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On January 10, the CFPB released the assessment reports required by Section 1022(d) of the Dodd-Frank Act for two of its 2013 mortgage rules: the TILA Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA Mortgage Servicing Rule. The assessment reports were conducted using the Bureau’s own research and external sources. The reports do not include a benefit-cost analysis of either rule, nor do they propose amendments to the rules or contain any other policy recommendations. However, the Bureau expects the reports to be used to “inform the Bureau’s future policy decisions.”
The ATR/QM Rule became effective in January 2014 and generally requires that lenders make a reasonable and good faith determination, based on documented information, that the borrower has the reasonable ability to repay the mortgage loan. Highlights of the report’s findings include:
- While it is difficult to distinguish the effects of the ATR/QM Rule and the marketwide tightening of underwriting standards following the housing crisis, the rule may have restricted the reintroduction of certain types of loans that were associated with high delinquency or foreclosure rates, such as loans based on limited or no documentation of income or assets, loans with low initial monthly payments that reset after a period of time, and loans with high debt-to-income ratios.
- The ATR/QM Rule was not generally associated with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination.
- The ATR/QM Rule did not impact access to credit for self-employed borrowers who were eligible for a GSE loan. For other self-employed borrowers, the Bureau acknowledged lenders may find it difficult to comply with the Appendix Q documentation and calculation requirements but found that approval rates for this population decreased only slightly.
- While the costs of originating a mortgage loan have increased substantially over time, the ATR/QM Rule does not appear to have materially increased the lenders’ costs or the prices the lenders charged to consumers, at an aggregate market level. However, based on data from nine lenders, the Bureau estimated the foregone profits from not originating certain types of non-QM loans at $20-$26 million per year.
- Contrary to the Bureau’s expectations when it issued the ATR/QM Rule, the GSEs have maintained a persistently high share of the market, and the market for non-QM loans remains relatively small.
The Mortgage Servicing Rule became effective in January 2014 and, among other things, imposes procedural requirements on servicers with respect to loss mitigation and foreclosure for delinquent borrowers. Highlights of the report’s findings include:
- Loans that became delinquent were less likely to proceed to a foreclosure during the months after the Mortgage Servicing Rule’s effective date compared to months prior to the effective date and were more likely to return to current status. For borrowers who became delinquent the year the rule took effect, the Bureau estimated that, absent the rule, at least 26,000 additional borrowers would have experienced foreclosure within three years, and at least 127,000 fewer borrowers would have recovered from delinquency within three years.
- The cost of servicing mortgage loans has increased substantially; the main increase in costs occurred before the Mortgage Servicing Rule took effect and is not attributable to the rule. However, some servicers reported significant ongoing costs of complying with the rule, which can be attributable with the need for “robust control functions” and higher personnel costs to support increased communication with delinquent borrowers.
- The time from borrower initiation of a loss mitigation application to short-sale offer increased in 2015 compared to 2012.
- A larger share of borrowers who completed loss mitigation applications in 2015 were able to avoid foreclosure than borrowers who completed loss mitigation applications in 2012.
- The rate of written error assertions per account fell by about one-half after the Mortgage Servicing Rule’s effective date compared to the prior three years.
- There was a moderate decrease in the share of borrowers receiving force-placed insurance and the Rule’s effective date, which can be attributable to the Rule but also to the changes in the insurance market.
On October 26, the CFPB announced it expects to publish proposed rules reconsidering the ability-to-repay provisions of the rule covering Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Rule) in January 2019. The Bureau does not intend to reconsider the payment provisions of the Rule, noting that the ability-to-repay provisions “have much greater consequences for both consumers and industry than the payment provisions.” Under the current Rule, it is an unfair and abusive practice for a lender to make a covered short-term loan or a covered longer-term balloon payment loan without reasonably determining that the consumer has the ability to repay the loan (see the Buckley Sandler Special Alert for more detailed coverage on the Rule). The Bureau also intends to address the compliance date for the Rule, which is currently set at August 19, 2019.
On December 6, the FDIC’s Office of Inspector General (OIG) released an evaluation report to examine how the agency implements certain consumer protection rules concerning consumers’ ability to repay mortgage loans and limits for loan originator compensation. The OIG report, FDIC’s Implementation of Consumer Protection Rules Regarding Ability to Repay Mortgages and Compensation for Loan Originators (EVAL-18-001), focused on the FDIC’s Division of Depositor and Consumer Protection (DCP), which is responsible for implementing the Ability to Repay/Qualified Mortgage (ATR/QM) and Loan Originator rules and tracking violations of the rules. The report found that the DCP “incorporated these rules into its examination program, trained its examiners, and communicated regulatory changes to FDIC-supervised institutions.” However, based on a sample of 12 examinations, the OIG also determined that examination workpapers generally needed improvement, finding (i) inconsistent documentation by examiners on decisions to exclude compliance testing for the ATR/QM and Loan Originator rules, and (ii) in certain circumstances, incomplete, incorrect, or improperly stored examiners’ workpapers, “which would preclude someone independent of the examination team from fully understanding examination findings and conclusions, based on the workpapers alone.”
