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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL HOUSING FINANCE AGENCY

Office of the Comptroller of the Currency

12 CFR Part 1222

[Docket No. CFPB-2012-0031]

RIN 2590-AA58

Appraisals for Higher-Risk Mortgage Loans

AGENCY: Board of Governors of the Federal Reserve System (Board); Bureau of Consumer Financial Protection (Bureau); Federal Deposit Insurance Corporation (FDIC); Federal Housing Finance Agency (FHFA); National Credit Union Administration (NCUA); and Office of the Comptroller of the Currency, Treasury (OCC).
ACTION: Proposed rule; request for public comment.
SUMMARY: The Board, Bureau, FDIC, FHFA, NCUA, and OCC (collectively, the Agencies) are proposing to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the official interpretation to the regulation. The proposed revisions to Regulation Z would implement a new TILA provision requiring appraisals for "higher-risk mortgages" that was added to TILA as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the proposed rule would require creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used.
DATES: Comments must be received on or before October 15, 2012, except that comments on the Paperwork Reduction Act analysis in part VIII of the Supplementary Information must be received on or before November 5, 2012.
ADDRESSES: Board:You may submit comments, identified by Docket No. R-1443 or RIN 7100-AD90, by any of the following methods:

*Agency Web Site: http://www.federalreserve.gov.Follow the instructions for submitting comments athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

*Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments.

*Email: regs.comments@federalreserve.gov.Include the docket number in the subject line of the message.

*Fax:(202) 452-3819 or (202) 452-3102.

*Mail:Address to Robert deV. Frierson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.

All public comments will be made available on the Board's Web site athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfmas submitted, unless modified for technical reasons. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper in Room MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 9:00 a.m. and 5:00 p.m. on weekdays.

Bureau:You may submit comments, identified by Docket No. CFPB-2012-0031 or RIN 3170-AA11, by any of the following methods:

*Electronic: http://www.regulations.gov.Follow the instructions for submitting comments.

*Mail:Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552.

*Hand Delivery/Courier in Lieu of Mail:Monica Jackson, Office of the Executive Secretary, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552.

All submissions must include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, all comments received will be posted without change tohttp://www.regulations.gov.In addition, comments will be available for public inspection and copying at 1700 G Street NW., Washington, DC 20552, on official business days between the hours of 10 a.m. and 5 p.m. Eastern Time. You can make an appointment to inspect the documents by telephoning (202) 435-7275.

All comments, including attachments and other supporting materials, will become part of the public record and subject to public disclosure. Sensitive personal information, such as account numbers or social security numbers, should not be included. Comments will not be edited to remove any identifying or contact information.

FDIC:You may submit comments by any of the following methods:

*Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments.

*Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html

*Mail:Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.

*Hand Delivered/Courier:The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m.

*Email: comments@FDIC.gov.

Comments submitted must include "FDIC" and "Truth in Lending Act (Regulation Z)." Comments received will be posted without change tohttp://www.FDIC.gov/regulations/laws/federal/propose.html,including any personal information provided.

FHFA:You may submit your comments, identified by regulatory information number (RIN) 2590-AA58, by any of the following methods:

*Email:Comments to Alfred M. Pollard, General Counsel, may be sent by email toRegComments@fhfa.gov.Please include "RIN 2590-AA58" in the subject line of the message.

*Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments. If you submit your comment to the Federal eRulemaking Portal, please also send it by email to FHFA atRegComments@fhfa.govto ensure timely receipt by the Agency. Please include "RIN 2590-AA58" in the subject line of the message.

*Hand Delivered/Courier:The hand delivery address is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA58, Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 20024. The package should be logged in at the Guard Desk, First Floor, on business days between 9 a.m. and 5 p.m.

*U.S. Mail, United Parcel Service, Federal Express, or Other Mail Service:The mailing address for comments is: Alfred M. Pollard, General Counsel, Attention: Comments/RIN 2590-AA58, Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 20024.

Copies of all comments will be posted without change, including any personal information you provide, such as your name, address, and phone number, on the FHFA Internet Web site athttp://www.fhfa.gov.In addition, copies of all comments received will be available for examination by the public on business days between the hours of 10 a.m. and 3 p.m., Eastern Time, at the Federal Housing Finance Agency, Eighth Floor, 400 Seventh Street SW., Washington, DC 20024. To make an appointment to inspect comments, please call the Office of General Counsel at (202) 649-3804.

NCUA:You may submit comments, identified by RIN 3133-AE04, by any of the following methods (Please send comments by one method only):

*Federal eRulemaking Portal: http://www.regulations.gov.Follow the instructions for submitting comments.

*NCUA Web Site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx.Follow the instructions for submitting comments.

*Email:Address toregcomments@ncua.gov.Include "[Your name] Comments on Appraisals for High Risk Mortgage Loans" in the email subject line.

*Fax:(703) 518-6319. Use the subject line described above for email.

*Mail:Address to Mary Rupp, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

*Hand Delivery/Courier in Lieu of Mail:Same as mail address.

You can view all public comments on NCUA's Web site athttp://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspxas submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call (703) 518-6546 or send an email toOGCMail@ncua.gov.

OCC:Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title "Appraisals for Higher-Risk Mortgage Loans" to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

*Federal eRulemaking Portal--"regulations.gov":Go tohttp://www.regulations.gov.Click "Advanced Search". Select "Document Type" of "Proposed Rule", and in "By Keyword or ID" box, enter Docket ID "OCC-2012-0013", and click "Search". If proposed rules for more than one agency are listed, in the "Agency" column, locate the notice of proposed rulemaking for the OCC. Comments can be filtered by Agency using the filtering tools on the left side of the screen. In the "Actions" column, click on "Submit a Comment" or "Open Docket Folder" to submit or view public comments and to view supporting and related materials for this rulemaking action. Click on the "Help" tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting or viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period.

*Email: regs.comments@occ.treas.gov.

*Mail:Office of the Comptroller of the Currency, 250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

*Fax:(202) 874-5274.

*Hand Delivery/Courier:250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

You must include "OCC" as the agency name and "Docket ID OCC-2012-0013" in your comment. In general, OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this notice of proposed rulemaking by any of the following methods:

*Viewing Comments Electronically:Go tohttp://www.regulations.gov.Click "Advanced Search". Select "Document Type" of "Public Submission", and in "By Keyword or ID" box enter Docket ID "OCC-2012-0013", and click "Search". If comments from more than one agency are listed, the "Agency" column will indicate which comments were received by the OCC. Comments can be filtered by Agency using the filtering tools on the left side of the screen.

*Viewing Comments Personally:You may personally inspect and photocopy comments at the OCC, 250 E Street SW., Washington, DC. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-4700. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.

You may also view or request available background documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Bureau:Michael Scherzer or John Brolin, Counsels, or William W. Matchneer, Senior Counsel, Division of Research, Markets, and Regulations, Bureau of Consumer Financial Protection, 1700 G Street NW., Washington, DC 20552, at (202) 435-7000.

