Alternative Mortgage Transactions: CFPB Rule Now Effective for State Housing Creditors by the Consumer Financial Services Group

Alternative Mortgage Transactions: CFPB Rule Now Effective for State Housing Creditors by the Consumer Financial Services Group

Effective July 22, 2011, preemption under the Alternative Mortgage Transaction Parity Act (AMTPA) is no longer available for many types of mortgage loans that previously qualified as "alternative mortgage transactions" (AMTs), such as fixed-rate mortgage loans with interest-only payments or negative amortization features and certain fixed-rate balloon loans.

Additionally, AMTPA no longer preempts state laws regulating features that are not integral to AMTs, even if such laws apply specifically to AMTs, such as mortgage disclosure requirements or restrictions on rate increases as a result of late payments, interest-only payments, and negative amortization. As a result, state-licensed and state-chartered lenders (state housing creditors) need to immediately review the permissibility of their mortgage product offerings under state law to determine if the new limits on AMTPA preemption require the elimination or modification of products.

The new limitations on AMTs result from the Dodd-Frank Wall Street Reform and Consumer Protection Act amendments to AMTPA, which were implemented by an interim final rule issued by the Consumer Financial Protection Bureau (CFPB) on the same date the rule became effective. For applications for AMTs received on or after July 22, 2011, state housing creditors must comply with the rule to continue making AMTs under AMTPA.

The rule implements the amendments to AMTPA by limiting (1) the definition of an AMT to transactions in which the interest rate or finance charge may be adjusted or renegotiated, and (2) the types of state laws that are preempted to laws that restrict the ability of a state housing creditor to adjust or renegotiate an interest rate or finance charge on an AMT or change the amount of interest or finance charge included in a regular periodic payment as a result of such an adjustment or renegotiation.

Other highlights of the interim final rule, which establishes new Regulation D, include the following:

  • AMTs continue to include shared appreciation and shared equity mortgages as well as fixed-rate balloon loans in which the lender has committed in writing to renew the loan at specified intervals throughout the amortization period.
  • Loans that have adjustable or renegotiable interest rates or finance charges continue to qualify as AMTs even if they contain additional, nontraditional features such as interest-only payments or negative amortization. However, if state law restricts such features, AMTPA would not preempt application of such state law to an AMT.
  • To rely on AMTPA preemption, creditors making AMTs must (1) if the AMT is an open-end home equity credit line, comply with the Regulation Z requirement that APR changes be made according to a publicly available index that is not subject to the creditor's control, and (2) if the AMT is a closed-end loan, base interest rate and finance charge adjustments on either a readily available and verifiable index outside the creditor's control or a formula or schedule identifying the amount by which the rate or finance charge can increase and when a change can occur. For purposes of the interim rule, a rate floor does not constitute creditor control over the index. Other requirements apply to renewable balloon-payment mortgages. For AMTs that are "high cost" loans subject to Reg. Z Sections 226.32 and 226.34 or "higher-priced mortgage loans" subject to Reg. Z Section 226.35, creditors must comply with those Reg. Z provisions as applicable.
  • Federally chartered lenders and state housing creditors making AMTs without reliance on AMTPA must comply with the interim final rule beginning July 22, 2012. During the interim, such lenders can continue to make AMTs consistent with federal law other than the interim final rule's AMT requirements and applicable state law, if any.
  • The interim final rule also provides that a modification, renewal, or extension of a loan that qualified as an AMT when the loan was made will not result in a loss of preemption based on the new AMTPA limitations. However, if a state housing creditor, on or after July 22, 2011, receives the application for a refinancing in which the existing obligation is satisfied and replaced, the new limitations will apply to the refinancing.

The interim rule is accompanied by an Official Commentary in the style long used by the Federal Reserve Board for Reg. Z and various other consumer finance regulations. In its background discussion, the CFPB states that, because it had no authority to issue an AMTPA rule before July 21, 2011, it bypassed the Administrative Procedure Act's notice-and-comment procedures to prevent the mortgage market disruption that might have resulted from the absence of an interim rule. Once the comment period on the interim final rule closes on September 22, 2011, the CFPB intends to follow APA procedures in adopting a permanent final AMTPA rule.

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).  For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Mercedes K. Tunstall, 202.661.2221 or tunstallm@ballardspahr.com; Keith R. Fisher, 202.661.2284 or fisherk@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com.

Copyright © 2011 by Ballard Spahr LLP  (No claim to original U.S. government material.)

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