[Federal Register Volume 78, Number 189 (Monday, September 30, 2013)]
[Proposed Rules]
[Pages 59890-59902]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-23472]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201, 203, 1005, and 1007

[Docket No. FR 5707-P-01]
RIN 2502-AJ18


Qualified Mortgage Definition for HUD Insured and Guaranteed 
Single Family Mortgages

AGENCY: Office of Secretary, HUD.

ACTION: Proposed rule.

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SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(Dodd-Frank Act) created new section 129C in the Truth-in-Lending Act 
(TILA), which establishes minimum standards for considering a 
consumer's repayment ability for creditors originating certain closed-
end, dwelling-secured mortgages, and generally prohibits a creditor 
from making a residential mortgage loan unless the creditor makes a 
reasonable and good-faith determination of a consumer's ability to 
repay the loan according to its terms. Section 129C provides lenders 
more certainty about meeting the ability-to-repay requirements when 
lenders make ``qualified mortgages,'' which are presumed to meet the 
requirements. Section 129C authorizes the agency with responsibility 
for compliance with TILA, which was initially the Federal Reserve Board 
and is now the Consumer Financial Protection Bureau (CFPB), to issue a 
rule implementing these requirements. The CFPB has issued its rule 
implementing these requirements, referred to throughout this proposed 
rule as the CFPB final rule.
    The Dodd-Frank Act also charges HUD and three other Federal 
agencies with prescribing regulations defining the types of loans that 
these Federal agencies insure, guarantee, or administer, as applicable, 
that are qualified mortgages. Through this proposed rule, HUD submits 
for public comment its definition of ``qualified mortgage'' for the 
types of loans that HUD insures, guarantees, or administers that aligns 
with the statutory ability-to-repay criteria of TILA and the regulatory 
criteria of the CFPB's definition, without departing from HUD's 
statutory missions. In this rulemaking, HUD proposes that any forward 
single family mortgage insured or guaranteed by HUD shall meet the 
criteria of a qualified mortgage, as defined in this rule, and HUD 
seeks comment on all components of its definition.

DATES: Comment Due Date: October 30, 2013.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, 
Department of Housing and Urban Development, 451 7th Street SW., Room 
10276, Washington, DC 20410-0500. Communications must refer to the 
above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to

[[Page 59891]]

the Regulations Division, Office of General Counsel, Department of 
Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
www.regulations.gov. HUD strongly encourages commenters to submit 
comments electronically. Electronic submission of comments allows the 
commenter maximum time to prepare and submit a comment, ensures timely 
receipt by HUD, and enables HUD to make them immediately available to 
the public. Comments submitted electronically through the 
www.regulations.gov Web site can be viewed by other commenters and 
interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note: To receive consideration as public comments, comments must 
be submitted through one of the two methods specified above. Again, 
all submissions must refer to the docket number and title of the 
proposed rule.


    No Facsimile Comments. Facsimile (fax) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m., weekdays, at 
the above address. Due to security measures at the HUD Headquarters 
building, an appointment to review the public comments must be 
scheduled in advance by calling the Regulations Division at 202-708-
3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number via TTY by calling the 
Federal Relay Service at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Michael P. Nixon, Office of Housing, 
Department of Housing and Urban Development, 451 7th Street SW., Room 
9278, Washington, DC 20410; telephone number 202-402-5216, ext. 3094 
(this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the Federal 
Relay Service at 800-877-8339 (this is a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Executive Summary

A. Purpose of the Regulatory Action

    This rulemaking commences the process by which HUD will meet its 
charge under TILA, as amended by the Dodd-Frank Act, to define, in 
regulation, the term ``qualified mortgage'' for the single family 
residential mortgages and loans that HUD insures, guarantees, or 
otherwise administers. While the CFPB, in accordance with statutory 
direction, has defined, through rulemaking, the term ``qualified 
mortgage'' for the broader single family mortgage market, HUD must 
define this term for use in its own single family insured or guaranteed 
mortgage programs.
    The statutory purpose of defining ``qualified mortgage,'' whether 
for the conventional mortgage market or for specific Federal programs, 
as specified in the Dodd-Frank Act, is to identify single family 
residential mortgages that take into consideration a borrower's ability 
to repay the loans and provide certain protections for the lender from 
liability. During the years preceding the mortgage crisis, too many 
mortgages were made to borrowers without regard to their ability to 
repay the loan and included risky features such as ``no doc'' loans or 
``interest only'' loans. As a result, many homeowners defaulted on 
these loans and faced foreclosure, causing a collapse in the housing 
market in 2008 and leading to the Nation's most serious financial 
crisis since the Great Depression.
    In developing a proposed definition of qualified mortgage, HUD 
reviewed its mortgage insurance and loan guarantee programs and 
determined that all of the single family residential mortgage and loan 
products offered under HUD programs are qualified mortgages; that is, 
they exclude risky features and are designed so that the borrower can 
repay the loan. However, for certain of its mortgage products, HUD 
proposes qualified mortgage standards similar to those established by 
the CFPB in its definition of ``qualified mortgage.''

B. Summary of the Major Provisions of the Regulatory Action

    In defining ``qualified mortgage'' in its rulemaking, the CFPB 
established both a safe harbor and a rebuttable presumption of 
compliance for transactions that are qualified mortgages. The label of 
safe harbor qualified mortgage is applied to those mortgages that are 
not higher-priced covered transactions (that is the annual percentage 
rate does not exceed the average prime offer rate by 1.5 percent). 
These are considered to be the least risky loans and presumed to have 
conclusively met the ability-to-repay requirements of TILA. The label 
of rebuttable presumption qualified mortgage is applied to those 
mortgages that are higher-priced transactions.
    HUD proposes to designate Title I (home improvement loans), Section 
184 (Indian housing loans), and Section 184A (Native Hawaiian housing 
loans) insured mortgages and guaranteed loans covered by this 
rulemaking to be safe harbor qualified mortgages and HUD proposes no 
changes to the underwriting requirements of these mortgage and loan 
products. However, for its largest volume of mortgage products, those 
insured under Title II of the National Housing Act, HUD proposes two 
categories of qualified mortgages similar to the two categories created 
in the CFPB final rule--a safe harbor qualified mortgage and a 
rebuttable presumption qualified mortgage.
    The rulemaking proposes to define safe harbor qualified mortgage as 
a mortgage insured under Title II of the National Housing Act (with the 
exception of reverse mortgages insured under section 255 of this act) 
that meets the points and fees limit adopted by the CFPB in its 
regulation at 12 CFR 1026.43(e)(3), and that has an annual percentage 
rate for a first-lien mortgage relative to the average prime offer rate 
that is less than the sum of the annual mortgage insurance premium and 
1.15 percentage points. HUD proposes to define a rebuttable presumption 
qualified mortgage as a single family mortgage insured under Title II 
of the National Housing Act (with the exception of reverse mortgages 
insured under section 255 of this act) that meets the points and fees 
limit adopted by the CFPB in its regulation at 12 CFR 1026.43(e)(3), 
but has an annual percentage rate that exceeds the average prime offer 
rate for a comparable mortgage, as of the date the interest rate is 
set, by more than the sum of the annual mortgage insurance premium and 
1.15 percentage points for a first-lien mortgage.
    HUD requires that all loans be insured under Title II of the 
National Housing Act in order to be either a rebuttable presumption or 
safe harbor qualified mortgage, and that they meet the CFPB's points 
and fees limit at 12 CFR 1026.43(e)(3). The CFPB set a three percent 
points and fees limit for its definition of qualified mortgage and 
allowed for adjustments of this limit to facilitate the presumption of 
compliance for smaller loans.
    As more fully discussed later in this preamble, HUD's proposal to 
establish

[[Page 59892]]

two categories of qualified mortgages for the majority of National 
Housing Act mortgages is to maintain consistency with the TILA 
statutory criteria defining qualified mortgage, as well as the CFPB's 
definition, to the extent consistent with the National Housing Act. HUD 
specifically seeks comment on its proposed two categories.

C. Costs and Benefits

    The impacts of HUD's proposed rule are relatively small. HUD's 
proposed rule in effect reclassifies a sizeable group (about 19 
percent) of Title II loans insured under the National Housing Act from 
rebuttable presumption qualified mortgages under the CFPB final rule to 
safe harbor qualified mortgages under HUD's proposed rule. A small 
number (about 7 percent) of Title II loans would continue to not 
qualify as qualified mortgages based on the points and fees limit, 
while the remaining Federal Housing Administration (FHA) loans (about 
74 percent) would qualify for qualified mortgage status with a safe 
harbor presumption of compliance with the ability-to-repay requirements 
under both the CFPB final rule and HUD's proposed rule. The Title II 
loans that would be nonqualified mortgages under the CFPB's rule would 
remain non-qualified mortgages under the proposed rule. The difference 
is that HUD, through this rulemaking, will no longer insure loans with 
points and fees above the CFPB level for qualified mortgages, but 
expects that these loans will adapt to meet the points and fees limit. 
In addition, HUD classifies all Title I, Section 184 and Section 184A 
insured mortgages and guaranteed loans, which most likely would have 
been nonqualified mortgages under the CFPB final rule, as safe harbor 
qualified mortgages.
    As a result of these reclassifications, lenders face lower costs of 
compliance under HUD's qualified mortgage rule than under the CFPB 
final rule and therefore receive incentives to continue making these 
loans without having to pass on their increased compliance costs to 
borrowers. While borrowers benefit from not having to pay for the 
higher lender costs, they also face less opportunity to challenge the 
lender with regard to ability to repay. HUD expects that almost all 
borrowers will gain from the reduction in litigation and that the 
reduction of the interest rate will compensate for the loss of the 
option to more easily challenge a lender. As a result of the 
reclassification of some HUD loans, the maximum expected impact of the 
proposed rule would be an annual reduction of lender legal costs by $41 
million.

