be consistent with industry's existing systems for quality control review. However, as discussed above, most industry commenters that suggested a specific cure time period stated that 180 days after consummation would be more consistent with current practices for post-consummation review. It is not clear whether all such commenters considered the administrative time required to process a cure payment once a points and fees overage has been identified, or whether those commenters were instead focused solely on current timelines for completing post-consummation loan audits. One GSE commenter suggested that 30 days is a reasonable amount of time for creditors or assignees to process and execute a cure payment to the consumer. The Bureau is finalizing a cure period of 210 days after consummation, which generally provides 180 days for post-consummation points and fees reviews and an additional 30 days to process and provide cure payments to consumers. The Bureau is not adopting a cure period that could extend beyond 210 days after consummation because, as explained above, an extended cure period would increase the potential for abusing the cure. Moreover, a cure period running from a loan's purchase or an overage's discovery would provide less encouragement for rigorous and prompt loan review and would likely delay cure payments to consumers. The Bureau is also adopting new comment 43(e)(3)(iii)-1 to provide additional clarification regarding the 210-day cure period. The comment provides that the creditor or assignee, as applicable, complies with § 1026.43(e)(3)(iii)(B) if it makes the cure payment described in § 1026.43(e)(3)(iv) to the consumer within 210 days after consummation and prior to the occurrence of any of the cut-off events described in § 1026.43(e)(3)(iii)(B)( 1 ) through ( 3 ). A creditor or assignee, as applicable, does not comply with § 1026.43(e)(3)(iii)(B) if the cure payment is made to the consumer more than 210 days after consummation or after the occurrence of any of the events in § 1026.43(e)(3)(iii)(B)( 1 ) through ( 3 ). In response to public comments suggesting different forms of payment, comment 43(e)(3)(iii)-1 also provides that the cure payment may be made by any means mutually agreeable to the consumer and the creditor or assignee, as applicable, or by check. This provision in comment 43(e)(3)(iii)-1 clarifies that the consumer and creditor or assignee (as applicable) may agree to any method of making the cure payment to the consumer. For example, as discussed below in the section-by-section analysis of § 1026.43(e)(3)(iv), the consumer and the creditor or assignee may agree to apply the cure payment towards the loan's unpaid principal balance. This provision in comment 43(e)(3)(iii)-1 also clarifies that the creditor or assignee (as applicable) may make the cure payment to the consumer by check without the agreement of the consumer. As such, comment 43(e)(3)(iii)-1 further provides that, if the cure payment is made by check, the creditor or assignee complies with § 1026.43(e)(3)(iii)(B) if the check is delivered or placed in the mail to the consumer within 210 days after consummation. The Bureau further concludes that the cure period should terminate automatically upon certain enumerated cut-off events, particularly given the expanded cure period provided in the final rule. Specifically, those cut-off events are: (1) The consumer's institution of any action in connection with the loan; (2) the creditor, assignee, or servicer receiving the consumer's written notice that the transaction's total points and fees exceed the applicable limit under § 1026.43(e)(3)(i); or (3) the consumer becoming 60 days past due on the terms of the legal obligation. As discussed below, the Bureau concludes that these limitations will help protect consumers, curb potential abuse of the cure provision, and incentivize the creditor or assignee to detect and make cure payments as early as possible. At the same time, the Bureau expects that the enumerated cut-off events will not substantially hinder the cure provision's intended effect of increasing access to affordable credit. The Bureau anticipates that the cut-off events will occur relatively infrequently and should not unduly deter creditors and assignees from relying on the cure provision. Institution of any action. The Bureau concludes that creditors and assignees should not be permitted to cure defects in points and fees calculations after the consumer's institution of a legal action in connection with the loan. The Bureau is concerned that allowing a points and fees cure after the action is instituted would permit creditors and assignees to misuse the cure provision. The Bureau concludes that cut-off events should not be limited to actions related to the ability-to-repay rules. Any litigation by the consumer so early in the loan's term is a signal of potential problems and suggests that the consumer likely values the right to litigate more than the limited cure payment, regardless of whether the claim is based specifically on the ability-to-repay rules or sounds in another legal theory. Moreover, consumers in litigation are well-positioned to negotiate compensation in settlement of the litigation, and so are unlikely to be harmed by cutting off the cure. 18 Accordingly, § 1026.43(e)(3)(iii)(B)( 1 ) cuts off the ability to cure upon the consumer's institution of any action in connection with the loan. 18 While the institution of any action by the consumer in connection with the loan will cut off the ability to cure a points and fees overage and thus prevents the loan from being a qualified mortgage, nothing in this rule precludes the negotiated settlement of claims otherwise permitted by law. The Bureau declines to cut off the ability to cure upon a regulator's institution of an action in connection with the loan. While such an action so early in the loan's term may also be a signal of potential problems with the loan, a regulator instituting an action does not indicate whether an individual