[Federal Register Volume 78, Number 75 (Thursday, April 18, 2013)]
[Proposed Rules]
[Pages 23171-23178]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-09058]


=======================================================================
-----------------------------------------------------------------------

BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1026

[Docket No. CFPB-2013-0009]
RIN 3170-AA37


Amendments to the 2013 Escrows Final Rule Under the Truth in 
Lending Act (Regulation Z)

AGENCY: Bureau of Consumer Financial Protection.

ACTION: Proposed rule with request for public comment.

-----------------------------------------------------------------------

SUMMARY: This rule proposes clarifying and technical amendments to a 
final rule issued by the Bureau of Consumer Financial Protection 
(Bureau) on January 10, 2013, which, among other things, lengthens the 
time for which a mandatory escrow account established for a higher-
priced mortgage loan (HPML) must be maintained. The rule also 
established an exemption from the escrow requirement for certain 
creditors that operate predominantly in ``rural'' or ``underserved'' 
areas. The amendments clarify the determination method for the 
``rural'' and ``underserved'' designations and keep in place certain 
existing protections for HPMLs until other similar provisions take 
effect in January 2014.

DATES: Comments must be received on or before May 3, 2013.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2013-
0009 or RIN 3170-AA37, by any of the following methods:
     Electronic: http://www.regulations.gov. Follow the 
instructions for submitting comments.
     Mail/Hand Delivery/Courier: Monica Jackson, Office of the 
Executive Secretary, Consumer Financial Protection Bureau, 1700 G 
Street NW., Washington, DC 20552.
    Instructions: All submissions should include the agency name and 
docket number or Regulatory Information Number (RIN) for this 
rulemaking. Because paper mail in the Washington, DC area and at the 
Bureau is subject to delay, commenters are encouraged to submit 
comments electronically. In general, all comments received will be 
posted without change to http://www.regulations.gov. In addition, 
comments will be available for public inspection and copying at 1700 G 
Street NW., Washington, DC 20552, on official business days between the 
hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment 
to inspect the documents by telephoning (202) 435-7275.
    All comments, including attachments and other supporting materials, 
will become part of the public record and subject to public disclosure. 
Sensitive personal information, such as account numbers or social 
security numbers, should not be included. Comments will not be edited 
to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: Whitney Patross, Attorney; Joseph 
Devlin and Richard Arculin, Counsels; Office of Regulations, at (202) 
435-7700.

SUPPLEMENTARY INFORMATION: 

I. Summary of Proposed Rule

    In January 2013, the Bureau issued several final rules concerning 
mortgage markets in the United States pursuant to the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 
111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules). One of 
these rules was Escrow Requirements Under the Truth in Lending Act 
(Regulation Z) (2013 Escrows Final Rule),\1\ issued on January 10.\2\ 
The rule expanded on an existing Regulation Z requirement that 
creditors maintain escrow accounts for higher-priced mortgage loans and 
created an exemption for certain loans made by

[[Page 23172]]

certain creditors that operate predominantly in ``rural'' or 
``underserved'' areas. Three other of the 2013 Title XIV Final Rules 
also contain provisions affecting certain loans made in ``rural'' or 
``underserved'' areas.
---------------------------------------------------------------------------

    \1\ 78 FR 4726 (Jan. 22, 2013).
    \2\ The other rules include: Ability-to-Repay and Qualified 
Mortgage Standards under the Truth in Lending Act (Regulation Z) 
(2013 ATR Final Rule), 78 FR 6407; High-Cost Mortgages 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) (2013 HOEPA Final 
Rule), 78 FR 6855; Disclosure and Delivery Requirements for Copies 
of Appraisals and Other Written Valuations under the Equal Credit 
Opportunity Act (Regulation B), 78 FR 7215; Mortgage Servicing Rules 
Under the Real Estate Settlement Procedures Act (Regulation X), 78 
FR 10695; Mortgage Servicing Rules Under the Truth in Lending Act 
(Regulation Z), 78 FR 10901; Appraisals for Higher-Priced Mortgage 
Loans (issued jointly with other agencies) (2013 Interagency 
Appraisals Final Rule), 78 FR 10367; Loan Originator Compensation 
Requirements under the Truth in Lending Act (Regulation Z), 78 FR 
11279.
---------------------------------------------------------------------------

    The Bureau is now proposing certain clarifying and technical 
amendments to the 2013 Escrows Final Rule, including clarification of 
how to determine whether a county is considered ``rural'' or 
``underserved'' for the application of the escrows requirement and the 
other Dodd-Frank Act regulations.\3\ Specifically, the Bureau is 
proposing changes to clarify how a county's ``rural'' and 
``underserved'' status may be determined based on currently applicable 
Urban Influence Codes (UICs) established by the United States 
Department of Agriculture, Economic Research Service (USDA-ERS) (for 
``rural'') or based on Home Mortgage Disclosure Act (HMDA) data (for 
``underserved'') and to provide illustrations of the rule to facilitate 
compliance.
---------------------------------------------------------------------------

    \3\ The specific provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) The Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon payment 
prohibition on high-cost mortgages; and (4) the Sec.  
1026.35(c)(4)(vii)(H) exemption from the Sec.  1026.35(c)(4)(i) HPML 
second appraisal requirement for credit transactions made by 
creditors located in a rural county.
---------------------------------------------------------------------------

    In addition, the proposal would restore certain existing Regulation 
Z requirements related to the consumer's ability to repay and 
prepayment penalties for HPMLs. The scope of these protections is being 
expanded in connection with the 2013 Title XIV Final Rules to apply to 
most mortgage transactions, rather than just HPMLs. For this reason, 
the 2013 Escrows Final Rule removed the regulatory text providing these 
protections solely to HPMLs. That final rule, however, takes effect on 
June 1, 2013, whereas the new ability-to-repay and prepayment penalty 
provisions do not take effect until January 10, 2014. To prevent any 
interruption in applicable protections, this proposal would establish a 
temporary provision to ensure the protections remain in place for HPMLs 
until the expanded provisions take effect in January 2014.
    In addition, the Bureau is making some technical corrections to 
enhance clarity.