II. Background

    New section 129C(a) of TILA, added by section 1411 of subtitle B of 
Title XIV of the Dodd-Frank Act (Pub. L. 111-203, 124 Stat. 1736, 
approved July 21, 2010), provides minimum standards for considering a 
consumer's ability to repay a residential mortgage. New section 
129C(b), added by section 1412 of the Dodd-Frank Act, establishes the 
presumption that the ability-to-repay requirements of section 129C(a) 
are satisfied if a mortgage is a ``qualified mortgage,'' and 
authorizes, initially, the Federal Reserve Board and, ultimately, the 
CFPB, to prescribe regulations that revise, add to, or subtract from 
the criteria in TILA that define a ``qualified mortgage.''
    Section 129C(b)(2)(A) defines qualified mortgage as a mortgage that 
meets the following requirements: (i) The transaction must have regular 
periodic payments; (ii) the terms of the mortgage must not result in a 
balloon payment; (iii) the income and financial resources of the 
mortgagor are verified and documented; (iv) for a fixed rate loan, the 
underwriting process fully amortizes the loan over the loan term; (v) 
for an adjustable rate loan, the underwriting is based on the maximum 
rate permitted under the loan during the first 5 years and includes a 
payment schedule that fully amortizes the loan over the loan term; (vi) 
the transaction must comply with any regulations established by the 
CFPB relating to ratios of total monthly debt to total monthly income; 
(vii) the total points and fees payable in connection with the loan 
must not exceed 3 percent of the total loan amount; and (viii) the 
mortgage must not exceed 30 years, except in specific areas.\1\
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    \1\ Section 129C also provides for a reverse mortgage to be a 
qualified mortgage if the mortgage meets the CFPB's standards for a 
qualified mortgage except to the extent that reverse mortgages are 
statutorily exempted altogether from the ability-to-repay 
requirements. The CFPB's regulations provide that the ability-to-
repay requirements of section 129C(a) do not apply to reverse 
mortgages. In the preamble to its final rule published on January 
30, 2013, the CFPB states: ``The Bureau notes that the final rule 
does not define a `qualified' reverse mortgage. As described above, 
TILA section 129C(a)(8) excludes reverse mortgages from the 
repayment ability requirements. See section-by-section analysis of 
Sec.  1026.43(a)(3)(i). However, TILA section 129C(b)(2)(ix) 
provides that the term `qualified mortgage' may include a 
`residential mortgage loan' that is `a reverse mortgage which meets 
the standards for a qualified mortgage, as set by the Bureau in 
rules that are consistent with the purposes of this subsection.' The 
Board's proposal did not include reverse mortgages in the definition 
of a `qualified mortgage.' '' (See 78 FR 6516.)
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    New section 129C(b)(3)(B)(ii), also added by section 1412, requires 
that HUD, the Department of Veterans Affairs (VA), the Department of 
Agriculture (USDA), and the Rural Housing Service (RHS), prescribe 
rules in consultation with the Federal Reserve Board \2\ to define the 
types of loans they insure, guarantee, or administer, as the case may 
be, that are ``qualified mortgages,'' and revise, add to, or subtract 
from the statutory criteria used to define a qualified mortgage.
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    \2\ Rulemaking authority under TILA has since been transferred 
to the CFPB.
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    The Federal Reserve Board published a proposed rule on May 11, 
2011, at 76 FR 27390, entitled, ``Regulation Z; Truth in Lending,'' in 
conformance with amendments to section 129C of TILA. On July 21, 2011, 
rulemaking authority under TILA transferred from the Federal Reserve 
Board to the CFPB. The CFPB published a final rule on January 30, 2013, 
at 78 FR 6408, entitled, ``Ability-to-Repay and Qualified Mortgage 
Standards under the Truth in Lending Act (Regulation Z),'' which has 
been referred to in this preamble as the CFPB final rule. This final 
rule implemented section 129C(b) by defining ``qualified mortgage'' 
with two degrees of protections for creditors and assignees of a 
qualified mortgage. The CFPB's regulations implementing section 129C(b) 
are codified at 12 CFR part 1026.
    The CFPB's regulations at 12 CFR 1026.43(e)(2) adopt in part the 
statutory qualified mortgage definition, and require that a mortgage 
meet 6 general requirements: (i) The transaction must have regular 
periodic payments; \3\ (ii) the mortgage must not exceed 30 years; \4\ 
(iii) the points and fees paid in connection with a loan greater than 
or equal to $100,000 does not exceed 3 percent of the total loan 
amount, with a higher amount allowed for loans under $100,000; \5\ (iv) 
the creditor must underwrite the loan taking into account the monthly 
payment for mortgage-related obligations; \6\ (v) the creditor must 
consider and verify income and debt; \7\ and (vi) the ratio of the 
consumer's monthly debt to total monthly income must not exceed 43 
percent.\8\
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    \3\ 129C(b)(2)(A)(i).
    \4\ 129C(b)(2)(A)(viii).
    \5\ 129C(b)(2)(A)(vii) (limiting total points and fees payable 
in connection with the loan to 3 percent of the total loan amount).
    \6\ 129C(b)(2)(A)(iv)-(v).
    \7\ 129C(b)(2)(A)(iii).
    \8\ 129C(b)(2)(A)(vi) (directing compliance ``with any 
guidelines or regulations established by the Board relating to 
ratios of total monthly debt to total monthly income or alternative 
measures . . .'').
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    The limit on points and fees is defined in 12 CFR 1026.43(e)(3) and 
the definition of points and fees is set out at 12 CFR 1026.32(b)(1). 
The total amount of points and fees for loans

[[Page 59893]]

greater than or equal to $100,000 (indexed for inflation) must not 
exceed 3 percent of the total loan amount. For a loan amount greater 
than or equal to $60,000 but less than $100,000, the points and fees 
must not exceed $3,000; for a loan amount greater than or equal to 
$20,000 but less than $60,000, the points and fees must not exceed 5 
percent of the total loan amount; for a loan amount greater than or 
equal to $12,500 but less than $20,000, the points and fees must not 
exceed $1,000; and for a loan amount less than $12,500, the points and 
fees must not exceed 8 percent of the total loan amount.
    The CFPB final rule creates both a safe harbor and a rebuttable 
presumption of compliance for transactions that are ``qualified 
mortgages.'' Section 129C(b) of TILA provides a presumption that a 
qualified mortgage has met the ability-to-repay requirements. However, 
as the CFPB noted in its final rule, ``the statute is not clear as to 
whether that presumption is intended to be conclusive so as to create a 
safe harbor that cuts off litigation or a rebuttable presumption of 
compliance with the ability-to-repay requirements.'' \9\ The CFPB's 
analysis of the statutory construction and policy implications 
demonstrates that there are sound reasons for adopting either 
interpretation.\10\ Given the statutory ambiguity, the CFPB adopted 
both a safe harbor and rebuttable presumption standard, exercising its 
authority under section 129C(b)(3)(B) of TILA to revise, add to, or 
subtract from the qualified mortgage criteria upon finding that the 
changes further the purposes of sections 129B and 129C. The CFPB's 
analysis found that the use of a safe harbor and a rebuttable 
presumption standard best promoted the various policy goals of the 
statute.\11\
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    \9\ See 78 FR 6506.
    \10\ The title of section 129C(b) refers to both a ``safe harbor 
and rebuttable presumption,'' and there are references to both safe 
harbors and rebuttable presumptions in other provisions of the Act. 
The authority to revise the definition of ``qualified mortgage'' at 
129C(b)(3)(B) is titled ``revision of safe harbor criteria.'' See 
also 76 FR 27390, 27452-55 (May 11, 2011).
    \11\ See 78 FR 6506-6513 for the CFPB's full analysis for 
adopting a safe harbor and rebuttable presumption standard.
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    A ``qualified mortgage'' falls into the safe harbor category and is 
conclusively presumed to have met the ability-to-repay requirements if 
it is not a ``higher-priced covered transaction.'' The safe harbor 
presumption was established to limit ability to repay challenges on 
mortgages that are considered to be the least risky.\12\ Consumers can 
only challenge loans in this category by showing that the loans do not 
meet the definition of a ``qualified mortgage.'' A ``qualified 
mortgage'' that is a higher-priced covered transaction has only a 
rebuttable presumption of compliance with the ability-to-repay 
requirement, even though each element of the ``qualified mortgage'' 
definition is met. See 12 CFR 1026.43(e)(1)(ii)(B). A ``higher-priced 
covered transaction'' is a transaction that has an annual percentage 
rate (APR) that exceeds the average prime offer rate (APOR) for a 
comparable transaction as of the date the interest rate is set by 1.5 
or more percentage points for a first-lien covered transaction, or by 
3.5 or more percentage points for a subordinate-lien covered 
transaction.
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    \12\ See 78 FR 6506.
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    The CFPB final rule also temporarily grants ``qualified mortgage'' 
status to loans that satisfy certain underwriting standards. See 12 CFR 
1026.43(e)(4). Loans in this category must satisfy the underwriting 
requirements of, and are therefore eligible to be purchased, guaranteed 
or insured by, one of the following: The government-sponsored 
enterprises (GSEs) (i.e., Fannie Mae and Freddie Mac) while they 
operate under Federal conservatorship or receivership, HUD (but only 
loans eligible to be insured under the National Housing Act), VA, USDA, 
or RHS. The temporary definition requires a qualified mortgage to 
satisfy only the first 3 requirements of the general definition of a 
qualified mortgage (i.e., must have regular periodic payments, term 
must not exceed 30 years, and points and fees must not exceed those 
specified in 1026.43(e)(3)) and excludes the underwriting, credit and 
income verification, and 43 percent total monthly debt-to-income ratio 
requirements for a ``qualified mortgage.'' These applicable provisions 
of the temporary definition phase out: (1) When each of the four 
Federal agencies issue their own ``qualified mortgage'' rule; (2) when 
conservatorship ends for the GSEs; or (3) for all four of the Federal 
agencies and the GSEs, no later than January 10, 2021, which is 7 years 
after the effective date of the CFPB final rule. (See 12 CFR 
1026.43(e)(4) at 78 FR 6586-6588, specifically 12 CFR 
1026.43(e)(4)(iii) at 78 FR 6587-6588.)