FDIC:Beverlea S. Gardner, Senior Examination Specialist, Risk Management Section, at (202) 898-3640, Sumaya A. Muraywid, Examination Specialist, Risk Management Section, at (573) 875-6620, Glenn S. Gimble, Senior Policy Analyst, Division of Consumer Protection, at (202) 898-6865, Mark Mellon, Counsel, Legal Division, at (202) 898-3884, or Kimberly Stock,Counsel, Legal Division, at (202) 898-3815, or 550 17th St NW., Washington, DC 20429.

FHFA:Susan Cooper, Senior Policy Analyst, (202) 649-3121, Lori Bowes, Policy Analyst, Office of Housing and Regulatory Policy, (202) 649-3111, or Ming-Yuen Meyer-Fong, Assistant General Counsel, Office of General Counsel, (202) 649-3078, Federal Housing Finance Agency, 400 Seventh Street SW., Washington, DC 20024.

NCUA:Chrisanthy Loizos and Pamela Yu, Staff Attorneys, or Frank Kressman, Associate General Counsel, Office of General Counsel, at (703) 518-6540, or Vincent Vieten, Program Officer, Office of Examination and Insurance, at (703) 518-6360, or 1775 Duke Street, Alexandria, Virginia 22314.

OCC:Robert L. Parson, Appraisal Policy Specialist, (202) 874-5411, Carolyn B. Engelhardt, Bank Examiner (Risk Specialist--Credit), (202) 874-4917, Charlotte M. Bahin, Senior Counsel or Mitchell Plave, Special Counsel, Legislative & Regulatory Activities Division, (202) 874-5090, Krista LaBelle, Counsel, Community and Consumer Law, (202) 874-5750.

SUPPLEMENTARY INFORMATION: I. Overview

The Truth in Lending Act (TILA), 15 U.S.C. 1601et seq.,seeks to promote the informed use of consumer credit by requiring disclosures about its costs and terms. TILA requires additional disclosures for loans secured by consumers' homes and permits consumers to rescind certain transactions that involve their principal dwelling. For most types of creditors, TILA directs the Bureau to prescribe regulations to carry out the purposes of the law and specifically authorizes the Bureau, among other things, to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Bureau's judgment are necessary or proper to effectuate the purposes of TILA, or prevent circumvention or evasion of TILA.1 15 U.S.C. 1604(a). TILA is implemented by the Bureau's Regulation Z, 12 CFR part 1026, and the Board's Regulation Z, 12 CFR part 226. Official Interpretations provide guidance to creditors in applying the rules to specific transactions and interprets the requirements of the regulation.See12 CFR parts 226, Supp. I, and 1026, Supp. I.

1For motor vehicle dealers as defined in section 1029 of the Dodd-Frank Act, TILA directs the Board to prescribe regulations to carry out the purposes of TILA and authorizes the Board to issue regulations that contain such classifications, differentiations, or other provisions, or that provide for such adjustments and exceptions for any class of transactions, that in the Board's judgment are necessary or proper to effectuate the purposes of TILA, or prevent circumvention or evasion of TILA. 15 U.S.C. 5519; 15 U.S.C. 1604(a).

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act)2 was signed into law. Section 1471 of the Dodd-Frank Act establishes a new TILA section 129H, which sets forth appraisal requirements applicable to “higher-risk mortgages.” Specifically, new TILA section 129H does not permit a creditor to extend credit in the form of a higher-risk mortgage loan to any consumer without first:

2Public Law 111-203, 124 Stat. 1376.

• Obtaining a written appraisal performed by a certified or licensed appraiser who conducts a physical property visit of the interior of the property.

• Obtaining an additional appraisal from a different certified or licensed appraiser if the purpose of the higher-risk mortgage loan is to finance the purchase or acquisition of a mortgaged property from a seller within 180 days of the purchase or acquisition of the property by that seller at a price that was lower than the current sale price of the property. The additional appraisal must include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale.

• Providing the applicant, at the time of the initial mortgage application, with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant's expense.

• Providing the applicant with one copy of each appraisal conducted in accordance with TILA section 129H without charge, at least three (3) days prior to the transaction closing date.

New TILA section 129H(f) defines a “higher-risk mortgage” with reference to the annual percentage rate (APR) for the transaction. A higher-risk mortgage is a “residential mortgage loan” secured by a principal dwelling with an 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 residential mortgage loan with an original principal obligation amount that does not exceed the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454);

• By 2.5 or more percentage points, for a first lien residential mortgage loan having an original principal obligation amount that exceeds the amount for the maximum limitation on the original principal obligation of a mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the sixth sentence of section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454); and

• By 3.5 or more percentage points for a subordinate lien residential mortgage loan.

The definition of “higher-risk mortgage” expressly excludes qualified mortgages, as defined in TILA section 129C, as well as reverse mortgage loans that are qualified mortgages as defined in TILA section 129C.

New TILA section 103(cc)(5) defines the term “residential mortgage loan” as any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan. 15 U.S.C. 1602(cc)(5).

New TILA section 129H(b)(4)(A) requires the Agencies to jointly prescribe regulations to implement the property appraisal requirements for higher-risk mortgages. 15 U.S.C. 1639h(b)(4)(A). Section 1400 of the Dodd-Frank Act requires that final regulations to implement these provisions be issued by January 21, 2013.

II. Summary of the Proposed Rule

The Agencies issue this proposal to implement the appraisal requirements for extensions of credit for “higher-risk mortgage loans” required by the Dodd-Frank Act, Title XIV, Subtitle F (Appraisal Activities). As required by the Act, this proposal was developed jointly by the Board, the Bureau, the FHFA, the FDIC, the NCUA, and the OCC. The Act generally defines a “higher-risk mortgage” as a closed-end consumer credit transaction secured by a principal dwelling with an APR exceeding certain statutory thresholds. These rate thresholds are substantially similar to rate triggers currently in Regulation Z for “higher-priced mortgage loans,” a category of loans to which special consumer protectionsapply.3 In general, loans are “higher-risk mortgage loans” under this proposed rule if the APR exceeds the APOR by 1.5 percent for first-lien loans, 2.5 percent for first-lien jumbo loans, and 3.5 percent for subordinate-lien loans.4

3Added to Regulation Z by the Board pursuant to the Home Ownership and Equity Protection Act of 1994 (HOEPA), the “higher-priced mortgage loan” rules address unfair or deceptive practices in connection with subprime mortgages. See 73 FR 44522, July 30, 2008; 12 CFR 1026.35.

4The “higher-priced mortgage loan” rules apply the 2.5 percent over APOR trigger for jumbo loans only with respect to a requirement to establish escrow accounts. See 12 CFR 1026.35(b)(3)(v).

