On May 29, 2013, the Consumer Financial Protection Bureau (CFPB) issued a final rule amending the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules it issued on January 10, 2013. Within this final rule are two new categories of small creditor QMs. The first, for small creditor portfolio loans, was adopted exactly as proposed alongside the January ATR rule and permits small creditors in all markets to make portfolio loans that are QMs even though the borrower’s DTI ratio exceeds the general QM 43% cap. As a reminder, small creditors for these purposes are those with less than $2 billion in assets at the end of the preceding calendar year that, together with their affiliates, made 500 or fewer covered first-lien mortgages during that year.
The second new QM is a welcome even if only temporary category of balloon mortgages. Unlike the small creditor portfolio QM, this interim QM was not an express part of the so-called “concurrent proposal” issued in January. This is simply but significantly a QM that meets all of the existing rural balloon-payment QM requirements except the controversial limitation that the creditor operate primarily in “rural” or “underserved” areas.
As written, the new balloon QM category expires two years after the ATR rules take effect on January 10, 2014. The CFPB characterizes this two-year window as a “transition period” useful for two purposes: (1) it will give the CFPB time to consider whether its definitions of “rural” and “underserved” are in fact too narrow for the needs of the rural balloon-payment QM rule and (2) it will give creditors time to “facilitate small creditors’ conversion to adjustable-rate mortgage products or other alternatives to balloon-payment loans.” The CFPB took pains to argue that Congress “made a clear policy choice” not to extend QM status to balloon mortgages outside of rural and underserved areas, and the agency reiterated its belief that adjustable-rate mortgages pose less risk to consumers than balloons: “The Bureau believes that balloon-payment mortgages are particularly risky for consumers because the consumer must rely on the creditors’ nonbinding assurances that the loan will be refinanced before the balloon payment becomes due. Even a creditor with the best of intentions may find itself unable to refinance a loan when a balloon payment becomes due.” For these reasons, creditors may expect future CFPB scrutiny intended to bury, not save, balloon mortgages. (more…)
Community bank lenders have responded to the CFPB’s Ability-to-Repay and Qualified Mortgage rules with questions about adjustable-rate mortgages (ARMs), balloon-payment qualified mortgages, and non-standard mortgage refinances. The CFPB’s implementation of Dodd-Frank’s balloon-payment qualified mortgage concept, for example, turns on a narrow definition of the types of lenders that qualify to make such loans. ARMs may be a viable alternative to balloon mortgages, but these loan products pose compliance and operational risks of their own. Finally, lenders may still be considering the types of transactions that qualify for the special “non-standard mortgage” refinancing exemption from the general Ability-to-Pay rule.
For a uniquely focused discussion on making these types of loans in light of the CFPB’s new mortgage regulations, join attorneys John ReVeal and Barry Hester for the latest installment of Bryan Cave’s webinar partnership with compliance training leader BAI Learning & Development. This free presentation will be held on Wednesday, May 8, from 3-4 pm Eastern. More information and registration are available here. Participants should walk away with a solid roadmap for managing existing portfolio balloons and ARMs now and for originating these types of mortgages once the CFPB’s rules take effect in 2014.
The mortgage servicing rules issued by the CFPB in January, 2013, implement another wave of Dodd-Frank reforms and outline best practices even for institutions not subject to these new requirements. Join Bryan Cave attorneys Barry Hester and Karen Neely Louis on Tuesday, April 9, from 3-4 pm Eastern, as they dissect these new rules and outline the higher servicing, foreclosure and eviction management expectations that follow.
More information and registration information for this free event, entitled “Servicing, Foreclosure and Eviction Management: Best Practices in the CFPB Era,” is available here.
On Tuesday, March 19 (3-4 pm Eastern), Bryan Cave attorneys John ReVeal and Barry Hester continue their 2013 webinar partnership with compliance training leader BAI Learning & Development. This free event will build on their January 22 overview of the new CFPB mortgage regulations and will specifically explore important exemptions and ambiguities within the final Ability-to-Repay and Qualified Mortgage rules.
Event and registration details are available here: http://www.bai.org/bai-events/EventDetails.aspx?ec=0767 .
We previously covered the CFPB’s issuance of final rules on Ability-to-Repay and Qualified Mortgages together with the expansion of HOEPA coverage under the Dodd-Frank Act (DFA). Here we review the final escrow rules and suggest that they reveal a line the Bureau intends to consistently draw—under its exemption authority—between large and small mortgage lenders (at $2 billion). The Bureau’s final escrow rules take effect on June 1, 2013.