consumer values a potential litigation claim more than the limited cure payment. Legal action by a regulator may be connected to a vast number of loans for which the regulator is unable to determine whether each consumer would prefer to receive a cure payment. Written notice of overage. The Bureau also concludes that creditors and assignees should not be permitted to cure defects in points and fees calculations after a consumer provides notice of a points and fees overage to the creditor, assignee, or servicer. The Bureau is concerned that cutting off the cure period only when a consumer files legal action would encourage disputes to be taken to court prematurely. Such an approach would be inefficient and would increase costs for both consumers and creditors. Unlike the cut-off event related to the institution of legal action described above, the notice cut-off event is triggered only where the consumer specifically gives notice that points and fees exceed the applicable limit, and not by notice of any defect with the loan more generally. The Bureau concludes this approach is appropriate to prevent consumers from inadvertently cutting off the ability to cure (and therefore potentially forfeiting cure payments) and also to provide a bright-line rule. The Bureau assumes that most consumers who have identified points and fees overages and are concerned about preserving their ability-to-repay litigation rights will be represented by counsel and will be able to make tactical decisions about forgoing a cure payment to strengthen their ability-to-repay claims. 19 These consumers may prefer to delay litigation if, for example, they are seeking a loan modification and are unsure if legal action will ultimately be necessary or if they believe additional investigation is necessary before bringing suit. Accordingly, § 1026.43(e)(3)(iii)(B)( 2 ) cuts off the ability to cure upon the creditor, assignee, or servicer receiving written notice from the consumer that the transaction's total points and fees exceed the applicable limit under § 1026.43(e)(3)(i). Given that many consumers communicate with their servicers regarding their loans, § 1026.43(e)(3)(iii)(B)( 2 ) specifically provides that notice of an overage to the servicer, in addition to the creditor and assignee, cuts off the ability to cure. For the reasons discussed above regarding cutting off the cure upon initiation of an action, the Bureau also concludes that notice of a points and fees overage from a regulator (rather than the consumer) should not cut off the cure period. 19 As noted above, nothing in this rule precludes the negotiated settlement of claims otherwise permitted by law. See supra note 18. A trade association commenter argued that a cut-off event based on an overage notice would incentivize all consumers to send such overage notices for every loan. The Bureau notes, however, that the notice cut-off event in the final rule is a concept similar to that in TILA section 130(b), and the Bureau is unaware of evidence that TILA section 130(b) has led to significant problems. 60 days past due. The Bureau concludes that consumers who are 60 days behind on their loans should generally be able to preserve potential ability-to-repay claims. Consumer group commenters broadly recommended that a consumer's default should cut off the cure period, but they did not elaborate on the types of default or periods of delinquency. The Bureau believes that, if cut-off events are too broad, creditors and assignees will be deterred from relying on the cure provision in lieu of maintaining current buffers near the qualified mortgage points and fees limits. The Bureau concludes that including any and all consumer defaults as cut-off events does not strike an appropriate balance between promoting affordable credit with the cure and protecting litigation rights for consumers most likely to benefit from them. A widely-used threshold for defining “serious” delinquencies is 90 days. 20 The Bureau believes that a loan becoming seriously delinquent within the first 210 days after consummation raises concerns that the loan violates ability-to-repay requirements. See, e.g., comment 43(c)(1)-1.ii.B. 1 (“the consumer's default on the loan a short time after consummation” may be evidence that a creditor's ability-to-repay determination was not reasonable or in good faith). For this reason, the cure is not permitted for seriously delinquent loans. Further, the Bureau is concerned that permitting cure of a points and fees overage when a loan is already near the point of serious delinquency could incentivize abuse of the cure provision. Therefore, § 1026.43(e)(iii)(3)(B)( 3 ) cuts off the ability to cure upon a payment becoming 60 days past due. 20 See, e.g., Freddie Mac, January 2014 U.S. Economic & Housing Market Outlook —Taking the Temperature of the Markets 1 (Jan. 16, 2014), available at http://www.freddiemac.com/finance/pdf/Jan_2014_public_outlook.pdf; Fannie Mae, Monthly Summary 4 tbl. 9 (June 2014), available at http://www.fanniemae.com/resources/file/ir/pdf/monthly-summary/063014.pdf. The Bureau is also adopting new comment 43(e)(3)(iii)-2 to provide additional clarification regarding the 60 days past due threshold. The comment provides that, for purposes of § 1026.43(e)(3)(iii)(B)( 3 ), “past due” means the failure to make a periodic payment (in one full payment or in two or more partial payments) sufficient to cover principal, interest, and, if applicable, escrow under the terms of the legal obligation. Other amounts, such as any late fees, are not considered for this purpose. For purposes of § 1026.43(e)(3)(iii)(B)( 3 ), a periodic payment is 30 days past due when it is not paid on or before the due date of the following scheduled periodic payment and is 60 days past due when, after already becoming 30 days past due, it is not paid on or before the due date of the next scheduled periodic payment. For purposes of § 1026.43(e)(3)(iii)(B)( 3 ), the creditor or assignee may treat a received payment as applying to the