[Federal Register Volume 78, Number 238 (Wednesday, December 11, 2013)]
[Rules and Regulations]
[Pages 75215-75238]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-29482]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / 
Rules and Regulations

[[Page 75215]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 201, 203, 1005, and 1007

[Docket No. FR 5707-F-02]
RIN 2502-AJ18


Qualified Mortgage Definition for HUD Insured and Guaranteed 
Single Family Mortgages

AGENCY: Office of Secretary, HUD.

ACTION: Final rule.

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

SUMMARY: Through this final rule, HUD establishes a definition of 
``qualified mortgage'' for the single family residential loans that HUD 
insures, guarantees, or administers that aligns with the statutory 
ability-to-repay criteria of the Truth-in-Lending Act (TILA) and the 
regulatory criteria of the definition of ``qualified mortgage'' 
promulgated by the Consumer Financial Protection Bureau (CFPB). The 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act) created new section 129C in 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 authorizes the agency with responsibility for compliance with 
TILA, which is CFPB, to issue a rule implementing these requirements, 
and the CFPB has issued its rule implementing these requirements.
    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 may be 
applicable, that are qualified mortgages. Through this rule, HUD 
complies with this statutory directive for the single family 
residential loans that HUD insures, guarantees, or administers.

DATES: Effective Date: January 10, 2014.

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 rule meets HUD's 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 promulgated regulations that define 
``qualified mortgage'' for the broader single family mortgage market, 
HUD, through this rule, promulgates regulations that define this term 
for HUD's 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 loan and provide certain protections for the lender from 
liability. During the years preceding the mortgage crisis, too many 
mortgages in the conventional mortgage market 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, 
contributing to the collapse in the housing market in 2008 and leading 
to the Nation's most serious financial crisis since the Great 
Depression.
    In developing its 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 should be defined as ``qualified 
mortgages''; that is, they exclude risky features and are designed so 
that the borrower can repay the loan. For certain of its mortgage 
products, HUD establishes qualified mortgage standards similar to those 
established by the CFPB in its definition of ``qualified mortgage.'' 
HUD has always required lenders to determine a borrower's ability to 
repay a mortgage in its insured and guaranteed single family mortgage 
programs. With ability-to-repay and qualified mortgage standards now in 
place for conventional mortgage loans, HUD determined that all HUD 
loans should be qualified mortgages and it could adjust its existing 
standards to more closely align with the standards promulgated by the 
CFPB, lessening future differences in standards for HUD's single family 
residential insured mortgages and those governing conventional 
mortgages to be designated qualified mortgage, but maintaining 
standards that continue to support the mission of HUD's programs.

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 applies 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.
    In this final rule, the definition of ``qualified mortgage,'' as 
provided in HUD's September 30, 2013, proposed rule, published at 78 FR 
59890, is retained with certain clarifications and exceptions HUD is 
making in response to public comments. As proposed by HUD in the 
September 30, 2013, proposed rule, this final rule designates Title I 
(property improvement loans and manufactured home loans), Section 184

[[Page 75216]]

(Indian housing loans), and Section 184A (Native Hawaiian housing 
loans) insured mortgages and guaranteed loans covered by this rule as 
safe harbor qualified mortgages and no changes to the current 
underwriting requirements of these mortgage and loan products are made 
by this final rule. To this list, FHA adds manufactured housing insured 
under Title II of the National Housing Act (Title II) and clarifies 
that the Title I Manufactured Home Loan program is included in the 
Title I exemption. However, for its largest volume of mortgage 
products, those insured under Title II of the National Housing Act, 
with certain exceptions, HUD retains the 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. HUD continues to exempt reverse mortgages insured 
under section 255 of Title II from the ``qualified mortgage'' 
definition. HUD has also added to the list of exempted transactions 
Title II insured mortgages made by housing finance agencies and certain 
other governmental or nonprofit organizations providing home financing 
under programs designed for low- and moderate-income individuals and 
families, and discussed in more detail later in this preamble.
    For the remaining Title II insured mortgages, this final rule, 
consistent with the proposed rule, defines safe harbor qualified 
mortgage as a mortgage insured under Title II of the National Housing 
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 no more than the sum of the annual mortgage insurance premium 
and 1.15 percentage points. This final rule defines a rebuttable 
presumption qualified mortgage as a single family mortgage insured 
under Title II of the National Housing 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, subject to the exceptions noted, be 
insured under Title II of the National Housing Act and meet the CFPB's 
points and fees limit at 12 CFR 1026.43(e)(3) in order to be either a 
rebuttable presumption or safe harbor qualified mortgage. 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 in HUD's September 30, 2013, proposed rule, 
HUD establishes two categories of qualified mortgages for the majority 
of National Housing Act mortgages 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.
    While the final rule makes no significant changes to HUD's proposed 
core definition of qualified mortgage, as noted above, HUD is making 
certain clarifications and exceptions.
    For example, commenters stated that compliance with HUD regulations 
would necessitate further and immediate system changes and that the 
lending industry lacked sufficient time to make such changes by January 
2014. HUD clarifies that HUD's definition of safe harbor qualified 
mortgage incorporates CFPB's requirements for a safe harbor qualified 
mortgage under the special provision for loans insured under the 
National Housing Act while allowing for a higher APR threshold, so 
compliance with HUD regulations does not necessitate immediate industry 
changes for lenders to identify safe harbor qualified mortgages under 
HUD's definition by January 2014. In other words, compared to the 
CFPB's regulations, this rule allows more FHA mortgages to qualify as 
safe harbor qualified mortgages; every FHA loan that would have 
qualified as a safe harbor qualified mortgage under the CFPB 
regulations for loans insured under the National Housing Act would 
qualify as a safe harbor qualified mortgage under this HUD rule. Since 
the lending industry must comply with CFPB's regulations by January 
2014, and were given a full year to prepare for compliance with the 
CFPB regulations, this clarification should ease concerns about 
additional immediate compliance costs and the need for additional time 
to comply with HUD's qualified mortgage regulations.

C. Costs and Benefits

    HUD's final 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 
regulations to safe harbor qualified mortgages under HUD's regulation, 
less than one percent would remain a rebuttable presumption qualified 
mortgage. A small number (about 7 percent) of Title II loans would 
continue to not qualify as qualified mortgage based on their exceeding 
the points and fees limit, while the remaining 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's rule and HUD's rule. The Title II loans that would be 
non-qualified mortgages under the CFPB's rule would remain non-
qualified mortgage under the proposed rule. The difference is that HUD, 
through this rule, will no longer insure loans with points and fees 
above the CFPB level for qualified mortgage, but expects that most of 
these loans will adapt to meet the points and fees to be insured.
    In addition, HUD classifies all Title I, Title II manufactured 
housing and Section 184 and Section 184A insured mortgages and 
guaranteed loans as safe harbor qualified mortgages that would have 
most likely been non-qualified mortgages under the CFPB's rule. 
Classifying these programs as safe harbor recognizes the unique nature 
of these loans. For these programs, HUD believes that providing safe 
harbor status to these programs will not increase market share but 
instead maintain availability of these products to the underserved 
borrowers targeted, and allow HUD additional time to further examine 
these programs and whether they should be covered by a definition of 
``qualified mortgage'' similar to the definition provided in this rule 
for Title II mortgages.
    As a result of these reclassifications, HUD expects the following 
economic impacts:

[[Page 75217]]



      Table 1--Summary of Economic Effects: Changing the Rebuttable
  Presumption Standard for Title I, Title II, Section 184, and Section
                               184A Loans
------------------------------------------------------------------------
            Effect                 Distribution         Effect size
------------------------------------------------------------------------
Benefits:
    Lower legal costs through   Lenders            $12.2 to $40.7
     an increase in the number   (transfers to      million.
     of safe harbor loans.       borrowers via
                                 lower interest
                                 rates).
Costs:
    Foregone benefits from      Borrowers........  Unquantified (the
     ability-to-pay lawsuits                        likelihood of such
     through incremental                            lawsuits has been
     decrease in rebuttable                         reduced greatly by
     presumption loans.                             changes in lending
                                                    practices stemming
                                                    from the Dodd-Frank
                                                    Act and the lawsuits
                                                    initiated by Federal
                                                    and State
                                                    governments).
    Operational costs through   Lenders            De minimus.
     the programming of a new    (potential
     HUD standard.               transfers to
                                 borrowers
                                 through
                                 increased loan
                                 costs for
                                 borrowers).
Transfers:
    Lower interest rates for    Lenders to         Unquantified but will
     FHA mortgages due to the    Borrowers.         be capped by legal
     increased legal benefits                       benefits to lenders.
     for lenders with the HUD
     rule vs. CFPB patch.
    Potential increase in the   Borrowers to FHA.  Unquantified as this
     volume of loans due to                         theoretical increase
     greater legal benefits to                      in volume is
     lenders for HUD rule                           expected to be
     relative to CFPB patch.                        minimal. (The
                                                    observable impact of
                                                    both the CFPB patch
                                                    and the HUD rule
                                                    will be a decrease
                                                    in volume relative
                                                    to HUD volume of
                                                    loans today).
    Potential increase in the   Borrowers to FHA.  De minimus.
     net present value of
     premium revenues minus
     mortgage insurance claims.
------------------------------------------------------------------------


  Table 2--Summary of Economic Effects: Eliminating the Points and Fee
 Limit for Title I, Section 184, Section 184A, and Title II Manufactured
                              Housing Loans
           [All designated as safe harbor qualified mortgages]
------------------------------------------------------------------------
            Effect                 Distribution             Size
------------------------------------------------------------------------
Benefits:
    Maintained Homeownership    Borrowers (Indian  Positive but
     benefits for underserved    and Native         unquantified. Under
     populations as loans        Hawaiian           the CFPB patch,
     continue to be made.        borrowers, home    there could be a
                                 improvement and    slight decrease in
                                 manufactured       loans to these
                                 housing            populations as
                                 borrowers).        lenders would be
                                                    making non-QM loans
                                                    that are
                                                    nevertheless
                                                    guaranteed/insured
                                                    by HUD.
    Lower legal costs.........  Lenders..........  Positive but
                                                    unquantified.
Costs:
    Foregone benefits from      Borrowers........  Unquantified but
     ability-to-pay lawsuits.                       expected to be
                                                    minimal (the
                                                    likelihood of such
                                                    lawsuits has been
                                                    reduced greatly by
                                                    changes in lending
                                                    practices stemming
                                                    from the Dodd-Frank
                                                    Act and the lawsuits
                                                    initiated by Federal
                                                    and State
                                                    governments).
Transfers:
    Potential increase in the   Borrowers to FHA.  Unquantified but
     volume of loans through                        expected to be
     greater legal protection                       minimal.
     for HUD rule relative to
     CFPB patch.
    Potential increase in the   Borrowers to FHA.  De minimus.
     net present value of
     premium revenues minus
     mortgage insurance claims.
------------------------------------------------------------------------

II. Background

    As noted in the Summary of this preamble, it is the Dodd-Frank Act 
that charges HUD and other Federal agencies to define ``qualified 
mortgage'' for the single family residential loans that meet statutory 
ability-to-repay requirements. 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,\1\ to prescribe regulations that revise, add to, 
or subtract from the criteria in TILA that define a ``qualified 
mortgage.''
---------------------------------------------------------------------------

    \1\ On July 21, 2011, rulemaking authority under TILA 
transferred from the Federal Reserve Board to the CFPB.
---------------------------------------------------------------------------

    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

[[Page 75218]]

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.\2\
---------------------------------------------------------------------------

    \2\ 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 CPFB 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.
---------------------------------------------------------------------------

    New section 129C(b)(3)(B)(ii) of TILA, also added by section 1412 
of the Dodd-Frank Act, requires that HUD, the Department of Veterans 
Affairs (VA), and the Department of Agriculture (USDA) prescribe rules 
in consultation with the Federal Reserve Board \3\ 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.
---------------------------------------------------------------------------

    \3\ Rulemaking authority under TILA was transferred 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 is referred to in this 
preamble as the CFPB final rule. The CFPB 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 regulations establish both a safe harbor and a 
rebuttable presumption of compliance for transactions that are 
``qualified mortgages.''
    Under the CFPB's regulation, 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.'' \4\ 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). The CFPB's rule is intended to provide greater 
protection for borrowers by providing only a rebuttable presumption of 
compliance for higher-priced covered transactions.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

    The preamble to HUD's September 30, 2013, proposed rule discussed 
the CFPB's qualified mortgage regulations in more detail. Members of 
the public interested in more detail about the CFPB's regulations may 
refer to the preamble of HUD's September 30, 2013, proposed rule (see 
78 FR 59892-59893) but more importantly should refer to the preamble to 
the CFPB's final rule published in the Federal Register on January 30, 
2013, at 78 FR 6409.\5\
---------------------------------------------------------------------------

    \5\ Various provisions of CFPB's January 2013, final rule were 
amended by rules published in the Federal Register on June 13, 2013, 
at 78 FR 35430, July 24, 2013, at 78 FR 44686, July 30, 2013, at 78 
FR 45842, October 1, 2013, at 78 FR 60382, and October 23, 2013, at 
78 FR 62993.
---------------------------------------------------------------------------

III. HUD's September 30, 2013, Proposed Rule

    In its September 30, 2013, proposed rule, HUD submitted for public 
comment regulations defining qualified mortgage for its insured and 
guaranteed single family loan programs. The covered programs consist of 
single family loans insured under the National Housing Act (12 U.S.C. 
1701 et seq.), and 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 section 184A loans for Native 
Hawaiian housing under the Housing and Community Development Act of 
1992 (1715z-13b) (Section 184A guaranteed loans). Of these programs, 
the single family loans insured under Title II of the National Housing 
Act (12 U.S.C. 1701 et seq.) (Title II) present the largest volume of 
mortgages insured by HUD, through FHA.
    In the September 30, 2013, proposed rule, HUD proposed 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. Mortgages insured under the Title I Property Improvement 
Loan Insurance program and Manufactured Home Loan program (Title I), 
authorized by section 2 of the National Housing Act (12 U.S.C. 1703), 
and Section 184 guaranteed loans and Section 184A guaranteed loans, 
would be designated safe harbor qualified mortgages, with no specific 
points and fees limits and with no annual percentage rate (APR) limits. 
See 78 FR 59895 and 59897.
    Similar to the CFPB's regulations, HUD proposed to provide for two 
types of qualified mortgages for FHA Title II mortgages: (1) A safe 
harbor qualified mortgage and (2) a rebuttable presumption qualified 
mortgage. For the Title II mortgages, HUD proposed to 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.
    For Title II mortgages, HUD proposed to add a new Sec.  203.19 to 
its regulations in 24 CFR part 203 \6\ that would require, through the 
proposed definition of ``qualified mortgage,'' all FHA-insured single 
family mortgages, except for HECMs, to be ``qualified mortgages.'' HUD 
proposed to incorporate the safe harbor and rebuttable presumption 
standards within the definition of a ``qualified mortgage'' rather than 
create subsets based on defining whether a mortgage is a higher-priced 
covered transaction, as provided in the CFPB's regulations. HUD also 
proposed to adopt the CFPB's points and fees limitations at 12 CFR 
1026.43(e)(3). HUD advised, in the proposed rule, that it considered 
the adoption of the points and fees limit as established by statute and 
adopted by the CFPB in its final rule to be appropriate.\7\
---------------------------------------------------------------------------

    \6\ 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 HECM program.
    \7\ As noted in the proposed rule, HUD's upfront mortgage 
insurance premium (UFMIP) is not included in the points and fees.
---------------------------------------------------------------------------