III. This Proposed Rule

    As required by section 129C(b)(3)(B)(ii) of TILA, through this 
rulemaking, HUD proposes to prescribe the regulations for the types of 
loans that HUD insures, guarantees, or administers, and which HUD has 
determined are qualified mortgages, under the definition proposed in 
this rulemaking. Section 129C(b)(3)(B)(ii) makes clear and explicit 
that the four Federal agencies--HUD, VA, USDA, and RHS--are to define 
qualified mortgages for their respective programs. As noted earlier, 
section 129C(b)(3)(B)(ii) authorizes the four Federal agencies, in 
defining qualified mortgages for their programs, to revise, add to, or 
subtract from the statutory criteria used to define a qualified 
mortgage. HUD proposes to provide a definition of qualified mortgage 
that is aligned, to the extent feasible, with the ability-to-repay 
criteria set out in TILA, given the statutory mandates and missions of 
HUD's mortgage insurance and loan guarantee programs.

A. Scope of Coverage

    Through FHA, HUD insures single family loans under the National 
Housing Act (12 U.S.C. 1701 et seq.). HUD guarantees section 184 loans 
for Indian housing under the Housing and Community Development Act of 
1992 (12 U.S.C. 1715z-13a) (Section 184 guaranteed loans) and 
guarantees section 184A loans for Native Hawaiian housing under the 
Housing and Community Development Act of 1992 (1715z-13b) (Section 184A 
guaranteed loans). Although section 129C(b)(3)(B)(ii)(I) of TILA 
specifically references mortgages insured by HUD under the National 
Housing Act, HUD submits that Section 184 guaranteed loans and Section 
184A guaranteed loans were intended to be covered. While Section 184 
guaranteed loans and Section 184A guaranteed loans are authorized by 
the Housing and Community Development Act of 1992, their authorizing 
sections of the 1992 law are codified in the National Housing Act. They 
are codified at 12 U.S.C. 1715z-13a and 1715z-13b, respectively. In 
addition, the direction to all four Federal agencies in section 
129C(b)(3)(B)(ii) is to prescribe regulations defining the ``types'' 
(plural) of loans they insure, guarantee, or administer that are 
qualified mortgages, and this proposed rule follows that direction. 
Mortgages insured under the National Housing Act are only one type of 
mortgage product and, therefore, subclause (I) covers only a portion of 
the overall scope of section 129C(b)(3)(B)(ii), creating some ambiguity 
as to its scope. HUD reads the reference to the National Housing Act as 
being exemplary, and not being an exclusive, limiting provision. The 
more limiting reading would undercut the intent present in the broader 
language directing agencies to make qualified mortgage determinations 
for the types, without qualification, of the loans they insure, 
guarantee, or administer. HUD,

[[Page 59894]]

therefore, interprets the more general language of this provision to 
permit HUD to define types of mortgages besides those insured under the 
National Housing Act as qualified mortgages.
    Accordingly, this proposed rule would define ``qualified mortgage'' 
for FHA-insured single family mortgages, section 184 guaranteed loans, 
and section 184A guaranteed loans.

B. National Housing Act Single Family Mortgage Programs

    Of the insured/guaranteed loan programs covered by this rule, 
single family loans insured under the National Housing Act (12 U.S.C. 
1701 et seq.) present the largest volume of mortgages insured by HUD, 
through FHA. Under the National Housing Act, FHA is not only required 
to meet the housing needs of borrowers (12 U.S.C. 1708(a)(7)(B)), 
including low- and moderate-income borrowers; borrowers from 
underserved areas, central city areas, and rural areas; and minority 
borrowers (12 U.S.C. 1709(w)), but to ensure the financial soundness of 
the Mutual Mortgage Insurance Fund, and make programmatic or premium 
adjustments as necessary to reduce risk to the fund. See 12 U.S.C. 
1708(a)(3) and (6). In addition, under the National Housing Act, FHA is 
charged with prohibiting acts or practices in connection with loans or 
extensions of credit for the purchase of a manufactured home that are 
unfair, deceptive, or otherwise not in the interests of the borrower 
(12 U.S.C. 1706f(d)), and to take administrative action (12 U.S.C. 
1708(c)) or impose civil money penalties (12 U.S.C. 1735f-14) against 
participants who violate the requirements of FHA programs.
    Given the broad missions to meet the housing needs of borrowers and 
to ensure the financial soundness of its programs, HUD is proposing to 
adopt a definition of qualified mortgage that adheres to the statutory 
criteria and the CFPB final rule but in a manner that will 
appropriately fit with the missions of the National Housing Act 
programs. HUD is proposing to maintain its existing regulatory 
structure for FHA-insured single family mortgage programs for purposes 
of defining qualified mortgages, but augment these programs with 
features of the statutory criteria as revised by the CFPB that are not 
inconsistent with the statutory parameters of the National Housing Act 
single family mortgage insurance programs or missions.
    In this rulemaking, HUD proposes to define all FHA-insured single 
family mortgages to be qualified mortgages, except for reverse 
mortgages insured under HUD's Home Equity Conversion Mortgage (HECM) 
program (section 255 of the National Housing Act (12 U.S.C. 1715z-20)), 
which are exempt from the ability-to-repay requirements.\13\ 
Additionally, except for mortgages insured under the Title I Property 
Improvement Loan Insurance program (Title I), authorized by section 2 
of the National Housing Act (12 U.S.C. 1703), HUD proposes to adopt the 
statutory points and fees structure for all of its FHA-insured single 
family mortgages, as this feature was implemented by the CFPB final 
rule. Further, similar to the CFPB final rule structure, this proposed 
rule would distinguish between two types of qualified mortgages: (1) A 
safe harbor qualified mortgage and (2) a rebuttable presumption 
qualified mortgage. For those HUD-insured loans subject to the points 
and fees structure, HUD would modify the APR limit used in the 
``higher-priced covered transaction'' element as defined by the CFPB to 
distinguish between HUD's safe harbor qualified mortgages and 
rebuttable presumption qualified mortgages.
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    \13\ Similar to action taken by the CFPB, HUD exempts HECM, 
HUD's reverse mortgage program, from the ability-to-repay 
requirements. As CFPB further stated in its preamble to the 
published January 30, 2013, final rule, making a reverse mortgage a 
``qualified mortgage'' would be contrary to the purpose of the 
statue because it would allow a ``qualified mortgage'' to include 
otherwise banned prepayment penalties. (See 78 FR 6516.)
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    All National Housing Act single family mortgages, except for HECMs, 
are defined as qualified mortgages by HUD. HUD is proposing to add a 
new Sec.  203.19 to its regulations in 24 CFR part 203 \14\ that would 
require, through the proposed definition of ``qualified mortgage,'' for 
all FHA-insured single family mortgages, except for HECMs, to be 
``qualified mortgages.'' HUD's definition would incorporate the safe 
harbor and rebuttable presumption standards within the definition of a 
``qualified mortgage'' rather than create subsets based on whether a 
mortgage is a higher-priced covered transaction. HUD recognizes, as did 
the CFPB, that the Dodd-Frank Act language is ambiguous in prescribing 
the type of presumption provided for a qualified mortgage. The CFPB 
used its authority under section 129C(b)(3)(B)(i) of TILA to adopt both 
standards. The CFPB found that adopting both a safe harbor and 
rebuttable presumption standard, based on a limit of the APR relative 
to the APOR, provides certainty to encourage creditors to extend credit 
reasonably and promotes consumers' access to credit.\15\ HUD also 
proposes to adopt both standards using its authority at section 
129C(b)(3)(B)(ii) of TILA to revise, add to, or subtract from criteria 
used to define a qualified mortgage for purposes of section 
129C(b)(2)(A).
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    \14\ All single family mortgages insured by FHA under the 
National Housing Act are governed by regulations in 24 CFR part 203 
except for property improvement and manufactured home loans under 
Title I and the Home Equity Conversion Mortgage (HECM) program.
    \15\ See 78 FR 6506-6513 for the CFPB's full analysis for 
adopting a safe harbor and rebuttable presumption standard.
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    FHA streamlined refinancing. This proposed rule would require FHA 
streamlined refinances to comply with HUD's qualified mortgage rule. 
Section 129C(a)(5) of TILA grants HUD the authority to exempt 
streamlined refinancing from the income verification requirements of 
section 129C(a)(4) as long as such refinances meet certain 
requirements, including that the consumer is not 30 days or more past 
due on the prior existing residential mortgage loan, the loan does not 
increase the principal balance, the points and fees do not exceed 3 
percent, and the new interest rate on the refinanced loan is lower than 
the current rate. HUD does not consider it necessary to exercise this 
authority under section 129C(a)(5) because HUD's qualified mortgage 
definition results in an exemption similar to the one contemplated 
under section 129C(a)(5) but consistent with HUD's mission to help 
existing FHA homeowners refinance. Specifically, HUD's qualified 
mortgage rule would require streamlined refinances to meet the points 
and fees requirements and HUD requirements for FHA-streamlined 
refinances. HUD requirements only exempt lenders from verifying income 
if the loan is originated consistent with the FHA-streamlined 
refinancing requirements, which means that the mortgage must be 
current, that the loan is designed to lower the monthly principal and 
interest payment, and that the loan involves no cash back to the 
borrower except for minor adjustments.\16\
---------------------------------------------------------------------------