II. Background

A. Title XIV Rulemakings Under the Dodd-Frank Act and the 2013 Escrows 
Final Rule

    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, under sections 1061 and 1100A, generally 
consolidated the rulemaking authority for Federal consumer financial 
laws, including the Truth in Lending Act (TILA), in the Bureau.\4\ At 
the same time, Congress significantly amended the statutory 
requirements governing mortgages with the intent to restrict the 
practices that contributed to and exacerbated the crisis. In January 
2013, the Bureau issued the 2013 Title XIV Final Rules. The 2013 
Escrows Final Rule,\5\ issued on January 10, was one of these rules. 
Among the 2013 Title XIV Final Rules in January were the 2013 ATR Final 
Rule, 2013 HOEPA Final Rule, and 2013 Interagency Appraisals Final 
Rule.
---------------------------------------------------------------------------

    \4\ Sections 1011 and 1021 of the Dodd-Frank Act, in title X, 
the ``Consumer Financial Protection Act,'' Public Law 111-203, secs. 
1001-1100H, codified at 12 U.S.C. 5491, 5511. The Consumer Financial 
Protection Act is substantially codified at 12 U.S.C. 5481-5603. 
Section 1029 of the Dodd-Frank Act excludes from this transfer of 
authority, subject to certain exceptions, 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. 12 U.S.C. 5519.
    \5\ 78 FR 4726 (Jan. 22, 2013).
---------------------------------------------------------------------------

B. Implementation Plan for New Mortgage Rules

    On February 13, 2013, the Bureau announced an initiative to support 
implementation of the new mortgage rules (Implementation Plan),\6\ 
under which the Bureau would work with the mortgage industry to ensure 
that the 2013 Title XIV Final Rules can be implemented accurately and 
expeditiously. The Implementation Plan included: (1) Coordination with 
other agencies; (2) publication of plain-language guides to the new 
rules; (3) publication of additional interpretive guidance and other 
updates regarding the new rules as needed; (4) publication of readiness 
guides for the new rules; and (5) education of consumers on the new 
rules.
---------------------------------------------------------------------------

    \6\ Consumer Financial Protection Bureau Lays Out Implementation 
Plan for New Mortgage Rules. Press Release. Feb. 13, 2013.
---------------------------------------------------------------------------

    This proposed rule is the first publication of additional guidance 
and updates regarding the 2013 Title XIV Final Rules. Priority for this 
first set of updates has been given to the 2013 Escrows Final Rule 
because the effective date is June 1, 2013, and certainty regarding 
compliance is a matter of some urgency. Another update to certain of 
the 2013 Title XIV Final Rules will be proposed shortly, which will 
affect provisions that take effect in January 2014, and others will be 
issued as needed.

III. Legal Authority

    The Bureau is issuing this proposed rule pursuant to its authority 
under TILA 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 Federal Reserve Board (Board) and the Department of 
Housing and Urban Development (HUD). 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.'' \7\ TILA, 
title X of the Dodd-Frank Act, and certain subtitles and provisions of 
title XIV of the Dodd-Frank Act are Federal consumer financial laws.\8\ 
Accordingly, the Bureau has authority to issue regulations pursuant to 
TILA, title X, and the enumerated subtitles and provisions of title 
XIV.
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 5581(a)(1).
    \8\ Dodd-Frank Act section 1002(14), 12 U.S.C. 5481(14) 
(defining ``Federal consumer financial law'' to include the 
``enumerated consumer laws'' and the provisions of title X of the 
Dodd-Frank Act); Dodd-Frank Act section 1002(12), 12 U.S.C. 5481(12) 
(defining ``enumerated consumer laws'' to include TILA), Dodd-Frank 
section 1400(b), 15 U.S.C. 1601 note (defining ``enumerated consumer 
laws'' to certain subtitles and provisions of title XIV).
---------------------------------------------------------------------------

    The Bureau is proposing to amend the 2013 Escrows Final Rule.\9\ 
This proposed rule relies on the broad rulemaking authority 
specifically granted to the Bureau by TILA section 105(a) and title X 
of the Dodd-Frank Act, as well as the exemption authority in TILA 
section 129D(c). Additionally, the proposed rule relies on the 
rulemaking authority used in connection with the 2013 HOEPA Final 
Rule,\10\ including RESPA section 19(a) and TILA section 129(p).
---------------------------------------------------------------------------

    \9\ 78 FR 4726 (January 22, 2013).
    \10\ 78 FR 6856 (January 31, 2013).

---------------------------------------------------------------------------

[[Page 23173]]

