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CFPB seeks comments on “QM patch” ahead of expiration
On July 25, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) seeking feedback on potential revisions to the Ability to Repay/Qualified Mortgage (ATR/QM) Rule related to the expiration in 2021 of the “GSE patch,” a temporary provision granting Qualified Mortgage status to mortgages that are eligible for purchase or guarantee by Fannie Mae and Freddie Mac, including loans with higher debt-to-income (DTI) ratios than are allowed under the general QM requirements. The GSE patch (also referred to as the “QM patch”) is set to expire no later than January 10, 2021, or when Fannie and Freddie exit their government conservatorship, whichever comes first, with the Bureau stating that it currently plans to allow the GSE patch to expire as scheduled or “after a short extension” to facilitate a smooth transition. As previously covered by InfoBytes, the Bureau issued an assessment report on the ATR/QM Rule, in which it reported, among other things, that the GSEs have persistently maintained a high share of the market.
The ANPR requests comments on several potential amendments, including (i) whether the “qualified mortgage” definition should be revised in light of the upcoming expiration (currently, loans under the GSE patch generally qualify for safe harbor from legal liability under the ATR/QM Rule even if their DTI ratio exceeds 43 percent); (ii) whether the DTI ratio limit should remain at 43 percent or be increased or decreased, along with whether loans above the DTI ratio should be granted QM status if they have “certain compensating factors,” (iii) whether the QM definition should take into account possible alternatives to the DTI ratio for assessing a borrower’s ability-to-repay; and (iv) whether Appendix Q—which sets standards for calculating and verifying debt and income to determine the borrower’s DTI ratio—should be replaced, changed, or supplemented. Comments on the ANPR are due 45 days after publication in the Federal Register.
District Court enters first significant decision under CFPB’s ATR/QM Rule
On March 26, the U.S. District Court for the Southern District of Ohio, in what appears to be the first significant decision on claims brought against a mortgage lender under the CFPB’s Ability-to-Repay/Qualified Mortgage Rule, granted summary judgment in favor of the lender. The court rejected plaintiff’s claims that his bank improperly relied on income under his spousal support agreement, stating that “[t]he fact that Plaintiff and [his spouse] did not keep the separation agreement and instead opted to divorce – a series of events which reduced Plaintiff’s income by an order of magnitude – was not an event that was reasonably foreseeable to the Bank.” The court also noted that, “[a]lthough Plaintiff is now in his eighties, he is a repeat player in the field of real estate and mortgages, and a consumer of above-average sophistication.” While this decision does not break new legal ground, it does provide useful insights into how courts may respond to inherently fact-specific claims about the underwriting of individual loans.
CFPB issues five-year lookback for 2013 ATR/QM and Mortgage Servicing Rule
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.
VA provides status update to address 2014 loan guaranty interim final rule
On October 9, the Department of Veterans Affairs (VA) published a status update in the Federal Register to inform the public that it will not publish a final rule to adopt provisions outlined in its May 2014 interim final rule (IFR). The IFR was issued to implement provisions of Dodd-Frank concerning ability-to-repay standards and qualified mortgages (QM) as defined under TILA. According to the status update, section 309 of Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) superseded certain elements of the IFR. Specifically, the EGRRCPA’s “seasoning and recoupment requirements for [Interest Rate Reduction Refinance Loans] effectively eliminated the category of rebuttable presumption QM.” The VA reminded program participates to refer to Circular 26-18-13, previously issued in May and covered by InfoBytes, which addressed “loan churning” of VA-guaranteed refinance loans and set out new requirements for VA eligibility as addressed by EGRRCPA. The VA commented that it will publish future rulemaking to supersede the IFR, but that in the meantime, the IFR remains in effect to the extent the provisions do not conflict, or are not superseded by, EGRRCPA.
CFPB publishes final rule adjusting annual dollar amount thresholds under TILA regulations
On August 27, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), including as amended by 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 annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2018. The following thresholds will be effective on January 1, 2019:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- 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 increase from $27 to $28, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase from $38 to $39;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $21,549, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,077; and
- The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) 3 percent of the total loan amount for loans greater than or equal to $107,747; (ii) $3,232 for loan amounts greater than or equal to $64,648 but less than $107,747; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,549 but less than $64,648; (iv) $1,077 for loan amounts greater than or equal to $13,468 but less than $21,549; and (v) 8 percent of the total loan amount for loan amounts less than $13,468.
House passes several bills focused on regulatory relief
On March 6, the House passed H.R. 2226, the “Portfolio Lending and Mortgage Access Act,” amending TILA and expanding the safe harbor provisions provided to qualified residential mortgages held in portfolio by banks with less than $10 billion in assets. Under the bill, a mortgage lender would not be subject to civil liability for violating specified ability-to-repay requirements if, among other things, the loan was originated and held continuously in portfolio by a covered institution and complies with certain limitations and requirements related to prepayment penalties and points and fees..
On the same day, the House also passed H.R. 4725, the “Community Bank Reporting Relief Act,” to amend the Federal Deposit Insurance Act to reduce the regulatory reporting burden on community banks. Specifically, federal banking agencies would be required to issue regulations allowing qualified depository institutions with less than $5 billion in assets to submit abbreviated call reports (consolidated reports of condition and income) every other quarter rather than submitting full call reports every quarter.
Finally, by a vote of 264-143, the House passed H.R. 4607, the “Comprehensive Regulatory Review Act,” a measure to amend the Economic Growth and Regulatory Paperwork Reduction Act of 1996’s regulatory review process. Among other things, the bill requires federal financial regulators to perform a comprehensive review at least every seven years, instead of every ten years as currently required, to identify regulations that may be tailored to limit burdens on insured depository institutions.FDIC’s OIG Issues Evaluation of Agency’s Implementation of ATR/QM and Loan Originator Rules
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.
CFPB Publishes Final Rule Amending Annual Dollar Threshold in TILA Regulations
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.
CFPB Issues Interim Final Rule, Broadens Small Creditors' Eligibility to Originate Certain Mortgages
On March 22, the CFPB issued an interim final rule to implement the Helping Expand Lending Practices in Rural Communities (HELP) Act by providing broader eligibility under TILA for small creditors originating balloon-payment qualified and balloon-payment high-cost mortgages. Specifically, under the interim rule, a small creditor with no more than 2,000 first-lien covered transactions and total assets less than $2 billion will be eligible for Qualified Mortgage provisions if it originates at least one covered mortgage loan in an area designated rural or underserved per calendar year. Previously, the CFPB “adopted a single test to determine whether a small creditor operated predominantly in rural or underserved areas for the purposes of eligibility for the special previsions exemption,” requiring that a small creditor made more than half of its covered mortgage loans in the previous calendar year on properties that were designated rural or underserved.
The interim final rule also amends the definition of “rural” for the purposes of a procedural rule announced in early March to establish an application process for petitioning the CFPB to identify an area as rural or underserved for the purposes of Federal consumer financial law. “Rural” will now include any area so designated pursuant to the application process.
Special Alert: USDA-RHS Proposes Its Own QM Rule
On March 5, 2015, the USDA-RHS released a proposed rule to amend the regulations for the Single Family Housing Guaranteed Loan Program (SFHGLP) to provide that a loan guaranteed by USDA-RHS is a QM if it meets certain requirements set forth by the CFPB. In addition, USDA-RHS proposed to add the definition of “Qualified Mortgage” to its regulations. The proposal follows the adoption of separate QM definitions for FHA and VA loans last year.
The proposed rule also seeks to: (i) expand USDA-RHS’ lender indemnification authority for loss claims in certain instances, such as fraud , misrepresentation, and noncompliance with loan origination requirements, (ii) add a new special loan servicing option, (iii) revise the interest rate reduction requirement for refinances, and (iv) add a streamlined-assist refinance option. Comments to the proposed rule must be received on or before May 4, 2015.
Questions regarding the proposed rule 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
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
- Sherry-Maria Safchuk, (310) 424-3917