Consistent with the statute, the proposal would exclude “qualified mortgages” from the definition of higher-risk mortgage loan. The Bureau will define “qualified mortgage” when it finalizes the proposed rule issued by the Board to implement the Dodd-Frank Act's ability-to-repay requirements in TILA section 129C. 15 U.S.C. 1639c; 76 FR 27390, May 11, 2011 (2011 ATR Proposal). In addition, the Agencies propose to rely on exemption authority granted by the Dodd-Frank Act to exempt the following additional classes of loans: (1) reverse mortgage loans; and (2) loans secured solely by residential structures, such as many types of manufactured homes.

Consistent with the statute, the proposal would allow a creditor to make a higher-risk mortgage loan only if the following conditions are met:

• The creditor obtains a written appraisal;

• The appraisal is performed by a certified or licensed appraiser;

• The appraiser conducts a physical property visit of the interior of the property;

• At application, the applicant is provided with a statement regarding the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, and that the applicant may choose to have a separate appraisal conducted at the expense of the applicant; and

• The creditor provides the consumer with a free copy of any written appraisals obtained for the transaction at least three (3) business days before closing.

In addition, as required by the Act, the proposal would require a higher-risk mortgage loan creditor to obtain an additional written appraisal, at no cost to the borrower, under the following circumstances:

• The higher-risk mortgage loan will finance the acquisition of the consumer's principal dwelling;

• The seller is selling what will become the consumer's principal dwelling acquired the home within 180 days prior to the consumer's purchase agreement (measured from the date of the consumer's purchase agreement); and

• The consumer is acquiring the home for a higher price than the seller paid, although comment is requested on whether a threshold price increase would be appropriate.

The additional written appraisal, from a different licensed or certified appraiser, generally must include the following information: an analysis of the difference in sale prices (i.e.,the sale price paid by the seller and the acquisition price of the property as set forth in the consumer's purchase agreement), changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale.

The proposal also includes a request for comments to address a proposed amendment to the method of calculation of the APR that is being proposed as part of other mortgage-related proposals issued for comment by the Bureau. In the Bureau's proposal to integrate mortgage disclosures (2012 TILA-RESPA Proposal), the Bureau is proposing to adopt a more simple and inclusive finance charge calculation for closed-end credit secured by real property or a dwelling.5 As the finance charge is integral to the calculation of the APR, the Agencies believe it is possible that a more inclusive finance charge could increase the number of loans covered by this rule. The Agencies note that the Bureau currently is seeking data to assist in assessing potential impacts of a more inclusive finance charge in connection with the 2012 TILA-RESPA Proposal and its proposal to implement the Dodd-Frank Act provision related to “high-cost mortgages” (2012 HOEPA Proposal).6

5 See2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 (published July 9, 2012), available athttp://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf.

6 See2012 HOEPA Proposal, pp. 44, 149-211 (published July 9, 2012),available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.

The Agencies also note that the Bureau is seeking comment on whether replacing APR with an alternative metric may be warranted to determine whether a loan is covered by the 2012 HOEPA Proposal,7 as well as by the proposal to implement the Dodd-Frank Act's escrow requirements in TILA section 129D. 15 U.S.C. 1639d; 76 FR 11598, March 2, 2011 (2011 Escrow Proposal). The alternative metric would also have implications for the 2011 ATR Proposal. One possible alternative metric discussed in those proposals is the “transaction coverage rate” (TCR), which would exclude all prepaid finance charges not retained by the creditor, a mortgage broker, or an affiliate of either.8 The new rate triggers for both “high-cost mortgages” and “higher-risk mortgages” under the Dodd-Frank Act are based on the percentage by which the APR exceeds APOR. Given this similarity, the Agencies also seek comment as to whether a modification should be considered for this rule as well, and if so, what type of modification. Accordingly, higher-risk mortgage loan is defined in the alternative as calculated by either the TCR or APR, with comment sought on both approaches. As explained further below in the section-by-section analysis of the Supplementary Information, the Agencies are relying on their exemption authority under section 1471 of the Dodd-Frank Act to propose an alternative definition of higher-risk mortgage. TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B).

7 See2012 HOEPA Proposal at 39-50, 218, 246.

8 See75 FR 58539, 58660-62 (Sept. 24, 2010); 76 FR 11598, 11609, 11620, 11626 (March 2, 2011).

III. Legal Authority

As noted above, TILA section 129H(b)(4)(A), added by the Dodd-Frank Act, requires the Agencies to jointly prescribe regulations implementing section 129H. 15 U.S.C. 1639h(b)(4)(A). In addition, TILA section 129H(b)(4)(B), grants the Agencies the authority to jointly exempt, by rule, a class of loans from the requirements of TILA section 129H(a) or section 129H(b) if the Agencies determine that the exemption is in the public interest and promotes the safety and soundness of creditors. 15 U.S.C. 1639h(b)(4)(B).

IV. Section-by-Section Analysis

For ease of reference, the Supplementary Information refers to the section numbers of the rules that would be published in the Bureau's Regulation Z at 12 CFR 1026.XX. As explained further in the section-by-section analysis of § 1026.XX(e), the rules would be published separately by the Board, the Bureau and the OCC. No substantive difference among the three sets of rules is intended. The NCUA and FHFA propose to adopt the rules as published in the Bureau's Regulation Z at 12 CFR 1026.XX, by cross-referencing these rules in 12 CFR 722.3 and 12 CFR part 1222, respectively. The FDIC proposes to not cross-reference the Bureau's Regulation Z at 12 CFR 1026.XX.

Section 1026.XX Appraisals for Higher-Risk Mortgage Loans XX(a) Definitions

Proposed § 1026.XX(a) sets forth four definitions, discussed below, for purposes of § 1026.XX. The Agencies request comment on whether additional terms should be defined for purposes of this rule, and how best to define those terms in a manner consistent with TILA section 129H.

XX(a)(1) Certified or Licensed Appraiser

TILA section 129H(b)(3) defines “certified or licensed appraiser” as a person who “(A) is, at a minimum, certified or licensed by the State in which the property to be appraised is located; and (B) performs each appraisal in conformity with the Uniform Standards of Professional Appraisal Practice and title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, and the regulations prescribed under such title, as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). Consistent with the statute, proposed § 1026.XX(a)(1) would define “certified or licensed appraiser” as a person who is certified or licensed by the State agency in the State in which the property that secures the transaction is located, and who performs the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice (USPAP) and the requirements applicable to appraisers in title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (FIRREA title XI) (12 U.S.C. 3331et seq.), and any implementing regulations, in effect at the time the appraiser signs the appraiser's certification.

Proposed § 1026.XX(a)(1) generally mirrors the statutory language in TILA section 129H(b)(3) regarding State licensing and certification. However, the proposed definition uses the defined term “State agency” to clarify that the appraiser must be certified or licensed by a State agency that meets the standards of FIRREA title XI. Specifically, proposed § 1026.XX(a)(4) defines the term “State agency” to mean a “State appraiser certifying and licensing agency” recognized in accordance with section 1118(b) of FIRREA title XI (12 U.S.C. 3347(b)) and any implementing regulations.9 See alsosection-by-section analysis of § 1026.XX(a)(4), below.

