On May 29, 2013, the CFPB amended the Truth-in-Lending Act and Regulation Z to finalize a rule aimed at assisting small creditors in originating Qualified Mortgages with the highest level of protection for compliance with the Ability To Repay (ATR) Rule. We discussed these changes in a Bulletin Update on June 4, 2013, but wanted to elaborate a bit on the changes.
First of all, the CFPB made no change with respect to the basic ATR Rule itself. Creditors still must make a reasonable and good faith determination based on verified and documented information that an applicant has a reasonable ability to repay the loan he/she has applied for using the eight underwriting criteria under the ATR Rule still apply.
Making a Qualified Mortgage is still the strongest option available to achieve compliance with the ATR Rule. In general, a Qualified Mortgage priced at an interest rate below 1.5% above the APOR receives “Safe Harbor” status, the highest level of protection for compliance with the Ability To Repay Rule. A higher priced Qualified Mortgage that exceeds that rate but does not exceed 3.5% above the APOR, receives a rebuttable presumption of compliance, a lower level of protection. A loan made under the general ATR Rule that is not a Qualified Mortgage receives no presumption of compliance protection.
As originally issued, the CFPB’s ATR Rule created three categories of “Qualified Mortgages”:
- A “general” Qualified Mortgage that meets all of the Truth-in-Lending definitions of a Qualified Mortgage;
- A “temporary” Qualified Mortgage which would have to satisfy the ATR requirements of one of the government agencies (e.g., FNMA); and
- A “small creditor” exception for banks with less than $2 billion in assets that originate fewer than 500 covered loans on an annual basis and primarily serve “rural” or “under-served” areas. These small creditors can originate loans with balloon payment features. (neither of the other two forms of Qualified Mortgage can have a balloon payment.)
These three types of Qualified Mortgages have not been changed; however, the changes made by the CFPB in May should give “small creditors” a greater measure of flexibility to originate balloon loans and loans with higher rates that still qualify as a Qualified Mortgage and receive the compliance Safe Harbor. Remember that a “Small Creditor” is any creditor that has total assets of less than $2 billion and that originated fewer than 500 first-lien loans secured by dwelling during the preceding calendar year). The following are the changes.
A new category of Qualified Mortgage has been added for banks that meet the small creditor limitations on asset, size and number of covered loans. This new category of Qualified Mortgage is for certain loans originated and held in portfolio for at least three years (subject to limited exceptions) even if the creditor does not operate predominately in rural or under-served areas. The loan must meet the general restrictions for a Qualified Mortgage with regard to loan features and points and fees, and the lender must still evaluate the consumer’s debt-to- income ratio or residual income; however, the loan would not be subject to a maximum DTI percentage. Therefore, a loan could not have negative amortization; or a term longer than 30 years; or points and fees greater than the general limit on points and fees for Qualified Mortgages (3%, etc.). The creditor must consider and verify the applicant’s income or assets as well as the applicant’s current debt obligations, alimony and child support. While the applicant’s debt-to-income ratio or residual income must be considered, the 43% maximum DTI would not apply. The loan must feature payments that are substantially equal and calculated using an amortization schedule that does not exceed 30 years. The loan must have a term of at least 5 years and a fixed interest rate. Most importantly for many community banks, the CFPB provided a two-year transition period, beginning January 10, 2014, during which a small creditor may originate balloon payment loans held in portfolio with the terms and features listed above without regard to whether the small creditor operates predominantly in rural or under-served areas.
Additionally, the CFPB finalized its earlier proposal to increase the threshold for all small creditors for higher-priced Qualified Mortgage loans from 1.5% above the APOR to no more than 3.5% above the APOR. This change means that loans made by a small creditor with rates that do not exceed 3.5% above the APOR would be granted Safe Harbor status when structured as a Qualified Mortgage. This interest rate relief and additional level of protection is only available for small creditors that fall under the new, fourth category of Qualified Mortgages outlined above.
In addition, the final rule provides an exemption from the ability-to-repay requirements for extensions of credit by certain types of creditors. Creditors designated by the U.S. Department of the Treasury as Community Development Financial Institutions and creditors designated by the U.S. Department of Housing and Urban Development as either a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing are exempt from the ability-to-repay requirements, under certain conditions. The final rule also generally exempts creditors designated as 501(c)(3) nonprofit organizations that extend credit no more than 200 times annually, provide credit only to low-to-moderate income consumers, and follow their own written procedures to determine consumers have a reasonable ability to repay their loans.
While not directly applicable to banks, the final rule also exempts from the ability-to- repay requirements extensions of credit made pursuant to programs administered by a housing finance agency and extensions of credit made pursuant to an Emergency Economic Stabilization Act program, such as extensions of credit made under a state’s Hardest Hit Fund program.
Finally, the CFPB clarified the points and fees test for purposes of the Qualified Mortgage and the HOEPA high-cost mortgage requirements. The ATR Rule generally provides that points and fees may not exceed three percent of the loan balance and points and fees in excess of five percent will trigger the HOEPA high-cost mortgage requirements. As originally issued, the CFPB rules would have required compensation paid to a mortgage loan originator to be included in the points and fees calculation. Since most lenders already take the originator’s compensation into consideration in setting things like interest rates and origination fees, the original rule would have double counted the originator’s compensation in many cases.
The final rule as amended excludes points and fees paid directly by a consumer to a mortgage broker when that payment has already been counted toward the points and fees thresholds as part of the finance charge on the loan. The rule also excludes from points and fees compensation paid by a mortgage broker to its employee. Most importantly, the final rule also excludes from points and fees compensation paid by a creditor to its employee loan originators; however, compensation paid by a creditor to a mortgage broker would still be counted towards the points and fees thresholds.
These changes provide substantial relief for qualifying small creditors that make balloon payment loans. While substantial changes in procedures likely will still be needed to satisfy the ATR Rule, the fact that a small creditor can continue to make balloon loans under the right circumstances and price them reasonably while still receiving Safe Harbor protection should dramatically reduce the overall risk to the bank.