Residential MortgageCompliance Monitor

Consumer Financial Protection Bureau Issues Ability-to-Repay and Qualified Mortgage Final Rule

by: Marissa Aquila Blundell, Esq.

On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued the final version of the hotly debated Ability- to-Repay rule set out in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank).

The rule requires creditors to make a reasonable and good faith determination that borrowers have a reasonable ability to repay residential mortgages. A creditor’s failure to do so gives way to enhanced civil money penalties under the Truth-in-Lending Act (TILA), among other potential penalties. The rule also defines the “Qualified Mortgage” (QM), for which creditors receive certain protections from liability. Whether the legal protection is a safe harbor or a presumption of compliance will depend upon certain other factors. The rules take effect on January 10, 2014.

The CFPB also proposes to modify the rule to address potential adverse consequences for certain lending programs. Below are initial key points about the new rule:

Good Faith Determination of Borrower’s Ability to Repay

• Creditors must, at a minimum, consider eight underwriting factors:
 
        – Current or reasonably expected income or assets
        – Current employment status
        – Monthly payment for the covered transaction
        – Monthly payment for any simultaneous loan
        – Monthly payment for mortgage-related obligations
        – Current debt obligations, alimony and child support
        – Monthly debt-to-income ratio or residual income
        – Credit history
 
• Special rules apply to required monthly payment calculations for ARMs, and loans with balloon, interest-only, or negative amortization features. Refinance transactions converting “non-standard mortgages” to “standard mortgages” are also subject to special provisions.
  
Qualified Mortgage Defined
  
• Some QMs will create a legal safe harbor for creditors. These QMs are “prime” loans, more specifically defined as a loan which is not a Higher-Priced Mortgage Loan (HPML) under TILA, and which satisfies the following criteria:
        – Points and fees do not exceed 3% of the loan amount,
          subject to limited exclusions
        – Debt-to-Income Ratio does not exceed 43%
        – Borrower income and assets are verified
        – Transaction does not contain “risky” features, such as
          negative amortization
 
• Temporarily, the CFPB is providing a second category of QMs with more flexible underwriting standards, so long as the transaction satisfies the product restrictions set forth in the QM criteria listed above and the loan is eligible for purchase or guarantee by the GSEs (while in conservatorship), or by HUD, the VA and the USDA/RHS. This provision will phase out as HUD, the VA, or the USDA issue QM rules, and if GSE conservatorship ends, or after seven years.
• HPMLs that satisfy the QM criteria, as set forth above, are also QMs; however, the HPML-QM provides a presumption of compliance in the lender’s favor which consumers may rebut.
• Certain Balloon-Payment loans will also be treated as QMs.
  
Proposals
  
• The CFPB has also proposed and seeks comment regarding:
        – Whether the ability-to-repay and QM rules should be
          modified to create an exemption for certain lending
          programs
        – Whether an additional QM category should be created for
           loans originated by and held in portfolio by “small creditors”,
           defined with the same general size thresholds as the
           Balloon-Payment QM
 
• Final action with respect to these proposals is expected to occur on a timeline allowing any additional final rules to share the current final rule’s January 10, 2014, effective date.
  
 
About the Author:
Marissa is Senior Vice President and General Counsel at Bankers Advisory, Inc.   She can be reached at marissa@bankersadvisory.com

, CFPB, Federal Mortgage Regulations | 1 Comment »

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Comments

  • loanmodifications
  • March 6, 2013

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Residential Mortgage Compliance Monitor is an educational resource for financial institutions, providing announcements, legislative summaries, and policy changes issued by state and national regulators. Announcements also cover mortgage lending rules of HUD, Fannie Mae, Freddie Mac, and other mortgage agencies.