    HUD's proposed rule defined ``safe harbor qualified mortgage'' for 
Title II mortgages as one that meets the requirements for insurance 
under the National Housing Act, meets the CFPB's points and fees limit, 
and has an APR for a first-lien mortgage relative to the average prime 
offer rate (APOR) that

[[Page 75219]]

does not exceed the combined annual mortgage insurance premium (MIP) 
and 1.15 percentage points. HUD's proposed definition of ``safe harbor 
qualified mortgage'' for Title II mortgages provides a different APR 
relative to APOR threshold than under the CFPB's regulation. The APR 
relative to APOR threshold is higher than CFPB's and fluctuates 
according to the product's MIP. The CFPB's construct for determining a 
higher-priced covered transaction captured a number of FHA loans as a 
result of the MIP which HUD believes needs to be addressed.
    As provided in the preamble to HUD's proposed rule, 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. As noted in the proposed rule, 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. HUD also provides for a 
higher overall APR relative to APOR to remove the impact of the MIP on 
the designation of ``safe harbor qualified mortgage'' and ``rebuttable 
presumption qualified mortgage'' definitions.
    In the September 30, 2013, proposed rule, HUD proposed to define a 
``rebuttable presumption qualified mortgage'' for Title II mortgages as 
a single family mortgage that is insured under the National Housing 
Act, does not exceed the CFPB's limits on points and fees, and has an 
APR that exceeds the APOR for a comparable mortgage, as of the date the 
interest rate is set, by more than the combined annual MIP and 1.15 
percentage points for a first-lien mortgage. HUD's proposed rule 
provided 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). The proposed rule 
further provided that 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 when underwriting the mortgage in accordance with 
HUD requirements.
    In the September 30, 2013, proposed rule, HUD proposed to require 
FHA streamlined refinances to comply with HUD's qualified mortgage 
rule; that is, to require streamlined refinances to meet the points and 
fees requirements. Section 129C(a)(5) of TILA grants HUD the authority 
to exempt streamlined refinancing from the income verification 
requirements of section 129C(a)(4), subject to certain conditions. In 
the proposed rule, HUD advised that it did not consider it necessary to 
exercise this authority because HUD's qualified mortgage definition 
results in an exemption similar to the one contemplated under section 
129C(a)(5). 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, the loan is designed to lower the monthly principal and 
interest payment, and the loan involves no cash back to the borrower 
except for minor adjustments.\8\
---------------------------------------------------------------------------

    \8\ 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.
---------------------------------------------------------------------------

    HUD's proposed rule provided a detailed description of the policy 
and factors that HUD considered in developing a definition of 
``qualified mortgage'' for the mortgages that it insures, guarantees, 
or otherwise administers. HUD is not repeating such description in the 
preamble to this final rule, and refers interested parties to the 
preamble of the September 30, 2013, proposed rule, for more detailed 
information about the proposed rule choices.

IV. This Final Rule

    As noted earlier in this preamble, HUD retains its core definition 
of qualified mortgage, as provided in the September 30, 2013, proposed 
rule. However, in response to public comments, HUD makes certain 
clarifications and provides certain exemptions to compliance with HUD's 
qualified mortgage regulations in this final rule. Changes to the 
regulatory text made by this final rule and certain clarifications are 
as follows:
     Compliance timeframe. As HUD notes in greater detail in 
the responses to public comments below, this rule should allow lenders 
to make the same number of insured safe harbor qualified mortgages, 
using systems they have already been putting in place, than if HUD had 
taken no action. By taking the action of issuing this rule, HUD also 
provides an opportunity for lenders to modify their systems further on 
their own timetable to take full advantage of the potential increase in 
the number of insured safe harbor qualified mortgages allowed by this 
rule. HUD expects in accordance with a lender's own timetable and 
allocation of resources a lender will update its systems to increase 
the number of HUD-insured safe harbor qualified mortgages so to track 
any future revisions to HUD's MIP.
     Designation of manufactured home mortgages as FHA safe 
harbor qualified mortgages. HUD designates mortgages on manufactured 
homes insured under Title I and Title II to be safe harbor qualified 
mortgages with no changes, at this time, to the underwriting 
requirements for this category of housing. HUD's proposed rule was 
silent on the treatment of Title II manufactured housing, but HUD's 
intention was to exempt Title II manufactured housing mortgages from 
meeting the points and fees requirements of HUD's definition of 
qualified mortgage. HUD's designation of Title I loans as safe harbor 
qualified mortgages was also meant to encompass not only the Title I 
property improvement loans but also the Title I Manufactured Home Loan 
program. Similar to HUD's approach to Title I, HUD insurance of 
manufactured housing under Title II is a specialized product that 
necessitates further study.
     Transactions exempted from compliance with HUD's qualified 
mortgage definition. HUD is exempting certain mortgage transactions 
from compliance with HUD's qualified mortgage definition, which means 
that unlike all other FHA-insured mortgages, these mortgages are not 
subject to the requirements in Sec.  203.19(b). These exemptions are 
the same exemptions provided by the CFPB in its regulations (see 12 CFR 
1026.43(a)(3)). In exempting some of these transactions, the CFPB 
stated that the institutions involved in these transactions employ a 
traditional model of relationship lending that did not succumb to the 
general deterioration in lending standards that contributed to the 
financial crisis, they have particularly strong incentives to maintain 
positive reputations in their communities, and they often keep the 
loans they make in their own portfolios in order to pay appropriate 
attention to the borrower's ability to repay the loan. Therefore, 
consistent with the CFPB, HUD exempts from compliance with its 
definition of qualified mortgage the following insured mortgages:

[[Page 75220]]

    (1) A reverse mortgage subject to 12 CFR 1026.33;
    (2) a temporary or ``bridge'' loan with a term of 12 months or 
less;
    (3) a construction phase of 12 months or less of a construction-to-
permanent loan;
    (4) a mortgage made by:
    (a) A housing finance agency (HFA), as defined in HUD's regulations 
at 24 CFR 266.5;
    (b) a creditor designated as a Community Development Financial 
Institution, as defined in the regulations of the Department of 
Treasury's Community Development Financial Institutions program at 12 
CFR 1805.104(h);
    (c) a creditor designated as a Downpayment Assistance through 
Secondary Financing Provider, pursuant to HUD's regulations in 24 CFR 
200.194(a), operating in accordance with HUD regulations as applicable 
to such creditors;
    (d) a creditor designated as a Community Housing Development 
Organization provided that the creditor has entered into a commitment 
with a participating jurisdiction and is undertaking a project under 
the HOME Investment Partnerships (HOME) program, pursuant to HUD's 
regulations at 24 CFR 92.300(a);
    (e) a creditor with a tax exemption ruling or determination letter 
from the Internal Revenue Service under section 501(c)(3) of the 
Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3)-
1), provided that:
    (i) During the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling no more 
than 200 times;
    (ii) during the calendar year preceding receipt of the consumer's 
application, the creditor extended credit secured by a dwelling only to 
consumers with income that did not exceed the low- and moderate-income 
household limit as established pursuant to section 102 of the Housing 
and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and 
amended from time to time by HUD pursuant to HUD's regulations at 24 
CFR 570.3;
    (iii) the extension of credit is to a consumer with income that 
does not exceed the household limit specified in the applicable FHA 
program; and
    (iv) the creditor determines, in accordance with written 
procedures, that the consumer has a reasonable ability to repay the 
extension of credit; and
    (5) an extension of credit made pursuant to a program authorized by 
sections 101 and 109 of the Emergency Economic Stabilization Act of 
2008 (12 U.S.C. 5211; 5219).

All of these mortgages were exempt by the CFPB from compliance with its 
ability to repay regulations and HUD agrees that the single family 
mortgages with which these governmental and nonprofit organizations are 
involved, many under HUD programs as noted above, should be exempt from 
compliance with HUD's qualified mortgage regulations while otherwise 
meeting HUD requirements.
     Adoption of the CFPB's guidance definitions for APR, APOR, 
and points and fees. For purposes of clarity, this final rule adopts, 
through cross-reference, the CFPB's definitions of APOR, APR, and 
points and fees. The CFPB defines APOR at 12 CFR 1026.35, APR at 
1026.22, and points and fees at 12 CFR 1026.32(b)(1). In addition to 
these definitions, the CFPB provides guidance for APR calculations in 
Appendix J to 12 CFR part 1026; guidance for points and fees is 
provided in Paragraph 32(b) of CFPB's Official Interpretation, which is 
Supplement I to 12 CFR part 1026; and guidance for APOR is provided in 
Paragraph 35 of Supplement I to 12 CFR part 1026. HUD adopts this 
guidance for consistency with the CFPB.
     Adoption of CFPB's definition of points and fees and 
clarification on non-affiliated fees. HUD clarifies the points and fees 
calculation that applies in this final rule by incorporating the CFPB's 
points and fees definition at 12 CFR 1026.32(b). In adopting the CFPB's 
points and fees definition, HUD clarifies for commenters that housing 
counseling fees and rehabilitation consultant fees under HUD's 203(k) 
program may be excluded from points and fees if made by a third-party 
and is not retained by the creditor, loan originator, or an affiliate 
of either. HUD-approved housing counseling for borrowers seeking FHA-
insured mortgages, whether such counseling is voluntary or required, is 
not part of the points and fees calculation. HUD-approved housing 
counseling agencies are not permitted to be affiliated with either a 
creditor or loan originator and, therefore, fees that were paid for 
counseling would be exempt from the points and fees calculation for the 
transaction. Additionally, exempt from the points and fees calculation 
are consultant fees for ensuring program compliance and for drafting 
the required architectural exhibits for the 203(k) program by non-
affiliated entities. HUD requires the use of a HUD consultant to ensure 
203(k) program compliance and strongly encourages the use of an 
independent consultant to prepare the required architectural exhibits. 
Both types of consultation fees, if obtained by non-affiliated entities 
on the 203(k) consultant list, are not included in the points and fees 
calculation, and therefore adoption of the CFPB points and fees 
definition should not reduce access to the 203(k) program
     Clarification of the rebuttable presumption standard. HUD 
amends the rebuttable presumption standard to clarify the elements of 
such standard are consistent with HUD's existing underwriting 
requirements for rebutting the presumption. The proposed rule stated 
that to rebut the presumption a borrower must prove 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.'' 
HUD adopted the list of the CFPB's factors (mortgagor's income, debt 
obligations, alimony, child support, monthly payment on any 
simultaneous loans, and monthly payment) to remain consistent with the 
CFPB's rebuttable presumption standard, but intended those factors to 
harmonize with HUD's existing underwriting requirements. In response to 
commenters, HUD believes listing HUD's specific underwriting categories 
is more helpful than solely citing to the list provided by the CFPB. 
HUD replaces the CFPB's list with FHA's ``income, credit and assets'' 
underwriting categories, found in FHA's Underwriting Handbook. 
Additionally, HUD clarifies that the entity is required to do more than 
consider the list of ability to repay indicators for the borrower, but 
evaluate the mortgagor's income, credit, and assets in accordance with 
HUD underwriting requirements.
     Clarification of relationship between indemnification and 
qualified mortgage status. HUD adds at this final rule stage a section 
clarifying that a demand for indemnification or the occurrence of 
indemnification does not per se remove qualified mortgage status. The 
final rule includes an indemnification clause for both Title I and 
Title II loans, which clarifies that an indemnification demand or 
resolution

[[Page 75221]]

of a demand that relates to whether the loan satisfied relevant 
eligibility and underwriting requirements at time of consummation may 
result from facts that could allow a change in qualified mortgage 
status, but the existence of an indemnification does not per se remove 
qualified mortgage status.
     Flexibility to respond to lender or borrower needs 
consistent with the FHA mission. HUD also adds language to its 
qualified mortgage regulations to give FHA flexibility to make 
adjustments, including to the points and fees definition and the list 
of exempted transactions, that may be necessary to address situations 
where the FHA Commissioner determines such adjustments are necessary, 
including in times of significant decrease of available credit, 
increase in foreclosures, or disaster situations that adversely affect 
the availability of housing finance. The changes would provide for 
notice and the opportunity for comment prior to implementing any 
changes, and HUD contemplates that changes made through this notice 
process would be temporary not permanent changes. For example, the 
housing mortgage crisis that emerged late in 2008 resulted in mortgage 
products designed to keep homeowners from losing their homes. These 
mortgage products were largely temporary without a permanent regulatory 
structure. In a situation such as this, the notice process provided in 
this rule would allow the Commissioner to determine whether such 
products would be subject to FHA's qualified mortgage definition or be 
exempt. The notice process would not, however, apply to the rebuttable 
presumption/safe harbor thresholds in Sec.  203.19(b)(2) and (3).
    In the preamble to the September 30, 2013, proposed rule, HUD 
committed to further study the parameters for distinguishing between a 
safe harbor qualified mortgage and a rebuttable presumption qualified 
mortgage for the Title I, Section 184 and Section 184A loans, and makes 
this same commitment for Title II loans that are subject to HUD's 
qualified mortgage regulations in this final rule. HUD will monitor how 
the two subsets of qualified mortgages work for FHA Title II loans 
subject to these regulations, primarily in relationship to the two 
subset approach provided for the conventional mortgage market. Given 
current and expected MIPs, HUD also reiterates that a mortgage that is 
a safe harbor qualified mortgage under the CFPB's special rules for HUD 
loans as a safe harbor qualified mortgage would satisfy HUD's 
regulations.

