On May 29, the Consumer Financial Protection Bureau (the “CFPB”) adopted several amendments1 to its “ability-to-repay” and “qualified mortgage” rules. These rules, which originally were adopted on January 10, 2013,2 implement the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”)3 for residential mortgage lenders to consider borrowers’ ability to repay before extending credit and define the long-anticipated category of “qualified mortgages” that will enjoy a presumption of compliance with those requirements. The rules will take effect on January 10, 2014.
One of the requirements of a “qualified mortgage” is that, generally, points and fees points and fees may not exceed three percent of the total loan amount. The CFPB has adopted amendments detailing how points and fees are to be calculated in several circumstances where payments pass from one party to another, such as to mortgage brokers and to individual loan officers.
The changes adopted by the CFPB exempt from the ability-to-repay requirements several new categories of loans and lenders, including loans made under various government programs and loans made by certain nonprofit organizations.
The CFPB also added a new category of qualified mortgages originated by small creditors that retain their loans in portfolio. The higher-priced mortgage threshold for these loans, and for the existing qualified mortgage category of balloon-payment mortgages originated by small creditors operating primarily in rural and underserved areas, has been increased to an annual percentage rate that exceeds the average prime offer rate by three and one-half percentage points.
Points and Fees
Under the Truth in Lending Act (“TILA”), as amended by the Dodd-Frank Act, points and fees include all compensation paid directly or indirectly by a consumer or creditor to a mortgage originator from any source. This includes compensation paid to mortgage brokerage firms, individual brokers, and employees of the lender, such as its loan officers. Despite extensive industry comment, in its original adopting release the CFPB did not waive the statutory requirements as they apply to individual loan originators, such as loan officers. The CFPB did clarify that compensation must be counted toward points and fees only if it can be attributable to the specific transaction at the time the interest rate is set. Therefore, individual employee compensation was required to be included in points and fees only if attributable to a particular transaction. The CFPB noted that this could result in double-counting, as loan originator compensation that is recovered through origination charges is already included in points and fees. The CFPB requested additional comment on this topic.
The CFPB has revised these rules and their associated commentary in several respects.
Payments by consumers to mortgage brokers need not be counted as loan originator compensation where they already have been included in points and fees as part of the finance charge. Compensation paid by a creditor to its own loan officer employees need not be included in points and fees. However, the CFPB did not alter the requirement that compensation paid by a creditor to a mortgage broker is included in points and fees, in addition to any origination charges paid by a consumer to the creditor. Because the “additive” concept is retained for mortgage broker compensation, in order to avoid double counting, the consumer would have to pay his or her broker directly.
The CFPB did not exclude compensation paid to a manufactured home retailer for loan origination activities, but acknowledged that it may be difficult to ascertain whether a retailer engages in loan origination activities and, if so, what compensation it is receiving from those activities. Therefore, the CFPB intends to issue additional guidance on these issues before the effective date of the rules.
Additional Exempt Loans and Lenders
The CFPB has adopted several new exemptions from the ability-to-repay requirements.
Credit extended pursuant to a program administered by a Housing Finance Agency (an “HFA”) is exempt from the ability-to-repay requirements.4 This exemption covers extensions of credit made directly by an HFA or by a private creditor pursuant to a program administered by an HFA.
Credit extended by a Community Development Financial Institution (a “CDFI”)5 is exempt from the ability-to-repay requirements, as is credit extended by a Downpayment Assistance Provider of Secondary Financing6 operating in accordance with the regulations prescribed by the Department of Housing and Urban Development (“HUD”).
Credit extended by a Community Housing Development Organization is exempt from the ability-to-repay requirements, if the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME program.7
Nonprofit organizations with a tax exemption ruling or determination letter under Section 501(c)(3) of the Internal Revenue Code are exempt from the ability-to-repay requirements, but only if they meet certain requirements:
The nonprofit exemption is not available to nonprofits under Section 501(c)(4) of the Internal Revenue Code.
An extension of credit made pursuant to a program authorized by Sections 101 and 109 of the Emergency Economic Stabilization Act of 20089 is exempt from the ability-to-repay requirements. This exemption applies whether the extension of credit is a loan modification, a refinancing or a new loan, but does not extend to proprietary foreclosure mitigation and homeownership stabilization programs.