9If the Appraisal Subcommittee of the Federal Financial Institutions Examination Council issues certain written findings concerning, among other things, a State agency's failure to recognize and enforce FIRREA title XI standards, appraiser certifications and licenses issued by that State are not recognized for purposes of title XI and appraisals performed by appraisers certified or licensed by that State are not acceptable for federally-related transactions. 12 U.S.C. 3347(b).

Uniform Standards of Professional Appraisal Practice (USPAP)

Proposed § 1026.XX(a)(1) uses the term “Uniform Standards of Professional Appraisal Practice.” Proposed comment XX(a)(1)-1 clarifies that USPAP refers to the professional appraisal standards established by the Appraisal Standards Board of the “Appraisal Foundation,” as defined in FIRREA section 1121(9). 12 U.S.C. 3350(9). The Agencies believe that this terminology is appropriate for consistency with the existing definition in FIRREA title XI.

TILA section 129H(b)(3) would require that the appraisal be performed in conformity with USPAP “as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). The proposed definition of “certified or licensed appraiser” and proposed comment XX(a)(1)-1 clarify that the “date of appraisal” is the date on which the appraiser signs the appraiser's certification. Thus, the relevant edition of USPAP is the one in effect at the time the appraiser signs the appraiser's certification.

Appraiser's certification.Proposed comment XX(a)(1)-2 clarifies that the term “appraiser's certification” refers to the certification that must be signed by the appraiser for each appraisal assignment as specified in USPAP Standards Rule 2-3.10

10 SeeAppraisal Standards Bd., Appraisal Fdn., Standards Rule 2-3, USPAP (2012-2013 ed.) at U-29,available at http://www.uspap.org.

FIRREA and Implementing Regulations

As previously noted, TILA section 129H(b)(3) defines “certified or licensed appraiser” as a person who is certified or licensed as an appraiser and “performs each appraisal in accordance with [USPAP] and title XI of [FIRREA], and the regulations prescribed under such title, as in effect on the date of the appraisal.” 15 U.S.C. 1639h(b)(3). Proposed § 1026.XX(a)(1) provides that the relevant provisions of FIRREA title XI and its implementing regulations are those selected portions of FIRREA title XI requirements “applicable to appraisers,” in effect at the time the appraiser signs the appraiser's certification. As discussed in more detail below, proposed comment XX(a)(1)-3 clarifies that the relevant standards “applicable to appraisers” are found in regulations prescribed under FIRREA section 1110 (12 U.S.C. 3339) “that relate to an appraiser's development and reporting of the appraisal,” but not those that relate to the review of the appraisal under paragraph (3) of FIRREA section 1110.

Section 1110 of FIRREA directs each Federal financial institutions regulatory agency (i.e.,each Federal banking agency11 ) to prescribe “appropriate standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of each such agency or instrumentality.” 12 U.S.C. 3339. These standards must require, at a minimum—(1) that real estate appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation; and (2) that such appraisals shall be written appraisals. 12 U.S.C. 3339(1) and (2). The Dodd-Frank Act added a third standard—that real estate appraisals be subject to appropriate review for compliance with USPAP—for which the Federal banking agencies must prescribe implementing regulations. FIRREA section 1110(3), 12 U.S.C. 3339(3). FIRREA section 1110 also provides that each Federal banking agency may require compliance with additional standards if the agency determines in writing that additional standards are required to properly carry out its statutory responsibilities. 12 U.S.C. 3339. Accordingly, the Federal banking agencies have prescribed appraisal regulations implementing FIRREA title XI that set forth, among other requirements, minimum standards for the performance of real estate appraisals in connection with “federally related transactions,” which are defined as real estate-related financial transactions that a Federal banking agency engages in, contracts for, or regulates, and that require the services of an appraiser.12 12 U.S.C. 3339, 3350(4).

11The Federal banking agencies are the Board, the FDIC, the OCC, and the NCUA.

12 SeeOCC: 12 CFR part 34, Subpart C; FRB: 12 CFR part 208, subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; and NCUA: 12 CFR part 722.

The Agencies are proposing to interpret the “certified or licensed appraiser” definition in TILA section 129H(b)(3) to incorporate provisions of the Federal banking agencies' requirements in FIRREA title XI and implementing regulations “applicable to appraisers,” which the Agencies have clarified through proposed comment XX(a)(1)-3 as the regulations that “relate to an appraiser's development and reporting of the appraisal.” While the Federal banking agencies' requirements, pursuant to this authorityand their authority to establish safety and soundness regulations, apply to an institution's ordering and review of an appraisal, the Agencies propose that the definition of “certified or licensed appraiser” incorporate only FIRREA title XI's minimum standards related to the appraiser's performance of the appraisal.

The Agencies propose this interpretation on the grounds that it is consistent with TILA section 129H. 15 U.S.C. 1639h. Congress included language requiring that appraisals be performed in conformity with FIRREA within the definition of “certified or licensed appraiser” under TILA section 129H(b)(3). 15 U.S.C. 1639h(b)(3). Thus, the Agencies believe that Congress intended to limit FIRREA's requirements to those that apply to theappraiser'sperformance of the appraisal, rather than the FIRREA requirements that apply to a creditor's ordering and review of the appraisal.

Proposed comment XX(a)(1)-3 would also clarify that the requirements of FIRREA section 1110(3) that relate to the “appropriate review” of appraisals are not relevant for purposes of whether an appraiser is a certified or licensed appraiser under proposed § 1026.XX(a)(1). The Agencies do not propose to interpret “certified or licensed appraiser” to include regulations related to appraisal review under FIRREA section 1110(3) because these requirements relate to an institution's responsibilities after receiving the appraisal, rather than to how the certified or licensed appraiser performs the appraisal.

The Agencies recognize that FIRREA title XI applies by its terms to “federally related transactions” involving a narrower category of institutions than the group of lenders that fall within TILA's definition of “creditor.”13 However, by cross-referencing FIRREA in the definition of “certified or licensed appraiser,” the Agencies believe that Congress intended all creditors that extend higher-risk mortgage loans, such as independent mortgage banks, to obtain appraisals from appraisers who conform to the standards in FIRREA related to the development and reporting of the appraisal.

13TILA section 103(g), 15 U.S.C. 1602(g) (implemented by § 1026.2(a)(17)).

Question 1:The Agencies invite comment on this interpretation. For example, do commenters believe that Congress intended that FIRREA title XI requirements would only apply to the subset of higher-risk mortgage loans that are already covered by FIRREA (i.e.,federally related transactions with a transaction value greater than $250,000 not otherwise exempted from FIRREA's appraisal requirements14 )? If so, do commenters believe the longstanding existence of USPAP Advisory Opinion 30 lends support to this approach?15

14Under title XI of FIRREA, the Federal banking agencies were granted the authority to identify categories of real estate-related financial transactions that do not require the services of an appraiser to protect Federal financial and public policy interests or to satisfy principles of safe and sound lending (e.g., transactions with a transaction value equal to or less than $250,000 do not require the services of an appraiser under the Federal banking agencies' regulations). For a discussion of these regulatory exemptions, see Interagency Appraisal and Evaluation Guidelines, 75 FR 77450, 77465-68 (Dec. 10, 2010).

15USPAP Advisory Opinion 30 is a long-standing advisory opinion issued by the Appraisal Standards Board of the Appraisal Foundation, which holds that USPAP creates an obligation for appraisers to recognize and adhere to applicable assignment conditions, including, for federally related transactions, FIRREA title XI and the regulations prescribed under such title.SeeAppraisal Standards Bd., Appraisal Fdn., Advisory Op. 30,available at http://www.uspap.org.

The Agencies have not identified specific FIRREA regulations that relate to the appraiser's development and reporting of the appraisal. The Federal banking agencies' regulations implementing title XI of FIRREA include “minimum standards” requiring, for example, that the appraisal be based on the definition of market value in their regulations,16 and that appraisals be performed by State-licensed or certified appraisers in accordance with their FIRREA regulations. The Federal banking agencies' regulations also include standards on “appraiser independence,” including that the appraiser not have a direct or indirect interest, financial or otherwise, in the property being appraised.

16The Federal banking agencies' appraisal regulations define “market value” to mean the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. See OCC: 12 CFR 34.42(g); FDIC: 12 CFR 323.2(g); FRB: 12 CFR 225.62(g); and NCUA: 12 CFR 722.2(g). Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby—(1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and acting in what they consider their own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.Id.

Question 2:The Agencies request comment on whether a final rule should address any particular FIRREA requirements applicable to appraisers related to the development and reporting of the appraisal.

“Certified” versus “licensed” appraiser.Neither TILA section 129H nor the proposed rule defines the individual terms “certified appraiser” and “licensed appraiser,” or specifies when a certified appraiser or a licensed appraiser must be used. Instead, the proposed rule, consistent with paragraphs (b)(1) and (b)(2) of TILA section 129H, would require that creditors obtain an appraisal performed by “a certified or licensed appraiser.”Seeproposed § 1026.XX(a)(1); 15 U.S.C. 1639h(b)(1), (b)(2). Certified and licensed appraisers generally differ based on the examination, education, and experience requirements necessary to obtain each credential. Existing State and Federal law and regulations require the use of a certified appraiser rather than a licensed appraiser for certain types of transactions. For example, the Federal banking agencies' FIRREA appraisal regulations define “State certified appraiser”17 and “State licensed appraiser,”18 and specify the use of a certified appraiser based on the complexity of the residential property and the dollar amount of the transaction.19 Several State agencies do not issue licensed appraiser credentials and issue different certified appraiser credentials (i.e.,a certified residential appraiser and a certified general appraiser) based on the type of property.

17 SeeOCC: 12 CFR 34.42(j); FDIC: 12 CFR 323.2(j); FRB: 12 CFR 225.62(j); and NCUA: 12 CFR 722.2(j).

18 SeeOCC: 12 CFR 34.42(k); FDIC: 12 CFR 323.2(k); FRB: 12 CFR 225.62(k); and NCUA: 12 CFR 722.2(k).

19For example, the Federal banking agencies' appraisal regulations require that a “State certified appraiser” be used for “[a]ll federally related transactions having a transaction value of $1,000,000 or more” and for “[a]ll complex 1-to 4 family residential property appraisals rendered in connection with federally related transactions * * * if the transaction value is $250,000 or more.” See, e.g., OCC: 12 CFR 34.43(d).

Question 3:The Agencies request comment on whether the rule should address the issue of when a creditor must use a certified appraiser rather than a licensed appraiser.

Further, the proposed rule does not specify competency standards. In selecting an appraiser for a particular appraisal assignment, creditors typically consider an appraiser's experience, knowledge, and educational background to determine the individual's competency to appraise a particular property and in a particular market. The Competency Rule in USPAP requires appraisers to determine, prior to accepting an assignment, that they can perform the assignment competently. SeeUSPAP, Competency Rule.20 The Federal banking agencies' FIRREA appraisal regulations provide that a State certified or licensed appraiser may not be considered competent solely by virtue of being certified or licensed.21

20 SeeAppraisal Standards Bd., Appraisal Fdn., Competency Rule, USPAP (2012-2013 ed.) at U-11.

21 SeeOCC: 12 CFR 34.46(b); FDIC: 12 CFR 323.6(b); FRB: 12 CFR 225.66(b); and NCUA: 12 CFR 722.6(b).

Question 4:The Agencies request comment on whether the rule should address the issue of appraiser competency.

The Agencies acknowledge that creditors not otherwise subject to FIRREA title XI may have questions about how to comply with the requirement to obtain an appraisal from a “certified or licensed appraiser” who performs an appraisal in conformity with the requirements applicable to appraisers in title XI of FIRREA and any implementing regulations. The Agencies also note that all creditors, including those already subject to FIRREA, may have questions about how FIRREA regulations relating to the development and reporting of the appraisal may be interpreted for purposes of applying TILA's civil liability provisions,seeTILA section 139, 15 U.S.C. 1640, including the liability provision for willful failures to obtain an appraisal as required by TILA section 129H.SeeTILA section 129H(e), 15 U.S.C. 1639h(e). To address these concerns, the Agencies are proposing a safe harbor for compliance with TILA section 129H at § 1026.XX(b)(2). See the section-by-section analysis of proposed § 1026.XX(b)(2), below.

XX(a)(2) Higher-Risk Mortgage Loans

New TILA section 129H(f) defines a “higher-risk mortgage” as a residential mortgage loan secured by a principal dwelling with an APR that exceeds the APOR for a comparable transaction by a specified percentage as of the date the interest rate is set. 15 U.S.C. 1639(f). New TILA section 103(cc)(5) defines the term “residential mortgage loan” as any consumer credit transaction that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling, other than a consumer credit transaction under an open-end credit plan. 15 U.S.C. 1602(cc)(5).

Proposed § 1026.XX(a)(2) would define the term “higher-risk mortgage loan” for purposes of § 1026.XX. Consistent with TILA sections 129H(f) and 103(cc)(5), proposed § 1026.XX(a)(2)(i) provides that a “higher-risk mortgage loan” is a closed-end consumer credit transaction secured by the consumer's principal dwelling with an APR that exceeds the APOR for a comparable transaction as of the date the interest rate is set by a specified percentage depending on the type of transaction. The proposed rule uses the phrase “a closed-end consumer credit transaction secured by the consumer's principal dwelling” in place of the statutory term “residential mortgage loan” throughout § 1026.XX(a)(2). The Agencies have elected to incorporate the substantive elements of the statutory definition of “residential mortgage loan” into the proposed definition of “higher-risk mortgage loan” rather than using the term itself to avoid inadvertent confusion of the term “residential mortgage loan” with the term “residential mortgage transaction,” which is an established term used throughout Regulation Z and defined in § 1026.2(a)(24).Compare15 U.S.C. 1602(cc)(5) (defining “residential mortgage loan”)with12 CFR 1026.2(a)(24) (defining “residential mortgage transaction”). Accordingly, the proposed regulation text differs from the express statutory language, but with no intended substantive change to the scope of TILA section 129H.