V. HUD's Responses to Key Issues Raised by Public Commenters

    This section of the preamble discusses the key issues raised by the 
comments submitted in response to the September 30, 2013, proposed 
rule. All public comments can be viewed at the following Web site, 
www.regulations.gov, under docket number HUD-2013-0093.
    Comment: Delay implementation of HUD's rule: The majority of 
commenters expressed support for HUD's proposed rule but the majority 
also stated that an implementation date of January 2014 was too soon 
and would not allow sufficient time for lenders to modify their systems 
to include the specific features of HUD requirements for qualified 
mortgages. Commenters stated that industry would find it extremely 
challenging to be ready to originate loans without a robust compliance 
infrastructure in place. Commenters suggested that if HUD is intent in 
implementing qualified mortgage regulations by January 2014, HUD should 
do so through a staged approach. Commenters suggested that HUD begin 
with all HUD insured and guaranteed single family mortgages being 
designated as safe harbor qualified mortgages and provide for 
implementation of HUD rebuttable presumption qualified mortgages at a 
later date. Another commenter requested that HUD withdraw its rule 
until HUD had taken more time to assess the impacts of its proposed 
rule.
    Response: HUD understands that the lending industry may need more 
time to adjust systems to fully implement HUD's qualified mortgage 
regulations. However, HUD considers that all lenders will be in a 
position to substantially implement HUD's regulations immediately 
because of system modifications that were already required under CFPB's 
regulations and which lenders have been given a full year to implement. 
If HUD had taken no action at all, lenders making FHA-insured loans 
that are qualified mortgages would have to have systems in place to 
account for loans that (1) have regular periodic payments and do not 
have certain risky features, (2) do not exceed a term of 30 years, and 
(3) do not exceed certain specified limits on points and fees. HUD's 
rule is not changing any of these requirements and, therefore, no 
system changes to address any of these requirements because of HUD's 
rule should be necessary. Further, systems that lenders have put in 
place to identify safe harbor qualified mortgages under the CFPB's 1.5 
percent APR threshold should also identify the substantial majority of 
safe harbor qualified mortgages under HUD's APR threshold. A loan that 
meets the 1.5 percent threshold will also be in compliance with the HUD 
threshold. Only HUD safe harbor loans that exceed the 1.5 percent 
threshold would not be picked up by such systems. Thus, lenders are no 
worse off under HUD's rule in terms of making safe harbor qualified 
mortgages, using systems already required to be in place, than they 
would be if HUD had taken no action. To the extent that lenders take 
steps to conform their systems to identify the higher APR safe harbor 
threshold allowed under the HUD rule, they will be better off in terms 
of making safe harbor qualified mortgages than they would have been if 
HUD had taken no action. The HUD rule provides an immediate opportunity 
for lenders to increase the number of HUD-insured safe harbor qualified 
mortgages they make in accordance with a timetable and allocation of 
resources of their choosing, but HUD does not consider it necessary for 
any lender to change systems immediately to adapt to HUD's requirements 
in order to make the same number of insured safe harbor qualified 
mortgages as a lender would otherwise make.
    Comment: Unnecessary to establish two types of qualified mortgages 
for FHA loans: Designate all FHA loans as safe harbor qualified 
mortgages to reduce burden and costs: Commenters stated that 
bifurcation between qualified mortgage safe harbor loans and qualified 
mortgage rebuttable presumption loans under CFPB's rule is intended to 
provide greater protection for borrowers with higher-priced mortgage 
loans. The commenters stated that unlike the CFPB's rule, which governs 
the wider market of private prime and higher-priced lending, HUD's rule 
covers only FHA loans. The commenters stated that this protection is 
unnecessary in the context of FHA loans, which are subject to strict 
oversight, control, and regulation. Commenters stated that FHA's sound 
underwriting process ensures consumer access to safe mortgage loans and 
the recent steps FHA has undertaken to strengthen its underwriting 
standards have reduced risks.
    A commenter similarly stated that its view is that there are 
safeguards and practices in place, unique to FHA lending and its 
mission, to lessen the need to copy the CFPB's two-tiered qualified 
mortgage approach and HUD should instead classify all FHA loans as safe 
harbor qualified mortgages. The commenter stated that other than a 
desire to mirror the CFPB's final rule,

[[Page 75222]]

HUD's proposed rule provides no basis that such a distinction is needed 
for the FHA market. The commenter stated that HUD acknowledges (in the 
costs and benefits discussion of the preamble to the proposed rule) 
that the vast majority of FHA loans will meet the proposed safe harbor 
parameters; and for most of those that do not, it would be attributable 
to the limit on points and fees. The commenter stated that this 
suggests that there are no market indications that the two-tiered 
approach is warranted.
    Another commenter stated that HUD defended its proposal to adopt 
the same points/fees measure for FHA-insured loans as the CFPB 
qualified mortgage final rule on the basis that it would not give a 
lender an incentive to choose on the basis of a different (and perhaps 
higher) points/fees measure for FHA-insured loans. The commenter stated 
that HUD should consider the potential loss of additional price, 
product, and service choices for the borrower that might be reduced by 
the use of a different qualified mortgage standard.
    A few commenters stated that FHA's mission is to correct, not 
create, market failure. The commenter stated that HUD's proposed rule 
establishes a materially different qualified mortgage standard for FHA 
insured mortgages than the CFPB qualified mortgage standard for 
conventional mortgage loans. The commenters stated that HUD seems to 
rely upon an overly expansive ``mission'' justification for creating a 
different qualified mortgage rule than the one established by the CFPB. 
The commenters stated that to the extent the mission of FHA is to 
ensure credit access to under-served people, such a distinction may be 
appropriate, but that the great majority of FHA-insured lending in 
recent years has been related to a different purpose, which is to 
provide backstop countercyclical liquidity in a housing market decline. 
The commenters stated this countercyclical activity is not discussed in 
the proposed rule, so it is unclear how this activity relates to the 
mission justification cited. The commenter stated that substantially 
different qualified mortgage rules distort markets and delay the return 
of FHA to its primary mission.
    Commenters stated that HUD's proposed qualified mortgage structure 
for FHA loans adds significant regulatory burden and cost to the lender 
and borrower. Commenters stated that differentiating safe harbor from 
rebuttable presumption loans for only 3 percent of the current FHA 
market would require extensive system changes, staff training and 
monitoring and compliance systems, which will be an expense that 
saddles the 97 percent of FHA borrowers, whereas, treating all loans as 
safe harbors will present little compliance cost or regulatory burden. 
The industry is already burdened with extensive and significant changes 
that are estimated to increase origination costs.
    Response: HUD's position is that in addition to prospective 
borrowers of FHA-insured mortgages the overall mortgage market benefits 
from FHA loans being closely aligned with the statutory criteria 
applicable to a borrower's ability to repay, and the regulations 
promulgated by the CFPB. Section 1402 of the Dodd-Frank Act states that 
Congress created new section 129C of TILA upon a finding that 
``economic stabilization would be enhanced by the protection, 
limitation, and regulation of the terms of residential mortgage credit 
and the practices related to such credit, while ensuring that 
responsible, affordable mortgage credit remains available to 
consumers.'' \9\ Section 1402 of the Dodd-Frank Act further states that 
the purpose of section 129C of TILA is to ``assure that consumers are 
offered and receive residential mortgage loans on terms that reasonably 
reflect their ability to repay the loans.'' The CFPB, in its 
regulations, distinguishes between a safe harbor qualified mortgage and 
a rebuttable presumption qualified mortgage based on whether the 
mortgages are prime loans (safe harbor) or subprime loans (rebuttable 
presumption).\10\
---------------------------------------------------------------------------

    \9\ See TILA section 129B(a)(1), 15 U.S.C. 1639b(a)(1).
    \10\ See 78 FR 6408.
---------------------------------------------------------------------------

    Although section 129C(b)(3)(B)(ii) of TILA authorizes HUD to 
revise, add to, or subtract from the statutory criteria used to define 
a qualified mortgage in defining ``qualified mortgage'' for the 
mortgages that HUD insures, guarantees or otherwise administers, HUD 
respects the analysis that the CFPB undertook in defining ``qualified 
mortgage'' for the conventional mortgage market, and sees value in 
having a safe harbor qualified mortgage and a rebuttable presumption 
qualified mortgage as established in regulation by the CFPB. HUD's 
regulation differs from the CFBP's regulation in distinguishing between 
the two types of qualified mortgages for FHA Title II mortgages based 
on the mortgage's APR. HUD incorporates the APR as an internal element 
of HUD's definition of qualified mortgages to distinguish 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.''
    As proposed in HUD's September 30, 2013, proposed rule, HUD's 
``safe harbor qualified mortgage'' provides 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 final rule, for a Title II FHA mortgage to meet the 
``safe harbor qualified mortgage'' definition, the mortgage is 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. HUD adopts the higher APR to remediate the fact 
that some FHA loans would fall under the CFPB's ``higher-priced covered 
transaction'' as a result of the MIP. The MIP by itself should not be 
the factor that determines whether a loan is a higher-priced 
transaction.
    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.
    In addition to the benefit of having a construct similar to the 
CFPB's construct, HUD expects that a rebuttable presumption category 
could place downward pressure on the APRs of FHA mortgages. This 
downward pressure would result in transfers from some FHA lenders to 
some FHA borrowers, and would also provide social benefits (more 
sustainable homeowners due to lower rates) in the aggregate. These 
transfers from lenders arise from legal protections they receive from 
achieving safe harbor rather than rebuttable presumption status under 
the HUD rule. Moreover, HUD, through proposing its own rebuttable 
presumption standard keeps conventional lenders from sending loans to 
HUD to take advantage of what would otherwise be no APR threshold and 
forces conventional lenders to keep APR within the limit for the CFPB's 
standard or HUD's standard for safe harbor. For example, a

[[Page 75223]]

consumer who applies for a higher risk conventional loan may not meet 
the CFPB's qualified mortgage on the basis of high points and fees, or 
if the points and fees are reduced to 3 percent, the APR may become too 
high for safe harbor under the CFPB rules. However, the consumer might 
instead be offered a higher interest rate FHA loan in return for lower 
points and fees, and the lender could achieve qualified mortgage with 
safe harbor status as an FHA loan with a very high APR in the absence 
of an FHA rebuttable presumption standard. Additionally, HUD believes 
that the loans that require a higher APR should be treated with more 
caution and borrowers should retain the right to challenge on ability-
to-repay grounds. HUD's rule attempts to strike a balance between 
providing lenders legal protections and providing borrowers with access 
to redress when a loan is more risky.
    HUD carefully reviewed the public comments requesting that HUD 
adopt a single standard--a safe harbor standard, but for the reasons 
presented in this response and in the preamble to HUD's September 30, 
2013, proposed rule, HUD maintains that this is the right approach.
    Comment: Designate all FHA loans rebuttable presumption qualified 
mortgages: A few comments opposed the establishment of a safe harbor 
for most FHA loans. The commenters stated that the proposed rule 
provides less protection to consumers than the CFPB's rule. The 
commenters expressed concern that a consequence would be the 
reemergence of abusive FHA lending. The commenters stated that a 
rebuttable presumption means that a homeowner can hold a lender to the 
basic promise of the CFPB's rule, which is that lenders will reasonably 
assess a person's ability to afford a loan before that loan is made. A 
commenter stated that only a rebuttable presumption standard can 
provide consumers with the legal protection needed to preempt 
unforeseen predatory practices.
    Another commenter stated that those who support a safe harbor 
emphasize the additional cost associated with a rebuttable presumption. 
The commenter stated that an examination of the structure of TILA and 
the litigation facts associated with claims under TILA makes clear 
these claims are unfounded. The commenter stated that TILA's pre-
existing general rules on liability already carefully calibrate the 
interests of the industry and its customers, and are applicable even 
where there is a rebuttable presumption for ability-to-pay claims. The 
commenter disputed that there are substantial legal costs associated 
with defending rebuttable presumption loans. The commenter stated that 
most homeowners will not have counsel to seek redress, the remedy is 
circumscribed, the amount of proof is substantial and the objective 
amount of litigation in this area is very small. The commenter urged 
HUD to look behind claims of substantial compliance costs associated 
with a rebuttable presumption.
    Response: HUD disagrees that that the inclusion of a safe harbor 
qualified mortgage, as opposed to making all FHA-insured loans 
rebuttable presumption mortgages, will result in ``abusive FHA 
lending.'' The inclusion of a safe harbor qualified mortgage offers 
lenders an incentive to make qualified mortgages while maintaining the 
borrower protections required by the Dodd-Frank Act. HUD further notes 
that a safe harbor qualified mortgage is not exempt from any legal 
challenge. A borrower can continue to file a legal claim against a 
lender if the borrower finds or believes that the lender did not meet 
statutory or regulatory requirements applicable to a mortgage. However, 
for a safe harbor mortgage, the bar in challenging a lender meeting 
ability to repay requirements will be higher. Additionally, the 
borrower benefits from lower loan costs because lender's face lower 
legal risk with a safe harbor qualified mortgage and, as a result, the 
lender does not need to build in the cost of the higher legal risk 
associated with a rebuttable presumption loan. HUD believes, therefore, 
that the loans labeled safe harbor have met the ability-to-repay 
requirements and that HUD's structure, that is consistent with CFPB's 
structure, is appropriate for FHA-insured loans.
    Comment: HUD's adoption of the CFPB's points and fees features will 
adversely affect the FHA mortgage market and reduce available credit 
for the very populations FHA was established to serve: Commenters 
stated that HUD's cap on points and fees will destroy the lending 
options for the exact group FHA and HUD were intended to assist. 
Commenters stated that lenders are not likely to adapt to meet the 
points and fees requirements to insure the loan, but instead the points 
and fees threshold will result in preventing some borrowers from 
obtaining loans. Commenters requested that HUD increase the 3 percent 
limit on points and fees to ensure that low- and moderate-income 
borrowers can continue to access a variety of affordable loan products.
    A commenter expressed support for protecting borrowers from 
excessive and unnecessary fees, but stated that the proposed cap was 
too low and could make ineligible for FHA-insurance many responsibly 
underwritten loans that are in the borrowers' best interest. A few 
commenters stated that HUD's adoption of points and fees is contrary to 
other FHA actions. The commenters stated that HUD is returning to an 
age where discount points were controlled and limitations were placed 
on origination points and this is contrary to action taken by FHA a 
year ago when FHA decided to ``deactivate the 1% ceiling to what was 
prudent and customary in our region.'' Another commenter stated that 
HUD should exclude MIP from the points and fees calculation.
    Response: In developing the September 30, 2013, proposed rule, HUD 
gave careful consideration to the percentage limit that should be 
placed on points and fees. 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 for FHA Title II loans that HUD has identified as 
subject to its qualified mortgage definition. In this final rule, HUD 
has clarified the points and fees are applicable to FHA-approved 
lenders by adopting, through cross-reference, the CFPB's definition of 
``points and fees.'' Included in the definition is the exclusion of 
``any premium or other charge imposed in connection with any Federal or 
State agency program for any guaranty or insurance that protects the 
creditor against the consumer's default or other credit loss.'' 12 CFR 
1026.32(b)(1)(i)(B).
    As stated in the preamble to HUD's September 30, 2013, proposed 
rule, HUD's practice prior to this rule was that points and fees would 
be individually negotiated.\11\ Although HUD has not established a firm 
cap for points and fees for HUD-insured mortgages, they have been 
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 (see 24 CFR 203.27(a)).
---------------------------------------------------------------------------

    \11\ Generally, the term ``points'' refers to points charged 
against interest so that a higher up-front payment results in a 
lower interest rate or vice versa.
---------------------------------------------------------------------------

    As stated in HUD's September 30, 2013, proposed rule, as the market

[[Page 75224]]

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 to prove that the loan was a qualified mortgage 
based solely on whether the points and fees of the loan were reasonable 
and customary. 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. Many commenters argued for a bright line 
test and the points and fees cap adopted from CFPB accommodates that 
request. Additionally, the 3-percent points and fees cap is consistent 
with the conventional market's qualified mortgage definition and 
adopting the same will provide consistency for FHA lenders. HUD 
believes that if it did not adopt the same 3-percent points and fees 
caps for the majority of HUD's portfolio FHA could see an increase of 
market share.
    With respect to concerns about loss of access to mortgage credit by 
low- and moderate-income borrowers that FHA has traditionally served, 
HUD submits that the exemption of certain transactions from compliance 
with HUD's qualified mortgage definition (transactions made on behalf 
of entities with missions similar to HUD which assist low- and 
moderate-income borrowers in obtaining homeownership financing) helps 
ensure that low- and moderate-income borrowers can continue to access a 
variety of affordable loan products. HUD also takes the opportunity at 
the final rule stage to clarify that HUD-approved housing counseling 
fees and rehabilitation consultant fees that are required by HUD and 
provided by non-affiliated entities are third party charges, and as 
such, would not be included in points and fees under the CFPB's 
exemption of bona fide third-party charges at 24 CFR 
1026.32(b)(1)(i)(D).\12\
---------------------------------------------------------------------------

    \12\ Exceptions to this exemption include when the charge is for 
a guaranty or insurance that is not in connection with any Federal 
or State agency program, is a real-estate related fee, or is a 
premium or other charge for insurance for which the creditor is the 
beneficiary. 12 CFR 1026.32(b)(1)(i)(D).
---------------------------------------------------------------------------