    \16\ Handbook 4155.1, Ch. 6, Sec. C (Mortgage Credit Analysis 
for Mortgage Insurance on One-to-Four Unit Mortgage Loans--
Streamline Refinances) http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh/4155.1.
---------------------------------------------------------------------------

    Requiring streamlined refinances to be ``qualified mortgages'' will 
also subject them to the APR threshold requirement for being either a 
rebuttable presumption or safe harbor qualified mortgage. Given the 
unique nature of streamlined refinances, this proposed rule would 
modify the CFPB rebuttable presumption standard to clarify that a

[[Page 59895]]

presumption is rebutted if the lender does not meet the underwriting 
requirements applicable to the transaction. Therefore, if a streamlined 
refinance was a ``rebuttable presumption qualified mortgage'' the 
presumption could only be rebutted by showing that the lender did not 
meet the applicable HUD requirements for originating streamlined 
refinances, including the points and fees limit.
    Title I program. Loans insured under the Title I program would be 
safe harbor qualified mortgages, with no specific points and fees 
limits and with no APR limits. The Title I program insures loans to 
finance the light or moderate rehabilitation of properties, as well as 
the construction of nonresidential buildings on the property. This 
program may be used to insure such loans for up to 20 years on either 
single or multifamily properties. The maximum loan amount is $25,000 
for improving a single family home. Under section 2(a) of the National 
Housing Act (12 U.S.C. 1703(a)), the Secretary is vested with the 
authority to establish the terms and conditions under which FHA will 
insure financial institutions that extend loan financing for home 
improvement loans for manufactured homes. Under section 2(h) of the 
National Housing Act (12 U.S.C. 1703(h)), the Secretary is authorized 
to issue rules and regulations to carry out the provisions of Title I. 
HUD has determined that designating Title I loans as safe harbor 
qualified mortgages, as proposed in this rule, furthers the purposes of 
Title I. HUD's proposed approach is intended to provide the necessary 
flexibility to continue to meet the housing needs of underserved 
borrowers, recognizing the unique nature of the Title I loan program, 
and to make programmatic and premium changes to maintain financial 
soundness. Coverage of the Title I program would be addressed by adding 
a definition of ``qualified mortgage'' to the definitions in 24 CFR 
201.7.
    Points and fees limitation. HUD's proposed ``qualified mortgage'' 
definition adopts the CFPB's points and fees limitations at 12 CFR 
1026.43(e)(3). A mortgage, except a mortgage insured under Title I or 
HECM, which does not comply with the limit on points and fees would be 
ineligible for insurance under the National Housing Act.
    The three percent points and fees limit is one of the statutory 
criteria used to define a qualified mortgage, and the CFPB has retained 
this criterion in its regulatory definition, with adjustments to 
facilitate compliance for smaller loans. Although it is also within the 
purview of HUD's ability to ``revise, add to, or subtract from'' the 
definition of qualified mortgage, under section 129C(b)(3) of TILA, and 
amend the points and fees, HUD considers the proposed adoption of the 
points and fees limit as established by statute and adopted by the CFPB 
in its final rule to be appropriate.\17\ By maintaining consistency 
with the points and fees threshold that applies to conventional 
qualified mortgages under the CFPB final rule, HUD expects to remove 
that requirement as a consideration in whether an insured or a 
conventional qualified mortgage is a more appropriate choice in a 
particular situation.
---------------------------------------------------------------------------

    \17\ HUD's upfront mortgage insurance premium (UFMIP) is not 
included in the points and fees.
---------------------------------------------------------------------------

    This approach also isolates points and fees as an independent 
factor and would allow HUD to focus on its existing requirements while 
it considers whether adjustments are necessary as HUD's experience with 
the effects of qualified mortgages develops.
    Specific solicitation of comment. HUD is aware of the considerable 
comment on the issue of the three percent points and fees limitation 
(which is the limitation in the statute), including specific elements 
of the points and fees, received in response to the proposed rule that 
preceded CFPB's final rule on qualified mortgages. With respect to FHA-
insured loans, HUD has limited data on points and fees charged on past 
FHA-insured loans, and therefore relies, to an extent, on the analysis 
undertaken by the CFPB, much of which was presented in the CFBP final 
rule in response to public comments. Essentially, the proposal that HUD 
presents in this rulemaking is that the CFPB's points and fees 
limitation for the broader mortgage market is also appropriate for 
FHA's segment of the market. As a result, HUD seeks comment from 
lenders participating in its programs on any issues specific to HUD's 
mortgage insurance and loan guarantee programs that HUD should take 
into consideration in setting its points and fees limits consistent 
with the CFPB's definition, including relevant differences (if any) 
with the non-FHA market, and the possibility for potential adverse 
selection issues if FHA were not to adopt the CFPB's points and fees 
limitation.
    Two subsets of FHA-insured qualified mortgages. This rulemaking 
proposes to establish two subsets of FHA-insured ``qualified 
mortgages'': a ``rebuttable presumption qualified mortgage'' and a 
``safe harbor qualified mortgage.'' As noted earlier in this preamble, 
with the exception of HECMs, the proposed rule would require all FHA-
insured single family mortgages to meet either the ``rebuttable 
presumption qualified mortgage'' or ``safe harbor qualified mortgage'' 
definition. HUD reads the ``for purposes of paragraph [129(b)(2)(A) of 
TILA]'' to include the basic purpose served by a qualified mortgages; 
namely, to provide mortgagees the presumption that a loan that is a 
qualified mortgage meets the ability to repay requirements of TILA 
section 129C(a). The proposed rule also states the degree to which each 
subset of FHA-insured qualified mortgages addresses its purpose of 
providing a presumption of compliance with the ability to repay 
requirements.
    Rebuttable presumption qualified mortgage. A ``rebuttable 
presumption qualified mortgage'' would be defined as a single family 
mortgage that is insured under the National Housing Act, except for 
loans insured under Title I or HECMs, which would include the 
requirement that it does not exceed the CFPB's limits on points and 
fees, codified at 12 CFR 1026.43(e)(3), and has an annual percentage 
rate that exceeds the average prime offer rate for a comparable 
mortgage, as of the date the interest rate is set by, more than the 
combined annual mortgage insurance premium and 1.15 percentage points 
for a first-lien mortgage. The rule provides that a mortgage that meets 
the requirements for a rebuttable presumption qualified mortgage would 
be presumed to comply with the ability to repay requirements in 15 
U.S.C. 1639c(a). Additionally, any rebuttal of such presumption of 
compliance must show that despite meeting the ``rebuttable presumption 
qualified mortgage'' requirements, the mortgagee did not make a 
reasonable and good-faith determination of the mortgagor's repayment 
ability at the time of consummation, as applicable to the type of 
mortgage, when underwriting the mortgage in accordance with HUD 
requirements, or that the points and fees limit was exceeded.
    Safe harbor qualified mortgage. A ``safe harbor qualified 
mortgage'' would be defined as one that is either (1) a mortgage 
insured under the National Housing Act, except for a mortgage insured 
under Title I or a HECM, and that meets the requirements of the 
National Housing Act, including the points and fees limit, and that has 
an APR for a first-lien mortgage relative to the APOR that is less than 
the combined annual mortgage insurance premium and 1.15 percentage 
points; or (2) a mortgage insured under Title I. A mortgagee that meets 
the requirements for a safe harbor qualified mortgage is deemed to meet 
the ability-to-repay requirements in 15 U.S.C. 1639c(a).

[[Page 59896]]

    HUD's proposed categorizations of safe harbor and rebuttable 
presumption are similar, but not identical to those of the CFPB. The 
CFPB final rule does not establish a ``safe harbor qualified mortgage'' 
or a ``rebuttable presumption qualified mortgage'' per se. Rather, the 
CFPB final rule provides separate definitions of ``higher-priced 
covered transaction'' and ``qualified mortgage'' and then states that 
(1) a qualified mortgage that is not a higher-priced transaction 
complies with the ability-to-repay requirements; and (2) a qualified 
mortgage that is a higher-priced transaction is presumed to comply with 
the ability-to-repay requirements. Even though the CFPB final rule is 
structured in this way to provide only a single definition of 
``qualified mortgage,'' the preamble to the CFPB final rule 
acknowledges that the result is that ``the final rule distinguishes 
between two types of qualified mortgages based on the mortgage's APR 
relative to the APOR.'' See the CFBP final rule at 78 FR 6505. The CFPB 
final rule also acknowledges that the definition of ``qualified 
mortgage'' may be structured in different ways, and the Federal Reserve 
Board's proposed rule on qualified mortgage (76 FR 27390, May 11, 2011) 
proposed two alternative definitions of a qualified mortgage, one that 
would have operated as a legal safe harbor, and one that would have 
provided a rebuttable presumption of compliance. See 78 FR 6417, 6508.
    APR (Annual Percentage Rate) relative to APOR (Average Prime Offer 
Rate). Similar to the CFPB final rule, HUD's proposed rule would 
distinguish between the two types of qualified mortgages based on the 
mortgage's APR relative to the APOR for the great majority of FHA-
insured single family mortgages. Using the APR relative to APOR to 
distinguish between safe harbor and rebuttable presumption for most 
loans provides consistency with a significant feature of the CFPB 
rule.\18\ The CFPB final rule, at 12 CFR 1026.35, consistent with 
section 129C(b)(2)(B) of TILA, provides for CFPB to set the APOR for a 
comparable transaction and to publish such rate.
---------------------------------------------------------------------------

    \18\ APOR does not include private mortgage insurance (PMI).
---------------------------------------------------------------------------