Principal Dwelling

Proposed comment XX(a)(2)(i)-1 clarifies that, consistent with other sections of Regulation Z, under proposed § 1026.XX(a)(2)(i) a consumer can have only one principal dwelling at a time. Proposed comment XX(a)(2)(i)-1 states that the term “principal dwelling” has the same meaning as in § 1026.2(a)(24), and expressly cross references existing comment 2(a)(24)-3, which further explains the meaning of the term. Consistent with this comment, a vacation home or other second home would not be a principal dwelling. However, if a consumer buys or builds a new dwelling that will become the consumer's principal dwelling within a year or upon the completion of construction, the proposed comment clarifies that the new dwelling is considered the principal dwelling.

Average Prime Offer Rate

Proposed comment XX(a)(2)(i)-2 would cross-reference existing comment 35(a)(2)-1 for guidance on APORs. Existing comment 35(a)(2)-1 clarifies that APORs are APRs 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. Other pricing terms include commonly used indices, margins, and initial fixed-rate periods for variable-rate transactions. Relevant pricing characteristics include a consumer's credit history and transaction characteristics such as the loan-to-value ratio, owner-occupant status, and purpose of the transaction. Currently, to obtain APORs, the Board, which currently publishes the APORs, uses a survey of creditors that both meets the criteria of § 1026.35(a)(2) and provides pricing terms for at least two types of variable rate transactions and at least two types of non-variable rate transactions. An example of such a survey, and the survey that is currently used to calculate APORs, is the Freddie Mac Primary Mortgage Market Survey.® As of the date of this proposed rule, the table of APORs is published by the Board; however, the Bureau will assume the responsibility for publishing all of the elements of the table in the future.

Comparable Transaction

Proposed comment XX(a)(2)(i)-3 cross-references guidance in existing comments 35(a)(2)-2 and 35(a)(2)-4 regarding how to identify the “comparable transaction” in determining whether a transaction meets the definition of a “higher-risk mortgage loan” under § 1026.XX(a)(2)(i). As these comments indicate, the table of APORs published by the Bureau will provide guidance to creditors in determining how to use the table to identify which APOR is applicable to a particular mortgage transaction. Consistent with the Board's current practices, the Bureau intends to publish on the internet, in table form, APORs for a wide variety of mortgage transaction types based on available information. For example, the Board publishes a separate APOR for at least two types of variable rate transactions and at least two types of non-variable rate transactions. APORs are APRs 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. Currently, the Board calculates an APR, consistent with Regulation Z (see12 CFR 1026.22andappendix J to part 1026), for each transaction type for which pricing terms are available from a survey, and estimates APRs for other types of transactions for which direct survey data are not available based on the loan pricing terms available in the survey and other information. However, data are not available for some types of mortgage transactions, including reverse mortgages. In addition, the Board publishes on the internet themethodology it uses to arrive at these estimates.22

22 See http://www.ffiec.gov/ratespread/newcalchelp.aspx#9.

Date APR is Set

Proposed comment XX(a)(2)(i)-4 would cross-reference existing comment 35(a)(2)-3 for guidance on the date the APR is set. Existing comment 35(a)(2)-3 clarifies that a transaction's APR is compared to the APOR as of the date the transaction's interest rate is set (or “locked”) before consummation. The comment notes that sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. Accordingly, under the proposal, for purposes of § 1026.XX(a)(2)(i), the creditor should use the last date the interest rate for the mortgage is set before consummation.

“Higher-Risk Mortgage Loan” Versus “Higher-Priced Mortgage Loan”

TILA section 129H(f) defines the term “higher-risk mortgage” in a similar manner to the existing Regulation Z definition of “higher-priced mortgage loan.” 12 CFR 1026.35(a). However, the statutory definition of higher-risk mortgage differs from the existing regulatory definition of higher-priced mortgage loan in several important respects. First, the statutory definition of higher-risk mortgage expressly excludes loans that meet the definition of a “qualified mortgage” under TILA section 129C. In addition, the statutory definition of higher-risk mortgage includes an additional 2.5 percentage point threshold for first-lien jumbo mortgage loans, while the definition of higher-priced mortgage loan contains this threshold only for purposes of applying the requirement to establish escrow accounts for higher-priced mortgage loans.CompareTILA section 129H(f)(2), 15 U.S.C. 1639h(f)(2),with12 CFR 1026.35(a)(1)and1026.35(b)(3). The Agencies have concerns that the use of two such similar terms within the same regulation may cause confusion to both consumers and industry. However, given that the definitions of the two terms differ in significant ways, the Agencies are proposing, consistent with the statute, to define and use the term “higher-risk mortgage loan” when establishing the scope of proposed § 1026.XX.

Question 5:The Agencies request comment on whether the concurrent use of the defined terms “higher-risk mortgage loan” and “higher-priced mortgage loan” in different portions of Regulation Z may confuse industry or consumers and, if so, what alternative approach the Agencies could take to implementing the statutory definition of “higher-risk mortgage loan” consistent with the requirements of TILA section 129H. 15 U.S.C. 1639h.

In addition, proposed § 1026.XX uses the term “higher-risk mortgage loan” instead of the statutory term “higher-risk mortgage” for clarity and consistency with § 1026.35, which uses the term “higher-priced mortgage loan.” 12 CFR 1026.35(a).

XX(a)(2)(i)(A) and (a)(2)(i)(B) Trigger for First Lien Loans

Consistent with TILA section 129H(f)(2)(A)-(B), paragraphs (a)(2)(i)(A) and (a)(2)(i)(B) of proposed § 1026.XX set the following thresholds for the amount by which the APR must exceed the applicable APOR for a loan secured by a first lien to qualify as a higher-risk mortgage loan:

• By 1.5 or more percentage points, for a loan with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac.

• By 2.5 or more percentage points, for a loan with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac.

Paragraphs (a)(2)(i)(A) and (a)(2)(i)(B) of proposed § 1026.XX include several non-substantive changes from the statutory language for clarity and consistency with § 1026.35(b)(3)(v). For an exemption from the requirement to escrow for property taxes and insurance for “higher-priced mortgage loans,” § 1026.35(b)(3)(v) defines a “jumbo” loan as: “[A] transaction with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac.” In particular, the proposal would use the phrase “for a loan secured by a first lien with” in place of the statutory phrase “in the case of a first lien residential mortgage loan having.”See15 U.S.C. 1639h(f)(2)(A)-(B). As discussed above, all of the elements of the statutory definition of the term “residential mortgage loan” are incorporated into proposed § 1026.XX(a)(2)(i). The proposed rule also uses the phrase “for the maximum principal obligation eligible for purchase by Freddie Mac” in place of the statutory phrase “pursuant to the sixth sentence of section 305(a)(2) the Federal Home Loan Mortgage Corporation Act,” for consistency with § 1026.35(b)(3)(v) and without intended substantive change.

