On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued its final “Ability to Repay and Qualified Mortgage Rule”, which rule amends Regulation Z/Truth-in-Lending and will take effect on January 10, 2014. The entire rule may be reviewed at the CFPB website, www.consumerfinance.gov. Interested parties have until February 25, 2013 to submit their comments to the CFPB, which may be done online through the Bureau’s website.
Prior to the mortgage meltdown of 2008, a number of residential lenders around the country made consumer mortgages without regard to the applicant’s ability to repay the loans. In response to those loose underwriting standards and the explosion of mortgage defaults, the Federal Reserve ruled that for higher-price mortgage loans, lenders must assess the borrower’s ability to repay the loan. This Federal Reserve rule has been in effect since October 2009.
In 2010, the Dodd-Frank Act expanded the ability to repay requirement to all consumer residential mortgages. The CFPB rule implements the Dodd-Frank law and adds a new section 129C to the Truth-in-Lending Act.
Credit Unions were not the lenders who caused the Crisis of 2008; for the most part, credit unions have always evaluated the member’s ability to repay a mortgage loan. Nevertheless, credit unions, like all lenders, must comply with the new CFPB rules that were mandated by the Dodd-Frank Act.
The CFPB’s final rule contains the following key elements:
Analysis of Consumer’s Ability to Repay
- The new rule applies to any “consumer credit transaction” secured by a dwelling. The dwelling does not have to be the consumer’s homestead. The rule does not apply to business/commercial transactions.
- A creditor is prohibited from making a consumer residential mortgage loan unless the creditor makes a good faith determination of the consumer’s reasonable ability to repay the loan according to its terms.
- The determination of the consumer’s ability to repay must at a minimum consider the following seven factors:Monthly payments must be calculated based on amortizing the loan in substantially equal payments over the loan term.
- Current or reasonably expected income or assets;
- Current employment status;
- Monthly payment of the new loan;
- Monthly payment for other mortgage obligations;
- Current debt obligations;
- Credit history
- Reliable third-party records must be used to verify the information used to evaluate the applicant’s ability to repay.
- For ARM loans, the analysis of the applicant’s ability to repay must use the fully indexed rate.
- The total “back-end” debt-to-income ratio should not exceed 43%. This 43% ratio may be exceeded if the loan is otherwise a Qualified Mortgage and the loan is eligible to be sold to Fannie Mae/Freddie Mac or may be insured/guaranteed by FHA or VA.
- Detailed procedures for analyzing the consumer’s ability to repay are set out in Appendix Q to the final rule.
Lender’s Failure to Make a Good Faith Determination of Applicant’s Ability to Repay Creates a New Cause of Action Against the Lender
- Dodd-Frank has amended the Truth-in-Lending law to give the borrower a right to sue the lender for damages for the lender’s violation of the “Ability to Repay” rule.
- The suit would need to be brought within 3 years of the violation.
- Even beyond the 3 year statute of limitations, if the lender attempts to foreclose on the property, the consumer may still assert the lender’s violation of the “Ability to Repay” rule as a defense against the foreclosure action.
The Qualified Mortgage (“QM”) is a Safe Harbor Against the Litigation Threat
1. A “Qualified Mortgage” designation provides a safe harbor against the threat of litigation imposed on Non-Qualifying Mortgages.
2. A Qualified Mortgage cannot have any of the following features:
- Negative amortization;
- Interest-only payments;
- Balloon payments (exception or certain Rural/Underserved areas);
- Term exceeding 30 years;
- Points and fees paid by the consumer exceeding the following amount:
- 3% for loans of $100,000.00 or greater
- $3,000.00 for loans from $60,000-$100,000.00
- 5% for loans of $12,500.00-$20,000.00
- 8% for loans less than $12,500.00.
- Monthly payments must be calculated based on the highest payment that will apply for the first 5 years of the loan.
- The borrower must have a total debt-to-income ratio that is does not exceed 43%; provided that this ratio may be exceeded for otherwise Qualifying Mortgages that are eligible to be sold to Fannie Mae/Freddie Mac or may be guaranteed/insured by the VA or FHA.
What is calculated as “points and fees”?
The calculation of “points and fees” is critical in determining whether a loan is a Qualified or Non-Qualified Mortgage. For a closed-end credit transaction, the “points and fees” used to determine whether a loan is a “Qualified Mortgage” will be all items included in the Finance Charge under Regulation Z, excluding the following:
- Interest/Time-Price Differential;
- Any premium or other charges from any Federal or State agency program for any guaranty or insurance that protects the creditor;
- “Any bona fide third party charge not retained by the creditor, loan originator or any affiliate of either…”
- Up to two bona fide discount points paid by the consumer in connection with the transaction if the interest rate does not exceed the average prime offer rate by more than 1%.
