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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.
CFPB Delays Remittance Rule Effective Date
On January 22, the CFPB announced that the effective date for its international remittance transfer rule, originally set for February 7, 2013, is delayed, and that a new effective date will be announced later this year. The CFPB recently proposed making the rule effective 90 days after proposed revisions to the rule are finalized.
CFPB Addresses Use of Electronic Periodic Statements for Residential Mortgage Loans
The CFPB’s recent rule amending Regulation Z (TILA), issued on January 17, included, among other changes, the requirement that mortgage servicers provide consumers with periodic billing statements. As required by the Dodd-Frank Act, the rule explicitly allows electronic distribution of the statements. However, the Bureau restricted the use of electronic statements only to instances where “the consumer agrees.” In describing the process through which this agreement must be obtained, the rule departs from the formal requirements of the federal ESIGN Act’s consumer consent process, authorizing instead a “simpler process” which requires only the consumer’s “affirmative consent.” The CFPB staff, in the accompanying Official Interpretations, indicates that consent may be presumed for consumers who are currently receiving electronic account disclosures from their servicer for any type of account, mortgage or otherwise. In light of concerns about information security, the Official Interpretations also indicate that mortgage servicers may make electronic periodic statements available on a secure website and notify the consumer that the statement is available, rather than delivering the statement directly to the consumer. Recognizing that some consumers may not desire regular notification emails, the Official Interpretations also allow a consumer who has demonstrated the ability to access statements online to opt out of receiving such notifications. Neither the rule nor the Official Interpretations address how the rule relates to other laws that may affect when an electronic communication is delivered, such as the sending or receipt requirements of state UETA statutes.
Chicago Requires Debt Collector Licensing, Sets Zoning Requirements for Small Dollar Lenders
On January 17, the City of Chicago passed ordinances related to debt collection, small dollar lending, and license enforcement. With the adoption of an ordinance requiring that debt collectors collecting debts from Chicagoans obtain from the City a Regulated Business License, Chicago becomes only the third municipality to require local debt collector licensing. By requiring a license, the ordinance requires that debt collectors follow all state and federal debt collection rules, including for example, providing debt verification. For debt collectors that have their licenses revoked, the ordinance requires a four-year wait period before a new license can be issued. A second ordinance sets new zoning rules for payday and title-secured lending stores. Finally, the City passed an ordinance that, effective June 1, 2013, will allow the Department of Business Affairs and Consumer Protection to initiate license revocation proceedings and refuse to issue or reissue the license of specific business locations convicted within the last five years of violating the Illinois Wage Payment and Collection Act (IWPCA) and the federal FDCPA. The passing of the ordinances follows a recent announcement by the City and the CFPB to enter a first-of-its-kind partnership to share information on consumer financial protection issues.
Special Alert: Detailed Analysis of CFPB's High-Cost Mortgage Rule
On January 10, the CCFPB issued a final rule that amends Regulation Z (Truth in Lending) to implement changes to the Home Ownership and Equity Protection Act (HOEPA) made by the Dodd-Frank Act. As detailed in BuckleySandler's Special Alert, the rule expands the types of loans subject to HOEPA, revises the tests for whether a loan is "high-cost" and therefore subject to HOEPA, imposes new restrictions on high-cost loans, and requires new disclosures. Because of the special requirements for loans that meet HOEPA's high-cost tests, the HOEPA threshold has acted as a de facto usury ceiling for the vast majority of mortgage originators. With the rule's extension of HOEPA to more types of loans, and the lowering of the HOEPA thresholds, this ceiling will now affect a broader segment of consumers seeking mortgage loans than before. The rule also implements two additional Dodd-Frank Act provisions that are not amendments to HOEPA related to homeownership counseling. Click here to download BuckleySandler's detailed analysis of the final high-cost mortgage rule.
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.
CFPB Issues Mortgage Servicing Standards
On January 17, the CFPB issued final rules amending Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The rule amending Regulation Z includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoff statements. The rule amending Regulation X addresses (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. While many of the rules implement changes required by the Dodd-Frank Act, other proposed requirements incorporate requirements similar to those placed on servicers as part of the national mortgage servicing settlement earlier this year, or corrective actions taken in 2011 by the prudential regulators. The new standards go into effect on January 10, 2014. The rule provides certain exemptions for servicers that service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own. BuckleySandler will provide additional analysis of key issues in the rules once we complete our review of them.
CFPB Plans Release of Mortgage Loan Originator Rule
On January 18, the CFPB announced that it will release a final rule regarding mortgage loan originator compensation and qualifications on Sunday, January 20. According to its press release, the rule will (i) prohibit steering incentives, (ii) prohibit “dual compensation,” and (iii) set qualification and screening standards for loan originators, but it will not require, as proposed, that mortgage loan originators make available a loan option with no upfront discount points or origination fees, if they were making available one with upfront discount points or origination fees. The press release states that while the majority of the loan originator rule will take effect in January 2014, certain provisions related to mandatory arbitration restrictions will take effect in June 2013. BuckleySandler will review the rule once it is released and provide additional analysis.
FDIC Approves Joint-Agency Appraisal Rule for Higher-Risk Mortgages
On January 18, the Federal Reserve Board, the OCC, the FDIC, the NCUA, the FHFA, and the CFPB issued a final rule to implement Dodd-Frank Act amendments to TILA that require creditors to meet certain appraisal conditions before making a higher-risk loan. The rule uses the term “higher-priced mortgage loan,” which covers: (i) a loan for which the APR exceeds the average prime offer rate (an average market rate) by 1.5 percent for a first-lien loan, (ii) 2.5 percent for a first-lien jumbo loan, and (iii) 3.5 percent for a subordinate-lien loan. For such loans, the final rule requires that a creditor obtain a written appraisal from a certified or licensed appraiser that is based on a physical property visit of the interior of the property. During the application process, the creditor must issue a disclosure stating (i) the purpose of the appraisal, (ii) that the creditor will provide the applicant a copy of any written appraisal, and (iii) that the applicant may choose to have a separate appraisal conducted at his or her own expense. The creditor must provide the borrower with a free copy of any written appraisals at least three business days before closing. Additional appraisal requirements apply under certain circumstances. As did the proposed rule, and consistent with the statute, the final rule exempts loans that are considered “qualified mortgages,” as recently defined by the CFPB, as well as reverse mortgages, loans secured by manufactured homes, and certain other loans.
On the same day, the CFPB issued a related rule to implement a Dodd-Frank Act provision that adds similar appraisal requirements to ECOA. The final rule generally mirrors the rule as proposed and requires that for any loan to be secured by a first lien on a dwelling, a creditor must (i) notify applicants within three business days of receiving an application of their right to receive a free copy of written appraisals and valuations and (ii) provide applicants a free copy of all written appraisals and valuations promptly after receiving them, but in no case later than three business days prior to closing on the mortgage. The rule prohibits creditors from charging additional fees for providing a copy of written appraisals and valuations, and allows applicants to waive the three day requirement, provided a copy of all written appraisals and valuations are provided at or prior to closing. Together, the revisions to TILA and ECOA, as implemented by these rules, require creditors to provide two appraisal disclosures to consumers applying for a higher-risk loan secured by a first lien on a borrower’s principal dwelling. The rules take effect January 18, 2014.
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)