    HUD also adds language to its qualified mortgage regulations to 
give FHA flexibility to make any adjustments to the points and fees 
calculation where the FHA Commissioner determines such adjustments are 
necessary.
    Comment: The inclusion of mortgage broker's and affiliate's fees in 
the cap on point and fees limits consumer choice and makes it difficult 
for small lenders and mortgage brokers to compete in the mortgage 
market: Several commenters stated that HUD's rule will limit the number 
of lenders who can offer mortgage products to borrowers. The primary 
objection was the inclusion of mortgage broker fees or affiliate fees 
in the points and fees cap in the CFPB's definition of points and fees. 
Commenters stated that applying the 3 percent points and fees cap to 
mortgage brokers creates a distinct and unfair competitive advantage to 
the banks and large lenders. Commenters stated that the points and fees 
cap limit adversely impacts lenders with affiliates without apparent 
reason.
    Commenters stated that the 3 percent cap is too low, and makes it 
unprofitable for lenders and brokers to engage in mortgage business. 
The commenters stated that, by including compensation paid by a 
creditor to any loan originator other than an employee (e.g., a 
mortgage brokerage company or a lender acting as a mortgage broker) in 
the points and fees calculation, non-depository direct lenders and 
other bank owned companies are given a distinct and arguably unfair 
competitive advantage over those in the wholesale channel. The 
commenters stated that the retail lender can build compensation into 
its loan, where the broker and a direct lender cannot, by effect making 
a double-standard. Commenters stated that inclusion of the lender-paid 
compensation in the 3 percent cap will all but eliminate broker 
participation in small loans. The adverse treatment of affiliated fees 
has a disproportionate effect on lower dollar transactions, and 
consequently, the availability of lower dollar mortgages will be 
somewhat limited, which goes against the mission of FHA lending.
    One commenter stated that it is important to remember that the 
largest third-party fee, often provided by an affiliated title agent, 
is title insurance. The commenter stated that the cost for title 
insurance to the consumer does not vary from title agent to title agent 
whether there is or is not an affiliation because agents are bound by 
their title insurance underwriter's filed rates for the state where the 
property is located. The commenter stated that the title agent charges 
the rate filed by the underwriter. Nonetheless, the current definition 
would include the title insurance charge in the points and fees if the 
title agent is an affiliate.
    One commenter stated that in place of the inclusion of mortgage 
broker's and affiliate's fees in the cap on points and fees, HUD could 
limit adverse selection by including in its regulation that ``any 
lender participating in the FHA program may not pay or compensate a 
loan originator or broker differently for originating an FHA loan than 
any other loan type, through any compensation mechanism, whether such 
compensation is paid directly or indirectly to the originator.''
    Response: HUD recognizes that this issue, which was raised in the 
CFPB's rulemaking on the definition of ``qualified mortgage,'' remains 
an issue among industry commenters. This issue was discussed by CFPB in 
the preamble to its January 2013 final rule. CFPB responded to comments 
submitted on the May 11, 2011, proposed rule of the Federal Reserve 
Board, which had initial responsibility for proposing regulations to 
implement section 129C of TILA,\13\ As explained by the CFPB in the 
preamble to the final rule, TILA, as amended by the Dodd-Frank Act, 
contemplates that compensation paid to mortgage brokers and other loan 
originators after consummation of a loan transaction is to be counted 
toward the points and fees threshold.
    The CFPB noted that the Dodd-Frank Act removed the phrase ``payable 
at or before closing'' from the high-cost mortgage points and fees test 
and did not apply the ``payable at or before closing'' limitation to 
the points and fees cap for qualified mortgages. See 78 FR 6432 and 
sections 103(bb)(1)(A)(ii) and 129C(b)(2)(A)(vii), (b)(2)(C) of TILA. 
The CFPB stated that in light of evident concern by Congress with loan 
originator compensation practices, it would not be appropriate to waive 
the statutory requirement that loan originator compensation be included 
in points and fees, but that the CFPB would provide detailed guidance 
to clarify what compensation must be included in points and fees. See 
78 FR 6434-6435. Additionally, CFPB stated that throughout the Dodd-
Frank Act amendments Congress made clear that affiliate fees should be 
treated the same way as fees paid to loan originators. See 78 FR 6439.
    Given the detailed response that CFBP provided in its rule on this 
issue, the submission of these same comments in response to HUD's 
rulemaking does not adequately rebut CFPB's justification for the 
differing treatment, which focuses on potential competition issues. At 
this final rule stage, HUD will not take a position that differs from 
that taken by

[[Page 75225]]

the CFPB, which was based on direction from Congress that loan 
origination compensation and affiliated fees are to be included in 
points and fees. HUD needs time to examine this issue further, and see 
whether HUD has discretion to take action that differs from the 
position taken by CFPB and whether a departure from CFPB on this issue 
would be in the interest of promoting HUD's mission.
    Comment: Failure to meet the point and fee structure disqualifies a 
loan from insurance and requires a more careful analysis: Commenters 
stated that if HUD will not insure non-qualified mortgages, HUD's 
regulation should provide for adjustment of the points and fees limits 
for lower balances. One of the commenters expressed support for a 
higher percentage for lower balance loans and wrote that the threshold 
of 3 percent for FHA becomes a problem at the $100,000 range. The 
commenter recommended amending the cap to allow loans between $100,000 
and $150,000, up to $4,500 in points and fees. The commenter stated 
that the additional rate would ``more accurately reflect the fixed 
costs of originating these smaller balance loans,'' and avoid the 
denial of loans to otherwise qualified FHA borrowers.
    Another commenter stated that HUD's rule provides that a failure to 
meet the points and fees limit and for any of the qualified mortgage 
requirements not only disqualifies a loan from qualified mortgage 
status but also disqualifies a loan from qualifying for FHA insurance. 
The commenter stated that if FHA does go in this direction it is 
important for FHA to ensure that qualified mortgage requirements are 
appropriately adjusted in light of their role as program requirements. 
The commenter urged HUD to adjust the points and fees limit for lower 
balance FHA-insured loans. Another commenter stated that, as a result 
of only being able to originate qualified mortgage loans lenders will 
likely leave the market place and that will disproportionately hurt 
underserved populations.
    Response: As addressed above, HUD believes aligning with the CFPB's 
limit on points and fees is appropriate. TILA section 129C(b)(2) 
defined the points and fees limit for a qualified mortgage at 3 percent 
and tasked the CFPB to come up with adjustments to the limit for 
smaller loans. The CFPB analyzed the differences between loan amounts 
to determine that a $100,000 loan cap was the appropriate place to 
limit the definition for a smaller loan for the points and fees 
threshold. See 78 FR 6531-6532. HUD does not currently have data on 
points and fees to determine whether a different threshold would be 
appropriate for defining smaller loans for FHA loans. HUD needs time to 
examine this issue further, and determine whether HUD has discretion to 
take action that differs from the position taken by CFPB and whether a 
departure from CFPB on this issue would be in the interest of promoting 
HUD's mission.
    Comment: Capping points and fees is irrelevant to a borrower's 
ability to repay a mortgage: A few commenters stated that capping 
points and fees does not have a direct connection to whether a borrower 
can repay a mortgage loan. A commenter stated that the APOR and APR 
have nothing to do with the actual ability of the borrower to repay the 
loan.
    Response: The 3 percent points and fees limit is one of the 
statutory criteria used to define a qualified mortgage. As the CFPB 
noted in the preamble to its January 2013 final rule, Congressional 
intent in amending TILA was not solely to require lenders to take the 
necessary steps to try and ensure that a borrower can repay a 
residential mortgage loan but that a qualified mortgage is a products 
with limited fees and safe features which preserves the availability of 
affordable credit to consumers. See the CFPB's final rule at 78 FR 
6426.
    Comment: Replace HUD's proposed 1.15 percentage point with the 
CFPB's 1.5 percentage point: Several commenters recommended that HUD's 
safe harbor APR standard for FHA be adopted with the standard 1.5 
percentage point in place of the proposed 1.15 percentage point. The 
commenters stated that such a change would bring consistency with the 
CFPB's regulation, reduce confusion in the lending community, and 
broaden the scope of loans that meet the safe harbor definition. Other 
commenters stated that this ``structure will more adequately address 
the needs of low- and moderate-income borrowers, borrowers from 
underserved areas, and minority borrowers.'' A commenter stated that 
adopting the 1.5 percentage point ratio would allow lenders more 
flexibility to offer lender credits to help first time and underserved 
buyers without exceeding the qualified mortgage limits.
    A commenter questioned HUD's basis for the APR for FHA safe 
harbor's to exceed the APR of the CFPB's safe harbor standard. The 
commenter stated that HUD's first justification seems to rest on lower 
lender compliance costs and lower litigation costs which will pass on 
savings to borrowers. The commenter stated that the second factor that 
HUD points to is the perceived need to allow its APR to APOR spread 
rate to float with the MIP rate. The commenter stated that the overall 
purpose of Dodd-Frank ability-to-repay requirements, of which the CFPB 
and HUD qualified mortgage rules are subsets, is to strike a balance 
between providing lenders with legal protection when making relatively 
safe loans that the borrower reasonably can be expected to repay, and 
providing borrowers with appropriate legal recourse when lenders do not 
do so. The commenter stated that while HUD's mission to facilitate 
lending to traditionally underserved borrowers is relevant here, so too 
must be preserving the legal rights of borrowers where lenders fail to 
meet their obligations to ensure the borrower's reasonable ability to 
repay the loan. The commenter further stated that while the inclusion 
of the MIP may be a legitimate concern it can be included within the 
calculation already provided by the CFPB's safe harbor definition.
    Response: As stated in HUD's September 30, 2013, proposed rule, and 
accompanying regulatory impact analysis, HUD's qualified mortgage 
standard increases the number of FHA-insured mortgages that are safe 
harbor. As provided in the proposed rule and maintained in this final 
rule, FHA's MIP is explicitly included in the APR to APOR spread 
calculation but the limit on the spread itself, prior to the addition 
of the MIP, is reduced from 150 basis points (in the CFPB final rule) 
to 115 basis points (in HUD's rule). The inclusion of the MIP and the 
reduction in basis points results in a reduction of the pool of FHA-
insured mortgages that would be designated rebuttable presumption under 
the CFPB's standard while increasing the number of FHA-insured 
mortgages that would be designated safe harbor. As noted in the 
regulatory impact analysis that accompanied HUD's September 30, 2013, 
proposed rule, HUD estimated that there were 129,500 (about 19 percent) 
FHA-insured mortgages (with relatively high APRs) insured between July 
2012 and December 2012 that would have been rebuttable presumption 
under the CFPB's qualified mortgage standard but qualify as safe harbor 
qualified mortgages under HUD's regulation. If HUD adopted a basis 
point metric higher than 115 percent plus MIP more loans would be 
designated safe harbor. HUD's analysis shows that adoption of a higher 
initial basis point, such as 150 percent, would result in only a few 
additional loans being designated a safe harbor qualified mortgage, but 
that the loans that would are the ones that HUD believes would receive 
greater benefit from having

[[Page 75226]]

access to the protections afforded a rebuttable presumption loan. 
Therefore, HUD maintains that the 115 basis points plus MIP is the 
appropriate standard.
    HUD reiterates that the compliance mechanisms to identify a safe 
harbor qualified mortgage under the special rules for HUD loans will 
similarly identify a safe harbor qualified mortgage for FHA insured 
loans under HUD's final rule.
    Comment: Provide a clear distinction between safe harbor and 
rebuttable presumption: Some commenters expressed support for HUD's 
proposal to adopt an APR relative to the APOR that accounts for the 
annual MIP. Other commenters, however, requested that HUD clarify how 
the threshold between FHA's safe harbor qualified mortgage and 
rebuttable presumption would work, specifically what the MIP is and how 
it is to be incorporated. The commenters stated that it is not entirely 
clear how lenders would combine the annual MIP with 1.15% to calculate 
the FHA safe harbor threshold. The commenters stated that it appears 
that HUD intends the lender to calculate the sum of the annual MIP rate 
and 1.15% (e.g., 1.35 + 1.15 = 2.50) and then determine whether the 
loan's APR exceeds the applicable APOR by that amount.
    Several commenters suggested that the distinction between an FHA 
safe harbor qualified mortgage and a rebuttable presumption qualified 
mortgage should be keyed to a bright line standard, not a rate cut-off 
that incorporates a floating MIP component. The commenters stated that 
HUD should consider moving from a floating threshold incorporating any 
of several MIP premiums to the CFPB standard of 150 bps with the 
addition of 135 bps to reflect the maximum MIP for FHA loans, or 285 
bps over APOR. The commenters stated that this standard would be pegged 
to the CFPB threshold and FHA's maximum MIP going forward so it could 
be adjusted as needed for all loans but it would not float or vary 
depending on the individual loan. The commenter stated that this 
approach has the benefit of employing a widely known and widely 
programmed standard--the CFPB threshold between safe harbor and 
rebuttable presumption loans. The commenter stated that taking such an 
approach would especially be helpful for smaller lenders, as the rule 
would be simpler and consequently less costly. It will also negate the 
necessity for the HUD to change its qualified mortgage rule every time 
FHA changes its maximum allowable MIP. Another commenter recommended 
that HUD establish a fixed threshold of 2.5 percentage points, which 
would include the annual MIP at approximately 135 basis points. The 
commenter stated that FHA loans would receive the safe harbor if the 
loan APR is no more than the 2.5 percentage points. The commenter 
stated that this would alleviate the complexities of complying with a 
fluctuating MIP.
    Commenters stated that clear standards without a floating component 
will simplify lender implementation as well as compliance oversight and 
accountability. Other commenters encouraged HUD to adopt a simpler 
approach that uses a single percentage point amount (while still taking 
the MIP into consideration), similar to the CFPB's approach. A 
commenter stated that it will be hard for lenders to know when to use 
the FHA standard and when to use the CFPB standard. A simpler approach 
that is also consistent with the CFPB's qualified mortgage regulations 
would minimize confusion and make it easier for both lenders and the 
FHA to oversee. Another set of commenters, however, stated that 
allowing the threshold for an FHA safe harbor qualified mortgage to 
potentially fluctuate in relation to the MIP could result in errors by 
lenders attempting to comply with the HUD's requirements. Some of the 
commenters stated that when a change in the threshold were to occur, 
then a certain period of time would be required to amend policies and 
procedures, re-program hardware and software systems, and re-train 
staff on the new threshold requirements and calculations. Several 
commenters suggested that HUD should provide at least 6 months advance 
notice prior to the effective date of any MIP change. Commenters also 
stated that industry needs more clarity and guidance from HUD about how 
the changes to MIP rates will be instituted going forward.
    Similar to comments pertaining to points and fees, a commenter 
recommended that the APR over APOR calculation, if retained, should 
increase for lower balance loans that have fixed costs. A commenter 
stated that, specifically, for loans between $100,000 and $150,000, an 
additional 50 basis points spread should be added to CFPB's points and 
fees basis of 150 basis points (1.5 percent)--resulting in a standard 
of 200 basis points over the APOR, plus the MIP; and for loans below 
$100,000, a further additional 50 basis points spread should be added 
to the CFPB's points and fees basis of 150 basis points--resulting in a 
standard of 250 basis points over the APOR, plus the MIP. The commenter 
stated that this tiered system would prevent many otherwise qualified 
FHA borrowers from being denied a loan because of the inability of a 
lender to meet the APOR standard in the proposed rule.
    One commenter suggested that HUD grant safe harbor designation to 
FHA loans that receive approval through FHA's TOTAL Scorecard. Related 
to this comment, another suggested that HUD update FHA's Total 
Scorecard system to allow lenders to use the FHA system, rather than 
their own, to determine at the front end if a loan qualifies as a safe 
harbor or rebuttable presumption qualified mortgage.
    Another commenter stated that a clear distinction between an FHA 
safe harbor qualified mortgage and an FHA rebuttable presumption 
qualified mortgage can be achieved by establishing a clear definition 
for each term. The commenter stated that HUD should define safe harbor 
qualified mortgages as loans with APRs equal to or less than APOR + 
115bps + on-going MIP, and define rebuttable presumption qualified 
mortgages as loans with an APR greater than APOR + 115 basis points 
(bps) + on-going MIP. Similar to this comment, another commenter stated 
that it is essential that HUD's qualified mortgage rule define the 
applicable MIP.
    Response: HUD's qualified mortgage standard is structured to 
recognize FHA's mission to serve a population that is somewhat riskier 
than the market in general and that the cost of providing mortgage 
insurance to this population is higher as well. This is accomplished by 
including FHA's MIP in the calculation. Without such accommodation, a 
high share of FHA-insured mortgages would be considered ``higher-priced 
covered transactions'' and, under the CFPB's standard, would be 
designated as rebuttable presumption qualified mortgages.
    As discussed in the regulatory impact analysis that accompanied 
HUD's proposed rule, under the CFPB's qualified mortgage regulations, a 
portion of FHA-insured mortgages would not qualify as qualified 
mortgages based on their exceeding the points and fees limit in the 
CFPB's regulation. As the regulatory impact analysis stated, a larger 
portion would be designated as qualified mortgages under the CFPB's 
regulation, but about 20 percent would only meet the CFPB's standard as 
a rebuttable presumption qualified mortgage. These FHA-insured 
mortgages would not qualify for safe harbor status under CFPB's 
regulations because of the 150 basis point limitation on the spread 
between APR and APOR, in large part because this spread for FHA-insured 
mortgages includes FHA's annual MIP