“Higher-priced mortgage loans” are a class of mortgages carrying APRs that are comparatively high but not high enough to trigger the full HOEPA protections implicated by “high-cost mortgages” (a.k.a. “HOEPA loans”). Under 2008 Federal Reserve amendments to Regulation Z, however, creditors must meet a number of requirements in conjunction with the origination of higher-priced mortgage loans, including the establishment and maintenance of escrow accounts for at least one year after origination. These escrow accounts set aside consumer funds on their behalf to pay property taxes, mortgage insurance premiums, and other mortgage-related insurance required by the creditor.
In its 2008 rulemaking, the Federal Reserve concluded that it was “unfair for a creditor to make a higher-priced loan without presenting the consumer a genuine opportunity to escrow.” The agency’s evidence suggested then that few subprime mortgage creditors provided for escrow accounts.
Congress liked these Fed rules enough to codify them, with certain differences, through Dodd-Frank. (more…)
The CFPB released its much-anticipated ability to repay (ATR) and qualified mortgage (QM) rules on January 10, 2013 after a field hearing attended by Bryan Cave in Baltimore, MD. At the same time, the CFPB issued a final rule amending Regulation Z (Truth in Lending) to implement Dodd-Frank Act (DFA) requirements for creditors to establish escrow accounts for higher-priced mortgage loans secured by a first lien on a principal dwelling, and a third rule to implement the DFA amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA) and modifying requirements with respect to homeownership counseling.
In the coming days, we will provide detailed analyses of these new rules. For now, the following addresses certain of the key provisions of the ATR and QM rules, including certain proposed exemptions and temporary measures intended to soften the impact of these changes on smaller lenders.
The ATR and QM rules are scheduled to take effect on January 10, 2014. However, the CFPB also has proposed possible adjustments to the final rules for certain specialized community-based lenders, housing stabilization programs, Fannie Mae and Freddie Mac refinancing programs, and small portfolio lenders (including many community banks, as explained below). The CFPB states that it would finalize those proposals this Spring so that they would also be effective on January 10, 2014.
One key issue resolved by the final rules is whether QMs will be afforded either a conclusive or, alternatively, a rebuttable presumption of compliance with the ATR requirements. Here, the CFPB drew a line that, according to Director Cordray during the field hearing in Baltimore, “has long been recognized as a rule of thumb to separate prime loans from subprime loans.” Specifically, the rule provides a conclusive presumption of ATR compliance—a so-called “safe harbor”—for loans that meet the definition of a qualified mortgage and that are not “higher-priced” under existing rules. All other qualified mortgages would only be afforded a rebuttable presumption of compliance with the new ATR rules.
This fleshes out a framework in which there are four ways to comply with ATR requirements:
(1) Satisfy the general ATR standards; (more…)
January 2013 promises to be a big month for mortgages and the CFPB, as a variety of provisions of Title XIV of the Dodd-Frank Act take effect by operation of law on January 21, 2013 unless the Bureau issues final rules implementing them by then. The Bureau has proven to be savvy in meeting its own Dodd-Frank deadlines. We will soon find out if it is as savvy in establishing compliance deadlines for its new mortgage rules.
Title XIV—Dodd-Frank’s “Mortgage Reform and Anti-Predatory Lending Act”—says that its provisions take effect 18 months following the designated transfer date of July 21, 2011 unless final implementing rules have been issued by the Bureau prior to that time. It also provides that such rules must take effect not later than 12 months after they are issued. So the industry has circled January 21, 2014 as a potential best-case scenario on compliance dates for the following important Title XIV content:
- Ability to Repay & “Qualified Mortgages”
- Certain New Mortgage Servicing Requirements
- High-Cost Mortgage Scope and Restrictions
- Loan Originator Compensation and Qualification
- Appraisal Standards and Disclosures
We say “potential best-case” for a few reasons. First, the Bureau may not publish corresponding final rules in time, so these provisions could take effect by operation of law on January 21, 2013. No one really believes that will happen, but it is possible. Proposed rules are pending as to each of these elements.
