InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Fannie Mae, Freddie Mac Directed to Purchase Only QM Loans
On May 6, the FHFA announced that Fannie Mae and Freddie Mac must limit their future mortgage acquisitions to loans that meet the requirements for qualified mortgages under the CFPB’s January 2013 ability-to-repay/qualified mortgage rule (ATR/QM rule), including special or temporary qualified mortgage requirements, and loans that are exempt from the “ability-to-repay” requirements. After the ATR/QM rule takes effect on January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan subject to the ability-to-repay requirements if the loan (i) is not fully amortizing, (ii) has a term of longer than 30 years, or (iii) includes points and fees in excess of 3% of the total loan amount, or such other limits for low balance loans as set forth in the rule. The announcement, together with announcements made by Fannie Mae and Freddie Mac, confirms that the enterprises will continue to purchase loans that meet the underwriting and delivery eligibility requirements stated in their respective selling guides, including those that are processed through their automated underwriting systems.
CFPB Proposes Changes to Qualified Mortgage and Mortgage Servicing Rules
On April 19, the CFPB proposed a rule to amend and clarify certain provisions of its final qualified mortgage rule and final mortgage servicing rule. The proposal addresses (i) preemption issues with regard to Regulation X’s servicing provisions, (ii) the small servicer exemption from certain of the new servicing standards, (iii) the use of government-sponsored enterprise and federal agency purchase, guarantee, or insurance eligibility for determining qualified mortgage status, and (iv) the determination of debt and income for purposes of originating qualified mortgages. With regard to small servicers, the proposal would clarify which mortgage loans to consider in determining small servicer status and the application of the small servicer exemption to servicer/affiliate and master servicer/subservicer relationships. It would exclude from consideration mortgage loans voluntarily serviced for an unaffiliated entity without remuneration, reverse mortgages, and mortgage loans secured by a consumer’s interest in timeshare plans. With regard to debt-to-income ratio assessments for purposes of offering qualified mortgages, the rule would amend language related to employment record and income, obtaining business credit reports and other issues related to self-employed borrowers, and the treatment of Social Security and rental income.
CFPB Publishes QM Rule Compliance Guide
On April 10, the CFPB published a guide to help small entities comply with its ability-to-repay/qualified mortgage rule. As required by the Small Business Regulatory Enforcement Fairness Act, the guide highlights issues for small creditors to consider when implementing the rule. More broadly, the CFPB believes the guide provides an “easy-to-use” summary of the rule for all creditors, as well as secondary market participants, software providers, and other vendors and creditor business partners. However, the CFPB notes that the guide is not a substitute for the rule and the Official Interpretations, and the guide does not consider other federal or state laws that may apply to the origination of mortgage loans. The CFPB also has prepared a chart that compares the general ability-to-repay requirements with requirements for originating qualified mortgages.
Senator Urges Federal Regulators to Sync QRM Rule with CFPB's QM Standard
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.
Special Alert: Detailed Analysis of CFPB's Final Ability-to-Repay/Qualified Mortgage Rule
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.
Special Alert: CFPB Issues Final Ability-to-Repay / Qualified Mortgage Rule
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.
- 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)
CFPB Issues Final Ability to Repay/Qualified Mortgage Rule and High-Cost Mortgage Rules
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.
Federal Reserve Board Governor Calls for New Approach to Mortgage Regulation, Highlights Potential Impacts of Qualified Mortgage Rule
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.
FDIC to Host Teleconferences on CFPB Proposed Mortgage Rules
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.
House Members Urge CFPB To Adopt QM Rule With Safe Harbor
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.