oldest outstanding periodic payment. The commentary provides an example to illustrate the meaning of 60 days past due for purposes of § 1026.43(e)(3)(iii)(B)( 3 ). The example assumes a loan is consummated on October 15, 2015, that the consumer's periodic payment is due on the 1st of each month, and that the consumer timely made the first periodic payment due on December 1, 2015. For purposes of § 1026.43(e)(3)(iii)(B)( 3 ), the consumer is 30 days past due if the consumer fails to make a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before February 1, 2016. For purposes of § 1026.43(e)(3)(iii)(B)( 3 ), the consumer is 60 days past due if the consumer then also fails to make a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before March 1, 2016. For purposes of § 1026.43(e)(3)(iii)(B)( 3 ), the consumer is not 60 days past due if the consumer makes a payment (sufficient to cover the scheduled January 1, 2016 periodic payment of principal, interest, and, if applicable, escrow) on or before March 1, 2016. This is consistent with the general industry accounting practice of crediting a received payment by applying it to the oldest outstanding periodic payment. 21 21 See, e.g., Fannie Mae, Security Instruments, https://www.fanniemae.com/singlefamily/security-instruments (last visited October 15, 2014) (security instruments for various states but with a uniform covenant that payments shall be applied to each periodic payment in the order in which it became due, such as Fannie Mae & Freddie Mac, California Single Family Uniform Instrument 4, available at https://www.fanniemae.com/content/legal_form/3005w.doc; Fannie Mae & Freddie Mac, New York Single Family Uniform Instrument 5, available at https://www.fanniemae.com/content/legal_form/3033w.doc). 43(e)(3)(iii)(C) The Bureau's Proposal Proposed § 1026.43(e)(3)(iii)(C) and proposed comment 43(e)(3)(iii)-2 would have provided that, as a condition of curing a points and fees overage, the creditor or assignee must maintain and follow policies and procedures for post-consummation review of loans and for refunding to consumers amounts that exceed the applicable limit under § 1026.43(e)(3)(i). For the reasons set forth below, the Bureau is finalizing § 1026.43(e)(3)(iii)(C), with certain clarifying changes. The Bureau is not finalizing the substance of proposed comment 43(e)(3)(iii)-2 but is finalizing new comment 43(e)(3)(iii)-3 to provide additional guidance on the post-consummation policies and procedures requirement in § 1026.43(e)(3)(iii)(C). Comments A State industry trade association and a nonprofit organization supported the post-consummation policies and procedures requirement as appropriate. However, several industry commenters expressed doubts about the requirement. Some industry commenters were not certain of the scope of the proposed requirement. For example, one national industry association asked whether a post-consummation review of all loans was required and noted that the cost of such a requirement would be prohibitive. A large creditor noted that the proposed cure period of 120 days would not provide sufficient time for post-consummation reviews of a significant number of loans. Other industry commenters, including a large creditor and an association of large creditors, argued that the post-consummation policies and procedures requirement introduced a subjective element into the cure procedure and that the resulting uncertainty would make the cure provision less usable by creditors. A GSE commenter stated that, in addition to being subjective, the requirement is not necessary. This commenter argued that the mere existence of a limited cure period would provide a powerful incentive for creditors to maintain and follow post-consummation review policies and procedures. While consumer group commenters generally did not focus on the post-consummation policies and procedures requirement, they addressed related issues by insisting that the cure itself must be made in good faith. As noted in the section-by-section analysis of § 1026.43(e)(3)(iii)(A), above, these commenters stated that, without a good faith requirement for the cure, creditors and assignees could selectively cure loans only when they feared a challenge to the creditor's compliance with the ability-to-repay rule or when the creditor wanted to sell a loan on the secondary market. These commenters argued that the final rule should make clear that curing some loans selectively indicates the mortgage holder is attempting to exploit the cure in bad faith rather than making a good faith attempt to comply with the ability-to-repay rule. Final Rule The Bureau is finalizing § 1026.43(e)(3)(iii)(C) generally as proposed, but with changes to provide greater clarity in response to issues raised by commenters and for consistency with other provisions of this final rule. As finalized, § 1026.43(e)(3)(iii)(C) provides that, as a condition of the cure, the creditor or assignee, as applicable, must maintain and follow policies and procedures for post-consummation review of points and fees and for making cure payments to consumers in accordance with § 1026.43(e)(3)(iii)(B) and (iv). The final commentary has been modified from the proposal to reflect and provide guidance on the final rule. Final § 1026.43(e)(3)(iii)(C) differs from the proposal in two ways. First, the final rule requires policies and procedures “for post-consummation review of points and fees” instead of “post-consummation review of loans.” The final rule makes clear that, for purposes of exercising the cure, the required post-consummation review may focus only on points and fees and is not required to be a full loan review. Second, final § 1026.43(e)(3)(iii)(C) refers to policies and procedures for “making payments to consumers in accordance with [§ 1026.43(e)(3)(iii)(B) and (e)(3)(iv)]” rather than “refunding to consumers amounts that exceed the applicable limit under [§ 10 [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%3A2014-25503. Public record. Not legal advice.