    Title I single family mortgages are specialized products that 
require further study to determine additional parameters for 
distinguishing the rebuttable presumption and safe harbor qualified 
mortgages. As referenced above, HUD proposes to designate them as safe 
harbor qualified mortgages so as not to interfere with current lending 
practices until appropriate parameters to distinguish between safe 
harbor and rebuttable presumption mortgages under Title I can be 
determined.
    HUD's purpose in establishing two categories of qualified mortgages 
for the bulk of loans it insures is to maintain consistency with the 
TILA statutory criteria defining qualified mortgage, as well as the 
CFPB's definition, to the extent consistent with the National Housing 
Act. The difference in structure from the CFPB final rule is that HUD 
proposes to incorporate the APR as an internal element of HUD's 
definition of qualified mortgages that would distinguish the safe 
harbor qualified mortgages from the rebuttable presumption qualified 
mortgages. The CFPB's ``higher-priced covered transaction'' is an 
external element that is applied to a single definition of ``qualified 
mortgage.''
    HUD's ``safe harbor qualified mortgage'' would provide a different 
APR relative to APOR threshold than the CFPB's requirement that a 
first-lien covered transaction have an APR of less than 1.5 percentage 
points above the APOR. Under this proposed rule, for a non-Title I 
single family mortgage to meet the ``safe harbor qualified mortgage'' 
definition, the mortgage would be required to have an APR that does not 
exceed the APOR for a comparable mortgage by more than the combined 
annual mortgage insurance premium (MIP) and 1.15 percentage points. 
Because all FHA-insured mortgages include a MIP that may vary from time 
to time to address HUD's financial soundness responsibilities, 
including the MIP as an element of the threshold that distinguishes 
safe harbor from rebuttable presumption allows the threshold to 
``float'' in a manner that allows HUD to fulfill its responsibilities 
that would not be feasible if HUD adopted a threshold based only on the 
amount that APR exceeds APOR. If a straight APR over APOR threshold 
were adopted by HUD, every time HUD would change the MIP, to ensure the 
financial soundness of its insurance fund and reduce risk to the fund 
or to reflect a more positive market, HUD would also have to consider 
changing the threshold APR limit.
    Specific solicitation of comment. HUD seeks comment on whether 
lenders participating in its mortgage insurance and loan guarantee 
programs would lower the APR relative to the APOR such that it is 
always less than the combined annual mortgage insurance premium and 
1.15 percentage points, so that the lender is originating only safe 
harbor qualified mortgages. Specifically, would lenders always opt for 
the safe harbor qualified mortgage and never make a rebuttable 
presumption qualified mortgage? If so, HUD welcomes comments on views 
on the effect that this incentive may have on lenders, borrowers, and 
the broader economy.
    Safe harbor versus rebuttable presumption mortgage--differences in 
liability protection. FHA-approved lenders that originate a safe harbor 
mortgage operate with greater legal protections than those that issue 
rebuttable presumption mortgages, but the latter group is not without 
legal protections.
    For an FHA-approved lender that originates a safe harbor qualified 
mortgage, the mortgage is conclusively presumed to comply with the 
ability to repay requirements. Meeting the qualified mortgage criteria 
and underwriting requirements and pricing of the loan at a prime rate 
are sufficient to ensure that the lender made a reasonable and good-
faith determination that the borrower will be able to repay the loan. 
If a borrower brings a claim that the FHA-approved lender did not make 
a reasonable and good-faith determination of the borrower's ability to 
repay the FHA-insured mortgage, and the court finds that the originated 
mortgage was a safe harbor qualified mortgage, as defined by HUD, then 
that finding by the court conclusively establishes that the lender 
complied with the ability-to-repay requirements and the consumer's 
claim is denied.
    For an FHA-approved lender that originates a rebuttable presumption 
mortgage, the mortgage is presumed to comply with the ability-to-repay 
requirements. If a borrower brings a claim that the FHA-approved lender 
did not make a reasonable and good-faith determination of the 
borrower's ability to repay the FHA-insured mortgage, and the court 
finds that the originated mortgage was a rebuttable presumption 
qualified mortgage, as defined by HUD, then the borrower may rebut the 
presumption. Therefore, the lender should exert greater care in 
underwriting the loan than would be true in the absence of any 
liability for extending a loan which the borrower cannot afford to 
repay. For the borrower to prevail on its claim against a lender that 
originates a rebuttable presumption, the borrower must prove that the 
lender did not make a reasonable and good-faith effort in evaluating 
the borrower's ability to repay the FHA-insured mortgage in accordance 
with HUD requirements.
    For either type of mortgage, however, documentation of the 
borrower's ability to repay will be important in demonstrating 
compliance with the ability-to-repay requirements. As stated

[[Page 59897]]

in the preamble to the CFPB final rule: ``As enacted by the Dodd-Frank 
Act, TILA section 129C(a)(1) provides that no creditor may make a 
residential mortgage loan unless the creditor makes 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 according to its terms and all 
applicable taxes, insurance, and assessments.'' (See 78 FR 6460.)

C. Native American and Native Hawaiian Loan Guarantee Programs

    Similar to Title I loans, HUD's Section 184 and Section 184A 
guaranteed loans create a very unique subset of loans for HUD and 
require additional study to determine the appropriate parameters for 
distinguishing rebuttable presumption and safe harbor qualified 
mortgages. HUD proposes to designate them as safe harbor qualified 
mortgages, with no APR limit, and with no points and fees limit, so as 
not to interfere with current lending practices until appropriate 
parameters to distinguish between safe harbor and rebuttable 
presumption mortgages can be determined. The pertinent regulatory 
provisions designating these loans safe harbor qualified mortgages are 
included in parts 1005 and 1007 of this title.

D. Existing HUD Requirements

    There are also provisions among HUD's requirements at 24 CFR part 
203 that already apply to mortgages insured under the National Housing 
Act and are consistent with section 129C(b)(2)(B) of TILA and the 
CFPB's requirements, including that a mortgage have regular periodic 
payments, that the mortgage does not exceed 30 years, and that lenders 
apply specific underwriting requirements.\19\ HUD is proposing to 
continue to use its existing underwriting and income verification 
requirements. HUD is proposing to not adopt the CFPB's 43 percent total 
monthly debt-to-income ratio requirement, in order to remain consistent 
with HUD's mission with respect to underserved borrowers. HUD does not 
expect its loan volume to increase as a result of its decision not to 
adopt the CFPB's 43 percent total monthly debt-to-income ratio 
requirement.
---------------------------------------------------------------------------

    \19\ See 24 CFR 203.1, 203.17(c)-(d), 203.33, 203.34; Handbook 
4155.1 (Mortgage Credit Analysis for Mortgage Insurance on One-to-
Four Unit Mortgage Loans) and Handbook 4155.2 (Lender's Guide to the 
Single Family Mortgage Insurance Process) available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/handbooks/hsgh; Borrowers Section 184 Loan Resources, 
available at http://portal.hud.gov/hudportal/HUD?src=/program_offices/public_indian_housing/ih/homeownership/184/borrowers; 
Section 184A Native Hawaiian Housing Loan Guarantee Program, 
available at http://portal.hud.gov/hudportal/documents/huddoc?id=DOC_8711.pdf.
---------------------------------------------------------------------------

E. Higher-Priced Covered Transactions

    The fact that the CFPB final rule provides a separate definition of 
``higher-priced covered transaction'' may potentially create issues in 
that some HUD safe harbor qualified mortgages would also be higher-
priced covered transactions as defined by the CFPB. To the extent that 
there are requirements not related to qualified mortgages that apply to 
higher-priced covered transactions, such requirements would apply to 
mortgages that meet the higher-priced covered transaction definition 
regardless of whether they are safe harbor or rebuttable presumption. 
For example, the calculation of certain maximum payments with respect 
to loans with balloon payments under 12 CFR 1026.43(c)(5)(ii)(A) of the 
CFPB's regulations is not expected to have any impact on mortgages 
insured under the National Housing Act. Apart from this requirement, 
HUD, however, is currently not aware of other possible overlaps of CFPB 
requirements.

F. HUD's Proposed Rule Is Consistent With Sections 129B and 129C of 
TILA

    In prescribing by rule the types of loans HUD insures that are 
qualified mortgages for purposes of TILA section 129C(b)(2)(A), HUD is 
required to consult with the CFPB and to make a finding that such rule 
is consistent with the purposes of sections 129B and 129C of TILA.\20\ 
HUD has consulted with the CFPB in the preparation of this proposed 
rule. HUD's existing regulations and guidance, promulgated under HUD's 
mandates to assist underserved borrowers and ensure the financial 
soundness of its insurance programs, already require FHA lenders to 
carefully assess a borrower's ability to repay, prohibit the use of 
products with higher risk, and restrict certain fees charged to the 
borrower. This rulemaking proposes to incorporate, in HUD's existing 
regulations, the CFPB's limit on points and fees and an APR relative to 
APOR calculation comparable to CFPB's calculation, but not identical, 
to establish safe harbor and rebuttable presumption qualified mortgages 
for the majority of FHA's portfolio and will provide further safeguards 
against risky lending and abusive terms. In addition, clarifying the 
extent of the presumption of ability to repay compliance afforded a 
single family mortgage insured under the National Housing Act or 
guaranteed under section 184 or 184A of the Housing and Community 
Development Act of 1992 provides TILA compliance assurance to lenders 
making loans insured and guaranteed by HUD.
---------------------------------------------------------------------------

    \20\ The purpose of 129B and 129C of TILA is to assure that 
consumers are offered and receive residential mortgages on loan 
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).
---------------------------------------------------------------------------

    HUD, therefore, finds that defining the loans it insures and 
guarantees as qualified mortgages in terms of its existing requirements 
for all lenders participating in its programs, coupled with the 
requirements adapted here, will provide a wide range of mortgagors 
access to residential mortgages on loan terms that reasonably reflect 
their ability to repay while protecting such mortgagors from unfair 
lending practices, consistent with the purpose of sections 129B and 
129C of TILA, as stated in section 129B(a)(2).
    In defining ``qualified mortgage'' in this way, HUD is stating that 
its insured single family mortgages and guaranteed residential loans 
meet TILA's ability-to-repay requirements. In essence, HUD is proposing 
not to insure a single family mortgage or guarantee a single family 
residential loan that is not a qualified mortgage, as defined by HUD. 
When HUD's definition is issued in final and becomes effective, 
following review and consideration of public comment, HUD's definition 
will replace the CFPB's qualified mortgage definition at 12 CFR 
1026.43(e), and therefore preclude the applicability of the temporary 
definition for loans eligible to be insured by HUD under the National 
Housing Act, as provided in the CFPB final rule at 12 CFR 
1026.43(e)(4)(iii).
    As addressed in the following section, HUD has determined that it 
is important for its definition to govern its programs, consistent with 
statutory intent and the statutory mandate to HUD and the other three 
Federal agencies to issue their own definitions of qualified mortgage. 
The CFPB's definition was designed for the general lending market, not 
specifically for HUD's mortgage insurance and loan guarantee programs. 
Therefore, wholesale application of ``qualified mortgage,'' as defined 
by the CFPB, without any modifications made by HUD, does not work as 
well for HUD's programs as HUD's definition.

IV. Justification for Shortened Public Comment Period

    For HUD rules issued for public comment, it is HUD's policy to 
afford the public ``not less than 60 days for submission of comments.'' 
See 24 CFR 10.1. In cases in which HUD determines that a shorter public 
comment period

[[Page 59898]]

may be appropriate, it is also HUD's policy to provide an explanation 
of why the public comment period has been abbreviated. For the reasons 
provided in this section of the preamble, HUD believes that this 
proposed rule merits an abbreviated public comment period.
    HUD's rule needs to be issued and effective by January 10, 2014, to 
decrease the risk of disruption to HUD's mortgage programs and avoid 
jeopardizing the availability of an important source of affordable home 
financing for first-time homebuyers and minority homebuyers, including 
Native Americans and Native Hawaiians. If HUD's rule is not effective 
by this date, these mortgages will be subject to the CFPB's definition 
of qualified mortgage, a definition that is not focused on, to the 
extent that HUD's definition is required to be, the populations that 
the HUD programs have a mission to serve. Specifically, CFPB's 
definition would result in a lower share of safe harbor qualified 
mortgages for FHA and would negatively affect borrowers with greater 
than 43 percent total monthly debt-to-income ratios. Further, the lack 
of a HUD rule on qualified mortgages would create uncertainty among FHA 
lenders. Delay in the implementation of this rule would increase the 
risk of disruption or delay in the availability of homeownership or 
home improvement financing for vulnerable groups of consumers, 
especially those who utilize the Title I, Section 184, and Section 184A 
programs.
    As discussed in the preamble, section 129C(b)(3)(B)(ii) of TILA 
charges HUD, VA, USDA, and RHS to prescribe their own rules, in 
consultation with the CFPB, defining the types of loans that these 
agencies insure, guarantee, or administer, as applicable, that are 
qualified mortgages. The statutory charge to these four agencies to 
issue their own definitions of qualified mortgage for their financing 
programs reflects a statutory view that these agencies are in the best 
position to define ``qualified mortgage'' for their loan products, 
consistent with the purposes of sections 129B and 129C of TILA, and 
within the statutory parameters of the programs and the mission of each 
agency.
    For HUD to responsibly and effectively carry out its rulemaking 
mandate under the Dodd-Frank Act, HUD did not issue its own qualified 
mortgage rule in advance of the CFPB final rule (nor did any of the 
other three Federal agencies). Similar to the statutory authority 
provided to the four Federal agencies, the CFPB was also authorized, in 
prescribing its rule defining qualified mortgage, to revise, add to, or 
subtract from, the statutory criteria defining qualified mortgage, 
factoring into HUD's decision to be prudent and wait for the CFPB final 
rule. HUD determined it was important to wait for the CFPB final rule 
defining qualified mortgage, with HUD's objective to be as consistent 
as feasible with the CFPB's definition, which closely tracks the 
statutory definition, while remaining attentive to HUD's mission and 
the statutorily required features of the various types of insured 
mortgage products.
    Although the CFPB published its final rule in the Federal Register 
on January 30, 2013, at 78 FR 6408 (effective as of January 10, 2014, 
one year from the date of the CFPB's posting of the rule on its Web 
site), the CFPB published on that same date, at 78 FR 6622, a proposed 
rule that submitted for public comment certain amendments to the CFPB 
final rule. These amendments included additional exemptions from the 
ability-to-repay requirements, and one such exemption was for the four 
Federal agencies' refinance programs. See 78 FR 6623. By final rule 
issued on May 29, 2013, and published on June 12, 2013, at 78 FR 35430, 
the CFPB determined that the Federal agencies' refinance programs would 
not be exempt from the ability-to-repay requirements.
    With CFPB having made its determinations on ability to pay/
qualified mortgage requirements, as provided in its January 30 and June 
12, 2013, final rules, it is necessary, in order to avoid disruptions 
in meeting the housing needs of borrowers that HUD is charged to serve, 
for HUD to issue for effect as quickly as possible its own rule on 
``qualified mortgage'' so that HUD's rule is in place on or before 
January 10, 2014, the date the CFPB final rule becomes effective. It 
was important for HUD to wait and see the scope of the CFPB's 
amendments, which were finalized in the June 12, 2013, rule because HUD 
must not only take into consideration the statutory criteria and 
purposes for defining a qualified mortgage as set out in the Dodd-Frank 
Act and the regulatory criteria as promulgated in the CFPB's rules, but 
must take into consideration the purposes and provisions of the 
programs HUD administers. Unlike the CFPB, HUD's definition is not 
designed for the general lending market but for the lenders who 
participate in HUD's mortgage insurance and guarantee programs and the 
borrowers who utilize mortgages under HUD's programs, and, as 
previously noted, the Dodd-Frank Act, is clear that HUD's definition of 
``qualified mortgage'' is to govern HUD programs.
    As discussed in this preamble, HUD maintains for its mortgage 
insurance and loan guarantee programs the regulatory framework now in 
place. HUD's proposed definition of ``qualified mortgage'' presents 
some additions to the requirements under which these programs are 
governed, to the extent feasible to better align them with the TILA 
purposes and the CFPB final rule.
    HUD's mortgage insurance and loan guarantee programs play a central 
role in the housing market and act as a stabilizing force during times 
of economic distress, facilitating mortgage financing during periods of 
severe constriction in conventional markets. Having HUD's qualified 
mortgage rule in place and effective by January 10, 2014, is a step 
that HUD must take to avoid unnecessarily disrupting the mortgage 
market, and seriously jeopardizing the security and certainty that 
HUD's mortgage insurance and loan guarantee programs provide in the 
housing market.
    For these reasons, HUD has determined that an abbreviated comment 
period is appropriate for this proposed rule. Because the comment 
period is an abbreviated one, HUD will consider comments that are 
submitted after the comment period has closed.

V. Findings and Certifications

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this proposed 
rule under Executive Order 12866 (entitled ``Regulatory Planning and 
Review''). This proposed rule was determined to be a ``significant 
regulatory action,'' as defined in section 3(f) of the Order (although 
not economically significant, as provided in section 3(f)(1) of the 
Order). The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 7th Street SW., Room 10276, Washington, DC 
20410-0500.
    As already discussed in the preamble, this rulemaking would remove 
the application of the CFPB's qualified mortgage rule to HUD-eligible 
loans and replace it with a definition of ``rebuttable presumption 
qualified mortgage'' and ``safe harbor qualified mortgage'' for loans 
insured or guaranteed by HUD. Neither the economic costs nor the 
benefits of this proposed rule are greater than the $100 million 
threshold that determines economic significance under Executive Orders 
12866 and 13563. The expected impact of the rulemaking would be no 
greater than an annual reduction of

[[Page 59899]]

lenders' legal costs of $41 million on the high end to $12.3 million on 
the low end, and may even fall below this range.
    Under HUD's qualified mortgage rule, lenders face lower costs of 
compliance than under the CFPB final rule and therefore receive 
incentives to continue making these loans without having to pass on 
their increased compliance costs to borrowers. While borrowers benefit 
from not having to pay for the higher lender costs, they also face less 
opportunity to challenge the lender with regard to ability to repay. 
HUD expects that almost all borrowers would gain from the reduction in 
litigation and that the reduction of the interest rate will compensate 
for the loss of the option to more easily challenge a lender. In 
addition, with reduced interest payments, the likelihood of a challenge 
is reduced. Very few borrowers would lose from this rulemaking. 
Generally, the reduction in legal costs represents a societal benefit. 
However, the rare instance a settlement in the borrower's favor is 
prevented that represents a transfer from the borrower to lender (to be 
redistributed to all other borrowers). Relative to the CFPB rule, HUD 
does not expect its qualified mortgage rule will substantially decrease 
the potential benefits of ability-to-repay lawsuits.
    If HUD had proposed a limit in excess of the CFPB standard on 
points and fees for receiving qualified mortgage status, there would be 
fewer borrowers benefiting as lenders would have less incentive to 
reduce points and fees (in both the FHA market and in the conventional 
market as conventional lenders who charge points and fees above the 
CFPB limit but below a higher HUD limit could attain qualified mortgage 
status by sending some of these loans to HUD). Moreover, HUD through 
proposing its own rebuttable presumption standard based on the spread 
between APOR and APR plus MIP keeps pressure on conventional lenders to 
keep APR within the limit for safe harbor as well, which will help 
ensure consumers are not merely charged higher interest rates in return 
for reduced points and fees.
    To estimate the size of the reduction in cost to FHA lenders, HUD 
notes that the CFPB estimated the legal costs to defend potential 
challenges on a nonqualified mortgage loan would add between 3 and 10 
basis points to the interest rate on the loan.\21\ HUD views 10 basis 
points (0.10 percentage points) as an upper bound because qualified 
mortgage loans with rebuttable presumption are expected to incur much 
lower legal costs to defend against challenges than non- qualified 
mortgage loans.
---------------------------------------------------------------------------

    \21\ Regulatory impact analysis by the CFPB of the ``Ability-to-
Repay and Qualified Mortgage Standards under Truth in Lending Act 
(Regulation Z),'' page 24.
---------------------------------------------------------------------------

    As discussed above, HUD would make all Title I, Section 184, and 
Section 184A insured mortgages and guaranteed loans safe harbor 
qualified mortgages. Under the CFPB final rule, many of these loans 
would have upfront fees and points that exceed the cap listed and would 
therefore be classified as nonqualified mortgages. Estimating the 
number of FY 2013 loans for the Title I program at 5,000 with an 
average balance of $47,900, the aggregate loan amount would be 
approximately $200 million. Estimating the number of FY 2013 loans for 
the Section 184 and Section 184A program also at 5,000, with an average 
balance of $175,000, the aggregate loan amount would be approximately 
$900 million. Classifying this group of loans as safe harbor qualified 
mortgages and applying the upper bound of 0.10 percentage points would 
lower lenders' legal costs to defend the loans by $1.1 million or a 
lower bound estimate of $400,000. However, because HUD does not track 
APR or points and fees on Title 1, Section 184, and Section 184A loans, 
HUD cannot estimate with certainty the percentage of loans that would 
be non-qualified mortgages. As such, HUD believes a high share of these 
loans would be non-qualified mortgages, and assumes 100 percent for 
this analysis, but it is reasonable to state that this percentage may 
be less than 100 percent, and the resulting benefits to consumers and 
legal cost reductions for lenders from the proposed rule may be 
overstated.
    Under the CFPB final rule, mortgages insured under Title II of the 
National Housing Act (with the exception of reverse mortgages insured 
under section 255 of this act) would be classified as nonqualified 
mortgages, while others would be qualified mortgages afforded a 
rebuttable presumption or a safe harbor presumption. A small number 
(about 7 percent) of Title II loans would not qualify as qualified 
mortgages based on their exceeding the points and fees limit. All other 
loans that FHA currently insures under Title II would meet qualified 
mortgage standards under the CFPB final rule, but about 20 percent only 
do so with a rebuttable presumption of compliance with ability to 
repay. The remaining FHA loans under the CFPB final rule (about 74 
percent) would qualify for qualified mortgage status with a safe harbor 
presumption of compliance with the ability to repay requirements.
    The Title II loans that would be nonqualified mortgages under the 
CFPB final rule would remain nonqualified mortgage under the proposed 
rule. The difference is that HUD, through this rulemaking, would no 
longer insure loans with points and fees above the CFPB level for 
qualified mortgage. This policy provides a very strong incentive for 
HUD mortgagees to comply with the qualified mortgage points and fees 
requirements. As a result, only a negligible fraction of these affected 
loans would have to find alternatives to FHA execution, or not be made 
at all, once the HUD qualified mortgage rule is in place. Most are 
expected to comply and to continue to be insured by HUD. Therefore, the 
costs and benefits would be similar to all other Title II loans.
    The primary impact on FHA loans (excluding Title I) is the 
reclassification of 19 percent of FHA's non-Title I loans from 
rebuttable presumption to safe harbor under the proposed rule. HUD 
estimates the number of loans insured in FY 2013 under the Title I 
program to be 1,180,000 with an aggregate loan amount of $210 billion. 
Only 19 percent of the portfolio would be a rebuttable presumption 
qualified mortgage making the adjusted aggregate loan amount $39.9 
billion. Classifying this group of loans as safe harbor qualified 
mortgages and applying the upper bound of .10 percentage points would 
lower lenders' legal costs to defend the loans by $39.9M, and applying 
the lower bound of .03 would result in a reduced cost of $12 million.
    Figure 1 in HUD's accompanying economic analysis illustrates the 
characteristics of the loan categories for FHA-insured loans under this 
proposed rule. A full economic analysis of the costs and benefits and 
possible impacts of this rulemaking is available on 
www.regulations.gov.
    Due to security measures at the HUD Headquarters building, please 
schedule an appointment to review the docket file by calling the 
Regulations Division at 202-708-3055 (this is not a toll-free number). 
Individuals with speech or hearing impairments may access this number 
via TTY by calling the Federal Relay Service at 800-877-8339 (this is a 
toll-free number).

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements, unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities.

[[Page 59900]]

    As provided in this rulemaking, HUD proposes no change to the 
current requirements governing its Title I loans, its Section 184 and 
184A guaranteed loans, and HECM loans. Therefore, there is no impact on 
either lenders or prospective borrowers under these programs.
    With respect to FHA-insured single family mortgages (except for 
Title I and HECMs), FHA proposes to adopt the points and fees 
limitation, similar to the structure provided in the CFPB final rule. 
As noted earlier in this preamble, the 3 percent points and fees limit 
is one of the statutory criteria used to define a qualified mortgage, 
and the CFPB retained this criterion in its regulatory definition with 
adjustments to facilitate the presumption of compliance for smaller 
loans. HUD considers the proposed adoption of the points and fees limit 
as established by statute and adopted by the CFPB in its rule to be 
appropriate. In addition to the points and fees limitation, and similar 
to the CFPB final rule, HUD's rulemaking proposes to distinguish 
between the two types of qualified mortgages based on the mortgage's 
APR relative to the APOR, for the great majority of FHA-insured single 
family mortgages. The difference, however, in structure from the CFPB 
final rule is that HUD proposes to incorporate the APR as an internal 
element of HUD's definition of qualified mortgages that would 
distinguish the safe harbor qualified mortgages from the rebuttable 
presumption qualified mortgages.
    With these few exceptions, HUD retains its existing requirements 
for the majority of its FHA-insured single family mortgages, thereby 
creating minimal impact on its programs. As also noted earlier in this 
preamble, there are provisions among HUD's requirements at 24 CFR part 
203 that are consistent with section 129C(b)(2)(B) of TILA and the 
CFPB's requirements, including that a mortgage have regular periodic 
payments, that the mortgage does not exceed 30 years, and that lenders 
apply specific underwriting requirements. See 24 CFR 203.1, 203.17(c)-
(d). HUD is proposing to continue to use its existing underwriting 
requirements, in order to remain consistent with HUD's mission with 
respect to underserved borrowers, and therefore does not propose to 
adopt the CFPB's 43 percent total monthly debt-to-income ratio 
requirement. The primary change made to the status quo by the Dodd-
Frank Act and the CFPB final rule is, simply put, to extend the 
requirement that a lender determine that a borrower has the ability to 
repay most single family loans. (See section 129C of TILA as added by 
title XIV, subtitle B, section 1411 of the Dodd-Frank Act, codified at 
15 U.S.C. 1639c (note).) While this may be a new requirement for 
private industry, HUD has long required, as a matter of prudent 
underwriting, that lenders determine that borrowers whose mortgage 
loans are HUD-insured have the ability to repay. For example, in HUD's 
single family mortgage insurance regulations at 24 CFR 203.21 
(consistent with section 203(b)(4) of the National Housing Act), the 
monthly payments on a mortgage must not be in excess of the borrower's 
reasonable ability to pay. When there is a second mortgage, the monthly 
payments on both mortgages must be within the borrower's reasonable 
ability to repay. See 24 CFR 203.32(c).
    Specific underwriting guidance, including factors for 
consideration, are found in HUD Handbook 4151.1, Mortgage Credit 
Analysis for Mortgage Insurance (October 18, 2010). Factors examined 
include factors similar to the factors stated in section 129C(a)(3) of 
the Dodd-Frank Act, 15 U.S.C. 1639c(a)(3). These include current income 
and expected income that the consumer is reasonably assured of 
receiving (Handbook 4155.1, chapter 4, sections D and E); debt 
obligations (as part of credit review in chapter 4, section C); debt-
to-income ratio (chapter 4, section C); and employment (chapter 4, 
section D). The preamble to the CFPB final rule also includes alimony 
and child support obligations (78 FR 6408, January 30, 2013; see HUD 
Handbook 4155.1 at chapter 4, section C, page 18), and monthly payments 
on the current transaction, any mortgage-related loans, and 
simultaneous loans (Id.; see also chapter 5, section C, page 4 of the 
Handbook, stating that ``The monthly payments under the insured 
mortgage and second lien, plus housing expense and other recurring 
charges, cannot exceed the borrower's ability to repay''). Thus, in 
large part, the requirements of the Dodd-Frank Act and the CFPB final 
rule are closely aligned with HUD's existing mortgage insurance and 
loan guarantee programs. HUD requires verification of income on all 
loans and full documentation.
    The one area where HUD's past practice differs from this rulemaking 
is in the area of points and fees. HUD has chosen to follow the CFPB's 
cap of 3-percent on points and fees combined, whereas previously points 
and fees would be individually negotiated. As to points, generally this 
refers to points charged against interest, so that a higher up-front 
payment results in a lower interest rate or vice-versa. Origination 
points and fees, although there is no firm cap for HUD-insured 
mortgages, are currently limited to reasonable and customary amounts 
not to exceed the actual costs of specific items and reasonable and 
customary charges as may be approved by the Federal Housing 
Commissioner (24 CFR 203.27(a)).
    As the market adopts the CFPB's 3-percent cap on points and fees 
for qualified mortgages, FHA lenders would be required to cap points 
and fees at about 3 percent, as a result of HUD's existing reasonable 
and customary standard. However, if HUD simply maintained its existing 
reasonable and customary standard for FHA lenders, FHA lenders would be 
forced to determine if charging an amount a little over 3-percent 
points and fees would mean the loan is a qualified mortgage, which 
could result in higher litigation costs. By HUD adopting the cap of 3- 
percent points and fees, lenders would not be forced to determine what 
is reasonable and customary, thereby, providing certainty in the market 
and setting a clear enforcement standard.
    As an insurer or guarantor of a loan, it is equally important to 
note that HUD has long had ability-to-repay requirements. As an insurer 
or guarantor of a loan, it is important for HUD to have its lenders 
ensure, to the best of their ability and consistent with HUD 
requirements, that a borrower is capable of repaying a mortgage or loan 
insured or guaranteed by HUD. If the borrower defaults and is unable to 
continue to make payments, HUD must pay the lender's claim. To this 
point, HUD's insurance and loan guarantee programs are statutorily 
exempt from the credit risk retention requirements of section 15G of 
the Securities and Exchange Act of 1934, as added by the Dodd-Frank 
Act. The statute provides that qualified residential mortgages are 
exempt from credit risk retention requirements and included HUD as one 
of the four Federal agencies to define what is meant by a qualified 
residential mortgage. HUD's handbook 4155.1 (Mortgage Credit Analysis 
for Mortgage Insurance) was included by the Federal agencies charged 
with promulgating rules to implement the credit risk retention 
requirements as an appendix to the agencies' proposed rule published on 
April 29, 2011 (see 76 FR 24090 at 24173) for the purpose of 
determining and verifying, among other things, borrower funds to close 
and borrower's monthly household debt, total monthly debit, and monthly 
gross income. (See 76 FR 24119.) Given HUD's longstanding ability to 
repay requirements, the transition to qualified mortgage requirements 
is not as

