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On December 10, the CFPB issued two final rules related to qualified mortgage (QM) loans. The first of the two final rules, the General QM Final Rule, amends Regulation Z and revises the definition of a General QM by eliminating the General QM loan definition’s 43 percent debt-to-income ratio (DTI) limit and replacing it with bright-line price-based thresholds. The General QM Final Rule also eliminates QM status resulting solely from loans meeting qualifications for sale to Fannie or Freddie Mac (GSEs), known as the so-called “GSE Patch.” The Bureau’s second final rule, the Seasoned QM Final Rule, creates a new category of safe-harbor QMs applicable to first-lien, fixed-rate mortgages that are held in portfolio by the originating creditor or first purchaser for a 36-month period while meeting certain performance requirements, and comply with general restrictions on product features and points and fees.
Both final rules become effective 60 days after publication in the Federal Register. The mandatory compliance date for the General QM Final Rule is July 1, 2021; however, the Bureau notes that, between the effective date and the mandatory compliance date, there will be an optional early compliance period during which creditors will be able to use either the current General QM definition or the revised General QM definition. In addition, the GSE Patch will be available only for transactions where the creditor receives the consumer’s application before July 1, 2021 (or earlier if the GSEs exit conservatorship). Further, the Seasoned QM Final Rule applies to covered transactions for which creditors receive an application on or after the effective date, but will not apply retroactively to loans already in a lender’s portfolio.
Buckley will follow up with a more detailed summary of the final rules soon.
On August 18, the CFPB released a Notice of Proposed Rulemaking (NPRM) to create a new category of Qualified Mortgages to be called “Seasoned QMs”. The CFPB concluded that if a loan has performed for a long enough period of time and meets certain underwriting conditions and product restrictions, it is warranted to conclusively presume that the creditor’s determination of a consumer’s ability to repay at consummation was reasonable. The new QM category would designate the loan as a safe harbor QM, even if the loan did not meet the criteria of any of the other QM definitions at consummation.
Under the NPRM, a loan originated as a rebuttable presumption QM or as a Non-QM loan will be granted a safe harbor presumption that it complies with the ATR requirements if it (1) meets certain product restrictions and (2) is held in portfolio during the seasoning period and meets specified performance criteria. The product restrictions require that (1) the loan is secured by a first lien; (2) the loan has a fixed rate, with fully amortizing payments and no balloon payment; (3) the loan term does not exceed 30 years; and (4) the total points and fees do not exceed specified limits.
On February 25, in a speech before the Credit Union National Association Government Affairs Conference, CFPB Director Kathy Kraninger discussed the Bureau’s rulemaking approach in the consumer financial marketplace. Specifically, Kraninger reminded attendees that the Bureau’s Advance Notice of Proposed Rulemaking (ANPR) on the Ability to Repay/Qualified Mortgage Rule (ATR/QM rule) issued last July signaled its “intent to allow the patch to expire as intended in January 2021 or shortly thereafter to allow for a smooth and orderly transition.” As previously covered by a Buckley Special Alert, the ANPR solicited feedback on, among other things, whether the debt-to-income ratio should be altered and how Regulation Z and the ATR/QM Rule should be amended to minimize disruption from the so-called GSE patch expiration. Following a review of all received public comments, Kraninger stated that the Bureau has “decided to propose to amend the QM rule by moving away from the 43 percent debt-to-income ratio requirement,” and will instead “propose an alternative, such as [a] pricing threshold to better ensure that responsible, affordable mortgage credit remains available for consumers.” A proposed rule seeking comments on possible amendments will be issued no later than May, Kraninger stated.
Kraninger also discussed possible amendments to the Remittance Rule (Rule), which implements the Electronic Fund Transfer Act and requires financial companies handling international money transfers, or remittance transfers, to disclose exact fees and exchange rates. The Bureau issued a Request for Information last April on two aspects of the Rule (covered by InfoBytes here), and a follow-up Notice of Proposed Rulemaking (NPR) in December (covered by InfoBytes here) to propose a permanent safe harbor for financial companies that provide 500 or fewer remittance transfers a year. According to Kraninger, “[t]his would reduce the burden on over 400 banks and almost 250 credit unions that send a relatively small number of remittances. Ultimately, by allowing the use of estimates in some circumstances and adjusting the threshold for coverage under the rule, . . . [the] proposal was designed to preserve consumers’ ability to send remittances from their bank accounts to certain destinations.” The Bureau plans to finalize the remittances rulemaking in May.
Kraninger also commented on the Bureau’s regulatory review process, and reminded attendees of its “Start Small, Save Up” initiative, which encourages partnerships between financial companies/service providers and the Bureau in order to develop savings products for consumers.