OIG further noted that, because DCP’s examination practices did not include tracking the number of institutions subject to the rules or recording how frequently examiners tested for compliance, any identified variances among the FDIC’s six regional offices could not be assessed for significance due to lack of context.
As a result of these findings, the OIG made several recommendations for the DCP to strengthen its compliance examination process, including:
- “research potential reasons for the regional variances in the number of rule violations by banks in the FDIC’s six regional offices”;
- “track the aggregate number of FDIC-supervised institutions in each region that are subject to the rules”;
- “track how often examiners test for compliance with the rules”; and
- ‘‘take steps to improve workpaper documentation and retention.”
The DCP agreed to implement these recommendations June 30, 2018.
On August 30, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank ability-to-repay and qualified mortgage provisions (ATR/QM). The CFPB is required to make adjustments to dollar amounts in the Regulation Z provisions implementing these laws based on the annual percentage change reflected in the Consumer Price Index effective June 1, 2017. For open-end consumer credit plans under TILA, the minimum interest charge disclosure threshold will remain unchanged at $1.00 in 2018. For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will remain unchanged at $27 in 2018, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will remain unchanged at $38 in 2018. For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages in 2018 will increase to $21,032, and the adjusted points and fees dollar trigger for high-cost mortgages in 2018 will be $1,052. To satisfy the underwriting requirements under the ATR/QM rule, the maximum thresholds for total points and fees for qualified mortgages in 2018 will be: (i) 3 percent of the total loan amount for loans greater than or equal to $105,158; (ii) $3,155 for loan amounts greater than or equal to $63,095 but less than $105,158; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,032 but less than $63,095; (iv) $1,052 for loan amounts greater than or equal to $13,145 but less than $21,032; and (v) 8 percent of the total loan amount for loan amounts less than $13,145. The final rule is effective January 1, 2018.
On May 25, the CFPB issued a request for comment on its plans for assessing the 2014 Ability-to-Repay/Qualified Mortgage Rule’s effectiveness in meeting the purposes and objectives outlined in the Dodd-Frank Act, which requires the Bureau to assess each significant rule or order it adopts under Federal consumer financial laws. According to the request for comment, and a May 25 blog post on the CFPB’s website, the self-assessment will focus on objectives to ensure that: (i) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (ii) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (iii) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (iv) federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (v) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.
The Dodd-Frank Act established new standards for mortgage lending and created a class of “qualified mortgage” (QM) loans. The standards required lenders to assess consumers’ ability to repay (ATR). Dodd-Frank also provided for a class of QM loans that must not have “certain risky product features and are presumed to comply with the ATR requirement.”
The CFPB issued rules to make ATR and QM standards “clear and effective” in January 2013. As previously covered in a Special Alert, the rule and its amendments that took effect on January 10, 2014 provide a mechanism for curing point-and-fees overages on QM loans as well as more minor amendments to its mortgage origination and servicing rules.
On April 11, the DOJ filed a memorandum in its case against a Brazilian construction company, requesting that the Court approve a lower sentence than originally proposed based on the company's inability to pay. On December 21, the company and its petrochemical affiliate reached a $4.5 billion combined global settlement with U.S., Brazilian, and Swiss authorities to resolve FCPA allegations, in which both companies agreed to plead guilty in the U.S. to conspiracy to violate the FCPA. As part of that agreement, the U.S. and Brazilian authorities agreed to conduct an independent analysis to confirm the accuracy of the construction company's representation that it had an inability to pay a penalty in excess of $2.6 billion. The memorandum set forth the DOJ’s determination that the construction company lacks the ability to pay a criminal penalty in excess of $2.6 billion and included adjustments for the requested penalty to match that ability. In particular, the portion of the penalty paid to the United States would be lowered from approximately $117 million to approximately $93 million. The sentencing hearing is scheduled for April 17.
Prior Scorecard coverage of the company's settlement can be found here.
I. Overview of the CFPB's Final Prepaid Rule
On October 5, 2016, the Consumer Financial Protection Bureau (Bureau) issued a final rule (Prepaid Rule) amending Regulations E and Z to extend consumer protections to prepaid card accounts. The new protections include pre-acquisition disclosures, error resolution rights, and periodic statements. In addition, prepaid card accounts that include a separate credit feature are subject to some of Regulation Z’s credit card provisions, including an ability-to-repay requirement. Prepaid card issuers are also required to submit to the Bureau and to post to their websites any new and revised prepaid card account agreements. In this alert we summarize key provisions of the Prepaid Rule except those provisions that apply only to payroll and government benefits prepaid cards, which will be covered in a separate alert.