[[Page 59901]]

significant of a change as it is for conventional mortgages.
    However, with the CFPB's final regulations now in place, 
conventional mortgages will now meet ability-to-repay requirements 
following similar underwriting guidelines long used by HUD. Since FHA-
approved lenders also originate conventional mortgages, the 
establishment of ability-to-repay requirements for conventional 
mortgages adds more consistency in the mortgage market overall; that 
is, conventional mortgages will be originated based on underwriting 
guidelines similar to those long in use by HUD and other federally 
insured or guaranteed mortgages. Such consistency will further reduce 
burden on lenders, large and small.
    For the reasons provided above and in this preamble overall, the 
undersigned certifies that this proposed rule would not have a 
significant economic impact on a substantial number of small entities. 
Notwithstanding HUD's determination that this proposed rule would not 
have a significant effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rulemaking that will meet HUD's objectives as 
described in the preamble to this proposed rule.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment has been made in accordance with HUD regulations at 24 CFR 
part 50, which implement section 102(2)(C) of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). The FONSI is 
available for public inspection between 8 a.m. and 5 p.m., weekdays, in 
the Regulations Division, Office of General Counsel, Department of 
Housing and Urban Development, 451 7th Street SW., Room 10276, 
Washington, DC 20410-0500. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the docket file 
must be scheduled by calling the Regulations Division at 202-708-3055 
(this is not a toll-free number). Hearing-or speech-impaired 
individuals may access this number through TTY by calling the Federal 
Relay Service at 800-877-8339 (this is a toll-free number).

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (i) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (ii) preempts 
state law, unless the agency meets the consultation and funding 
requirements of section 6 of the Executive Order. This proposed rule 
would not have federalism implications and would not impose substantial 
direct compliance costs on state and local governments or preempt state 
law within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This proposed rule would 
not impose any Federal mandates on any state, local, or tribal 
governments, or on the private sector, within the meaning of the UMRA.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance number for Mortgage 
Insurance-Homes is 14.117; for the Section 184 Loan Guarantees for 
Indian Housing is 14.865, and for the Section 184A Loan Guarantees is 
14.874.

List of Subjects

24 CFR Part 201

    Claims, Health facilities, Historic preservation, Home improvement, 
Loan programs--housing and community development, Manufactured homes, 
Mortgage insurance, Reporting and recording requirements.

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 1005

    Indians, Loan programs--Indians, Reporting and recordkeeping 
requirements.

24 CFR Part 1007

    Loan programs--Native Hawaiians, Native Hawaiians, Reporting and 
recordkeeping requirements.

    Accordingly, for the reasons stated above, HUD proposes to amend 24 
CFR parts 201, 203, 1005 and 1007 as follows:

PART 201--TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS

0
1. The authority citation for part 201 is amended to read as follows:

    Authority:  12 U.S.C. 1703; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).

0
2. Section 201.7 is added to read as follows:


Sec.  201.7  Qualified Mortgage.

    A mortgage insured under section 2 of title I of the National 
Housing Act (12 U.S.C. 1703) is a safe harbor qualified mortgage that 
meets the ability to repay requirements in 15 U.S.C. 1639c(a).

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
3. The authority citation for part 203 is amended to read as follows:

    Authority:  12 U.S.C. 1709, 1710, 1715b, 1715z-16, 1715u, and 
1717z-21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d).

0
4. Section 203.19 is added to read as follows:


Sec.  203.19  Qualified Mortgage.

    (a) Definitions. As used in this section:
    (1) Average prime offer rate means an annual percentage rate that 
is derived from average interest rates, points, and other loan pricing 
terms currently offered to mortgagors by a representative sample of 
mortgagees for mortgage transactions that have low-risk pricing 
characteristics as published by the Consumer Financial Protection 
Bureau (CFPB) from time to time in accordance with the CFPB's 
regulations at 12 CFR 1026.35, pertaining to prohibited acts or 
practices in connection with higher-priced mortgage loans.
    (2) Annual percentage rate is the measure of the cost of credit, 
expressed as a yearly rate, that relates the amount and timing of value 
received by the mortgagor to the amount and timing of payments made and 
is the rate required to be disclosed by the mortgagee under 12 CFR 
1026.18, pertaining to disclosure of finance charges for mortgages.
    (b) Qualified Mortgage--(1) Limit. For a single family mortgage to 
be insured under the National Housing Act (12 U.S.C. 1701 et seq.), 
except for Home Equity Conversion Mortgages under section 255 of the 
National Housing Act (12 U.S.C. 1715z-20) and mortgages under section 2 
of Title I of the National Housing Act (12 U.S.C. 1703), the total 
points and fees payable in connection with a loan used to secure a 
dwelling shall not exceed the CFPB's limit on points and fees for 
qualified mortgage regulations at 12 CFR 1026.43(e)(3), or successor 
regulation.
    (2) Rebuttable presumption qualified mortgage. (i) A single family 
mortgage insured under the National Housing Act (12 U.S.C. 1701 et 
seq.), except for Home Equity Conversion Mortgages

[[Page 59902]]

under section 255 of the National Housing Act (12 U.S.C. 1715z-20) and 
mortgages under section 2 of Title I of the National Housing Act (12 
U.S.C. 1703), that has an annual percentage rate that exceeds the 
average prime offer rate for a comparable mortgage, as of the date the 
interest rate is set, by more than the combined annual mortgage 
insurance premium and 1.15 percentage points for a first-lien mortgage 
is a rebuttable presumption qualified mortgage that is presumed to 
comply with the ability to repay requirements in 15 U.S.C. 1639c(a).
    (ii) To rebut the presumption of compliance, it must be proven that 
the mortgage exceeded the points and fees limit in paragraph (b)(1) of 
this section or that, despite the mortgage being insured under the 
National Housing Act, the mortgagee did not make a reasonable and good-
faith determination of the mortgagor's repayment ability at the time of 
consummation, by failing to consider the mortgagor's income, debt 
obligations, alimony, child support, monthly payment on any 
simultaneous loans, and monthly payment (including mortgage-related 
obligations) on the mortgage, as applicable to the type of mortgage, 
when underwriting the mortgage in accordance with HUD requirements.
    (3) Safe harbor qualified mortgage. (i) A mortgage that is insured 
under section 2, Title I of the National Housing Act (12 U.S.C. 1703) 
is a safe harbor qualified mortgage that meets the ability to repay 
requirements in 15 U.S.C. 1639c(a); and
    (ii) A single family mortgage insured under the National Housing 
Act (12 U.S.C. 1701 et seq.), except for Home Equity Conversion 
Mortgages under section 255 of the National Housing Act (12 U.S.C. 
1715z-20), that has an annual percentage rate that does not exceed the 
average prime offer rate for a comparable mortgage, as of the date the 
interest rate is set, by more than the combined annual mortgage 
insurance premium and 1.15 percentage points for a first-lien mortgage 
is a safe harbor qualified mortgage that meets the ability to repay 
requirements in 15 U.S.C. 1639c(a).

PART 1005--LOAN GUARANTEES FOR INDIAN HOUSING

0
5. The authority citation for part 1005 is amended to read as follows:

    Authority:  12 U.S.C. 1715z-13a; 15 U.S.C. 1639c; 42 U.S.C. 
3535(d).

0
6. Section 1005.120 is added to read as follows:


Sec.  1005.120  Qualified Mortgage.

    A mortgage guaranteed under section 184 of the Housing and 
Community Development Act of 1992 (12 U.S.C. 1715z-13a) is a safe 
harbor qualified mortgage that meets the ability-to-repay requirements 
in 15 U.S.C. 1639c(a).

PART 1007--SECTION 184A LOAN GUARANTEES FOR NATIVE HAWAIIAN HOUSING

0
7. The authority citation for part 1007 is amended to read as follows:

    Authority:  12 U.S.C. 1715z-13b; 15 U.S.C. 1639c; 42 U.S.C. 
3535(d).

0
8. Section 1007.80 is added to read as follows:


Sec.  1007.80  Qualified Mortgage.

    A mortgage guaranteed under section 184A of the Housing and 
Community Development Act of 1992 (1715z-13b) is a safe harbor 
qualified mortgage that meets the ability-to-repay requirements in 15 
U.S.C. 1639c(a).

    Dated: September 20, 2013.
Shaun Donovan,
Secretary.
[FR Doc. 2013-23472 Filed 9-27-13; 8:45 am]
BILLING CODE 4210-67-P