A controversial part of this calculation is the inclusion of a lender’s affiliates’ fees/charges as part of the 3% limit. If a third party provider (Title Company, Real Estate Company, Insurance Company) is NOT an affiliate of the lender, the fees will NOT count towards the 3% limit. If, however, a credit union has a CUSO that is a third party provider, those fees/charges paid by the borrower will count towards the 3% limit, even if those fees/charges would be less than those charged by non-affiliates.
Exception for Small Lender Portfolio Loans
When the CFPB issued its final rule, it also proposed a new category of Qualified Mortgages for residential mortgage loans originated by small creditors. In the words of the CFPB Director, Richard Cordray, “Community Banks and credit unions did not cause the financial crisis…their traditional model of relationship lending has been beneficial for many people in rural areas and small towns across this country.”
This new category of Qualified Mortgage will encourage small lenders to make loans to individuals that would not fit within the guidelines set by larger lenders.
In order to qualify, the small lender must:
- Have total assets of $2 billion or less at the end of the previous calendar year; and
- Together with its affiliates, originated no more than 500 first-lien residential mortgages during the previous calendar year.
- In order to be Qualified Mortgages, the loans may not have negative amortization, a term longer than 30 years or points/fees greater than 3% of the loan amount.
- The 43% limit for debt/income ratio would not apply provided the loan is otherwise a Qualified Mortgage and the small lender has made a reasonable effort to verify the applicant’s ability to repay the loan.
Other Provisions of the CFPB’s Final Rule
- Prepayment Penalties: The final rule also prohibits prepayment penalties except for certain fixed-rate, Qualified Mortgages where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties.
- Record Retention: Creditors must retain records of their compliance with the Ability to Repay Rule for three (3) years.
The new CFPB “Ability to Repay and Qualified Mortgage Rule” implements provisions of the Dodd-Frank Act mandating that lenders make a good faith determination of the consumer’s ability to repay the loan according to its terms. Consumers may sue lenders who fail to properly ascertain the applicant’s ability to repay the loan. Lenders may avoid the threat of litigation if the loan is a “Qualified Mortgage.”
The Director of the CFPB has acknowledged that credit unions and community banks were not the cause of the Crisis of 2008. There is tacit recognition that credit unions have always evaluated their members’ ability to repay their mortgage loans. The new CFPB Ability to Repay and Qualified Mortgage Rule, though it applies across the board to every residential mortgage lender, was aimed at those mortgage lenders who failed to evaluate their applicant’s ability to repay. Credit unions have never loosened their underwriting standards and should be optimistic about their prospects in the new regulatory environment created by the CFPB.
I have reproduced below my comment to the CFPB on the inclusion of an affiliate’s fees as part of the maximum 3% for Qualified Mortgages. If you have any questions or concerns about this new rule, please contact our office right away.
Morton W. Baird II
Law Offices of Morton W. Baird II
242 West Sunset Ste 201
San Antonio, Texas 78209
210 828 5844
Comment Submitted to the CFPB by Morton Baird on the “Ability to Repay/Qualified Mortgage Rule”
“The proposed definition of a “Qualified Mortgage” limits the lender’s fees to 3% of the loan amount, which in itself is not an issue but the inclusion in the calculation of all fees earned by an affiliate of the lender will have harmful consequences for consumers.
I am a Texas attorney who has represented Texas credit unions for over 30 years and am passionate about how credit unions protect the interests of their members and keep costs low. Credit unions put their members/borrowers’ interests first , they give great service to every member, regardless of the size of that member’s account and they keep costs as low as possible.
As part of their long-time commitment to their members to keep costs low and to provide exemplary service, some Texas credit unions have created CUSOs (wholly owned subsidiaries) that are title companies, real estate companies and insurance companies. These subsidiary/affiliate/CUSO entities provide better service for the credit union member and usually lower the member’s closing costs.
If the fees charged by these CUSOs are calculated as part of the 3% limit to qualify a loan as a “Qualified Mortgage”, credit unions will be less likely to provide such a service to their members and the members will probably pay a higher cost for less service with other, non-affiliated service providers.
The fees charged by credit union affiliates should not be included in the calculation of the 3% limit for a Qualified Mortgage. The CFPB’s mission of defending America’s consumers will be well served by recognizing that credit unions are bulwarks of consumer protection and that they do what they can, every day, to help their members find the best, lowest cost settlement services.”
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