On February 6, CFPB Director Kathy Kraninger testified at a House Financial Services Committee hearing on the CFPB’s Semi-Annual Report to Congress. (Covered by InfoBytes here.) The hearing covered the semi-annual report to Congress on the Bureau’s work from April 1, 2019, through September 30, 2019. In her opening remarks, Committee Chairwoman Maxine Waters argued, among other things, that the Bureau’s recent policy statement on the “abusiveness” standard in supervision and enforcement matters “undercuts” Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Waters also challenged Kraninger on her support for the joint notice of proposed rulemaking issued by the OCC and FDIC to strengthen and modernize Community Reinvestment Act regulations (covered by a Buckley Special Alert), arguing that the proposal would lead to disinvestment in communities, while emphasizing that Kraninger’s actions have not demonstrated the Bureau’s responsibility to meaningfully protect consumers. However, in her opening statement and written testimony, Kraninger highlighted several actions recently taken by the Bureau to protect consumers, and emphasized the Bureau’s commitment to preventing harm by “building a culture of compliance throughout the financial system while supporting free and competitive markets that provide for informed consumer choice.”
Additional highlights of Kraninger’s testimony include:
- Memoranda of Understanding (MOU) with the Department of Education (Department). Kraninger discussed the recently announced information sharing agreement (covered by InfoBytes here) between the Bureau and the Department, intended to protect student borrowers by clarifying the roles and responsibilities for each agency and permitting the sharing of student loan complaint data analysis, recommendations, and data analytic tools. Kraninger stated that the MOU will give the Department the same near real-time access to the Bureau’s complaint database enjoyed by other government partners, and also told the Committee that the Bureau and Department are currently discussing a second supervisory MOU.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans. Kraninger told the Committee that a rewrite of the payday lending rule—which will eliminate requirements for lenders to assess a borrower’s ability to repay loans—is expected in April. (Covered by InfoBytes here.) Kraninger noted that the Bureau is currently reviewing an “extensive number of comments” and plans to address a petition on the rule’s payments provision. “[F]inancial institutions have argued that there were some products pulled into that that were, you know, unintended,” she stated. “[W]orking through all of that and. . .moving forward in a way that is transparent in. . .April is what I am planning to do.”
- Ability-to-Repay and Qualified Mortgages (QM). Kraninger discussed the Bureau’s advanced notice of proposed rulemaking that would modify the QM Rule by moving away from the 43 percent debt to income ratio requirement and adopt an alternative such as a pricing threshold to ensure responsible, affordable mortgage credit is available to consumers. (Covered by InfoBytes here.) She stated that the Bureau would welcome legislation from Congress in this area.
- Supervision and Enforcement. Kraninger repeatedly emphasized that supervision is an important tool for the Bureau, and stated in her written testimony that during the reporting period discussed, “the Bureau’s Fair Lending Supervision program initiated 16 supervisory events at financial services institutions under the Bureau’s jurisdiction to determine compliance with federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities, including the Equal Credit Opportunity Act  and HMDA.” In addition to discussing recent enforcement actions, Kraninger also highlighted three innovation policies: the Trial Disclosure Program Policy, No-Action Letter Policy, and the Compliance Assistance Sandbox Policy. (Covered by InfoBytes here.)
- Military Lending Act (MLA). Kraninger reiterated her position that she does not believe Dodd-Frank gives the Bureau the authority to supervise financial institutions for military lending compliance, and repeated her request for Congress to grant the Bureau clear authority to do so. (Covered by InfoBytes here.) Congressman Barr (R-KY) noted that while he introduced H.R. 442 last month in response to Kraninger’s request, the majority has denied the mark up.
- UDAAP. Kraninger fielded a number of questions on the Bureau’s recent abusiveness policy statement. (Covered by InfoBytes here.) Several Democrats told Kraninger the new policy will put unnecessary constraints on the Bureau’s enforcement powers, while some Republicans said the policy fails to define what constitutes an abusive act or practice. Kraninger informed the Committee that the policy statement is intended to “clarify abusiveness and separate it from deceptive and unfairness because Congress explicitly gave us those three authorities.” Kraninger reiterated that the Bureau will seek monetary relief only when the entity has failed to make a good faith effort to comply, and that “[r]estitution for consumers will be the priority in these cases.” She further emphasized that “in no way should that policy be read to say that we would not bring abusiveness claims.” Congresswoman Maloney (D-NY) argued, however, that a 2016 fine issued against a national bank for allegedly unfair and abusive conduct tied to the bank’s incentive compensation sales practices “would have been substantially lower if the [B]ureau hadn’t charged [the bank] with abus[ive] conduct also.” Kraninger replied that the Bureau could have gotten “the same amount of restitution and other penalties associated with unfairness alone.”
- Constitutionality Challenge. Kraninger reiterated that while she agrees with Seila Law on the Bureau’s single-director leadership structure, she differs on how the matter should be resolved. “Congress obviously provided a clear mission for this agency but there are some questions around. . .this and I want the uncertainty to be resolved,” Kraninger testified. “Congress will have the opportunity to make any changes or respond to that and I think that’s appropriate,” she continued. “I would very much like to see a resolution on this question because it has hampered the CFPB’s ability to carry out its mission, virtually since its inception.” (Continuing InfoBytes coverage on Seila Law LLC v. CFPB here.)