XX(a)(2)(i)(C) Trigger for Subordinate-Lien Loans

Consistent with TILA section 129H(f)(2)(C), proposed § 1026.XX(a)(2)(i)(C) provides that the APR must exceed the applicable APOR by 3.5 or more percentage points for a loan secured by a subordinate lien to qualify as a higher-risk mortgage loan. In addition, for the reasons discussed above, proposed § 1026.XX(a)(2)(i)(C) uses the phrase “for a loan secured by a subordinate lien” in place of the statutory phrase “for a subordinate lien residential mortgage loan.” 15 U.S.C. 1639h(f)(2)(C).

Alternative Calculation Method: Transaction Coverage Rate

In the Bureau's 2012 TILA-RESPA Proposal, the Bureau is proposing to adopt a simpler and more inclusive finance charge calculation for closed-end credit secured by real property or a dwelling.23 The finance charge is integral to the calculation of the APR, which is designed to serve as a benchmark in TILA disclosures for consumers to evaluate the overall cost of credit.

23 See2012 TILA-RESPA Proposal, pp. 101-127, 725-28, 905-11 (July 9, 2012), available athttp://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_integrated-mortgage-disclosures.pdf). This proposal is similar to the simpler, more inclusive finance charge proposed by the Board in its 2009 proposed amendments to Regulation Z containing comprehensive changes to the disclosures for closed-end credit secured by real property or a consumer's dwelling.See74 FR 43232, 43241-45 (Aug. 26, 2009).

Currently, TILA and Regulation Z allow creditors to exclude various fees or charges from the finance charge, including most real estate-related closing costs. Consumer groups, creditors, and some government agencies have long been dissatisfied with the “some fees in, some fees out” approach to the finance charge. The 2012 TILA-RESPA Proposal would maintain TILA's definition of a finance charge as a fee or charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to the extension of credit. However, the proposal would require the creditor to include in the finance charge most charges by third parties. The Bureau's 2012 TILA-RESPA proposal discusses the potential benefits to consumers of making the APR a more accurate and useful comparison tool and to industryof using simpler calculations to reduce compliance burden and litigation risk.24

24 See2012 TILA-RESPA Proposal at 101-27, 600-08.

A simpler and more inclusive finance charge, however, would increase the APR for most mortgage loans. However, the Agencies currently lack sufficient data to model the amount by which this change would increase the APR or how the increase in turn would affect the number of loans that will exceed the statutory threshold for higher-risk mortgages. The Agencies note that the Bureau is seeking data to assist in assessing potential impacts of a more inclusive finance charge in connection with the Bureau's 2012 TILA-RESPA Proposal25 and its 2012 HOEPA Proposal.26

25 See2012 TILA-RESPA Proposal at,e.g.,101-12.

26 See2012 HOEPA Proposal, pp. 44, 149-211 (July 9, 2012),available at http://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.

Under TILA section 129H(f), to determine whether a loan is a higher-risk mortgage loan, the loan's APR is measured against the benchmark APOR. 15 U.S.C. 1639h(f). The APOR is not a market wide average of the APR but, instead, is derived from average interest rates, points, and other loan pricing terms such as margins and indices. Currently, the APOR is based on the Freddie Mac Primary Mortgage Market Survey (PMMS) of pricing by a representative sample of creditors on transactions with low-risk pricing characteristics. There are some important differences between the fees and charges used in the calculation of the APR and APOR. In particular, the APOR consistently includes the contract interest rate and “total points,”27 but the reporting of other origination fees is not consistently included. Thus, the APOR derived from such surveys likely understates the actual cost to consumers of the low-risk loans intended to form the benchmark.

27Freddie Mac defines “total points” to include both “discount [points] and origination fees that have historically averaged around one point.”See http://www.freddiemac.com/pmms/abtpmms.htm. The Agencies understand that it is not clear that survey respondents are consistent in their reporting or in including origination fees not expressed as a point.

By contrast, the finance charge used to calculate the APR currently includes both discount points and origination fees, together with most other charges the creditor retains and certain third-party charges. By including additional creditor and third-party charges, the proposed more inclusive finance charge would widen the disparity between APR and APOR and potentially push more loans into the “higher-risk mortgage loan” category, though by how much is uncertain.

As noted, the Bureau, in connection with its 2012 TILA-RESPA Proposal, is proposing a more inclusive finance charge. The Agencies are aware that the more inclusive finance charge has implications for several rulemakings, including this proposal regarding higher-risk mortgage appraisal rules, the Bureau's 2012 HOEPA Proposal,28 as well as the 2011 ATR Proposal and the 2011 Escrow Proposal. Each of these proposals separately discusses the impacts of the more inclusive finance charge and potential modifications, and the Agencies believe that it is helpful to do so in this proposal as well. This approach permits assessment of the impacts and the merits of any modifications on a rule-by-rule basis.

28 See2012 HOEPA Proposal (July 9, 2012), available athttp://files.consumerfinance.gov/f/201207_cfpb_proposed-rule_high-cost-mortgage-protections.pdf.

Question 6:Accordingly, this proposal seeks comment on whether and how to account for the implications of a more inclusive finance charge on the scope of higher-risk mortgage coverage.

If the Bureau adopts a more inclusive finance charge, one way potentially to reduce the disparity between the resulting APR and the APOR for purposes of different regulatory thresholds would be to modify the numeric threshold that triggers coverage. The Bureau sought comment on such an approach in the 2012 HOEPA proposal, as one of two alternatives, but lacked the data necessary to propose a specific numeric modification. The Agencies similarly lack such data for higher-risk mortgages. However, unlike the Bureau's authority to adjust the threshold triggers in HOEPA, TILA section 129H does not give the Agencies express authority to revise the numeric threshold triggers for purposes of determining which loans are higher-risk mortgage loans. 15 U.S.C. 1639h.See alsoTILA section 103(bb)(2)(A) and (B), 15 U.S.C. 1639h(bb)(2)(A) and (B).

An alternative approach would be to use a “transaction coverage rate” (TCR) for the APR as the metric for determining whether a closed-end loan is a higher-risk mortgage loan subject to § 1026.XX. This is the other alternative on which the Bureau seeks comment in the 2012 HOEPA Proposal.29 Under this approach, the TCR would be calculated in a manner similar to how the APR is calculated, except that the prepaid finance charge used for the TCR calculation would include only charges retained by the creditor, a mortgage broker, or an affiliate of either.30 The TCR would not reflect other closing costs that would be included in the broader finance charge for purposes of calculating the APR that would be disclosed to consumers. For example, the APR resulting from the proposed more inclusive finance charge would reflect third-party charges such as title insurance premiums, but the TCR would not.See75 FR 58539, 58661; 76 FR 11598, 11626. Thus, a creditor would calculate the TCR to determine coverage, but the new APR would be used for consumer disclosures.