IV. Section-by-Section Analysis

Section 1026.35 Requirements for Higher-Priced Mortgage Loans

35(b) Escrow Accounts
35(b)(1)
    The Bureau is making a technical correction to 1026.35(b)(1) to 
update a citation.
35(b)(2) Exemptions
``Rural'' or ``Underserved'' Designation
    Four of the Bureau's January 2013 mortgage rules included 
provisions that provide for special treatment under various Regulation 
Z requirements for certain credit transactions made by creditors 
operating predominantly in ``rural'' or ``underserved'' areas: (1) 
Sec.  1026.35(b)(2)(iii) provides an exemption to the 2013 Escrows 
Final Rule's escrow requirement for HPMLs; (2) Sec.  1026.43(f) 
provides an allowance to originate balloon-payment qualified mortgages 
under the 2013 ATR Final Rule; (3) Sec.  1026.32(d)(1)(ii)(C) provides 
an exemption from the balloon payment prohibition on high-cost 
mortgages under the 2013 HOEPA Final Rule; and (4) Sec.  
1026.35(c)(4)(vii)(H) provides an exemption from a requirement to 
obtain a second appraisal for certain HPMLs under the 2013 Interagency 
Appraisals Final Rule. These provisions rely on the criteria for 
``rural'' and/or ``underserved'' counties set forth in Sec.  
1026.35(b)(2)(iv)(A) and (B), respectively, of the 2013 Escrows Final 
Rule, which takes effect on June 1, 2013.
    Two special provisions for creditors operating predominantly in 
``rural'' or ``underserved'' areas were set forth in the Dodd-Frank Act 
amendments to TILA, but the terms were not defined by statute. TILA 
section 129D, as added and amended by Dodd-Frank Act sections 1461 and 
1462 and implemented by Sec.  1026.35(b), generally requires that 
creditors establish escrow accounts for HPMLs secured by a first lien 
on a consumer's principal dwelling, but the statute also authorizes the 
Bureau to exempt from this requirement transactions by a creditor that, 
among other criteria, ``operates predominantly in rural or underserved 
areas.'' TILA section 129D(c)(1). Similarly, the ability-to-repay 
provisions in Dodd-Frank Act section 1412 contain a set of criteria 
with regard to certain balloon-payment mortgages originated and held in 
portfolio by certain creditors that operate predominantly in rural or 
underserved areas, allowing those loans to be considered qualified 
mortgages. See TILA section 129C(b)(2)(E), 15 U.S.C. 1639c(b)(2)(E). In 
the 2013 Escrows and ATR Final Rules, the Bureau implemented the HPML 
escrows requirement and the section 1412 balloon-payment qualified 
mortgage provision through Sec. Sec.  1026.35(b)(2)(iii) and 
1026.43(f), respectively. In addition, the Bureau adopted an exemption 
to the general prohibition of balloon payments for high-cost mortgages 
when those mortgages meet the criteria for balloon-payment qualified 
mortgages set forth in Sec.  1026.43(f), as part of the 2013 HOEPA 
Final Rule, in Sec.  1026.32(d)(1)(ii)(C). Finally, the Bureau and 
other Federal agencies adopted Sec.  1026.35(c)(4)(vii)(H), which 
provides an exemption from a requirement to obtain a second appraisal 
for certain HPMLs under the 2013 Interagency Appraisals Final Rule for 
credit transactions made by creditors in rural counties.
    Through the 2013 Escrows Final Rule, the Bureau adopted Sec.  
1026.35(b)(2)(iv)(A) and (B) to define ``rural'' and ``underserved'' 
respectively for the purposes of the four rules discussed above that 
contain special provisions that use one or both of those terms. The 
2013 Escrows Final Rule also provided comment 35(b)(2)(iv)-1 to clarify 
further the criteria for ``rural'' and ``underserved'' counties, and 
provided that the Bureau will annually update on its public Web site a 
list of counties that meet the definitions of rural and underserved in 
Sec.  1026.35(b)(2)(iv). In advance of the rule's June 1 effective 
date, the Bureau is proposing to amend Sec.  1026.35(b)(2)(iv) and 
comment 35(b)(2)(iv)-1 to clarify how to determine whether a county is 
rural or underserved for the purposes of these provisions.
35(b)(2)(iii)
    The Bureau is proposing modifications to Sec.  1026.35(b)(2)(iii) 
and comment 35(b)(2)(iii)-1.i for clarification purposes and for 
consistency with other provisions. As adopted, Sec.  1026.35(b)(2)(iii) 
and its commentary state that the Bureau will designate or determine 
which counties are rural or underserved for the purposes of the special 
provisions of the four rules discussed above. This was not the Bureau's 
intent. Rather, the Bureau intended to require determinations of 
``rural'' or ``underserved'' status to be made by creditors as 
prescribed by Sec.  1026.35(b)(2)(iv)(A) and (B), but also intended for 
the Bureau to apply both tests to each U.S. county and publish an 
annual list of counties that satisfy either test for a given calendar 
year, which creditors may rely upon as a safe harbor. The Bureau is 
proposing modifications to Sec.  1026.35(b)(2)(iii)(A) and comment 
35(b)(2)(iii)-1.i for the purposes of clarification and consistency 
with these provisions.
35(b)(2)(iv)(A)
``Rural''
    As adopted, Sec.  1026.35(b)(2)(iv)(A) defines ``rural'' based on 
currently applicable UICs established by the USDA-ERS. The UICs are 
based on the definitions of ``metropolitan statistical area'' and 
``micropolitan statistical area'' as developed by the Office of 
Management and Budget (OMB), along with other factors reviewed by the 
ERS that place counties into twelve separately defined UICs depending, 
in part, on the size of the largest city and town in the county. Based 
on these definitions, Sec.  1026.35(b)(2)(iv)(A) as adopted states that 
a county is ``rural'' during a calendar year if it is neither in a 
metropolitan statistical area nor in a micropolitan statistical area 
that is adjacent to a metropolitan statistical area, as those terms are 
defined by OMB and applied under currently applicable UICs.
    As adopted, comment 35(b)(2)(iv)-1.i explains that, for the 
purposes of the provision, the terms ``metropolitan statistical areas'' 
and ``micropolitan statistical areas adjacent to a metropolitan 
statistical area'' are given the same meanings used by USDA-ERS for the 
purposes of determining UICs. The USDA-ERS considers micropolitan 
counties as ``adjacent'' to a metropolitan statistical area for this 
purpose if they abut a metropolitan statistical area and have at least 
2% of employed persons commuting to work in the core of the 
metropolitan statistical area.\11\ It is thus implicit in this comment 
that ``adjacent'' is given the same meaning used by the USDA-ERS for 
the purposes of Sec.  1026.35(b)(2)(iv)(A).
---------------------------------------------------------------------------

    \11\ See http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx.
---------------------------------------------------------------------------

    Nevertheless, the Bureau believes additional commentary that 
explains the meaning of ``adjacent'' more directly would be useful to 
facilitate compliance with Sec.  1026.35(b)(2)(iv) and the provisions 
that rely on it. Accordingly, the Bureau is proposing to amend comment 
35(b)(2)(iv)-1.i. to state expressly that ``adjacent'' entails physical 
contiguity with a metropolitan statistical area where certain minimum 
commuting standards are also met, as defined by the USDA-ERS. The 
Bureau believes this is consistent with USDA-ERS's use of ``adjacent'' 
and better explains the rule for compliance purposes.
    Similarly, the Bureau is proposing language to specify under Sec.  
1026.35(b)(2)(iv)(A) how ``rural'' status