According to sources, on January 17, CFPB Director Kathy Kraninger sent a letter to prominent members of Congress announcing plans to extend the qualified mortgage patch—which exempts loans eligible for purchase by Fannie Mae and Freddie Mac (GSEs) from the Qualified Mortgage (QM) Rule’s 43 percent debt-to-income (DTI) ratio—for a short period beyond its current January 2021 expiration. As previously covered by a Buckley Special Alert, the Bureau issued an Advance Notice of Proposed Rulemaking last July to solicit feedback on, among other things, whether the DTI limit should be altered and how Regulation Z and the Ability to Repay/QM Rule should be amended to minimize disruption from the so-called GSE patch expiration. Kraninger notes in her letter that the Bureau plans to propose an amendment to the QM Rule to replace DTI ratios as a factor in mortgage underwriting with an alternative measure of credit risk. One alternative, Kraninger says, could be to use pricing thresholds based on the difference between the loan’s annual percentage rate and the average prime offer rate for a similar loan. The Bureau is also considering adding a “seasoning” approach through a separate rulemaking process to give safe harbor to certain loans when the borrower has made timely payments for a certain period, Kraninger states. Sources report that the Bureau plans to issue a Notice of Proposed Rulemaking no later than May.
On September 17, nine Democratic Senate Banking Committee members wrote to the CFPB in response to its Advanced Notice of Proposed Rulemaking (ANPR) soliciting feedback on amending Regulation Z and the Ability to Repay/Qualified Mortgage Rule (ATR/QM Rule) to minimize disruption from the so-called GSE patch expiration, previously covered by a Buckley Special Alert. The GSE patch confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac (GSEs) while those entities operate under FHFA conservatorship. The letter urges the Bureau to ensure two things when reexamining the regulation: (i) borrowers maintain the same level of access to responsible, affordable mortgage credit; and (ii) all mortgage underwriting decisions are based on a borrower demonstrating an ability to repay and rely on documentation and use verified income. The Senators request that the CFPB use the ANPR “as an opportunity to ensure the ATR and QM regulations facilitate a mortgage market that provides access to safe, sustainable mortgage credit for all creditworthy borrowers.”
On July 25, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPR) that is intended as a first step in an orderly expiration of the so-called GSE patch, which confers Qualified Mortgage status for loans purchased or guaranteed by Fannie Mae and Freddie Mac while those entities operate under FHFA conservatorship. The patch expires in January 2021, or when Fannie and Freddie exit their conservatorships, whichever comes first. The ANPR solicits feedback on amending Regulation Z and the Ability to Repay/Qualified Mortgage Rule (ATR/QM Rule) to minimize disruption from the patch’s expiration. Comments are due 45 days after the ANPR’s publication in the Federal Register, which has not occurred as of the publication of this Special Alert.
The Bureau has previously solicited comments on the ATR/QM Rule, including the GSE Patch — first through a request for information relating to its adopted regulations in March 2018, and then in its ATR/QM Rule Assessment Report in January 2019.
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Click here to read the full special alert.
If you have questions about the GSE Patch and potential changes to the Ability to Repay/Qualified Mortgage Rule, please visit our Consumer Financial Protection Bureau practice page or contact a Buckley attorney with whom you have worked in the past.
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.
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.
On February 6, the CFPB released two notices of proposed rulemaking (NPRM) related to certain payday lending requirements under the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (the Rule). As previously covered by InfoBytes, last October the Bureau announced plans to reconsider the Rule’s mandatory underwriting requirements and address the Rule’s compliance date.
The first NPRM proposed will rescind certain provisions of the Rule related to underwriting standards for payday loans and related products scheduled to take effect later this year. Specifically, the CFPB proposes to rescind the portion of the Rule that would make it an unfair and abusive practice for a lender to make covered high-interest rate, short-term loans or covered longer-term balloon payment loans without reasonably determining that the consumer has the ability to repay. The proposed changes would also rescind prescribed mandatory underwriting requirements for making the ability-to-repay determination, provisions exempting certain loans from the mandatory underwriting requirements, as well as related definitions, reporting, and recordkeeping requirements. The CFPB explains that it now initially determines that the evidence underlying the identification of the unfair and abusive practice in the Rule “is not sufficiently robust and reliable to support that determination, in light of the impact those provisions will have on the market for covered short-term and longer-term balloon-payment loans, and the ability of consumers to obtain such loans, among other things.” If finalized, the proposals represent a significant change to the Rule as finalized during the tenure of former Bureau Director Richard Cordray in October 2017. (See Buckley Special Alert for more detailed coverage on the Rule.) Comments will be accepted for 90 days following publication in the Federal Register.
The second NPRM seeks to delay the Rule’s compliance date for mandatory underwriting provisions from August 19, 2019 to November 19, 2020. Notably, the Bureau states in a press release announcing the NPRMs that the proposal to delay the effective date does not extend to the Rule’s provisions governing payments, which “prohibit payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals.” Lenders also will still be required to provide written notice to consumers both before the first attempt to withdraw payment from their accounts, as well as prior to subsequent attempts involving different dates, amounts, or payment channels. These provisions are not under reconsideration and will take effect August 19, 2019. Comments will be accepted for 30 days following publication in the Federal Register.