CFPB Mortgage Rules

By David A. Wolfe, Attorney

On May 29, the Consumer Financial Protection Bureau (CFPB) finalized several amendments to its ability-to-repay and qualified mortgage rules.  Originally adopted in January 2013 and taking effect next January, these rules require residential mortgage lenders to consider a borrower’s ability to repay before extending credit and provide certain protections from liability for “qualified mortgages.” With its enactment of the Dodd-Frank Reform Act, Congress required creditors to make a reasonable and good faith determination of the consumer’s reasonable ability to repay loans according to their terms based on verified and documented information, while establishing a presumption of compliance for a certain category of mortgages, called “qualified mortgages.”

One of the key factors used to identify a qualified mortgage is a determination that the amount of points and fees charged does not exceed 3% of the mortgage value.  Such qualified mortgages are entitled to a presumption of compliance with the CFPB’s ability-to-repay rules, and this presumption is conclusive for those qualified mortgages that pose the least risk.  For “higher-priced” qualified mortgages, which generally have an APR that exceeds the average prime offer rate for a comparable transaction by 1.5 percentage points or more, the lender’s presumption of compliance with the ability-to-repay rules is rebuttable.

The CFPB’s final rules adopt an exemption from its ability-to-repay requirements for mortgages that are originated and held in portfolio by certain small creditors, including most credit unions, which permits mortgages to be qualified if they meet the applicable requirements other than debt-to-income ratio.  In addition to retaining the loan in its portfolio, the lender must have total assets of less than $2 billion and made less than 500 first-mortgage transactions in the preceding year.  A loan that is a qualified mortgage because of this rule will lose its exemption if later sold or transferred, with some exceptions for transfers made more than three years after origination.

For high-cost mortgages, CFPB’s final rule amends Regulation Z (Truth in Lending) by expanding the types of loans subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA), revising the tests for whether a loan is “high-cost,” imposing new restrictions on high-cost loans, and requiring new disclosures, including a pre-loan counseling requirement.  A first mortgage is a high-cost mortgage if the annual percentage rate exceeds the average prime offer rate by more than 6.5%, which is published by the Fed and updated weekly.  Borrowers must receive pre-loan counseling before they receive a high-cost mortgage by a HUD-certified counselor or other approved authority and the new rules implement a requirement under TILA that creditors must obtain confirmation that a first-time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or organization before making a loan that provides for or permits negative amortization to the borrower.

David Wolfe is an attorney of Consumer Collections in the Detroit office of Weltman, Weinberg & Reis Co., LPAwho can be reached at 248.362.6142 and dwolfe@weltman.com.

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