[[Page 23174]]

should be determined for a county that does not have a currently 
applicable UIC because it was created after the USDA-ERS last 
categorized counties by UIC. Because the USDA-ERS only updates UICs 
decennially based on the most recent census, it is possible that new 
counties may be created that will not have a designated UIC until after 
the next census. In such instances, clarification is needed to explain 
how ``rural'' status would be determined. The Bureau is proposing to 
amend comment 35(b)(2)(iv)-1.i to address this issue and explain that 
any such county is considered ``rural'' for the purposes of Sec.  
1026.35(b)(2)(iv) only if all counties from which the new county's land 
was taken are themselves rural under the rule.
    The Bureau is also proposing comment 35(b)(2)(iv)-2.i to provide an 
example of how ``rural'' status is determined. In addition, the Bureau 
is making small technical changes to the rule provision and commentary 
to enhance clarity.
35(b)(2)(iv)(B)
``Underserved''
    Section 1026.35(b)(2)(iii)(A) creates an exemption from the HPML 
escrow requirement for transactions by creditors operating in rural or 
underserved counties, if they meet certain criteria involving the loans 
they originated during the preceding calendar year. Thus, the 
availability of the rural or underserved exemption always follows a 
year after the origination activity that makes a creditor eligible for 
the exemption.
    As adopted by the 2013 Escrows Final Rule, Sec.  
1026.35(b)(2)(iv)(B) states that a county is ``underserved'' during a 
calendar year if, ``according to Home Mortgage Disclosure Act (HMDA) 
data for that year,'' no more than two creditors extended covered 
transactions, as defined in Sec.  1026.43(b)(1), secured by a first 
lien, five or more times in the county. However, HMDA data typically 
are released for a given calendar year during the third or fourth 
quarter of each subsequent calendar year. It is thus not generally 
possible for creditors to make determinations concerning whether a 
county was underserved during the preceding calendar year based on that 
preceding year's HMDA data, because such data likely will not be 
available until late in the following year. In wording Sec.  
1026.35(b)(2)(iv)(B) as it did, the Bureau did not intend to require 
the use of HMDA data that is not yet available at the time the 
determination of a county's ``underserved'' status is made; the 
Bureau's intent was to provide for the use of the most recent HMDA data 
available at the time of the determination.
    The Bureau therefore is proposing to amend Sec.  
1026.35(b)(2)(iv)(B) to clarify that a county is considered 
``underserved'' during a given calendar year based on HMDA data for 
``the preceding calendar year'' as opposed to ``that calendar year.'' 
This look-back feature coordinates with the look-back feature in the 
exemption itself at Sec.  1026.35(b)(2)(iii)(A), so that a creditor 
would rely on the underserved status of a county based on HMDA data 
from two years previous to the use of the exemption, which are the most 
recent data available for use as the Bureau intended. The Bureau is 
also proposing to amend comment 35(b)(2)(iv)-1.ii to conform to this 
change, and to add proposed comment 35(b)(2)(iv)-2.ii to provide an 
example.
1026.35(e) Repayment Ability, Prepayment Penalties
    The Bureau is proposing language in Sec.  1026.35(e) to keep in 
place existing requirements contained in Sec.  1026.35(b) concerning 
assessment of consumers' ability to repay an HPML and limitations on 
prepayment penalties for HPMLs. These provisions were originally 
adopted by the Board in 2008,\12\ and will be supplanted by the 
Bureau's new rules implementing similar Dodd-Frank requirements in 
Sec.  1026.43 on January 10, 2014.
---------------------------------------------------------------------------

    \12\ 73 FR 44522 (July 30, 2008).
---------------------------------------------------------------------------

    The 2013 Escrows Final Rule inadvertently removed the existing 
language of Sec.  1026.35(b) between June 1, 2013 and the January 10, 
2014, effective date for the ability-to-repay and prepayment penalty 
provisions in Sec.  1026.43. This proposed rule would restore this 
language at Sec.  1026.35(e) and keep it in effect during that 
intervening period. The Bureau is also proposing to update existing 
cross-references to the Sec.  1026.35(b) HPML provisions.

V. Effective Date

    The Bureau contemplates making the proposed Sec.  1026.35(e) 
effective from June 1, 2013, through and including January 9, 2014, and 
making the other proposed amendments effective on June 1, 2013. Section 
553(d) of the Administrative Procedure Act generally requires the 
effective date of a final rule to be at least 30 days after publication 
of a rule, except for (1) a substantive rule which grants or recognizes 
an exemption or relieves a restriction; (2) interpretive rules and 
statements of policy; or (3) as otherwise provided by the agency for 
good cause found and published with the rule. 5 U.S.C. 553(d). The 
Bureau believes the proposed amendments would likely fall under one or 
more of these exceptions to section 553(d). The Bureau particularly 
notes that making the proposed amendments effective on June 1, 2013, 
would ease compliance and reduce disruption in the market, and ensure 
that the protections of the rule are uninterrupted.

VI. Section 1022(b)(2) of the Dodd-Frank Act

A. Overview

    The Bureau is considering the potential benefits, costs, and 
impacts of the proposed rule.\13\ The Bureau requests comment on the 
preliminary analysis presented below as well as submissions of 
additional data that could inform the Bureau's analysis of the 
benefits, costs, and impacts of the proposed rule. The Bureau has 
consulted, or offered to consult with, the prudential regulators, SEC, 
HUD, FHFA, the Federal Trade Commission, and the Department of the 
Treasury, including regarding consistency with any prudential, market, 
or systemic objectives administered by such agencies.
---------------------------------------------------------------------------

    \13\ Section 1022(b)(2)(A) of the Dodd-Frank Act, 12 U.S.C. 
5521(b)(2), directs the Bureau, when prescribing a rule under the 
Federal consumer financial laws, to consider the potential benefits 
and costs of regulation to consumers and covered persons, including 
the potential reduction of access by consumers to consumer financial 
products or services; the impact on insured depository institutions 
and credit unions with $10 billion or less in total assets as 
described in section 1026 of the Dodd-Frank Act; and the impact on 
consumers in rural areas. Section 1022(b)(2)(B) of the Dodd-Frank 
Act directs the Bureau to consult with appropriate prudential 
regulators or other Federal agencies regarding consistency with 
prudential, market, or systemic objectives that those agencies 
administer.
---------------------------------------------------------------------------

    The proposal would clarify how to determine whether a county is 
considered ``rural'' or ``underserved'' for the application of the 
special provisions adopted in certain of the 2013 Title XIV Final 
Rules.\14\ These changes would not have a material impact on consumers 
or covered persons.
---------------------------------------------------------------------------