Why should banks worry about new municipal advisor regulations? This question is of particular importance to community banks that do not engage in underwriting or brokering municipal securities and therefore believe (logically), that they could not possibly be a “municipal advisor.” But, many community banks hold significant deposits of municipal entities, extend credit to municipalities or enter into interest rate swaps with municipal entities and discuss all of those products and services extensively with the municipal entities. As discussed below, such business dealings may, in some cases, bring the bank within the scope of the new municipal advisor registration regime. Under that regime, municipal advisors are subject to extensive and demanding fiduciary duties to the municipalities they advise as well as anti-fraud standards.
No banking exemption. Neither Dodd-Frank nor the Security Exchange Commission’s release adopting the new temporary rule includes any exemption for the activities of banks related to municipal deposits, loans to municipalities or interest rate swaps with municipalities. Industry comments on this rule, such as those from The Financial Services Roundtable and the Independent Community Bankers of America, have clearly expressed to the Securities Exchange Commission (SEC) the need to exempt banks from municipal advisor status. Without such an exemption, several of the definitions are broad enough to include a range of traditional banking services and products, such as interest rate swaps, cash management, deposit and lending activities and trust and custody services. There are compelling arguments for such an exemption, including the fact that Section 975 of Dodd-Frank appears aimed at unregulated institutions and the longstanding regulatory tradition of allowing bank regulators exclusive authority to regulate and examine traditional banking activities. But for now, no such exemption exists.
The CFPB published its Supervision and Examination Manual (the “Manual”) on October 13, 2011, designed to provide CFPB examiners with direction on how to determine if providers of consumer financial products are complying with consumer protection laws. The CFPB’s press release states that the Manual incorporates procedures already used by other federal regulators. The Manual does simply recite certain interagency procedures, such as for fair lending examinations. At the same time, the Manual addresses new Dodd-Frank concepts, such as unfair, deceptive and abusive acts or practices.
The CFPB will use the Manual initially to supervise the more than 100 large banks, thrifts, and credit unions that are subject to the CFPB’s examination authority pursuant to the Dodd-Frank Act (those with total assets over $10 billion, as well as their affiliates). The Bureau’s examiners will also ultimately use the Manual to supervise non-depository consumer financial service companies (e.g., mortgage lenders), with the stated goal of promoting “fair, transparent, and competitive consumer financial markets where consumers can have access to credit and other products and services, and where providers can compete for their business on a level playing field where everyone has to play by the rules.”
The CFPB Examination Framework and Philosophy
While only certain entities will be subject to CFPB examination, the Manual outlines an examination approach that is illustrative of the Bureau’s bend on matters over which it has rulemaking authority. This is particular true of its view of its authority over matters it considers unfair, deceptive or abusive acts or practices (UDAAP).
Like other bank regulators, the CFPB will prepare for examinations by gathering and reviewing a wide array of regulatory and public data about an institution: state and/or prudential regulator reports of examination and correspondence, enforcement actions, state licensing and registration information, complaint data, call reports, HMDA LARs, HAMP data, fair lending analyses, SEC or other securities-related filings, the institution’s website and advertising, and, among other things, “newspaper articles, web postings, or blogs that raise examination related issues.” The CFPB will then contact the institution about the examination and prepare its customized Information Request.
The Consumer Financial Protection Bureau (CFPB) has moved into its fourth round of testing of a new consumer mortgage loan disclosure. Acting under the mandate of the Dodd-Frank Act, the CFPB is preparing a single, integrated disclosure to address the disclosure requirements of both the Truth in Lending Act and Real Estate Settlement Procedures Act.
The specific focus of this fourth round of testing is comparison shopping. Consumers and the lending industry have been asked to compare two different types of loan products using the same version of the form. The CFPB states that it wants to be sure that the disclosure actually helps consumers to understand the features of competing loan products, from the overall loan amount to estimates of tax and insurance costs.
The CFPB’s efforts in this area have generally met with approval from all interested parties. The proposed form is more clear, concise and informative than either the existing TILA or RESPA disclosures. For example, all of the useless “seller’s column” and “buyer’s column” information on the RESPA good faith estimate has been eliminated in favor of total dollar amounts for the services the consumer can shop for and for the services the consumer cannot shop for. Implementing the new requirements will require systems changes, but we might finally arrive at a disclosure that eliminates useless information, reconciles the differences between TILA and RESPA, and that is easier to explain to borrowers.
Past efforts to reconcile TILA and RESPA disclosures were hampered by the fact that the Federal Reserve had primary regulatory authority for TILA and the Department of Housing and Urban Development had primary authority for RESPA. The Dodd-Frank Act removed this roadblock by transferring these powers to the Bureau.