By the Mortgage Banking Group
The CFPB has issued its long-awaited ability-to-repay/qualified mortgage rule, and at first glance, it appears to warrant cautious optimism for the mortgage industry. The industry fought hard for the creation of a safe harbor for qualified mortgages, and the rule includes one for lower-priced qualified mortgages.
The rule was issued on January 10, 2013, and the final rule is effective January 10, 2014. The CFPB also issued concurrent proposals to address particular concerns under the final rule. Comments on the proposals are due February 25, 2013.
At a public field hearing held by the CFPB in Baltimore, government officials, consumer representatives, and industry representatives addressed the rule. As expected, consumer representatives generally did not favor the adoption of a safe harbor for qualified mortgages with lower interest rates, while industry representatives applauded the outcome.
Director Cordray stated that not only would the rule stop lenders from making loans that borrowers cannot afford, it also would address the current tight credit market by giving consumers access to affordable credit. He did not fully explain exactly how adding regulatory requirements, even with a safe harbor for lower-rate qualified mortgages, will open up the credit markets.
Consistent with recent expectations, the CFPB adopted a two-prong approach to the treatment of a qualified mortgage based on the interest rate. Loans that satisfy the qualified mortgage criteria and have an annual percentage rate that does not exceed the applicable average prime offer rate by 1.5 or more percentage points (3.5 or more percentage points for junior lien loans) will be entitled to a safe harbor. The safe harbor is structured as a conclusive presumption of compliance with the rule.
A consumer could challenge whether the loan is in fact such a qualified mortgage loan. A consumer could not otherwise raise issues of non-compliance with the rule, but would not be precluded from raising claims under other laws. The industry strongly supported a safe harbor approach, noting that an approach that provided less certainty for the industry would curtail the availability of credit to only highly credit-worthy borrowers, and product selection would be limited.
Loans that satisfy the qualified mortgage criteria and have an annual percentage rate that exceeds the applicable average prime offer rate by 1.5 percentage points or more (3.5 percentage points or more for junior lien loans) will be entitled to a rebuttable presumption of compliance with the rule. A consumer could challenge whether the loan is in fact such a qualified mortgage loan, and also could demonstrate non-compliance by showing that his or her debt obligations were so high that they left insufficient income or assets to meet living expenses.
The commentary to the final rule provides, however, that the longer the time period that the consumer demonstrates the actual ability to repay the loan by making timely payments, without a modification or accommodation, the harder it will be for the consumer to rebut the presumption of compliance.
A potential problem with this approach is that it does not account for the typically higher rates for jumbo mortgage loans-those that exceed the maximum loan amount that Fannie Mae and Freddie Mac will buy. The CFPB considered and rejected adopting a higher threshold for jumbo loans, and believes that the application of the 1.5 percentage point threshold to jumbo loans will not create any credit accessibility problems. That remains to be seen.
The general criteria for qualified mortgage loans include:
The industry strongly opposed the inclusion in points and fees of compensation paid to a loan originator employee and fees, such as appraisal or title fees, if paid to an affiliate. In the concurrent proposals, the CFPB addresses loan originator compensation (see below) but not affiliate fees. The provisions of the final rule, and proposed clarifications, regarding the inclusion of loan originator compensation in points and fees are overly complex. They are in need of a complete reassessment.
To provide more guidance on the inclusion of loan originator compensation in points and fees, the CFPB seeks input on two proposed comments. These comments seek to clarify that payments from a consumer directly to a mortgage broker do not need to be counted twice towards the points and fees cap, and that payments from a mortgage broker to its loan originator employees also do not need to be included in the calculation, assuming the payment to the broker was already included. The CFPB also seeks input on two alternative proposed comments regarding the treatment of employee loan originator compensation.
Under the approach of the first proposed comment a creditor would need to include in points and fees all compensation paid by the consumer or creditor to the employee loan originator. Under this approach, for example, if a consumer paid an origination fee to the creditor, and part of the origination fee is paid to the loan originator, both the origination fee and the amount paid to the loan originator would be included-thus, the amount paid to the originator is included twice.
The second proposed comment calls for an approach in this situation under which the creditor could offset the amount of loan originator compensation by the amount of the origination fee charge paid by the consumer. Under this approach, only the amount of the origination fee would be included in points and fees, unless the amount paid to the loan originator exceeds the amount of the origination fee paid by the consumer, in which case the difference would also be included in points and fees.
Significantly, and perhaps based on a concern of how a narrow concept of qualified mortgage would affect an economy and housing market that still are far less than optimal, the final rule includes a temporary category of qualified mortgages that are not subject to the underwriting requirements generally applicable to such mortgages. To qualify for the temporary category of qualified mortgages, a loan must:
The temporary category will expire in seven years or earlier regarding Fannie Mae and Freddie Mac when they cease to be operated under such conservatorship (and there is no limited-life regulatory entity that is a successor to Fannie Mae or Freddie Mac), and with respect to FHA, VA, and RHS, when the respective agencies adopt their own guidelines for qualified mortgages (provided for in Dodd-Frank). This category will likely prolong the significant role of the federal government in the mortgage market, which may complicate the government's efforts to resolve Fannie Mae and Freddie Mac and lessen the role of the federal government in the mortgage market.
The CFPB also proposes an exemption from the ability-to-repay requirements for loans made under refinance programs of FHA, VA, or RHS, as long as such agencies have not adopted their own specific qualified mortgage requirements for such loans.
Loans that are not qualified mortgage loans must satisfy the general repayment ability requirements, and are not entitled to any special status (presumption or safe harbor) with regard to compliance. It is anticipated that the availability of such loans will be limited at best. A lender will need to consider the following eight underwriting factors, and use third-party records to verify the information used to evaluate them:
The CFPB seeks comment on these proposals:
Director Cordray said during the public hearing that the CFPB will help lenders implement the rule and has hired a mortgage industry veteran to coordinate those efforts. The CFPB plans to publish plain-language translations of the rule in booklet and video form.
Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr's Consumer Financial Services Group, which produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.
We will be closely following the CFPB's activity concerning the ability-to-repay rule. For more information, contact Richard J. Andreano, Jr., at 202.661.2271 or firstname.lastname@example.org, John D. Socknat at 202.661.2253 or email@example.com, or Michael S. Waldron at 202.661.2234 or firstname.lastname@example.org.
Copyright © 2013 by Ballard Spahr LLP.www.ballardspahr.com(No claim to original U.S. government material.)
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.
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