[Federal Register Volume 79, Number 212 (Monday, November 3, 2014)]
[Rules and Regulations]
[Pages 65140-65142]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-25492]



24 CFR Part 203

[Docket No. FR 5812-N-01]

HUD's Qualified Mortgage Rule: Announcement of Intention To Adopt 
Changes Pertaining to Exempted Transaction List

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Announcement of change to HUD's exempted transaction 


SUMMARY: The Consumer Financial Protection Bureau (CFPB) is issuing a 
final rule being published concurrently with this document, and it can 
be found elsewhere in this Federal Register, entitled ``Amendments to 
the 2013 Mortgage Rules under the Truth in Lending Act (Regulation 
Z),'' amending certain terms in CFPB's definition of ``qualified 
mortgage'' which HUD cross-referenced in HUD's qualified mortgage 
definition. In accordance with the procedures incorporated in HUD's 
definition of ``qualified mortgage,'' this document advises of HUD's 
intention to adopt, for HUD's qualified mortgage rule, CFPB's changes 
to the exemption for non-profit transactions from the qualified 
mortgage standards. HUD is not, however, adopting the new points and 
fees cure provision adopted by CFPB for the reasons stated in this 
document, but is providing guidance to mortgagees on curing points and 
fees errors prior to insurance endorsement.

DATES: Effective Date: November 3, 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).


I. Background

    On December 11, 2013, at 78 FR 75215, HUD published a final rule 
that established a definition of ``qualified mortgage'' for single 
family residential mortgages that HUD insures, guarantees, or 
administers. Under HUD's qualified mortgage rule, qualified mortgage 
status attaches at origination and insurance endorsement to those 
single family residential mortgages insured under the National Housing 
Act (12 U.S.C. 1701 et seq.), 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). HUD's definition 
of ``qualified mortgage'' is codified for each program at 24 CFR 201.7, 
203.19, 1005.120 and 1007.80.
    HUD defined ``qualified mortgage'' in a manner that aligned HUD's 
definition, to the extent feasible and consistent with HUD's mission, 
with that of the qualified mortgage definition promulgated by the CFPB, 
and which is codified at 12 CFR 1026.43. HUD undertook the alignment 
for the purpose of lessening future differences in standards for HUD's 
single family residential insured mortgages and those established by 
the CFPB, which apply to conventional mortgages seeking designation as 
qualified mortgage.
    HUD's alignment to CFPB's standards also included cross-references 
to CFPB's list of transactions exempted from the qualified mortgage 
definition, including a non-profit transaction exemption, and CFPB's 
limit on points and fees for qualified mortgage status as of January 
10, 2014. HUD's definition of qualified mortgage provides that when 
CFPB amends its definition of qualified mortgage, HUD may announce the 
adoption of CFPB change or changes through publication of a notice and 
after providing FHA-approved mortgagees with time, as may be determined 
necessary, to implement. Members of the public interested in more 
detail about HUD's qualified mortgage regulations may refer to the 
preamble of HUD's September 30, 2013, proposed rule and HUD's December 
11, 2013, final rule, at 78 FR 59890, 78 FR 75215.

II. HUD Notice of CFPB's Final Rule

    Published elsewhere in this Federal Register is CFPB's final rule 
amending the non-profit transaction exemption from the ability-to-repay 
rule and providing a limited cure mechanism for

[[Page 65141]]

the points and fees limit that applies to qualified mortgages.

A. Amendment to the Non-Profit Transaction Exemption

    CFPB's final rule amended the ``exempted transaction'' list to 
provide that certain interest-free, contingent subordinate liens 
originated by non-profit creditors would not be counted towards the 
credit extension limit of 200 transactions that qualifies a nonprofit 
for the nonprofit exemption at 12 CFR 1026.43(a)(3)(v)(D). 
Specifically, the rule excludes consumer credit transactions if the 
transaction is secured by a subordinate lien; for the purpose of down 
payment, closing costs, or other similar home buyer assistance, such as 
principal or interest subsidies; for property rehabilitation 
assistance; for energy efficiency assistance; or for the purpose of 
foreclosure avoidance or prevention. Additionally, the consumer credit 
contract must not require payment of interest; must provide that 
repayment of the amount of the credit extended is forgiven either 
incrementally or in whole, at a date certain, and subject only to 
specified ownership and occupancy conditions; and the total of costs 
payable by the consumer in connection with the transaction at 
consummation is less than 1 percent of the amount of credit extended 
and includes no charges other than: Fees for recordation of security 
instruments, deeds, and similar documents, a bona fide and reasonable 
application fee and a bona fide and reasonable fee for housing 
counseling services. Lastly, the creditor must also comply with all 
other applicable requirements of this part in connection with the 
    By excluding these interest-free, contingent subordinate liens from 
determining if a non-profit creditor qualifies for the non-profit 
exemption (i.e. extends credit secured by a dwelling no more than 200 
times), more non-profit creditors will qualify for the exemption and 
additional consumers with income that does 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)), will have access to credit. For additional information 
about CFPB's change, interested members of the public should refer to 
the CFPB's proposed and final rules. See 79 FR 25730 and the CFPB's 
final rule published elsewhere in this Federal Register entitled 
``Amendments to the 2013 Mortgage Rules under the Truth in Lending Act 
(Regulation Z).''
    HUD sees value in maintaining consistency with CFPB's rule when it 
is consistent with HUD's mission and statutes. HUD believes that the 
amendment to the non-profit exemption in the exempted transaction list 
is balanced in a way to protect against abuse while providing more 
access to credit for borrowers with low- and moderate-incomes, 
consistent with HUD's mission. Therefore, HUD is adopting the amendment 
and maintaining consistency with the CFPB's list of exempted 
transactions at 12 CFR 1026.43(a)(3), as cross-referenced in HUD's 
definition at 24 CFR 203.19.\1\ HUD's definition will thus track the 
new CFPB definition as of November 3, 2014. This change will be 
effective for all case numbers assigned on or after the effective date 
of this document.