II. Effective Date
The Prepaid Rule’s effective date is October 1, 2017, however, the effective date for posting prepaid card account agreements is October 1, 2018. Heeding concerns about burden, the Bureau stated that the Prepaid Rule does not require financial institutions to pull and replace prepaid account access devices or packaging materials that were manufactured, printed, or otherwise produced in the normal course of business prior to October 1, 2017. Instead, financial institutions must provide consumers with notice of certain changes in terms and updated initial disclosures, in certain circumstances.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Manley Williams, (202) 349-8060
On February 13, the FDIC released the third and final technical assistance video intended to assist bank employees to comply with certain mortgage rules issued by the CFPB. The final video addresses the Mortgage Servicing Rules and the “Small Servicer” exemption. The first video, released on November 19, 2014, covered the ATR/QM Rule, and the second video, released on January 27, covered the Loan Originator Compensation Rule.
Last week, the CFPB finalized an important amendment to its ATR/QM Rule that provides a mechanism for curing points-and-fees overages on qualified mortgage (“QM”) loans, as well as more minor amendments to its mortgage origination and servicing rules. The new rules, which were proposed in April, are detailed below. The discussion below regarding the new origination rules, including the points-and-fees cure, will also appear with the American Bankers Association/BuckleySandler publication, The New CFPB Mortgage Origination Rules Deskbook. (Click here for information about obtaining copies of the Deskbook.)
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Benjamin K. Olson, (202) 349-7924
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
On October 22, the CFPB finalized targeted amendments to the Dodd-Frank Act mortgage rules that took effect in January 2014. The amendments include:
- Points and fees cure. Under the Ability-to-Repay/Qualified Mortgage Rule, loans must meet certain requirements to receive “qualified mortgage” or “QM” status. In particular, the points and fees charged to a consumer on a QM generally cannot exceed 3 percent of the loan amount. The amendments permit a lender or secondary market purchaser that discovers, after the loan has closed, that the 3 percent cap was exceeded to retain QM status by refunding the excess amount to the consumer with interest. However, the refund must occur within 210 days after consummation and before the consumer files suit, provides written notice to the lender that the cap has been exceeded, or becomes 60 days past due. In addition, the creditor must maintain and follow policies and procedures for reviewing points and fees and providing refunds to consumers. Although the CFPB stated that this amendment is intended to encourage lenders to provide access to credit to consumers seeking loans that are at or near the points and fees limit, the provision will expire on January 10, 2021.
- Debt-to-income cure. In the April proposal, the Bureau requested comment on the need for a cure for loans that inadvertently exceed the 43% debt-to-income requirement for QMs made under Appendix Q. The Bureau deferred action on this issue, stating that it is considering the comments and whether to address the issue in a future rulemaking.
- Ability-to-Repay exemption for non-profits expanded. Certain 501(c)(3) nonprofit organizations that lend to low- and moderate-income consumers are already exempt from the Ability-to-Repay rule if the organization makes no more than 200 mortgages a year, among other limitations. The CFPB has amended this provision to allow certain non-profit groups to continue extending interest-free, forgivable loans, also known as “soft seconds,” without regard to the 200-mortgage loan limit.
- Small servicer exemption expanded. Certain small servicers are exempt from some of the CFPB’s new mortgage servicing rules, so long as they (and their affiliates) service 5,000 or fewer mortgage loans and they (or their affiliate) are the creditor or assignee for all of the loans. However, some non-profit organizations do not meet this exemption because they service loans, for a fee, from other associated non-profit lenders that are not considered “affiliates,” even though they operate under mutual contractual obligations to serve the same charitable mission, and use a common name, trademark, or servicemark. Because of this unique corporate structure, these non-profit organizations did not qualify for the small servicer exemption, unlike their for-profit counterparts with similar arrangements. The final rule expands the small servicer exemption to include these non-profit organizations, so long as they are 501(c)(3) non-profits that service loans on behalf of other non-profits within a common network or group of nonprofit entities, and meet other requirements.
- Buckley Webcast: Tips for this year’s FHA annual recertification and what the shutdown means
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference
- Melissa Klimkiewicz to discuss "RESPA-compliant marketing" at NEXT
- Daniel P. Stipano to provide "Update on AML/SAR reporting and enforcement" at an Mortgage Bankers Association webinar
- Daniel P. Stipano to discuss "Dynamic customer due diligence and beneficial ownership from KYC to ongoing CDD and the new rule implementation" at the Puerto Rican Symposium of Anti-Money Laundering
- Jon David D. Langlois to discuss "Successors in interest updates" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Melissa Klimkiewicz to discuss "Servicing super session" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Moorari K. Shah to provide "Regulatory update – California and beyond" at the National Equipment Finance Association Summit
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference