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Financial Services Law Insights and Observations

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  • Senator Urges Federal Regulators to Sync QRM Rule with CFPB's QM Standard

    Lending

    On January 22, Senator Bob Corker (R-TN) sent a letter to federal regulators responsible for finalizing the Dodd-Frank Act mandated “qualified residential mortgage” (QRM) standard, urging that the final QRM definition mirror the “qualified mortgage” (QM) definition recently promulgated by the CFPB. The QRM rule will define those loans exempt from the Act’s risk retention requirements for mortgage securitizers, a requirement that also will be set by the rule though it cannot be less than the statutory floor of five percent of the credit risk for any asset that is not a QRM. The Act also prohibits the QRM standard from being broader than the QM definition. Senator Corker maintains that, because the QRM rule will exempt loans sold to federal government sponsored enterprises and government agencies, “if the QRM rule is written differently than the QM rule, most financial institutions will only originate loans intended for sale to” those entities and as a result the return of private capital to the secondary market will be limited.

    CFPB Dodd-Frank Federal Reserve RMBS U.S. Senate Qualified Mortgage Qualified Residential Mortgage

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  • Special Alert: Detailed Analysis of CFPB's Final Ability-to-Repay/Qualified Mortgage Rule

    Lending

    As promised in our earlier flash Alert on the Consumer Financial Protection Bureau's highly anticipated final "Ability-to-Repay" rule governing residential mortgage lending under Regulation Z, we are providing in this Special Alert a detailed summary and analysis of the Rule, which becomes effective on January 10, 2014.  We also assess the Bureau's concurrently issued proposal, which seeks comments by February 25, 2013 on potential amendments to the Rule.  For ease of reference, the Alert contains a detailed, hyper-linked Table of Contents.

    CFPB TILA Dodd-Frank Qualified Mortgage

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  • Special Alert: CFPB Issues Final Ability-to-Repay / Qualified Mortgage Rule

    Lending

    On January 10, the CFPB issued its keenly awaited final "Ability-to-Repay" rule under Regulation Z that will require lenders to verify a consumer's ability to repay a mortgage loan as required by Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule will become effective on January 10, 2014. Concurrently, the CFPB released a proposal seeking comment on amendments to the final rule. Together, the releases containing the final and concurrent proposed rules total almost 1,000 pages. This alert highlights some key issues that the releases resolve and leave open; we will send a summary of the releases with additional analysis of the key issues once we have had more time to review.

    Because of the severe penalties established by Congress for violating the "Ability to Repay" requirements - a borrower in foreclosure can assert a violation against the creditor or assignee seeking up to three years of finance charges paid on the loan - the key definitions and exemptions established by the rule are expected to greatly influence the availability and cost of residential mortgage credit for years to come.

    The statute defines a subset of mortgage loans to be "Qualified Mortgages" (or QMs), which would be more difficult for consumers to challenge on ability-to-repay grounds. The rule resolves three of the major policy debates surrounding the QM concept, as discussed below, but leaves open many related matters:

    • Whether the QM definition should be objective (and thus easier to determine compliance with up front but more rigid in application to individual borrowers) or subjective (creating more of a compliance challenge but allowing for more individualized determinations)

      • The rule takes the more objective path, using as its underwriting criteria (i) a numerical standard of 43% debt to income (DTI) ratio as the QM cut-off or, alternatively, for the time being, (ii) eligibility for purchase, guarantee or insurance by the GSEs or Federal agencies. (This alternative to the 43% cut-off will become unavailable after seven years or, if earlier and as applicable, until the Federal agencies write their own qualified mortgage rules or the GSE conservatorships end.) Note that jumbo loans, by definition, could not qualify under the GSE/Federal agency alternative; thus, they will have to be made at a 43% DTI just to pass the QM underwriting test.

    • Whether the QM definition should encompass much of the market or be limited to the very top end of the market

      • The definition clearly includes much of the market. The underwriting criteria described above would make well over 90% of the current residential mortgage marketplace QM eligible. How many of those loans would also pass the separate "points and fees" test for QM (discussed below) is an open question, however.

    • Whether QM status would provide a "safe harbor" from liability under the requirements or merely a "rebuttable presumption" that the loan meets the ability-to-repay requirements

      • The rule provides a safe harbor for loans with APRs below the "higher-priced" threshold of 150 basis points over the Average Prime Offer Rate (APOR), and a "rebuttable presumption" for loans with an APR above that threshold.

    The expansive underwriting criteria adopted in the final rule for QMs will place relatively more importance on the separate QM requirement that points and fees be limited to 3% of the loan amount. Indeed, to many observers, the components of that cap present the most significant unresolved issues in the rule. The final rule includes in the 3% cap both (i) direct and indirect loan originator compensation, as well as (ii) closing charges paid to affiliated settlement providers such as a lender-owned title company.

    The inclusion of those items in the 3% cap will place a lot of stress on mortgage brokers and wholesale lending business models (and the brokers that send applications to those lenders) and on the use of affiliates. By including these items in the 3% cap, there will be little room for upfront lender charges. At least on the issue of indirect loan originator compensation, however, the Bureau has shown some potential flexibility by raising the matter in the concurrent proposal.

    CFPB TILA Dodd-Frank Mortgage Origination Qualified Mortgage

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  • CFPB Issues Final Ability to Repay/Qualified Mortgage Rule and High-Cost Mortgage Rules

    Lending

    On January 10, the CFPB issued the final version of a rule that will require creditors to verify a consumer’s ability to repay prior to making a consumer credit transaction secured by a dwelling. The rule defines a “qualified mortgage,” providing a safe harbor from liability for loans with an APR below Regulation Z's “higher-priced” threshold of 150 basis points above the Average Prime Offer Rate, and a “rebuttable presumption” for loans with an APR above that threshold. The rule will become effective on January 10, 2014. Concurrently, the CFPB released a proposal seeking comment on amendments to the final rule that would, among other things, provide exemptions for certain community-based lenders and small portfolio creditors and potentially change the treatment of indirect lender compensation for purposes of the qualified mortgage "points and fees" test. BuckleySandler has prepared a Special Alert that highlights a few key issues resolved and left open by the nearly 1,000-page releases on the rule and concurrent proposal. We will distribute a summary and additional analysis of key issues in the releases once we complete our review of them.

    Also on January 10, the CFPB issued two final rules related to high-cost mortgages. The first rule amends Regulation Z to implement changes to TILA made by the Dodd-Frank Act that lengthen the time for which a mandatory escrow account established for a higher-priced mortgage loan must be maintained. This rule also exempts certain transactions from the statute’s escrow requirement. The second rule, which also amends Regulation Z  to incorporate Dodd-Frank Act statutory changes, expands the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA), revises and expands the tests for coverage under HOEPA, and imposes additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement. This rule also amends Regulation Z and Regulation X to require, among other things, that lenders provide borrowers information about homeownership counseling providers. BuckleySandler is reviewing these rules and will soon provide additional information.

    TILA Mortgage Origination HOEPA Qualified Mortgage Escrow

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  • Federal Reserve Board Governor Calls for New Approach to Mortgage Regulation, Highlights Potential Impacts of Qualified Mortgage Rule

    Lending

    On November 9, in a speech to the Community Bankers Symposium, Federal Reserve Board Governor Elizabeth Duke reviewed in detail the role community banks play in the mortgage market and the post-Dodd-Frank Act mortgage lending challenges facing community banks. Ms. Duke explained that new rules to implement the Basel III capital accords, as well as those to put in place by Dodd-Frank Act requirements regarding escrow accounts for higher-priced mortgages, loan officer compensation, and appraisal requirements will burden community banks significantly. Ms. Duke highlighted the pending qualified mortgage and qualified residential mortgage rules, noting that they could have a “profound effect on the mortgage terms offered and the underwriting conditions.” not only for community banks, but for all banks. Specifically, she said that these rules could “constrain community bankers from using their experience with the cash flows from a small business customer or their knowledge of local real estate markets to customize a loan for an ‘irregular’ situation, such loans may not be made.”. Given the “cost of regulation that is prescriptive with respect to underwriting, loan structure, and operating procedures” and the “lack of evidence that balance sheet lending by community banks created significant problems,” relating to the financial crisis, Ms. Duke concluded that policymakers should establish a separate, simpler regulatory structure applicable to community bank mortgage lending.

    CFPB Dodd-Frank Mortgage Origination Federal Reserve Capital Requirements Qualified Mortgage

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  • FDIC to Host Teleconferences on CFPB Proposed Mortgage Rules

    Lending

    On September 18, the FDIC announced in Financial Institution Letter FIL-39-2012 that it plans to host two teleconferences in the coming weeks to discuss the CFPB’s mortgage-related proposed rules. The teleconferences will be conducted by staff from the FDIC’s Division of Depositor and Consumer Protection and are being offered to officers and employees of FDIC-supervised institutions. The first call will take place on September 27, 2012 and will cover (i) mortgage origination standards, (ii) appraisals for “higher-risk” mortgages, (iii) ECOA appraisal requirements, and (iv) mortgage servicing standards. On October 10, 2012, FDIC staff will discuss (i) RESPA/TILA mortgage disclosure integration, (ii) qualified mortgages and the ability to repay standard, (iii) escrow requirements for “higher-priced mortgage loans”, and (iv) high-cost HOEPA loans.

    FDIC CFPB Mortgage Origination Mortgage Servicing ECOA HOEPA Qualified Mortgage

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  • House Members Urge CFPB To Adopt QM Rule With Safe Harbor

    Lending

    This week, 90 members of the House of Representatives reportedly sent a letter to CFPB Director Richard Cordray urging the CFPB to include a clear and strong safe harbor in its final “ability to repay” or “qualified mortgage” (QM) rule. The rule would require creditors to verify a consumer’s ability to repay prior to making a residential mortgage loan and would define a QM that has a presumption of compliance with the ability to repay requirement. The letter, which was initiated by Representatives Capito (R-WV) and Sherman (D-CA), adds to a record that some Members of Congress have been building with regard to the QM rule. The Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee chaired by Representative Capito held a hearing this week to receive testimony on the rule from stakeholders. While the witnesses generally agreed that the QM rule should be broad and provide clearly defined standards, differences of opinion remain with regard to the safe harbor issue. This week the extended comment period for the rule closed; the CFPB has indicated that it expects to issue its final rule before the end of 2012.

    CFPB U.S. House Qualified Mortgage

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  • CFPB Delays Release of "Ability-to-Repay" Rule

    Lending

    On May 31, the CFPB announced that it has reopened the comment period for the proposed “ability-to-repay” rule that would require creditors to verify a consumer’s ability to repay prior to making a consumer credit transaction secured by a dwelling. The rule would also define a “qualified mortgage” that has a presumption of compliance with the ability-to-repay requirement. The CFPB is specifically seeking comments on new loan data provided to the CFPB by the Federal Housing Finance Agency. According to the CFPB, the loan data, which contains loan-level information on the characteristics and performance of all single-family mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, can be used to analyze the impact of certain variables on a consumer’s ability to repay such as debt-to-income ratio. The CFPB is also seeking comments regarding the potential risk of litigation in connection with the proposed rule. The CFPB specifies that it has not reopened for comment any other aspect of the proposed rule. Comments are due by July 9, 2012. In its press release, the CFPB states that it expects to issue its final rule before the end of 2012. For more information on the proposed rule, see InfoBytes, Apr. 22, 2011.

    CFPB Freddie Mac Fannie Mae Qualified Mortgage

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