    \1\ The list of mortgage transactions exempted under12 CFR 
1026.43(a)(2) in the Title II program at 24 CFR 203.19 is also 
included in the Title I program at 24 CFR 201.7, the Section 184 
guaranteed loan program at 24 CFR 1005.120 and the Section 184A 
guaranteed loan program at 24 CFR 1007.80 by cross-reference to 24 
CFR 203.19(c)(2).

B. Amendment to the Points and Fees Limit Provision--Post Consummation 
Cure Provision

    CFPB's final rule also provides a limited, post-consummation cure 
mechanism for loans that are originated with the expectation of 
qualified mortgage status but actually exceed the points and fees limit 
for qualified mortgage status. The CFPB's final rule amends the points 
and fees provision at 12 CFR 1026.43(e)(3) to permit a creditor or 
assignee to cure an inadvertent excess over the qualified mortgage 
points and fees limits by refunding to the consumer the amount of 
excess, under certain conditions.\2\

    \2\ Cure means a procedure to reduce points and fees or debt-to-
income ratios after consummation when the qualified mortgage limits 
have been inadvertently exceeded. See 79 FR 25740 and the CFPB's 
final rule published elsewhere in this Federal Register entitled 
``Amendments to the 2013 Mortgage Rules under the Truth in Lending 
Act (Regulation Z).''

    Given the complexity and exercise of judgment involved in 
determining points and fees, CFPB found that some creditors may not 
originate and secondary market participants may not purchase mortgage 
loans that are near the qualified mortgage points and fees limit. Given 
the establishment of this buffer, CFPB was concerned that access to 
credit for consumers seeking loans at the margins of the limits might 
be negatively affected. Therefore, the provision would permit a 
creditor or assignee to cure an inadvertent excess over the qualified 
mortgage points and fees limit and the creditor or assignee must refund 
to the consumer within 210 days after consummation the amount of money 
over the points and fees limit. This new provision is intended to ease 
the current burden on the market, but will expire on January 10, 2021. 
For additional information about CFPB's change interested members of 
the public should refer to the CFPB's proposed and final rules. See 79 
FR 25730 and the CFPB's final rule published elsewhere in this Federal 
Register entitled ``Amendments to the 2013 Mortgage Rules under the 
Truth in Lending Act (Regulation Z).''
    Despite HUD's authority under 24 CFR 203.19 to adopt the CFPB's 
changes to points and fees by notice for this subset of loans, and 
while recognizing the usefulness of a cure provision for these loans, 
HUD cannot adopt the CFPB's cure provision for the following reasons, 
including but not limited to: First, the CFPB's cure provision requires 
that the cured loan meet CFPB's qualified mortgage definition in order 
to qualify for the cure, but HUD has codified its own definition, which 
differs. Second, if HUD permitted a FHA lender to return funds to a 
borrower or pay down the principal balance for a single family mortgage 
insured under Title II, the amount returned could result in a violation 
of the statutorily required borrower minimum cash investment of 3.5 
percent or other FHA requirements relating to interested party 
contributions and the calculation of the maximum insured mortgage 
value.\3\ In addition, unlike the general market, the points and fees 
limit for Title II mortgages is a requirement for insurability of the 
mortgage by FHA. As an insurer of the mortgage, it is imperative that 
FHA ensure all eligibility requirements are met prior to insurance 
endorsement. Therefore, while permitting a cure in connection with FHA-
insured mortgages may have the same benefit for the FHA-approved lender 
as a lender in the general market, the impact on FHA as the insurer is 
substantially different.

    \3\ See section 203(b)(9) of the National Housing Act (12 USC 
1709(b)(9)) which requires the homebuyer to pay in cash or 
equivalent on account of the property an amount equal to not less 
than 3.5 percent of the appraised value of the property.

    While FHA is not able to adopt the CFPB's cure provision that 
allows the cure period to extend beyond insurance endorsement, FHA 
approved lenders are not without the ability to cure errors that occur 
in origination before submission for insurance endorsement. FHA reminds 
all FHA-approved mortgagees that, consistent with FHA's existing Notice 
of Return/Notice of Non-

[[Page 65142]]

Endorsement (NOR) process, mortgagees may continue to cure errors and 
resubmit mortgages for insurance endorsement, provided all eligibility 
criteria are met at the time of insurance endorsement. FHA believes 
that the existing ability to cure errors is sufficient and is 
consistent with the attachment of qualified mortgage status at 
endorsement. As such, HUD is not adopting the CFPB's cure provisions 
and does not believe any further ability to cure is warranted.
    In summary, HUD's qualified mortgage definition for Title II 
mortgages, except for manufactured housing and exempted transactions, 
will continue to use the CFPB's points and fees limit at 12 CFR 
1026.43(e)(3) as of January 10, 2014 and not include the change 
published on November 3, 2014.

    Dated: October 21, 2014.
Carol J. Galante,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 2014-25492 Filed 10-31-14; 8:45 am]