    \14\ The special provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) The Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon payment 
prohibition on high-cost mortgages; and (4) the Sec.  
1026.35(c)(4)(vii)(H) exemption from the Sec.  1026.35(c)(4)(i) HPML 
second appraisal requirement for credit transactions made by 
creditors located in a rural county.
---------------------------------------------------------------------------

    Other provisions of the proposed rule are related to underwriting 
and features of HPMLs. As described above, existing

[[Page 23175]]

Regulation Z contains requirements related to the consumer's ability to 
repay and prepayment penalties for HPMLs. The scope of these 
protections is being expanded in connection with the Dodd-Frank Act 
title XIV rulemakings to apply to most mortgage transactions, rather 
than just HPMLs. For this reason, the 2013 Escrows Final Rule removed 
the regulatory text providing these protections solely to HPMLs. That 
final rule, however, takes effect on June 1, 2013, whereas the new 
ability-to-repay and prepayment penalty provisions do not take effect 
until January 10, 2014. Absent a correction, as proposed, the final 
rules issued in January would inadvertently create an interruption in 
applicable protections for certain consumers obtaining HPMLs effective 
June 1, and a corresponding relaxation of the requirements for lenders. 
This proposal would establish a temporary provision to ensure the 
protections remain in place for HPMLs until the expanded provisions 
take effect in January 2014. Because this interruption was inadvertent, 
the Bureau's 1022 analyses in the 2013 Title XIV Final Rules considered 
the impact of the protections at issue in this rule as if they were 
remaining in place.

B. Potential Benefits and Costs to Consumers and Covered Persons

    Compared to the baseline established by the issuance of the final 
rules issued in January 2013, the proposed rule would offer consumers 
who obtain HPMLs from June 1, 2013 through and including January 9, 
2014 the benefit of the existing protections under Regulation Z 
regarding ability-to-repay and prepayment penalties.\15\ These 
provisions are designed to limit consumers' exposure to collateral-
based lending, potentially harmful prepayment penalties and other 
harms. The price of HPMLs may be slightly higher than they would be in 
the absence of these protections; however, these effects are likely to 
be minimal.
---------------------------------------------------------------------------

    \15\ The Bureau has discretion in any rulemaking to choose an 
appropriate scope of analysis with respect to potential benefits and 
costs and an appropriate baseline.
---------------------------------------------------------------------------

    Compared to the same baseline, covered persons issuing such 
mortgages during this time period would incur any costs related to the 
ability-to-pay requirements and the restrictions on certain prepayment 
penalties. These costs would include the costs of documenting and 
verifying the consumer's ability to repay and some expected litigation-
related costs. As noted above, the evidence to date is that these costs 
are quite limited. The 2013 ATR Final Rule and the Board's earlier 2008 
HOEPA Final Rule (73 FR 44522 (July 30, 2008)) discuss these costs and 
benefits in greater detail. This rule simply extends these impacts from 
June 1, 2013 through and including January 9, 2014. The Bureau also 
believes that the proposed rule would benefit both consumers and 
covered persons in limiting unnecessary and possibly disruptive changes 
in the regulatory regime.
    The proposed rule may have a small differential impact on 
depository institutions and credit unions with $10 billion or less in 
total assets as described in Section 1026. To the extent that HPMLs 
comprise a larger percentage of originations at these institutions, the 
relative increase in costs may be higher relative to other lenders.
    The proposed rule would have some differential impacts on consumers 
in rural areas. In these areas, a greater fraction of loans are HPMLs. 
As such, to the extent that these added protections lead to additional 
lender costs, interest rates may be slightly higher on average; 
however, rural consumers will derive greater benefit from the proposed 
provisions than non-rural consumers.
    Given the small changes for the proposed rule, the Bureau does not 
believe that the proposed rule would meaningfully reduce consumers' 
access to credit.

VII. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis (FRFA) of any rule subject to 
notice-and-comment rulemaking requirements.\16\ These analyses must 
``describe the impact of the proposed rule on small entities.'' \17\ An 
IRFA or FRFA is not required if the agency certifies that the rule will 
not have a significant economic impact on a substantial number of small 
entities,\18\ or if the agency considers a series of closely related 
rules as one rule for purposes of complying with the IRFA or FRFA 
requirements.\19\ The Bureau also is subject to certain additional 
procedures under the RFA involving the convening of a panel to consult 
with small business representatives prior to proposing a rule for which 
an IRFA is required.\20\
---------------------------------------------------------------------------

    \16\ 5 U.S.C. 601 et. seq.
    \17\ 5 U.S.C. 603(a). For purposes of assessing the impacts of 
the proposed rule on small entities, ``small entities'' is defined 
in the RFA to include small businesses, small not-for-profit 
organizations, and small government jurisdictions. 5 U.S.C. 601(6). 
A ``small business'' is determined by application of Small Business 
Administration regulations and reference to the North American 
Industry Classification System (NAICS) classifications and size 
standards. 5 U.S.C. 601(3). A ``small organization'' is any ``not-
for-profit enterprise which is independently owned and operated and 
is not dominant in its field.'' 5 U.S.C. 601(4). A ``small 
governmental jurisdiction'' is the government of a city, county, 
town, township, village, school district, or special district with a 
population of less than 50,000. 5 U.S.C. 601(5).
    \18\ 5 U.S.C. 605(b).
    \19\ 5 U.S.C. 605(c).
    \20\ 5 U.S.C. 609.
---------------------------------------------------------------------------

    This rulemaking is part of a series of rules that have revised and 
expanded the regulatory requirements for entities that offer HPMLs. In 
January 2013, the Bureau adopted the 2013 Escrows Final Rule and 2013 
ATR Final Rule, along with other related rules mentioned above. Section 
VIII of the supplementary information to each of these rules set forth 
the Bureau's analyses and determinations under the RFA with respect to 
those rules. See 78 FR 4749, 78 FR 6575. The Bureau also notes because 
the potential interruption in applicable protections created by the 
issuance of the final rules in January was inadvertent, its Regulatory 
Flexibility analyses considered the impact of the protections at issue 
in this rule remaining in place for HPMLs until the expanded provisions 
take effect in January 2014. Because these rules qualify as ``a series 
of closely related rules,'' for purposes of the RFA, the Bureau relies 
on those analyses and determines that it has met or exceeded the IRFA 
requirement.
    In the alternative, the Bureau also concludes that the proposed 
rule would not have a significant impact on a substantial number of 
small entities. The proposal would establish a temporary provision to 
ensure the protections remain in place for HPMLs until the expanded 
provisions take effect in January 2014. Since the new requirements and 
liabilities that will take effect in January 2014 as applied to higher-
priced mortgage loans are very similar in nature to those that exist 
under the pre-existing regulations, the gap absent the proposed 
correction would be short-lived and would affect only the higher-priced 
mortgage loan market. It is therefore very unlikely absent the proposed 
correction that covered persons would alter their behavior 
substantially in the intervening period.
    The proposal would also clarify how to determine whether a county 
is considered ``rural'' or ``underserved'' for the application of the 
special provisions adopted in certain of the 2013 Title XIV

[[Page 23176]]

Final Rules.\21\ These changes would not have a material impact on 
small entities.
---------------------------------------------------------------------------

    \21\ The special provisions that rely on the ``rural'' and 
``underserved'' definitions are as follows: (1) the Sec.  
1026.35(b)(2)(iii) exemption to the 2013 Escrows Final Rule's escrow 
requirement for higher-priced mortgage loans; (2) the Sec.  
1026.43(f) allowance for balloon-payment qualified mortgages; (3) 
the Sec.  1026.32(d)(1)(ii)(C) exemption from the balloon payment 
prohibition on high-cost mortgages; and (4) the Sec.  
1026.35(c)(4)(vii)(H) exemption from the Sec.  1026.35(c)(4)(i) HPML 
second appraisal requirement for credit transactions made by 
creditors located in a rural county.
---------------------------------------------------------------------------

    As such, the Bureau affirms that the proposal would not have a 
significant impact on a substantial number of small entities.

VIII. Paperwork Reduction Act

    This proposed rule would amend 12 CFR part 1026 (Regulation Z), 
which implements the Truth in Lending Act (TILA). Regulation Z 
currently contains collections of information approved by OMB. The 
Bureau's OMB control number for Regulation Z is 3170-0015. However, the 
Bureau has determined that this proposed rule would not materially 
alter these collections of information nor impose any new 
recordkeeping, reporting, or disclosure requirements on the public that 
would constitute collections of information requiring approval under 
the Paperwork Reduction Act, 44 U.S.C. 3501 et seq.
    Comments on this determination may be submitted to the Bureau as 
instructed in the ADDRESSES section of this Notice and to the attention 
of the Paperwork Reduction Act Officer.

List of Subjects in 12 CFR Part 1026

    Advertising, Consumer protection, Mortgages, Recordkeeping 
requirements, Reporting, Truth in lending.

Authority and Issuance

    For the reasons set forth in the preamble, the Bureau proposes to 
further amend Regulation Z, 12 CFR part 1026, as amended by the final 
rule published on January 22, 2013, 78 FR 4726, as set forth below:

PART 1026--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 1026 continues to read as follows:

    Authority: 12 U.S.C. 2601; 2603-2605, 2607, 2609, 2617, 5511, 
5512, 5532, 5581; 15 U.S.C. 1601 et seq.

Subpart C--Closed-End Credit

0
2. Section 1026.23 is amended by revising paragraph (a)(3)(ii) to read 
as follows:


Sec.  1026.23   Right of rescission.

    (a) * * *
    (3) * * *
    (ii) For purposes of this paragraph (a)(3), the term ``material 
disclosures'' means the required disclosures of the annual percentage 
rate, the finance charge, the amount financed, the total of payments, 
the payment schedule, and the disclosures and limitations referred to 
in Sec. Sec.  1026.32(c) and (d) and 1026.35(e)(2).

Subpart E--Special Rules for Certain Home Mortgage Transactions

0
3. Section 1026.34 is amended by revising paragraph (a)(4)(i) to read 
as follows:


Sec.  1026.34   Prohibited acts or practices in connection with high-
cost mortgages.

    (a) * * *
    (4) * * *
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec.  1026.35(b), and similar expenses.
0
4. Section 1026.35 is amended by revising paragraphs (b)(1), 
(b)(2)(iii)(A) and (b)(iv)(A) and (B), and adding paragraph (e), to 
read as follows:


Sec.  1026.35  Requirements for higher-priced mortgage loans.

* * * * *
    (b) * * * For purposes of this paragraph (b), the term ``escrow 
account'' has the same meaning as under Regulation X (12 CFR 
1024.17(b)), as amended.
    (2) Exemptions. Notwithstanding paragraph (b)(1) of this section:
* * * * *
    (iii) Except as provided in paragraph (b)(2)(v) of this section, an 
escrow account need not be established for a transaction if, at the 
time of consummation:
    (A) During the preceding calendar year, the creditor extended more 
than 50 percent of its total covered transactions, as defined by Sec.  
1026.43(b)(1), secured by a first lien, on properties that are located 
in counties that are either ``rural'' or ``underserved,'' as set forth 
in paragraph (b)(2)(iv) of this section;
* * * * *
    (iv) For purposes of paragraph (b)(2)(iii)(A) of this section:
    (A) A county is ``rural'' during a calendar year if it is neither 
in a metropolitan statistical area nor in a micropolitan statistical 
area that is adjacent to a metropolitan statistical area, as those 
terms are defined by the U.S. Office of Management and Budget and as 
they are applied under currently applicable Urban Influence Codes 
(UICs), established by the United States Department of Agriculture's 
Economic Research Service (USDA-ERS). A creditor may rely as a safe 
harbor on the list of counties published by the Bureau to determine 
whether a county qualifies as ``rural'' for a particular calendar year.
    (B) A county is ``underserved'' during a calendar year if, 
according to Home Mortgage Disclosure Act (HMDA) data for the preceding 
calendar year, no more than two creditors extended covered 
transactions, as defined in Sec.  1026.43(b)(1), secured by a first 
lien, five or more times in the county. A creditor may rely as a safe 
harbor on the list of counties published by the Bureau to determine 
whether a county qualifies as ``underserved'' for a particular calendar 
year.
* * * * *
    (e) Repayment ability, Prepayment penalties. Higher-priced mortgage 
loans are subject to the following restrictions:
    (1) Repayment ability. A creditor shall not extend credit based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation as provided in Sec.  
1026.34(a)(4).
    (2) Prepayment penalties. A loan may not include a penalty 
described by Sec.  1026.32(d)(6) unless:
    (i) The penalty is otherwise permitted by law, including Sec.  
1026.32(d)(7) if the loan is a mortgage transaction described in Sec.  
1026.32(a); and
    (ii) Under the terms of the loan:
    (A) The penalty will not apply after the two-year period following 
consummation;
    (B) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor; 
and
    (C) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.
    (3) Sunset of requirements on repayment ability and prepayment 
penalties. The requirements described in paragraphs (e)(1) and (e)(2) 
of this section shall expire on January 10, 2014.
0
5. In Supplement I to Part 1026--Official Interpretations:
0
A. Under Section 1026.32--Requirements for Certain Closed-End Home 
Mortgages, under Paragraph 32(d) Limitations, paragraph 1 is revised.
0
B. Under Section 1026.34--Repayment Ability
0
i. Under Paragraph 34(a)(4) Repayment ability for high-cost mortgages, 
paragraph 1 is revised.
0
ii. Under Paragraph 34(a)(4)(i) Mortgage-Related Obligations, paragraph 
1 is revised.

[[Page 23177]]

0
C. Under Section 1026.35--Requirements for Higher-Priced Mortgage 
Loans:
0
i. Under Paragraph 35(b)(2)(iii), paragraphs 1 and i are revised.
0
ii. Under Paragraph 35(b)(2)(iv), paragraphs 1, i, ii, 2, i, and ii are 
revised.
0
iii. The headings 35(e) Rules for Higher-Priced Mortgage Loans and 
Paragraph 35(e)(2)(ii)(C), and paragraphs 1 and 2 are added.

Supplement I to Part 1026--Official Interpretations

* * * * *

Subpart E--Special Rules for Certain Home Mortgage Transactions

* * * * *

Sec.  1026.32--Requirements for Certain Closed-End Home Mortgages

* * * * *
Paragraph 32(d) Limitations.
    1. Additional prohibitions applicable under other sections. Section 
1026.34 sets forth certain prohibitions in connection with mortgage 
credit subject to Sec.  1026.32, in addition to the limitations in 
Sec.  1026.32(d). Further, Sec.  1026.35 prohibits certain practices in 
connection with transactions that meet the coverage test in Sec.  
1026.35(a). Because the coverage test in Sec.  1026.35(a) is generally 
broader than the coverage test in Sec.  1026.32(a), most Sec.  1026.32 
mortgage loans are also subject to the prohibitions set forth in Sec.  
1026.35 (such as escrows), in addition to the limitations in Sec.  
1026.32(d).
* * * * *

Sec.  1026.34--Prohibited Acts or Practices in Connection with High-
Cost Mortgages

* * * * *
Paragraph 34(a)(4) Repayment Ability.
    1. Application of repayment ability rule. The Sec.  1026.34(a)(4) 
prohibition against making loans without regard to consumers' repayment 
ability applies to mortgage loans described in Sec.  1026.32(a). In 
addition, the Sec.  1026.34(a)(4) prohibition applies to higher-priced 
mortgage loans described in Sec.  1026.35(a). See Sec.  1026.35(e)(1).
* * * * *
Paragraph 34(a)(4)(i) Mortgage-Related Obligations.
    1. Mortgage-related obligations. A creditor must include in its 
repayment ability analysis the expected property taxes and premiums for 
mortgage-related insurance required by the creditor as set forth in 
Sec.  1026.35(b), as well as similar mortgage-related expenses. Similar 
mortgage-related expenses include homeowners' association dues and 
condominium or cooperative fees.
* * * * *

Sec.  1026.35--Requirements for Higher-Priced Mortgage Loans

* * * * *
Paragraph 35(b)(2)(iii).
    1. Requirements for exemption. Under Sec.  1026.35(b)(2)(iii), 
except as provided in Sec.  1026.35(b)(2)(v), a creditor need not 
establish an escrow account for taxes and insurance for a higher-priced 
mortgage loan, provided the following four conditions are satisfied 
when the higher-priced mortgage loan is consummated:
    i. During the preceding calendar year, more than 50 percent of the 
creditor's total first-lien covered transactions, as defined in Sec.  
1026.43(b)(1), are secured by properties located in counties that are 
either ``rural'' or ``underserved,'' as set forth in Sec.  
1026.35(b)(2)(iv). Pursuant to that section, a creditor may rely as a 
safe harbor on a list of counties published by the Bureau to determine 
whether counties in the United States are rural or underserved for a 
particular calendar year. Thus, for example, if a creditor originated 
90 covered transactions, as defined by Sec.  1026.43(b)(1), secured by 
a first lien, during 2013, the creditor meets this condition for an 
exemption in 2014 if at least 46 of those transactions are secured by 
first liens on properties that are located in such counties.
* * * * *
Paragraph 35(b)(2)(iv).
    1. Requirements for ``rural'' or ``underserved'' status. A county 
is considered to be ``rural'' or ``underserved'' for purposes of Sec.  
1026.35(b)(2)(iii)(A) if it satisfies either of the two tests in Sec.  
1026.35(b)(2)(iv). The Bureau applies both tests to each county in the 
United States. If a county satisfies either test, the Bureau will 
include the county on a published list of ``rural'' or ``underserved'' 
counties for a particular calendar year. To facilitate compliance with 
appraisal requirements in Sec.  1026.35(c), the Bureau will also create 
a list of only those counties that are ``rural'' but excluding those 
that are only ``underserved.'' The Bureau will post on its public Web 
site the applicable lists for each calendar year by the end of that 
year, thus permitting creditors to ascertain the availability to them 
of the exemption during the following year. For 2012, however, the list 
will be published before June 1, 2013. A creditor may rely as a safe 
harbor, pursuant to section 130(f) of the Truth in Lending Act, on the 
lists of counties published by the Bureau to determine whether a county 
qualifies as ``rural'' or ``underserved'' for a particular calendar 
year. A creditor's originations of covered transactions, as defined by 
Sec.  1026.43(b)(1), secured by a first lien, in such counties during 
that year are considered in determining whether the creditor satisfies 
the condition in Sec.  1026.35(b)(2)(iii)(A) and therefore will be 
eligible for the exemption during the following calendar year.
    i. Under Sec.  1026.35(b)(2)(iv)(A), a county is rural during a 
calendar year if it is neither in a metropolitan statistical area nor 
in a micropolitan statistical area that is adjacent to a metropolitan 
statistical area. These areas are defined by the Office of Management 
and Budget and applied under currently applicable Urban Influence Codes 
(UICs), established by the United States Department of Agriculture's 
Economic Research Service (USDA-ERS). Accordingly, for purposes of 
Sec.  1026.35(b)(2)(iv)(A), ``adjacent'' has the meaning applied by the 
USDA-ERS in determining a county's UIC; as so applied, ``adjacent'' 
entails a county not only being physically contiguous with a 
metropolitan statistical area but also meeting certain minimum 
population commuting patterns. Specifically, a county is ``rural'' if 
the USDA-ERS categorizes the county under UIC 4, 6, 7, 8, 9, 10, 11, or 
12. Descriptions of UICs are available on the USDA-ERS Web site at 
http://www.ers.usda.gov/data-products/urban-influence-codes/documentation.aspx. A county for which there is no currently applicable 
UIC (because the county has been created since the USDA-ERS last 
categorized counties) is rural only if all counties from which the new 
county's land was taken are themselves rural under currently applicable 
UICs.
    ii. Under Sec.  1026.35(b)(2)(iv)(B), a county is underserved 
during a calendar year if, according to Home Mortgage Disclosure Act 
(HMDA) data for the preceding calendar year, no more than two creditors 
extended covered transactions, as defined in Sec.  1026.43(b)(1), 
secured by a first lien, five or more times in the county. 
Specifically, a county is ``underserved'' if, in the applicable 
calendar year's public HMDA aggregate dataset, no more than two 
creditors have reported five or more first-lien covered transactions 
with HMDA geocoding that places the properties in that county. For 
purposes of this determination, because only covered transactions are 
counted,