29 See2012 HOEPA Proposal at 39-50, 218, 246. The transaction coverage rate has been proposed previously by the Board for substantially similar reasons in a proposal related to mortgages in 2010,see75 FR 58539, 58660-62, Sept. 24, 2010 (2010 Mortgage Proposal), and 2011 Escrow Proposal,see76 FR 11598, 11609, 11620, 11626, March 2, 2011.

30 See2012 HOEPA Proposal at 46-47. The wording of the Board's proposed definition of “transaction coverage rate” varied slightly between the 2010 Mortgage Proposal and the 2011 Escrow Proposal as to treatment of charges retained by mortgage broker affiliates. In its 2012 HOEPA Proposal, the Bureau proposes to use the 2011 Escrow Proposal version, which would include charges retained by broker affiliates. The Agencies believe that this approach is consistent with the rationale articulated by the Board in its earlier proposals and with certain other parts of the Dodd-Frank Act that distinguish between charges retained by the creditor, mortgage broker, or affiliates of either company.See, e.g.,Dodd-Frank Act section 1403.

If the Bureau adopts a more inclusive finance charge, the Agencies will consider whether to adopt the TCR in this rule. This alternative would allow creditors to exclude some fees from the “rate” used to determine if a loan is a “higher-risk mortgage loan.” By excluding these fees, it is possible fewer loans would be covered by the rule. Accordingly, to adopt the TCR, the Agencies would rely on their authority to exempt a class of loans from the requirements of the rule if the Agencies determine the exemption is in the public interest and promotes the safety and soundness of creditors. TILA section 129H(b)(4)(B), 15 U.S.C. 1639h(b)(4)(B). The Agencies believe that use of the TCR could have both advantages and disadvantages with respect to being in the public interest and promoting the safety and soundness of creditors. One advantage would be that loans that Congress may not have intended to be treated as higher-risk mortgage loans would remain not covered by the higher-risk mortgage appraisal requirements. On the other hand, some loans that Congress intended to be treated as higher-risk mortgages might end up not being covered by the higher-risk mortgageappraisal requirements. This is because the TCR as proposed would exclude some third-party fees that are currently included in the finance charge, such as upfront mortgage guaranty insurance premiums paid to independent third-party providers. The Agencies expect to analyze the potential differential as data become available.

Another potential disadvantage is that adopting a TCR for determining coverage would require a creditor to make an additional calculation to determine whether a loan is subject to TILA section 129H. Creditors would continue to be required to calculate the APR to provide required disclosures to the consumer. Additionally, creditors would have to calculate the TCR to determine whether the loan is subject to the requirements of this rule. On the other hand, if the Bureau adopts both the more inclusive finance charge and the TCR modification in a final rule pursuant to the 2012 HOEPA Proposal and 2011 Escrow Proposal, adopting the TCR modification in the higher-risk mortgage rule could ensure consistency across rules.

Question 7:Comments are invited on both the potential for TCR to introduce additional complexity in enforcement and litigation contexts31 and any possible additional burden for the industry.

31Agency examiners and enforcement staff, as well as consumers seeking to determine whether they are entitled to the higher-risk mortgage protections, would have to know how to determine and calculate the TCR and how to verify a creditor's TCR calculation to ascertain whether the appraisal protections should apply to a given transaction.

In light of the uncertainty regarding whether the Bureau will adopt a more inclusive finance charge and the potential impact of that change, the Agencies have proposed two alternative versions of § 1026.XX(a)(2)(i), similar to those proposed by the Bureau in connection with the 2012 HOEPA Proposal. Alternative 1 would define the threshold for higher-risk mortgages based on APR. Alternative 2 would use TCR. The Agencies would not adopt Alternative 2 if the Bureau does not change the definition of finance charge. As noted above, if the Agencies were to adopt Alternative 2, the Agencies would rely on their exemption authority set forth in TILA section 129H(b)(4)(B). 15 U.S.C. 1639h(b)(4)(B). The Agencies would reference the definition of “transaction coverage rate” provided in the Board's proposed § 226.45(a)(2)(i), proposed by the Bureau to be codified in § 1026.35(a)(2)(i), along with the guidance provided in its associated commentary. The Agencies also would reference the definition of “average prime offer rate” proposed by the Bureau to be codified in § 1026.35(a)(2)(ii). This is the approach to defining TCR (and APOR) that the Bureau is proposing in the 2012 HOEPA Proposal.See2012 HOEPA Proposal at 46-47, 218.32

32In the Board's 2010 Mortgage Proposal, the definition of “transaction coverage rate” was proposed in § 226.35(a)(2)(i), and the definition of “average prime offer rate” in existing § 226.35(a)(2) would have been redesignated as § 226.35(a)(2)(ii) for organizational purposes. The Board's 2011 Escrow Proposal contained parallel provisions, although they were set forth in a proposed new § 226.45(a)(2)(i) and (ii).

Again, the Agencies do not currently have sufficient data to model the impact of the more inclusive finance charge on coverage of the higher-risk mortgage loan requirements.33 Similarly, the Agencies lack data to assess whether the benefits and costs of those requirements are significantly different as to the loans that would be affected by the more inclusive finance charge.

33In its 2009 mortgage proposal, the Board relied on a 2008 survey of closing costs conducted by Bankrate.com that contains data for hypothetical $200,000 loans in urban areas.See74 FR 43232, 43244 (Aug. 26, 2009). Based on that data, the Board estimated that 3 percent of loans would be reclassified as “higher-priced loans” (which are similar to “higher-risk mortgages”) if the definition of finance charge was expanded. See id. The Agencies are considering the 2010 version of that survey; however, the data being sought by the Bureau in its 2012 TILA-RESPA Proposal and 2012 HOEPA Proposal as described above would provide more representative information regarding closing and settlement costs that would allow for a more refined analysis of the proposals.

Question 8:The Agencies therefore seek comment on the impacts the proposed more inclusive finance charge would have on application of the higher-risk mortgage loan requirements, and whether it would be in the public interest and promote the safety and soundness of creditors to modify the triggers for higher-risk mortgage loans to approximate more closely the coverage levels under the finance charge and APR as currently calculated.

Question 9:If potential modifications are warranted, the Agencies also seek comment on what methods may be appropriate, including use of the TCR in lieu of APR, or other methods commenters may suggest. The appraisal provisions of the Dodd-Frank Act are intended to protect lenders, consumers and investors against fraudulent and inaccurate appraisals. With this in mind, commenters are invited to address the relative costs and benefits of any modification in the context of the higher-risk mortgage loan appraisal proposal, including any potential impact on the market. Where possible, comments should include supporting data. In particular, data regarding the amount of charges currently considered prepaid finance charges and the amount of charges currently excluded from th