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From Banking and Finance Law Daily, July 11, 2013

CFPB finalizes clarifications to ability-to-repay and mortgage servicing rules

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has adopted a final rule implementing corrections, clarifications, and amendments to its ability-to-repay and mortgage servicing rules. The amendments were proposed in April 2013. The ability-to-repay rule is intended to protect consumers by requiring that lenders make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans, the bureau noted in its announcement. The mortgage servicing rules establish protections for homeowners as they repay their loans.

“We know that effective implementation helps our rules deliver their intended value to consumers,” said CFPB Director Richard Cordray. “We are listening closely to feedback on our rules, and today’s clarifications show our willingness to make appropriate adjustments to achieve that goal.”

Background. In January 2013, the CFPB adopted a number of final rules concerning U.S. mortgage markets pursuant to the Dodd-Frank Act. On January 10, 2013, the bureau issued the 2013 ATR final rule. On January 17, 2013, the bureau adopted the 2013 mortgage servicing final rules, and on May 16, 2013, the CFPB issued amendments to the 2013 escrows final rule. The current final rule amends these rules.

Overview of final rule. The current final rule:

  • clarifies that the CFPB’s Regulation X—Real Estate Settlement Procedures (12 CFR 1024) rule does not preempt the field of servicing regulation by states;
  • explains how to determine a consumer’s debt-to-income (DTI) ratio;
  • clarifies the eligibility standard of the temporary qualified mortgage (QM) provision;
  • establishes which mortgage loans to consider in determining small servicer status;
  • clarifies the implementation dates for adjustable-rate mortgages (ARMs) in Section 1026.20 (c) and (d) of the 2013 mortgage servicing rule; and
  • explains that construction and bridge loans and reverse mortgages are not subject to Regulation Z—Truth in Lending (12 CFR 1026) requirements on repayment abilities and prepayment penalties for higher-priced mortgage loans.

Regulation X rule. The preamble to the CFPB’s final mortgage servicing rules stated that the bureau’s authority on servicing, from RESPA, does not preempt the field of possible mortgage servicing regulation by states. In the current final rule, the CFPB added a comment to clarify this point and explain how RESPA preemption works. The rule also redesignates the Regulation X preemption provision, currently 1024.13, as 1024.5(c).

DTI ratio. Under the ability-to-repay rule, a lender may make a QM. A QM loan prohibits certain features and limits the fees that can be charged. The main type of QM requires that a consumer’s monthly debt payments, including the mortgage, will not be more than 43 percent of the consumer’s monthly income. The current final rule clarifies and amends how several factors can be used to calculate a consumer’s DTI ratio. These factors include a consumer’s employment record and income, business credit reports and other documents relating to self-employed consumers, Social Security income, and non-employment related income such as from a trust or rental property.

Temporary QM provision. Under the ability-to-repay rule, a loan can be a QM mortgage if it is eligible for purchase, guarantee, or insurance by government sponsored enterprises (GSEs) or by certain federal agencies if the loan does not contain certain risky loan features and meets certain limitations on points and fees. The current rule clarifies the standards that a loan must meet if the creditor is underwriting it based on GSE or agency guidelines.

Small servicer status. The servicing rules issued in January 2013 included an exemption from some requirements for small servicers. The final rule clarifies which mortgage loans will be considered in determining whether a servicer qualifies as “small.” For example, loans serviced on a charitable basis will not be considered in making that determination.

ARM implementation dates. The CFPB received a number of unsolicited questions about the implementation dates for ARMs under Sections 1026.20 (c) and (d) of the Regulation Z mortgage servicing rule. Because of these queries, the bureau is clarifying the implementation dates in the current rule.

Higher-priced mortgage loans. In the rule, the CFPB indicates that the bureau is concerned that its recently published amendments to the 2013 escrows final rule requiring the industry to comply with certain provisions regarding repayment ability and prepayment penalties for higher-priced mortgage loans could be interpreted as requiring that certain transactions excluded from such requirements are now subject to those requirements. Therefore, the CFPB is amending Section 1026.35 (e) to explicitly exclude from coverage construction and bridge loans and reverse mortgages.

Effective date. The final rule is effective on January 10, 2014, except for the provision amending 1026 (e), which is effective immediately upon publication of the rule in the Federal Register.

MainStory: TopStory CFPB Loans Mortgages

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