[[Page 23178]]

all first-lien originations (and only first-lien originations) reported 
in the HMDA data are counted except those for which the owner-occupancy 
status is reported as ``Not owner-occupied'' (HMDA code 2), the 
property type is reported as ``Multifamily'' (HMDA code 3), the 
applicant's or co-applicant's race is reported as ``Not applicable'' 
(HMDA code 7), or the applicant's or co-applicant's sex is reported as 
``Not applicable'' (HMDA code 4). The most recent HMDA data are 
available at http://www.ffiec.gov/hmda.
    2. Examples. i. A county is considered ``rural'' for a given 
calendar year based on the most recent available UIC designations, 
which are updated by the USDA-ERS once every ten years. As an example, 
assume a creditor makes first-lien covered transactions in County X 
during calendar year 2014, and the most recent UIC designations have 
been published in the second quarter of 2013. To determine ``rural'' 
status for County X during calendar year 2014, the creditor will use 
the 2013 UIC designations. However, to determine ``rural'' status for 
County X during 2012 or 2013, the creditor would use the UIC 
designations last published in 2003.
    ii. A county is considered ``underserved'' for a given calendar 
year based on the most recent available HMDA data. For example, assume 
a creditor makes first-lien covered transactions in County Y during 
calendar year 2013, and the most recent HMDA data is for calendar year 
2012, published in the third quarter of 2013. To determine 
``underserved'' status for County Y in calendar year 2013 for the 
purposes of qualifying for the ``rural or underserved'' exemption in 
calendar year 2014, the creditor will use the 2012 HMDA data.
* * * * *
35(e) Rules for Higher-Priced Mortgage Loans
Paragraph 35(e)(2)(ii)(C).
    1. Payment change. Section 1026.35(e)(2) provides that a loan 
subject to this section may not have a penalty described by Sec.  
1026.32(d)(6) unless certain conditions are met. Section 
1026.35(e)(2)(ii)(C) lists as a condition that the amount of the 
periodic payment of principal or interest or both may not change during 
the four-year period following consummation. For examples showing 
whether a prepayment penalty is permitted or prohibited in connection 
with particular payment changes, see comment 32(d)(7)(iv)-1. Those 
examples, however, include a condition that Sec.  1026.35(e)(2) does 
not include: the condition that, at consummation, the consumer's total 
monthly debt payments may not exceed 50 percent of the consumer's 
monthly gross income. For guidance about circumstances in which payment 
changes are not considered payment changes for purposes of this 
section, see comment 32(d)(7)(iv)-2.
    2. Negative amortization. Section 1026.32(d)(2) provides that a 
loan described in Sec.  1026.32(a) may not have a payment schedule with 
regular periodic payments that cause the principal balance to increase. 
Therefore, the commentary to Sec.  1026.32(d)(7)(iv) does not include 
examples of payment changes in connection with negative amortization. 
The following examples show whether, under Sec.  1026.35(e)(2), 
prepayment penalties are permitted or prohibited in connection with 
particular payment changes, when a loan agreement permits negative 
amortization:
    i. Initial payments for a variable-rate transaction consummated on 
January 1, 2010, are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first 
date that a scheduled payment in a different amount may be due is 
January 1, 2014, and the creditor does not have the right to change 
scheduled payments prior to that date even if negative amortization 
occurs. A prepayment penalty is permitted with this mortgage 
transaction provided that the other Sec.  1026.35(e)(2) conditions are 
met, that is: provided that the prepayment penalty is permitted by 
other applicable law, the penalty expires on or before December 31, 
2011, and the penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or its affiliate.
    ii. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first 
date that a scheduled payment in a different amount may be due is 
January 1, 2014, but the creditor has the right to change scheduled 
payments prior to that date if negative amortization occurs. A 
prepayment penalty is prohibited with this mortgage transaction because 
the payment may change within the four-year period following 
consummation.
* * * * *

    Dated: April 11, 2013.
Richard Cordray,
Director, Bureau of Consumer Financial Protection.
[FR Doc. 2013-09058 Filed 4-17-13; 8:45 am]
BILLING CODE 4810-AM-P