CFPB Issues Final Rules on Ability-to-Repay and Qualified Mortgage Standards Under Regulation Z, as Required by Dodd-Frank

BY: EDMUND D. HARLLEE

On Wednesday, June 12, the Consumer Financial Protection Bureau (the “Bureau”) issued final rules amending  its Regulation Z (Truth in Lending) in order to implement certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”).

On January 10, 2013, the Federal Reserve Board issued proposed rules with respect to changes to the Truth in Lending Act addressing exemptions to the “ability-to-repay” rule, the definition of “Qualified Mortgage” in certain cases, and related provisions.  The proposed rules were reported in this publication on January 29, 2013.

The Bureau’s final rule amends Regulation Z in the following three main areas:

1.         Loan Originator Compensation and the Calculation of Points and Fees .  Under the Act, there is a cap on the amount of points and fees a lender may charge on mortgages.  The Act also requires that loan originator compensation be included in that calculation, even if the loan originator is not paid up front by the consumer in the transaction.  The Bureau issued its proposed rule on this point because it was concerned that compensation paid may be derived from sources that the Act does not require to be counted toward the points and fees calculation, based upon the way the lender pays its loan originators, or that certain compensation may be double-counted.  Accordingly, the final rule excludes the following from the calculation of points and fees:

• Loan originator compensation paid by the consumer to a mortgage broker, when that payment has already been counted toward the fee cap as a finance charge.
• Compensation paid by a broker to its employee.
• Compensation paid by a lender to its loan officer.

2.         Exemptions from the “Ability-to-Repay” Rule.  The final rule provides several exemptions from the ability-to-repay rule:

• Loans made by certain types of creditors.  Under certain conditions, loans made by lenders designated as “Community Development Financial Institutions” by the Treasury Department, and loans made by lenders designated as either a “Community Housing Development Organization” or a “Downpayment Assistance Provider of Secondary Financing” by the Department of Housing and Urban Development, are exempt from the ability-to-repay requirements.  Non-profits under Section 501(c)(3) are exempt, so long as  they make no more than 200 loans per year, lend only to low-to-moderate income consumers, and follow their own rules regarding the consumer’s ability to repay the loan.
• Loans made under certain lending programs.  Loans made under a program administered by a housing finance agency, and loans made pursuant to an Emergency Economic Stabilization Act program, are exempt from the ability-to-repay rules.  

3.         Loans by Small Creditors.  In order to preserve access to credit from small creditors, the final rules provide for an easing of restrictions on compliance with certain requirements for these lenders.  A “small creditor” is defined generally as one having no more than $2 billion in assets and that makes no more than 500 first lien mortgage loans subject to the ability-to-repay rules per year.  With respect to loans from these creditors, the final rules provide for the following:

• Creation of a new, fourth category of “qualified mortgage,” for those made by “small creditors” under certain circumstances.  The loans must be held in portfolio for at least 3 years, and must meet the “qualified mortgage” requirements with regard to loan features, points and fees.   While the creditor must evaluate the borrower’s debt-to-income ratio or residual income, it need not comply with the debt-to-income ratio requirements usually applicable to “qualified mortgages.”
• An increase in the threshold for determining the point below which a qualified mortgage receives a safe harbor, and above which it receives a rebuttable presumption, with respect to its compliance with the “ability-to-repay” requirement.  Previously, loans below 1.5% over the average prime offer rate received a safe harbor as to compliance, and those above 1.5% received a rebuttable presumption of compliance.  With the new rule, the threshold is raised to 3.5% over the average prime offer rate.  This provision applies to loans made by small creditors under the balloon-loan category (see below) or the small creditor portfolio category (see this publication of January 29, 2013 on the proposed rules) of qualified mortgages.
• Creation of a 2-year transition period, during which small creditors that do not operate predominantly in “rural” or “underserved” areas can originate balloon-payment loans, so long as they retain the loans in portfolio.  During this period, the Board will conduct a review of the definitions of “rural” and “underserved” and explore whether additional allowances may be made for other types of loans, such as adjustable-rate loans that otherwise comply with the definition of “qualified mortgages.”

The final rules go into effect on January 10, 2014.