[[Page 75227]]

that is currently135 basis points for most loans.
    HUD recognizes concerns of some commenters that a standard which is 
tied to FHA's MIP, resulting in a floating threshold, may cause 
operational difficulties and delay the ability of lenders' to comply 
with FHA's qualified mortgage standards. As HUD stated in the preamble 
to its proposed rule, if a straight APR over APOR threshold were 
adopted by HUD, in lieu of inclusion of the MIP, then every time FHA 
changes the MIP, for purposes of ensuring the financial soundness of 
its insurance fund and reducing risk to the fund or to reflect a more 
positive market, FHA would also have to consider changing the threshold 
APR limit. This would be a less dynamic approach than that proposed by 
HUD in its September 30, 2013, proposed rule. HUD believes that the 
qualified mortgage standard proposed in the September 30, 2013, 
proposed rule and adopted as final in this rule will be, when systems 
have been adjusted, easy to administer, and HUD is providing the time 
for lenders to adjust their systems. Again, a mortgage that would be 
designated a safe harbor qualified mortgage under the special rules for 
eligible loans under the National Housing Act in the CFPB's regulations 
receives the same designated under HUD's definition if insured by HUD.
    Comment: The APOR is not an appropriate metric: A few commenters 
stated that the APOR is not the appropriate metric for FHA to use to 
determine what constitutes a baseline for the safe harbor/rebuttable 
presumption distinction, and that an APOR, derived from the Freddie Mac 
Primary Mortgage Market Survey (PMMS), is not the best metric for 
determining the dichotomy for FHA. The commenter stated that ``The PMMS 
index contains only conventional conforming loans; no government 
insured loans are included. Additionally, in recent quarters the PMMS 
has fallen well below [the Mortgage Bankers Association] survey rates, 
at times by as much as 20 basis points.'' The commenter suggested 
additional study on what is the most useful index for FHA loans.
    Response: The Dodd-Frank Act provides for use of the APOR in 
calculating points and fees and has been adopted by the CFPB in its 
qualified mortgage regulation. As HUD stated in its September 30, 2013, 
proposed rule and in this rule, it is HUD's objective to establish 
qualified mortgage standards that align to the statutory ability-to-
repay criteria of TILA and the regulatory criteria of the CFPB's 
qualified mortgage standard to the extent feasible without departing 
from FHA's statutory mission. HUD recognizes that the APOR is a rate 
that is derived from average interest rates, points, and other loan 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics, and that the representative sample may not include 
government-insured loans. However, as a result of the ability-to-repay 
requirements and enhanced consumer protections of the Dodd-Frank Act, 
the differences between conventional mortgage products and the 
government mortgage products are lessened.
    Comment: Clarify the APR and APOR calculation: A commenter stated 
that HUD's final rule should specify the APR being examined. The 
commenter asked HUD to clarify that the APR is the actual APR on the 
loan and not the high cost APR calculation used for purposes of 
``Section 32 High Cost testing.'' The commenter also stated that the 
final rule should clarify the effective date of the APOR to be used for 
testing. The commenter asked whether or not this is the APOR in effect 
at the time the lock is set (which is consistent with the Section 32 
High Cost and Section 35 higher-priced mortgage loans (HPML) testing), 
or HUD expects the test to use the APOR in effect at the time of case 
number assignment, or some other time frame. The commenter also asked 
that HUD's final rule clarify that if the APR is calculated to three or 
more places, HUD will require a specific rounding or truncation method 
for the purposes of this test. The commenter asked, for instance, if 
the APR is 6.225 and the APOR is 2.860 would the difference between 
them be calculated at 3.36 (the result truncated) or would the result 
be 3.370 (the result using standard rounding)?
    Response: As noted earlier in this preamble, the final rule adopts 
the CFPB's definition of APR and APOR, and therefore the CFPB's 
guidance on the determination of each of these rates is applicable to 
FHA's qualified mortgage regulation. The CFPB provides detailed 
guidance on each of these calculations. Appendix J to the CFPB's 
regulations in 12 CFR part 1026 provides guidance on the APR 
computations for closed-end credit transactions. The guidance notes 
that the CFPB's regulation at 12 CFR 1026.22(a) provides that the APR 
for other than open-end credit transactions shall be determined in 
accordance with either the actuarial method or the United States Rule 
method, and provides that Appendix J contains an explanation of the 
actuarial method as well as equations, instructions and examples of how 
this method applies to single advance and multiple advance 
transactions. Supplement I (Official Interpretations) to the CFPB's 
part 1026 regulations, provides guidance on calculation of APOR, under 
the heading for Section 1026.35. By following the CFPB with respect to 
the APR and APOR calculations, HUD eliminates any inconsistency between 
APR/APOR calculations to be undertaken by FHA-approved lenders 
originating FHA qualified mortgages and lenders originating 
conventional qualified mortgages in accordance with the CFPB's 
regulations.
    Comment: Exclusion of debt-to-income could increase the number of 
riskier borrowers coming to FHA--a residual income test should be 
included: The majority of commenters, commenting on debt-to-income 
(DTI) limits, stated that HUD's proposal to use its existing 
underwriting and income verification requirements and to not adopt the 
CFPB's 43 percent total monthly debt-to-income ratio requirements is 
the right approach. The commenters stated that HUD's underwriting 
standards have historically been the industry bench mark for 
documenting a consumer's ability to repay a mortgage debt. A commenter 
stated that a fixed DTI would only further limit credit availability 
especially to borrowers living in high-cost underserved communities.
    Another commenter stated that HUD's decision to not include a DTI 
limit in its qualified mortgage regulations could increase the number 
of riskier credit quality borrowers to the FHA in an origination 
environment where conventional loans must meet the more stringent CFPB 
qualified mortgage standard. The commenter stated that this result is 
inconsistent with HUD's stated goal to foster private market, not FHA, 
activity as steps are taken to reduce Fannie Mae and Freddie Mac's 
position in the market.
    Other commenters stated that adoption of a residual income test 
would substantially improve the sustainability of FHA lending, 
particularly for low-income borrowers. The commenter stated that it 
understands that the purposes of FHA differ from those of the CFPB and 
the adoption of the DTI requirement would likely restrict opportunities 
for credit for many of the FHA constituencies specifically mentioned in 
its statute. The commenter urged HUD to work with the Department of 
Veterans Affairs and the CFPB to develop a residual income test that 
would be uniform

[[Page 75228]]

across these agencies. The commenter stated that such a test, clear and 
easily integrated into automated systems, would permit good loans to be 
made to FHA's constituencies at DTIs of 43 percent or higher. The 
commenter stated that if such a rule were also adopted by the CFPB, 
then all loans above DTIs or 43 percent would not flow to FHA, thereby 
satisfying another accepted public policy goal.
    Response: HUD appreciates the commenters' suggestions about a 
residual income test that would be adopted by all agencies, and this 
may well be something to further examine. For this final rule, HUD 
retains the approach provided in the proposed rule. However, HUD will 
add this issue to HUD's plan for retrospective review of regulatory 
actions.\14\
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    \14\ See HUD's plan at http://portal.hud.gov/hudportal/HUD?src=/program_offices/general_counsel/Review_of_Regulations.
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    Comment: Treat certain other loans similarly to proposed treatment 
of Title I and Sections 184 and 184A loans: The majority of commenters 
expressed support for HUD's decision to designate all Title 1, Section 
184 and Section 184A mortgages as safe harbor qualified mortgages, 
without any change in underwriting requirements for these loan 
products. One commenter, however, stated that loans without points and 
fees caps encourage the assessment of junk fees and these incentives 
should not be part of loan programs meant to shore up needs in 
vulnerable communities. The commenter stated that the Title I loan 
program in particular has had a long history of abusive lending, 
primarily in low-income communities.
    Other commenters, however, identified various loan products that 
they stated should be treated by HUD similarly to the proposed 
treatment of Title I, Sections 184, and Section 184A loans. Commenters 
recommended that HUD automatically make Section 203(k) repair and 
rehabilitation loans, energy efficient mortgages, and mortgages 
involving real estate-owned (REO) properties safe harbor qualified 
mortgages. One of the commenters stated that these types of loans, 
especially 203(k) loans, require more work for the lender, and 
consequently, the lender is compensated more. The commenter stated that 
this higher compensation could jeopardize the qualified mortgage status 
of the loan if the rule does not permit a higher points and fees 
threshold for such loans. Another commenter stated that housing finance 
agencies (HFAs) often use 203(k) loans ``to support the purchase of 
affordable homes in need of repair or modernization for traditionally 
underserved consumers.'' The commenter stated that because of the 
increased costs associated with these loans, HFAs often pay lenders 
higher levels of compensation for originating them and also have to 
charge higher fees to borrowers. The commenter stated that ``if these 
loans are subject to HUD's proposed qualified mortgage requirements, it 
would become cost-prohibitive for HFAs, or other lenders, to continue 
originating these loans.''
    Response: HUD's final rule will continue to designate Title I, 
Section 184 and Section 184A loans as safe harbor qualified mortgages. 
HUD believes that the final rule HUD published on November 7, 2001, 
entitled, ``Strengthening the Title I Property Improvement and 
Manufactured Home Loan Insurance Programs and Title I Lender/Title II 
Mortgagee Approval Requirements'' (66 FR 56410) strengthened the Title 
I program and that the Title I program is sound. The Title I loan 
program insures maximum loan amounts of $25,000 for single family home 
loans to finance the light or moderate rehabilitation of properties, as 
well as the construction of nonresidential buildings on the property. 
Additionally, Title I covers the Manufactured Home Loan program which 
provides a source of financing for buyers of manufactured homes and 
allows buyers to finance their home purchase at a longer term and lower 
interest rate than with conventional loans. Considering the small size 
of the Title I property improvement loans and the limited access to 
conventional financing otherwise available to manufactured home loans, 
HUD believes these loans should be designated as safe harbor qualified 
mortgages until further study can be conducted on how to apply the 
qualified mortgage definition.
    HUD declines to designate Section 203(k) repair and rehabilitation 
loans as safe harbor qualified mortgages. HUD does clarify that non-
affiliated consultation fees authorized under the Section 203(k) 
program are exempt from the CFPB's points and fees calculation, adopted 
by HUD. Section 203(k) mortgages cover both the acquisition of a 
property and its rehabilitation. While Section 203(k) loans involve 
minimal financing amounts, Section 203(k) mortgages can cover the 
virtual reconstruction of a property. For example, a home that has been 
demolished or will be razed as part of rehabilitation is eligible for 
financing under FHA's Section 203(k) mortgage program provided that the 
existing foundation remains in place. HUD also declines to designate an 
FHA-insured mortgage on property acquired by a borrower through FHA's 
REO process as a safe harbor qualified mortgage. An FHA-insured 
mortgage on a REO property is a standard single family-insured 
mortgage, and therefore would need to meet the qualifications for 
either a safe harbor qualified mortgage or a rebuttable presumption 
qualified mortgage. In addition, HUD exempts housing finance agencies 
from the qualified mortgage rule, consistent with the CFPB's rule, as 
explained further in Section IV of the preamble.
    Comment: Provide an exemption for HFAs as exempted under CFPB's 
rule: With respect to loans originated by HFAs, certain commenters 
requested that HFAs should be exempt from ability-to-repay requirements 
and FHA should classify all HFAs loans as safe harbor qualified 
mortgages. The commenters stated that HFAs have a consistent record of 
providing good lending for affordable housing, have never engaged in 
subprime or other risky lending, and the revenues generated are 
reinvested in furtherance of their affordable housing mission. The 
commenter stated that recently, 75 percent of HFA mortgages funded by 
tax-exempt Mortgage Revenue Bonds have been FHA-insured.
    Another commenter stated that the proposed safe harbor qualified 
mortgage APR to APOR rate of 1.15 percentage points plus MIP would 
hinder the ability of an HFA to finance FHA-insured loans. The 
commenter stated many lenders are reluctant to finance HFA loans 
because the HFA requirements already add extra costs to HFA loans. Some 
of the extra costs which lenders might try to pass onto borrowers with 
slightly higher interest rates reflect a legitimate business expense 
incurred by the lender but could cause a loan to exceed the safe harbor 
APR cap. As a result, HFA lending could be curtailed, particularly when 
the CFPB allows for a more flexible APR limit on conventional loans.
    Response: As noted earlier in this preamble, HUD agrees with the 
commenters and has exempted HFAs from the requirement to comply with 
FHA's qualified mortgage regulations, consistent with the CFPB.
    Comment: Exempt FHA streamlined refinancing from qualified mortgage 
requirements: Commenters stated that streamlined refinances should be 
excluded from the higher-priced mortgage loan limitations or the APR 
threshold increased to meet the unique needs of refinancing. The 
commenter

[[Page 75229]]

stated that the rates on streamlined refinances are higher because 
lenders include the closing cost in the rate and may, therefore, result 
in some streamlined refinances losing safe harbor qualified mortgage 
status.
    A commenter stated that under TILA, HUD has been granted the 
authority to exempt streamlined refinancings from the income 
verification requirements of the ability-to-repay rule, as long as the 
refinancings meet certain requirements. The commenter stated that HUD, 
however, intimates that including streamlined refinancings in the 
proposed qualified mortgage requirements would meet similar objectives 
of a broader exemption, as the proposed qualified mortgage definition 
would still require these types of loans to meet the three percent 
points and fees requirements and HUD's existing requirements for 
streamlined refinances.
    In contrast to these commenters, a commenter expressed support for 
HUD's inclusion of the points and fees cap in the FHA qualified 
mortgage definition for streamline refinancings and for all Title II 
loans. The commenter stated that this will help ensure that FHA 
borrowers obtain loans in a more fair and transparent market while 
discouraging price gouging. The commenter stated that the points and 
fees cap ensures that homeowners are not subject to inflated costs and 
junk fees associated with the initial making of the loan. The commenter 
stated that while the streamlined refinance program provides needed 
access to capital for many homeowners, HUD's guidelines assume that a 
borrower making payments on the previous loan can actually afford those 
payments. The commenter stated that the program does not account for 
instances where the previous loan's payments were paid out of proceeds 
from that loan (and therefore out of equity from the property).
    Response: HUD declines to exempt streamlined refinances from the 
safe harbor and rebuttable presumption qualified mortgage definition. 
As HUD stated in the proposed rule, HUD advised that it did not 
consider it necessary to exercise this authority because HUD's 
qualified mortgage definition results in an exemption similar to the 
one contemplated under section 129C(a)(5) of TILA. HUD also believes 
that the points and fees requirement is appropriate for streamlined 
refinances just as it is for other Title II products, and that the 
revised APR to APOR threshold will benefit refinances the same as other 
Title II products. While HUD maintains that subjecting streamlined 
refinances to the qualified mortgage definition is appropriate now, HUD 
recognizes that in times of stress, the current qualified mortgage 
definition may inhibit access to streamlined refinancing, and if this 
were to occur, HUD will reexamine whether streamlined refinances should 
be exempt.
    Comment: Establish clear criteria for rebutting the presumption of 
a rebuttable presumption loan: Several commenters stated that HUD needs 
to establish clear criteria on the basis for a borrower rebutting the 
presumption of one's ability to repay a mortgage. A commenter stated 
that the proposed rule appears to significantly change the requirements 
for a borrower to rebut the presumption of compliance from the CFPB's 
relatively narrow focus on whether the borrower had sufficient residual 
income to one that is a far broader inquiry of whether the general 
ability to repay test was satisfied. The commenter stated that a 
qualified mortgage is designed to provide a means for a lender, by 
meeting product and underwriting standards, to gain a presumption that 
the lender has satisfied the ability to repay requirements without 
undergoing the statute's factor by factor analysis and demonstrating 
that the borrower had a ``reasonable ability to repay.'' The commenter 
stated that HUD's rebuttable presumption definition, however, appears 
to render the presumption nearly meaningless by returning the inquiry 
to whether the lender made a reasonable and good faith determination 
that the borrower had the ability to repay the loan. The commenter 
stated that if the proposed rule goes forward, it is unlikely that 
lenders that participate in the FHA program will be willing to assume 
the greater liability that comes with a relatively unbounded rebuttable 
presumption. The commenter stated that lenders are more likely to 
confine their lending to safe harbor loans and in some cases will 
choose to operate well within qualified mortgage's safe harbor 
standards to avoid liability.
    Another commenter stated that it understood that the CFPB's 
rebuttable presumption standard is not appropriate for FHA because 
residual income calculations are not currently required by FHA, but 
nevertheless, it is important for HUD to establish a limited, objective 
and clear inquiry into the presumption. In a similar vein, a commenter 
stated that FHA underwriting requirements do not contain a residual 
income requirement and do not require that a creditor assess a 
consumer's residual income on an FHA loan. The commenter stated that, 
therefore, a consumer cannot challenge the creditor's assessment of 
their ability to repay on an FHA loan based on a claim of insufficient 
residual income, even if that loan is a higher priced mortgage as 
defined under Regulation Z. The commenter stated that to avoid any 
possible confusion among creditors and to ensure the greatest number of 
creditworthy consumers are served by FHA, the commenter asked that HUD 
confirm this understanding is accurate in the final rule.
    A commenter stated that under HUD's rebuttable presumption 
standard, the borrower may prove the lender did not make a reasonable 
and good faith determination of the borrower's repayment ability. The 
commenter stated that it is not clear, however, whether this requires 
the lender to show it followed the specific HUD requirements or whether 
the borrower can use other evidence to prove the lender did not 
consider the borrower's ability to repay, even if the lender followed 
HUD requirements.
    Another commenter stated that HUD needs to elaborate on what is 
meant by a reasonable and good faith determination of the borrower's 
ability to repay.3
    A few commenters stated that HUD's rebuttable presumption standard 
appears to permit rebuttal of the presumption of compliance based on 
lending standards that are in addition to FHA underwriting 
requirements, and therefore HUD is establishing new underwriting 
requirements. The commenters stated that, as proposed, the presumption 
of compliance could be rebutted in two ways: One relates to points and 
fees and the other basis is a showing 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.''
    The commenters stated that if underwriting in accordance with HUD's 
requirements is insufficient to establish sufficient repayment ability 
under TILA, and if FHA does not revise its requirements to correct that 
problem, then this language appears to create a new FHA underwriting 
requirement for rebuttable presumption FHA loans. The commenters stated 
that the quoted

[[Page 75230]]

language in the rule differs from FHA underwriting standards, yet this 
aspect of the rebuttal standard can only apply to loans that are FHA-
insured. The commenters stated that the list of factors in HUD's 
qualified mortgage rule differs from the list in the FHA Handbook 
monthly housing expense as defined in section 4155.1 4.C.4.b of the 
Handbook. The commenters stated that HUD uses, in its rule, mortgage-
related obligations, which is undefined in FHA's Handbook. The 
commenters stated that all the types of income and all the types of 
obligations that are relevant to rebutting the presumption need to be 
clearly defined, and mortgagees need to know how and be able to 
quantify them. The commenters suggested that HUD use standards that do 
not differ from existing FHA loan underwriting requirements.
    A commenter suggested that HUD establish a clear standard for 
rebutting the presumption by adopting the following language: ``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, to the extent required by applicable HUD requirements, 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.''
    Other commenters stated that HUD proposed to permit rebuttal of the 
presumption by showing points and fees. The commenters stated that such 
a standard is meaningless because, under HUD's regulation, any loan 
with points and fees above the cap cannot be an FHA loan or a qualified 
mortgage loan. One of the commenters stated that even if HUD's 
regulations were to apply to a non-FHA loan, a showing of points and 
fees above the qualified mortgage cap cannot establish a violation of 
the ability-to-repay requirement. The commenter requested that HUD 
clarify that it did not intend to imply that points and fees above the 
cap, without more, could establish a violation of TILA's ability-to-
repay requirement.
    Another commenter stated that HUD should establish a 
``materiality'' standard by which only uncured underwriting errors that 
make a material difference to a borrower's ability to repay a loan 
should be a permissible basis for rebutting a presumption of compliance 
with the ability-to-repay requirement.
    Response: In response to the comments, HUD has sought to clarify 
the rebuttable presumption language in this final rule. As addressed 
above in Section IV, HUD adopted the list of the CFPB's factors, 
mortgagor's income, debt obligations, alimony, child support, monthly 
payment on any simultaneous loans, and monthly payment, to remain 
consistent with the CFPB's rebuttable presumption standard, but 
intended those factors to harmonize with HUD's existing underwriting 
requirements. In response to the comments, HUD will reference FHA's 
underwriting categories as the applicable categories and believes that 
this better clarifies that HUD-specific underwriting requirements shall 
be used for rebutting the presumption, rather than the list provided by 
CFPB. The applicable categories can be found in FHA Handbook 4155.1, 
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit 
Mortgage Loans. Additionally, HUD clarifies that instead of merely 
considering the factors listed, the mortgagee must evaluate the factors 
as required by HUD underwriting requirements for each applicable 
transaction.
    Comment: HUD's rule will delay lender compliance with foreclosure 
timeframes during prolonged rebuttable presumption litigation: A 
commenter suggested that protracted litigation resulting from the 
rebuttable presumption could result in the curtailment of an interest 
claim by a lender because ``lenders are required to meet `reasonable 
diligence' timeframes in prosecuting foreclosure proceedings and 
acquiring title as set forth in 24 CFR 203.356.'' The commenter stated 
that it is unclear whether litigation resulting from a rebuttable 
presumption challenge would be viewed as lender error and thus lenders 
would be ineligible for a timeframe extension.
    Response: Litigation resulting from a rebuttable presumption 
challenge will not in and of itself make a lender ineligible for 
timeframe extension for submission of a claim. The existence of a 
challenge to rebuttable presumption does not necessarily indicate 
lender error rendering the lender ineligible for an extension of the 
deadline. However, where the presumption is successfully rebutted, FHA 
will not entertain requests for extensions of foreclosures and claim 
deadlines.
    Comment: Rule needs a cure provision; indemnification demand is not 
dispositive of loan's qualified mortgage status: Several commenters 
requested that HUD establish a mechanism by which lenders can cure 
loans where there was a miscalculation in points and fees or any other 
failure to satisfy the qualified mortgage test. The commenters stated 
that a ``cure provision'' is necessary for those situations when 
technical violations are discovered by lenders and can be easily 
corrected. The commenters stated that this is particularly important if 
qualified mortgage status is to equate with FHA eligibility. The 
commenters stated that these types of procedures encourage early action 
by lenders and foster more advantageous loans for borrowers. One of the 
commenters stated that if HUD does not create a mechanism to cure loans 
where there are qualified mortgage defects, such loans will simply 
become uninsurable by FHA in the short run and cause greater caution 
and lack of credit to consumers over the long term. A commenter asked 
whether FHA would allow lenders to correct a points and fees violation 
by refunding the excess costs to bring the loan in compliance.
    Another commenter requested that HUD continue to insure mortgages 
which were originated as qualified mortgage loans, but through audit or 
self-discovery were later found to have certain errors. The commenter 
stated, for example, if the 3 percent threshold of fees was exceeded, 
that in lieu of requiring indemnification, HUD allow for the lender to 
cure the overage. The commenter stated that this would allow the loan 
to maintain its qualified mortgage status. The commenter requested that 
if the error was related to an alternative matter (i.e., income/asset 
related) it would request that HUD allow a lender to indemnify a loan, 
and through that indemnification, allow for the loan to maintain its 
qualified mortgage status. The commenter stated that this would allow 
lenders to continue to treat the loan as a qualified mortgage to avoid 
unnecessary secondary market ramifications.
    Another commenter suggested that HUD should adopt an approach 
similar to that adopted by Fannie Mae which was that, during the 
initial roll-out of its qualified mortgage standard, at least during an 
initial twelve month roll-out period, Fannie Mae would allow the 
industry to adjust systems and take corrective actions to comply. 
Without this leniency, the commenter stated that it is concerned that 
the consumers served will be faced with increased costs, extensive 
delays and, unfortunately, may find they are unable to obtain the 
financing they need to secure the American dream.
    A commenter stated that recently, the CFPB explained that a defect 
under the underwriting procedures of the government-sponsored 
enterprises (GSEs) that is unrelated to the ability to repay should not 
affect qualified mortgage status.

[[Page 75231]]

    Another commenter requested clarification of the impact on 
qualified mortgage status if FHA insurance of a loan is subsequently 
revoked. The commenter requested that as such revocation may be wholly 
unrelated to the applicant's ability to repay the loan or to the 
creditor's compliance with the underwriting requirements, the commenter 
requested that HUD include in its final rule a statement that such a 
loan will retain qualified mortgage status following revocation of FHA 
insurance, provided that all pertinent underwriting criteria had been 
met.
    To address the qualified mortgage status concerns, one commenter 
requested that Sec.  203.19 include a new paragraph (b)(4) to read as 
follows: ``(b)(4) Indemnification Demands-An indemnification demand by 
HUD is not dispositive of qualified mortgage status. Qualified mortgage 
status depends on whether a loan is guaranteed or insured, provided 
that other requirements under this section are satisfied. Even where an 
indemnification demand relates to whether the loan satisfied relevant 
eligibility requirements at time of consummation, the mere fact that a 
demand has been made, or even resolved, between a creditor and HUD is 
not dispositive for purposes of establishing a loan's qualified 
mortgage status.''
    Response: As addressed above in Section IV, HUD adds at the final 
rule stage a section clarifying that a demand for indemnification or an 
indemnification does not per se remove qualified mortgage status in the 
regulations for Title I and Title II.
    Requested clarifications: The final rule needs to provide 
clarification in a number of areas: Several commenters requested that 
HUD clarify its position in certain areas.
    Clarify that this rule preempts CFPB's rule in its entirety for FHA 
loans:
    Response: Except to the extent that FHA's regulation cross-
references to terms defined by CFPB, FHA's underwriting requirements 
and qualified mortgage definition govern FHA insurance of single family 
mortgages.
    Clarify the presumption afforded a safe harbor qualified mortgage:
    Response: A safe harbor qualified mortgage is one that provides a 
conclusive presumption of compliance with the ability to repay 
requirements for loans that satisfy the definition of a safe harbor 
qualified mortgage.
    Clarify eligibility for insurance versus actual insurance: A 
commenter stated that HUD's proposed rule appears to base qualified 
mortgage status on whether a loan is actually insured by FHA, rather 
than whether the loan is eligible for insurance. The commenter stated 
that if the commenter is understanding HUD correctly, HUD's position is 
inconsistent with the transitional qualified mortgage category created 
by the CFPB in Sec.  1026.43(e)(4) of Regulation Z for loans eligible 
for purchase, guarantee or insurance by various government agencies and 
government-sponsored enterprises. The commenter stated that the FHA 
guidelines impose a variety of requirements relating not only to 
underwriting, but to the procedures of sale, guarantee, and insurance, 
as well as to post-consummation activities, which may be wholly 
unrelated to the applicant's ability to repay. The commenter stated 
that to avoid basing qualified mortgage status on the actual insurance 
status of a loan, the commenter requested that HUD clarify in its final 
rule that the qualified mortgage status of a loan is based on whether 
the loan is eligible for insurance by FHA. Other commenters also 
supported that HUD provide qualified mortgage status for FHA Title II 
loans eligible for FHA insurance. One of the commenters requested that 
the qualified mortgage coverage be based on whether the loan qualifies 
or is eligible for FHA insurance so that any transaction defects that 
are not related to ``ability to repay'' would not affect qualified 
mortgage coverage.
    Response: The commenters' understanding is correct. Under HUD's 
regulations, as promulgated through this final rule, qualified mortgage 
status for FHA Title II loans is provided only for loans that FHA 
insures. FHA's responsibility and oversight is only for the mortgages 
that it insures, not for those that may be eligible for FHA insurance 
but have not been insured by FHA.
    Clarify that there is no preemption of State fair lending laws: Two 
commenters requested that HUD make clear that it does not preempt State 
claims for fair lending abuses. The commenters stated that State 
enforcement of fair and responsible lending is essential to prevent 
unintended consequences.
    Response: This final rule does not preempt any claims a borrower 
may bring for violation of fair lending laws.
    Clarify that FHA's regulatory framework is unchanged: Commenters 
asked that the final rule specify that the regulatory framework of 
current FHA programs would remain the same with the addition of the 
``qualified mortgage'' definition applied, specifically in reference to 
ability-to-repay.
    Response: The commenters are correct that HUD is not changing the 
regulatory framework for its FHA programs with regard to ability to 
repay other than to establish the requirements for designation of a 
safe harbor qualified mortgage or rebuttable presumption qualified 
mortgage. It should be noted, however, that FHA will not insure a 
mortgage that is not a qualified mortgage but this is not a departure 
from existing standards since FHA has always had ability to repay 
standards and mortgages insured by FHA were based on these standards.
    Clarify which FHA loans are covered by HUD's qualified mortgage 
regulations when the regulations become effective: A commenter 
requested that HUD clarify if the intended January 10, 2014 effective 
date will apply to loans with an application date on or after January 
10th (consistent with the CFPB effective date for ability-to-repay/
qualified mortgage applicability) or with case number assignment dates 
on or after January 10, 2014.
    Response: This rule applies to all case numbers assigned on or 
after the effective date of this rule.
    Clarify whether escrows for taxes and insurance are included in the 
points and fees limitation: Another commenter stated that there is 
considerable confusion about whether escrows for taxes and insurance 
are included in the points and fees limitation. The commenter stated 
that these are just pass-through amounts that have no risk of imposing 
excessive costs on consumers, and they should not be included. The 
commenter stated that the CFPB was not clear on this matter. The 
commenter urged HUD to clarify that it will interpret the definition of 
points and fees to exclude escrows for taxes and insurance.
    Response: HUD is adopting the CFPB's definition of points and fees, 
and defers to CFPB's interpretations and guidance on that definition. 
The CFPB's regulation at 12 CFR 1026.32(b)(1) excludes amounts held for 
future payment of taxes from the calculation of points and fees. See 12 
CFR 1026.32(b)(1)(iii). The CFPB also excludes from the calculation of 
points and fees any premium or other charge imposed in connection with 
any Federal or State agency program for any guaranty or insurance that 
protects the creditor against the consumer's default or other credit 
loss, and any guaranty or insurance that protects the creditor against 
the consumer's default or other credit loss and that is not in 
connection with any Federal or State agency program. See 12 CFR 
1026.32(b)(1)(i)(B) and (C). However, the CFPB includes in

[[Page 75232]]

the calculation of points and fees any premiums or other charges 
payable at or before consummation for any credit life, credit 
disability, credit unemployment, or credit property insurance, or any 
other life, accident, health, or loss-of-income insurance for which the 
creditor is a beneficiary, or any payments directly or indirectly for 
any debt cancellation or suspension agreement or contract. See 12 CFR 
1026.32(b)(1)(iv).
    Clarify meaning of reasonable ability to repay: A commenter stated 
that HUD's rule includes a statement that ``the monthly payments on a 
mortgage must not be in excess of a borrower's reasonable ability to 
repay.'' The commenter stated that this is too vague and subject to 
subjective interpretation. The commenter stated that what is reasonable 
for one person may not be reasonable for another in a similar financial 
position. The commenter stated that there would be almost no ``safe 
harbor'' for lenders on FHA loans. The commenter requested that HUD 
clarify the meaning of ``reasonable'' in this context.
    Response: The guiding basis for whether a determination has been 
made of a borrower's reasonable ability to repay a mortgage is by the 
lender following the underwriting guidelines in FHA Handbook 4155.1, 
Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit 
Mortgage Loans, or subsequent handbook.
    Recommendations: Several commenters offered recommendations for 
additional provisions to be included in HUD's rule:
    Mandate prepurchase counseling: A commenter stated that ``pre-
purchase counseling by a HUD-certified housing counselor should become 
a mandatory component of all FHA qualified mortgage loans. The 
commenter stated that housing counseling has proven to be an invaluable 
tool for creating successful homeowners. The commenter stated that a 
study of counseling programs found that prepurchase counseling can help 
reduce the likelihood of default and foreclosures from the start by 
helping prospective homeowners determine if they are ready to buy.''
    Response: As a result of changes made to HUD's housing counseling 
program by the Dodd-Frank Act, and counseling requirements, HUD is 
examining a variety of counseling issues, several of which will be 
addressed through separate rulemaking.
    Enforce loss mitigation requirements: Two commenters stated that 
rigorous loss mitigation requirements and compliance with those rules 
is essential to a sustainable system. The commenters stated that HUD 
should fully review its loss mitigation options and compliance programs 
to maximize beneficial outcomes for homeowners, communities, investors 
and the FHA insurance fund.
    Response: FHA has strong loss mitigation requirements and 
undertakes periodic review of them. HUD invites the commenters to view 
the following Web site which identifies mortgagee letters addressing 
the subject of loss mitigation, recently and previously issued by FHA. 
See http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/nsc/lmmltrs.
    Prohibit prepayment penalties: A commenter stated that under the 
CFPB's regulation, covered transactions, including FHA loans that are 
covered transactions, ``must not include a prepayment penalty'' unless 
the loan is a qualified mortgage loan, and prepayment penalties are 
payable only during the first three years after consummation. The 
commenter urged FHA to amend its notes to be clear that they do not 
permit any interest charge for any time after a loan is fully paid, 
even for a partial month.
    Response: HUD is developing a proposed rule that addresses 
prepayment penalties for an FHA-insured loan.
    Provide better lending oversight: A commenter stated the industry 
does not need more restrictions. The commenter stated that instead of 
rewarding institutions that have always adhered to the HUD regulations, 
HUD is treating the good the same as the bad actors. Other commenters 
stated that government enforcement is a key component to securing 
widespread industry compliance with regulation. One of the commenters 
stated that HUD should engage in active oversight of FHA lending, 
including direct endorsement lenders, with aggressive consequences for 
non-compliance. The commenter stated that oversight should include 
proactive resolution of consumer complaints, including requirements for 
lenders and servicers to document answers to HUD in response to 
consumer complaints. Another commenter stated that HUD must adopt 
strong compliance and enforcement provisions to ensure that the 
required minimum standards are being met in practice and to ensure 
borrowers have appropriate recourse when these standards are not 
actually complied with.
    Another commenter recommended that HUD avoid unnecessary regulation 
of FHA lending and that it rely on its existing standards to continue 
to ensure that FHA loans are appropriate and affordable. The commenter 
stated that it does not believe another layer of ability-to-repay 
regulation similar to existing FHA underwriting standards would improve 
or even alter the quality of FHA loans. The commenter stated that, 
instead, it would run the risk of constraining lending unless the 
additional standard is substantially clearer than the proposed 
rebuttable presumption standard.
    Response: FHA continually strives to strengthen its oversight of 
FHA-approved lenders. HUD values the input of its FHA-approved lenders 
and other interested parties and members of the public and is 
considering recommendations offered by the commenters on this notice. 
HUD also believes that implementation of the final rule improves the 
quality of FHA loans, which protects borrowers from higher priced 
loans.
    HUD questions in the preamble--feedback offered by commenters:
    The preamble to HUD's September 30, 2013, proposed rule included 
several questions for which HUD specifically sought comment. One 
question which received the most feedback was HUD's question of whether 
lenders participating in FHA's mortgage insurance and loan guarantee 
programs would lower the APR relative to the APOR such that the lenders 
in essence always opt for the safe harbor qualified mortgage and never 
make a rebuttable presumption qualified mortgage. HUD asked if 
commenters thought that was the case, and welcomed comments on the 
effect this incentive may have on lenders, borrowers, and the broader 
economy.
    Feedback: Several stated that it would be extremely difficult to 
find lenders to make rebuttable presumption mortgages for the 7 percent 
\15\ of Title II loans that will not qualify as safe harbor qualified 
mortgages. The commenter stated that mortgage professionals will favor 
safe harbor qualified mortgages and will avoid the potential legal risk 
associated with rebuttable presumption qualified mortgages. This will 
result in disparate impact of homeownership throughout the country. 
Another commenter agreed that lenders are likely to elect only to offer 
safe harbor qualified mortgages due to the uncertainty surrounding 
lending outside of the safe harbor qualified mortgage category. The

[[Page 75233]]

commenter stated that if this occurs, the result will mean less 
available credit.
---------------------------------------------------------------------------

    \15\ The 7 percent referred to by the commenter is in fact the 
number of loans that would not be considered a qualified mortgage 
under FHA's rule or eligible for insurance as a result of the points 
and fees. Only 1 percent of Title II loans would be designated 
rebuttable presumption under the proposed and final rule.
---------------------------------------------------------------------------

    Another commenter stated that due to the high legal fees related to 
making a rebuttable presumption loan, lenders are more likely not to 
make loans that would be rebuttable presumption. The commenter stated 
that the result will be that some borrowers are prevented from 
obtaining loans due to the risk aversion of lenders.
    A commenter stated that the consequences of the 1.15% threshold set 
by FHA is that loans above that amount will not be made and or will 
have a disparate impact on minorities who often present somewhat higher 
risks.
    A commenter stated that, after polling its members, the consensus 
was that, at least in the beginning, members would not make rebuttable 
presumption loans because of the risk of substantial liability if the 
courts interpreted rebuttable presumption in an adverse manner. As for 
lowering the APR to be a safe harbor loan, the commenter stated that a 
small number may be in the margins, but for a substantially larger 
number, especially small balance loans, it will not be profitable to 
lower the APR and lenders will simply not make the loans to an 
otherwise qualified borrower.
    A commenter stated that it believes the majority of FHA qualified 
mortgages made will qualify for the safe harbor due to the pricing of 
the loan and the level of protection that such status provides, much 
the same as under the CFPB's qualified mortgage rule. The commenter 
also stated that it is possible that lenders may make a small reduction 
in the APR if that is the only requirement standing in the way of a 
loan qualifying as a safe harbor.
    Another commenter expressed disagreement with HUD's hypothesis that 
the APR standard would put pressure on the conventional market because 
HUD's MIP is so high in relation to conventional private mortgage 
insurance (PMI) or loans without PMI. The commenter stated that FHA's 
market share is likely to decrease and only people who could not obtain 
conventional insurance will turn to FHA, presenting danger to the fund. 
The commenter further stated that HUD's lower threshold for exceeding 
the safe harbor is also a negative incentive for originating an FHA 
loan versus a conventional loan and is compounded by excluding the 
annual MIP in the APOR calculation.
    Another commenter stated that, with respect to interest rates, FHA 
is a relatively competitive market, and the purported benefits of the 
dichotomy is marginal at best and less effective than FHA's current 
protections. The commenter stated that it will, however, have the 
result of limiting some otherwise eligible borrowers from receiving an 
FHA loan.
    Response: HUD appreciates all the feedback provided in response to 
this question. As HUD stated in the preamble to its September 30, 2013, 
proposed rule and reiterates in this final rule, HUD will carefully 
monitor how HUD's definition of safe harbor qualified mortgage and 
rebuttable presumption qualified mortgage for the majority of its Title 
II programs works. HUD will also study, as it has committed to do so, 
the HUD mortgage insurance and guarantee programs whose mortgages have 
been designated safe harbor qualified mortgage, and the appropriateness 
of such designation. HUD recognized that there may be a transition 
period before the one percent of rebuttable presumption loans in FHA 
portfolio are made, but HUD's changes to the rebuttable presumption 
definition should clarify for lenders and borrowers the standard that 
applies for rebuttable presumption qualified mortgage loans. The 
transition period should be similar to that of the conventional market 
where the market will assess the legal risk and costs of making a 
rebuttable presumption loan before proceeding. Additionally, as 
provided in HUD's accompanying regulatory impact analysis, while there 
may be programming changes needed to comply with HUD's definition of 
qualified mortgage, HUD estimates that the costs are de minimis.
    Procedural Issues: A few commenters raised concerns with certain 
procedural issues pertaining to the rule:
    Comment: Additional public comment should be provided: A few 
commenters stated that the 30-day comment period was too short to fully 
identify and compare policy alternatives and the likely consequences, 
especially when compared to the time used by the CFPB to explore the 
issues involved in creating a qualified mortgage rule. The commenters 
requested HUD extend the comment period for at least 60 days after the 
CFPB issues its final integrated disclosure rule and clarifies the APR 
calculation.
    Response: HUD recognizes that the comment period provided for its 
qualified mortgage rule was an abbreviated one. However, since HUD 
strived to closely align its definition of safe harbor qualified 
mortgage and rebuttable presumption qualified mortgage, HUD had the 
advantage of reviewing the comments submitted to the CFPB on issues and 
approaches that HUD considered in its proposed rule, and the benefit of 
reviewing the CFPB's analysis of such issues. As HUD stated in its 
proposed rule, HUD accepted and reviewed comments submitted after the 
30-day public comment period closed.
    Comment: HUD's regulatory impact analysis did not support the 
policy taken in HUD's rule: A few commenters stated that HUD's 
assessment of the probable effects of its rule on important mortgage 
market stakeholders is not well supported. The commenter stated that 
borrowers, lenders, U.S. taxpayers, and other private market 
participants have important interests that have not been analyzed 
within a robust cost/benefit framework.
    Another commenter stated that HUD's supporting economic analysis 
did not consider the broader mortgage market context, the interaction 
between HUD's proposed rule and the CFPB qualified mortgage rule, and 
lender incentives to minimize litigation risk. The commenter suggested 
that HUD examine the likely credit risk management and loan performance 
consequences to FHA of reduced conventional access to higher loan-to-
value (LTV) loans, combined with the more expansive qualified mortgage 
standard included in HUD's proposed rule.
    A commenter stated that significant questions remain unanswered 
regarding the likely effect of HUD's rule on the size and allocation of 
the insured low down-payment market. HUD should examine those questions 
before issuing a final rule.
    Another commenter stated that the economic analysis in the preamble 
to HUD's rule posits that lenders will have an incentive to keep their 
costs low to minimize the number of loans that would be ineligible for 
FHA insurance, in light of lower compliance and litigation costs under 
the FHA program that HUD expects to result from its proposal. The 
commenter stated that it believes that lenders are likely to reduce the 
points and fees to 3 percent or less in more cases, further minimizing 
the impact even on the 7 percent. The commenter stated that if the APOR 
or 3 percent cap tests turn out to have onerous effects on first-time 
homebuyers and other potential FHA borrowers, it trusts HUD will 
reconsider the rule and take action to eliminate such unintended 
consequences.
    Response: HUD appreciates the comments raised in response to HUD's 
regulatory analysis. HUD acknowledges that, without a qualified 
structure yet in place for the majority of FHA Title II loans as 
provided in this final rule, and without the CFPB's qualified mortgage 
regulations yet in operation, the data provided in the regulatory 
impact

[[Page 75234]]

analysis are estimates to the best of HUD's ability on how the impact 
will play out when both sets of regulations are in effect. HUD does not 
believe that this final rule will have an impact on the LTV in the 
conventional market and the regulatory impact analysis does not analyze 
the effect of the CFPB's rule on the number of high loan-to-value (LTV) 
ratio loans made in the conventional market. The regulatory impact 
analysis uses a base case scenario in which the CFPB rule is in effect 
on January 10, 2014. In the regulatory impact analysis that accompanies 
this final rule, HUD strives to address some of the questions raised by 
the commenters, but a more accurate analysis may not be possible until 
the annual actuarial report for FHA prepared in the fall of each year, 
is prepared in the fall of 2014.
    Comment: HUD's Regulatory Flexibility Act analysis failed to 
discuss the impact on small mortgage brokers: Two commenters stated 
that data from mortgage broker operations and business models indicate 
a significant impact on small business mortgage broker firms if the 
rule is finalized. The commenters stated that HUD's rule could cause a 
high percentage of mortgage broker firms to change business models, 
merge with lending operations or cease operations in order to remain in 
business based on HUD's qualified mortgage proposed rule.
    Response: Please see HUD's Regulatory Flexibility Act analysis 
provided in the preamble of this final rule. HUD continues to maintain 
that this final rule will not have a significant economic impact on a 
substantial number of small entities, but HUD addresses the comments 
raised by the commenters.

VI. Findings and Certifications

Consultation With the Consumer Financial Protection Bureau

    In accordance with section 129C(b)(3)(B)(ii) of TILA, HUD consulted 
with CFPB regarding this final rule.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this 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 rule would define 
``qualified mortgage'' for loans insured, guaranteed, or otherwise 
administered by HUD and, in so defining this term, replace application 
of CFPB's qualified mortgage regulation to these loans. 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 rule is no 
greater than an annual reduction of lenders' legal costs of $40.7 
million on the high end to $12.2 million on the low end, and may even 
fall below this range.
    HUD's final 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 
regulations to safe harbor qualified mortgages under HUD's regulation. 
A small percentage (about 1 percent) of Title II loans insured under 
the National Housing Act would remain rebuttable presumption qualified 
mortgages under HUD's rule based on HUD's APR threshold. Some HUD 
insured or guaranteed loans, the same number under the CFPB's 
definition of ``qualified mortgage'', would be non-qualified mortgage 
due to points and fees rising above the CFPB points and fees limit. 
Under HUD's rule, these loans would also be non-qualified mortgage. The 
difference is that HUD, as provided in HUD's proposed rule and retained 
in this final rule, will 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 reduce points and fees to 
comply with HUD's qualified mortgage requirements. A vast majority of 
these loans could be expected to be made as lenders could be expected 
to find ways to comply with the QM requirement and still originate the 
loan with HUD insurance. As a result, HUD believes only a fraction of 
the 7 percent of non-qualified mortgage loans that HUD would have 
insured prior to this rulemaking (from HUD's 2012 analysis) would have 
to find alternatives to FHA, or not be made at all, once HUD's 
qualified mortgage rule is issued and effective. However, most of the 7 
percent of the non-qualified loans (from HUD's 2012 analysis) are 
expected to comply and to continue to be insured by HUD, once the rule 
is in place.
    In addition, HUD classifies all Title I, Title II manufactured 
housing and Section 184 and Section 184A insured mortgages and 
guaranteed loans as safe harbor qualified mortgages that would have 
most likely been non-qualified mortgages under the CFPB's rule. 
Classifying these programs as safe harbor recognizes the unique nature 
of these loans. For these programs, HUD believes that providing safe 
harbor status to these programs will not increase market share but 
instead maintain availability of these products to the underserved 
borrowers targeted. In addition, HUD considers the additional benefit 
of homeownership provided under these programs, which might otherwise 
be lost if HUD applied the points and fees and APR requirements to 
these programs, justifies the loss of some borrowers access to the 
broader ability-to-repay challenge afforded a rebuttable presumption 
loan. Assuming that all of these loans are re-classified from non-QMs 
or rebuttable presumptions QMs to safe harbor QMs, the expected 
reduction in costs is no greater than an annual reduction of lenders' 
legal costs of $2.8 million on the high end to $900 thousand on the low 
end, and may even fall below this range.
    A difference between HUD's proposed rule and this final rule is 
that this final rule exempts certain institutions such as state and 
local housing finance agencies (HFAs) from the TILA ability-to-pay 
requirements, thereby aligning with CFPB's regulations in this regard. 
Since the loans from these institutions would be exempt under both the 
CFPB's regulation and HUD's regulation, it is reasonable to expect a 
symmetric effect in both scenarios. Typically, the loans from HFAs are 
made to lower income families with some form of downpayment assistance, 
and often with below market interest rates. By HUD's estimate, about 
1.3 percent (or 0.9 percent as a share of aggregate principal balance) 
of its fiscal year (FY) 2012 endorsements were funded by HFAs.
    Although HUD is exempting certain institutions from the TILA 
ability-to-repay requirements, the analysis made at the proposed rule 
stage and the analysis made at this final rule stage remains the same 
in that the majority of HUD loans insured or guaranteed prior to the 
implementation of this rule will qualify as safe harbor qualified 
mortgage under this final rule. HUD does not expect FHA's loan volume 
to increase nor does it expect the volume of conventional loans to be 
materially affected as a result of this rule, and consequently HUD's 
market share is not expected to increase as a result of this rule.

[[Page 75235]]

    While HUD considered whether it should make all loans safe harbor 
as requested by a number of commenters, HUD believes that if the 
largest category of FHA loans, Title II non-manufactured housing loans, 
were all designated safe harbor than FHA would see an increase in 
market share and borrowers would be charged higher APRs than those in 
the conventional market. HUD does not believe that this alternative 
would benefit borrowers. As a result of these reclassifications, HUD 
continues to maintain that lenders face lower costs of compliance under 
HUD's regulations than under the CFPB regulations and therefore receive 
incentives to continue making these loans without having to pass on 
their increased compliance costs to borrowers.
    While, under HUD's regulations, borrowers benefit from not having 
to pay for the higher lender costs, HUD acknowledges that they also 
face less opportunity to challenge the lender with regard to ability to 
repay. Given that litigation involves many wasteful costs, 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 of HUD loans, the expected impact of the 
rule is an annual reduction of legal costs from $12.2 to $40.7 million, 
and may even fall below this range, as the range was derived from the 
CFPB's estimate of the range of legal cost differences between a 
qualified mortgage loan and a non-qualified mortgage loan.
    Thus, the FHA qualified mortgage rule would not have an economic 
impact above $100 million, and the rule is not economically 
significant.
    HUD's full economic analysis of the costs and benefits and possible 
impacts of this rule 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. 
For the reasons provided in the preamble to this final rule and further 
discussed in this section, this rule will not have a significant 
economic impact on a substantial number of small entities.
    As provided in this final rule (and as proposed in the September 
30, 2013, rule), HUD makes no change to the current requirements 
governing its Title I loans, its Section 184 and 184A guaranteed loans, 
and HECM loans. Therefore, this rule has no impact on either lenders or 
prospective borrowers under these programs. In addition to the 
exemptions provided in the proposed rule, and as discussed in the 
preamble to this final rule, HUD is also exempting Title I and Title II 
manufactured home mortgages, and certain transactions from compliance 
with HUD's qualified mortgage regulations. (See the second and third 
bulleted paragraphs in Section IV of the preamble to this final rule.) 
Consequently, there is also no impact on either lenders or prospective 
borrowers under these programs or transactions. These exemptions 
address several of the concerns raised by small entities in public 
comments submitted in response to HUD's September 30, 2013, proposed 
rule.
    In this final rule, HUD also provides clarifications that address 
certain other issues raised by small entities. HUD clarifies that 
housing counseling fees and rehabilitation consultant fees under HUD's 
203(k) program may be excluded from points and fees if made by a third-
party and is not retained by the creditor, loan originator, or an 
affiliate of either. HUD-approved housing counseling for borrowers 
seeking FHA-insured mortgages, whether such counseling is voluntary or 
required, is not part of the points and fees calculation. HUD also 
clarifies that exempt from the points and fees calculation are 
consultant fees for ensuring program compliance and for drafting the 
required architectural exhibits for the 203(k) program by non-
affiliated entities. HUD requires the use of a HUD consultant to ensure 
203(k) program compliance and strongly encourages the use of an 
independent consultant to prepare the required architectural exhibits. 
Both consultation fees, if obtained by non-affiliated entities on the 
203(k) consultant list, are not included in the points and fees 
calculation, and therefore adoption of the CFPB points and fees 
definition should not reduce access to the 203(k) program.
    The primary concern, however, of commenter raising small entity 
concerns was the time needed to adjust systems in order to be able to 
comply with HUD's qualified mortgage regulation. The commenters were 
particularly concerned about changes that would need to be made to 
address the rebuttable presumption distinction for FHA loans. The 
commenters questioned why such a distinction was needed since, as they 
stated per HUD's own analysis, this category would cover only a small 
percentage of FHA loans. This concern was reiterated in a November 4, 
2013, letter to HUD's FHA Commissioner from the Office of Advocacy of 
the Small Business Administration (SBA).
    As stated earlier in the preamble to this final rule, HUD respects 
the analysis that CFPB undertook in defining ``qualified mortgage'' for 
the conventional mortgage market, and sees value in having a safe 
harbor qualified mortgage and a rebuttable presumption qualified 
mortgage as established in regulation by the CFPB. HUD's regulation 
differs from CFPB's regulation in distinguishing between the two types 
of qualified mortgages for FHA Title II mortgages based on the 
mortgage's APR. HUD incorporates the APR as an internal element of 
HUD's definition of qualified mortgages to distinguish 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.''
    Under this final rule, for a Title II FHA mortgage to meet the 
``safe harbor qualified mortgage'' definition, the mortgage is 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. HUD adopts a higher APR than that adopted by 
CFPB to remediate the fact that some FHA loans would fall under CFPB's 
``higher-priced covered transaction'' as a result of the MIP. The MIP 
by itself should not be the factor that determines whether a loan is a 
higher-priced transaction. By reclassifying some loans that would have 
been rebuttable presumption loans under CFPB's ``higher-priced covered 
transaction'' definition to safe harbor qualified mortgage loans under 
HUD's rule, HUD thus reduces the potential cost of litigation for those 
loans. The reclassification will result in lenders facing lower costs 
under HUD's regulations than under the CFPB regulations and therefore 
receive incentives to continue making these loans without having to 
pass on their increased compliance costs to borrowers.

[[Page 75236]]

    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.
    As further stated in the preamble of this final rule HUD expects 
that a rebuttable presumption category could place downward pressure on 
the APRs of FHA mortgages. This downward pressure could have positive 
implications for FHA borrowers. Moreover, HUD, through having its own 
rebuttable presumption standard, keeps pressure on conventional lenders 
to keep APR within the limit for CFPB's standard for safe harbor as 
well. For example, a consumer who applies for a higher risk 
conventional loan may not meet the CFPB's QM on the basis of high 
points and fees, or if the points and fees are reduced to 3 percent, 
the APR may become too high for safe harbor under CFPB rules. However, 
the consumer might instead be offered a higher interest rate FHA loan 
in return for lower points and fees, and the lender could achieve QM 
with safe harbor status as an FHA loan in the absence of an FHA 
rebuttable presumption standard. With the FHA rebuttable presumption 
standard, the conventional lender would have incentive to work within 
the CFPB's APR-APOR spread to maintain a safe harbor status. It is for 
these reasons that HUD believes it is important to retain a rebuttable 
presumption category for Title II mortgages.
    With respect to concerns about insufficient time to adjust systems 
to accommodate the different categories of loans, HUD has clarified 
that lenders can identify a safe harbor qualified mortgage for Title II 
loans under HUD's regulations by using the same compliance mechanisms 
for identifying ``qualified mortgages'' under the CFPB's definition. 
Systems that lenders have put in place to identify safe harbor 
qualified mortgages under the CFPB's 1.5 percent APR threshold should 
also identify the substantial majority of safe harbor qualified 
mortgages under HUD's APR threshold. A loan that meets the 1.5 percent 
threshold will also be in compliance with the HUD threshold. Only HUD 
safe harbor loans that exceed the 1.5 percent threshold and rebuttable 
presumption loans would not be picked up by such systems. Thus, lenders 
are no worse off under HUD's rule in terms of making safe harbor 
qualified mortgages, using systems already required to be in place, 
than they would be if HUD had taken no action.
    HUD has heard from the industry that a change to the system would 
require resources but not that the specific system as proposed would be 
more costly than any other system. A system to identify HUD safe harbor 
qualified mortgage would need to pull the MIP from a specific source or 
be manually inputted by the individual lender to calculate an APR to 
APOR threshold similar to CFPB's metric. All system changes require 
resources and time, but, in accordance with a timetable and allocation 
of resources of their choosing, when lenders do implement HUD's rule it 
provides an immediate opportunity for lenders to increase the number of 
HUD-insured safe harbor qualified mortgages they make in accordance 
with a timetable and allocation of resources of their choosing. HUD 
does not consider it necessary for any lender to change systems 
immediately to adapt to HUD's requirements in order to make the same 
number of insured safe harbor qualified mortgages as a lender would 
otherwise make.
    For the reasons provided above and in this preamble overall, the 
undersigned certifies that this rule would not have a significant 
economic impact on a substantial number of small entities.

Environmental Impact

    A Finding of No Significant Impact (FONSI) with respect to the 
environment was made at the proposed rule stage 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)). That 
FONSI remains applicable to this final rule and 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 rule will not 
have federalism implications and will 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 rule does 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.


[[Page 75237]]


    Accordingly, for the reasons stated above, HUD amends 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 revised to read as follows:

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

0
2. A new Sec.  201.7 is added to subpart A to read as follows:


Sec.  201.7  Qualified mortgage.

    (a) Qualified mortgage. A mortgage insured under section 2 of title 
I of the National Housing Act (12 U.S.C. 1703), except for mortgage 
transactions exempted under Sec.  203.19(c)(2), is a safe harbor 
qualified mortgage that meets the ability to repay requirements in 15 
U.S.C. 1639c(a).
    (b) Effect of indemnification on qualified mortgage status. An 
indemnification demand or resolution of a demand that relates to 
whether the loan satisfied relevant eligibility and underwriting 
requirements at the time of consummation may result from facts that 
could allow a change to qualified mortgage status, but the existence of 
an indemnification does not per se remove qualified mortgage status.

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

0
3. The authority citation for part 203 is revised 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. A new Sec.  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.
    (3) Points and fees has the meaning given to ``points and fees'' in 
12 CFR 1026.32(b)(1) as of January 10, 2014. Any changes made by the 
CFPB to the points and fees definition may be adopted by HUD through 
publication of a notice and after providing FHA-approved mortgagees 
with time, as may be determined necessary, to implement.
    (b) Qualified mortgage. (1) Limit. For a single family mortgage to 
be insured under title II of the National Housing Act (12 U.S.C. 1701 
et seq.), except for mortgages for manufactured housing and mortgages 
under paragraph (c) of this section, 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 in its 
regulations at 12 CFR 1026.43(e)(3) as of January 10, 2014. Any changes 
made by the CFPB to the limit on points and fees may be adopted by HUD 
through publication of a notice and after providing FHA-approved 
mortgagees with time, as may be determined necessary, to implement.
    (2) Rebuttable presumption qualified mortgage. (i) A single family 
mortgage insured under title II of the National Housing Act (12 U.S.C. 
1701 et seq.), except for mortgages for manufactured housing and 
mortgages under paragraph (c) of this section, 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 having been endorsed for 
insurance 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 evaluate the 
mortgagor's income, credit, and assets in accordance with HUD 
underwriting requirements.
    (3) Safe harbor qualified mortgage. (i) A mortgage for manufactured 
housing that is insured under Title II of the National Housing Act (12 
U.S.C. 1701 et seq.) 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 title II of the 
National Housing Act (12 U.S.C. 1701 et seq.), except for mortgages 
under paragraph (c) of this section, 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).
    (4) Effect of indemnification on qualified mortgage status. An 
indemnification demand or resolution of a demand that relates to 
whether the loan satisfied relevant eligibility and underwriting 
requirements at the time of consummation may result from facts that 
could allow a change to qualified mortgage status, but the existence of 
an indemnification does not per se remove qualified mortgage status.
    (c) Exempted transactions. The following transactions are exempted 
from the requirements in paragraph (b) of this section:
    (1) Home Equity Conversion Mortgages under section 255 of the 
National Housing Act (12 U.S.C. 1715z-20); and
    (2) Mortgage transactions exempted by the CFPB in its regulations 
at 12 CFR 1026.43(a)(3) as of January 10, 2014. Any changes made by 
CFPB to the list of exempted transactions may be adopted by HUD through 
publication of a notice and after providing FHA-approved mortgagees 
with time, as may be determined necessary, to implement.
    (d) Ability to make adjustments to this section by notice. The FHA 
Commissioner may make adjustments to this section, including the 
calculations of fees or the list of transactions excluded from 
compliance with the requirements of this section as the Commissioner 
determines necessary for purposes of meeting FHA's mission, after 
solicitation and consideration of public comments.

PART 1005--LOAN GUARANTEES FOR INDIAN HOUSING

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

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


0
6. A new Sec.  1005.120 is added to read as follows:


Sec.  1005.120  Qualified mortgage.

    A mortgage guaranteed under section 184 of the Housing and 
Community

[[Page 75238]]

Development Act of 1992 (12 U.S.C. 1715z-13a), except for mortgage 
transactions exempted under Sec.  203.19(c)(2), 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 revised to read as follows:

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


0
8. A new Sec.  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), except for mortgage 
transactions exempted under Sec.  203.19(c)(2), is a safe harbor 
qualified mortgage that meets the ability-to-repay requirements in 15 
U.S.C. 1639c(a).

    Dated: December 5, 2013.
Shaun Donovan,
Secretary.
[FR Doc. 2013-29482 Filed 12-10-13; 8:45 am]
BILLING CODE 4210-10-P