The CFPB withdrew a proposed exemption for refinancings that are eligible to be insured by the Federal Housing Administration (the “FHA”), the Department of Veteran’s Affairs (the “VA”) or the Department of Agriculture (the “USDA”). The CFPB also withdrew a proposed exemption for refinancings under government-sponsored entity (“GSE”) programs for mortgage loans with high loan-to-value ratios or for consumers harmed by the financial crisis, such as the Home Affordable Refinance Program.10
Small Creditor Qualified Mortgage Categories
As originally adopted, the ability-to-repay rules provided a special exception for certain balloon mortgages, permitting them to be qualified mortgages if they meet all of the other requirements to be a qualified mortgage and if the lender:
A loan that is a qualified mortgage because of this rule will lose its exemption if sold or otherwise transferred, except for transfers made three or more years after origination, to another qualifying institution, as required by supervisory action, or pursuant to a merger or acquisition
The CFPB has adopted a somewhat similar new exemption for mortgages that are originated and held in portfolio by certain small creditors, permitting them to be qualified mortgages if they meet all of the applicable requirements other than debt-to-income ratio, and if the lender:
A loan that is a qualified mortgage because of this rule will lose its exemption if sold or otherwise transferred, except for transfers made three or more years after origination, to another qualifying institution, as required by supervisory action or pursuant to a merger or acquisition. A loan does not qualify for this exemption if it is originated subject to a commitment to be acquired by a non-qualifying entity. There is a two-year transition period during which balloon-payment mortgages may qualify for this exemption, even if the lender does not operate predominantly in rural or underserved areas.
TILA provides that qualified mortgages are entitled to a presumption of compliance with the ability-to-repay rules. The ability-to-repay rules bifurcate the types of presumption that are available for originators of qualified mortgages. For qualified mortgages that pose the least risk, there is a safe harbor. For “higher-priced” qualified mortgages, the lender’s presumption of compliance with the ability-to-repay rules is rebuttable. In general, a “higher-priced” mortgage has an APR that exceeds the APOR by one and one-half percentage points for first liens, and three and one-half percentage points for subordinate liens. The “APOR” is the average prime offer rate for a comparable transaction as of the date on which the interest rate is set, as published by the CFPB.
The CFPB has adopted a special higher threshold for higher-priced mortgages in the new qualified mortgage category of small creditor mortgages held in portfolio, and amended the corresponding threshold for qualified balloon mortgages. For these categories of qualified mortgage, a loan is higher-priced only if its APR exceeds the APOR by three and one-half percentage points.
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1 Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act, 78 Fed. Reg. 35429 (June 12, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-06-12/pdf/2013-13173.pdf.
2 Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act, 78 Fed. Reg. 6408 (Jan 30, 2013), available at http://www.gpo.gov/fdsys/pkg/FR-2013-01-30/pdf/2013-00736.pdf . Our client alert on the ability to repay rules, as originally adopted, is available at http://www.bingham.com/Alerts/2013/01/CFPB-Adopts-Final-Ability-to-Repay-and-Qualified-Mortgage-Rules-for-Residential-Mortgage-Lenders.
3 The Dodd-Frank Act is available at http://banking.senate.gov/public/_files/Rept111517DoddFrankWallStreetReformandConsumerProtectionAct.pdf. Our summary of the Dodd-Frank Act is available at http://www.bingham.com/Media.aspx?MediaID=10963.
4 Within the meaning of 24 C.F.R. § 266.5. An HFA is any public body, agency, or instrumentality created by a specific act of a state legislature or local municipality empowered to finance activities designed to provide housing and related facilities, through land acquisition, construction or rehabilitation.
5 Within the meaning of 12 C.F.R. § 1805.104(h). To be a CDFI, an entity must meet a variety of application requirements set forth in 12 C.F.R. §§ 1805.200 and 1805.201(b).
6 Pursuant to 24 C.F.R. § 200.194(a).
7 Pursuant to 24 C.F.R. § 92.2.
8 Pursuant to § 102 of the Housing and Community Development Act of 1974, 42 U.S.C. § 5302(a)(20), as amended by the HUD from time to time pursuant to 24 C.F.R. § 570.3.
9 12 U.S.C. §§ 5211, 5219.
10 Loans in both of these categories may still benefit from the temporary exemption for loans eligible for purchase or guarantee by the GSEs, or eligible to be insured or guaranteed by the FHA, the VA, the USDA or the Rural Housing Service, which extends until January 10, 2021.
This article was originally published by Bingham McCutchen LLP.