The CFPB published a Proposed Rule offering three specific amendments to the 2013 Title XIV Final Mortgage Rules. The proposed amendments respond to concerns about origination and servicing issues.
In particular, the Proposed Rule would: (1) create a limited, post-consummation cure mechanism for mortgage loans thought to be qualified mortgages (QMs) at origination but that actually exceed the points and fees limit for QMs, (2) provide an alternative definition for the term “small servicer” that would apply to certain nonprofit entities that service mortgage loans, and (3) amend the ability-to-repay (ATR) requirements to allow certain subordinate-lien loans originated by nonprofit creditors to be excluded from the credit extension limit used for determining whether a nonprofit is exempt from the ATR requirements.
QM Points and Fees Amendment
QMs are afforded important consumer protections under the ATR rule (such as a rebuttable presumption of compliance with the ATR rule or a safe harbor from liability under the rule). Generally, to be considered a QM, a mortgage loan must not contain points and fees that exceed three percent (3%) of the loan if the principal is $100,000 or more. The Proposed Rule addresses the scenario when a lender may be under the assumption that it has originated a QM but later discovers that the points and fees exceeded the 3% (or other applicable) cap. The CFPB notes that the points and fees concept is complex and may result in certain items, such as discount points, mortgage insurance premiums and loan originator compensation, being improperly excluded from points and fees.
The Proposed Rule creates a procedure permitting the lender to refund the excess points and fees amount to the borrower within 120 days and keep the loan’s QM status. The lender must also maintain and follow policies and procedures for reviewing the loans and providing refunds to borrowers. Further, the lender must have originated the mortgage loan in good faith as a QM. The Proposed Rule also lists examples of factors that may be evidence that a loan was or was not originated in good faith as a qualified mortgage. For example, if the loan pricing is consistent with pricing on QMs originated by the same lender, this factor could serve as evidence that the loan was originated in good faith as a QM.
The CFPB states that the proposal is meant to encourage lenders to maintain healthy access to consumer mortgage credit. The preamble to the rule acknowledges that some lenders and secondary market participants have decided not to make or purchase loans with points and fees close to the 3% cap in fear that they may inadvertently exceed the limit. To be sure, the points and fees cure provision will be welcomed by market participants and signals that the CFPB is willing to respond to industry concerns.
Alternative Small Servicer Definition
Under the RESPA-TILA mortgage servicing rules, “small servicers” (as defined by the servicing rules) are exempt from certain provisions of the rules if they service 5,000 or fewer mortgage loans annually and meet other requirements. The CFPB states that it has learned of situations where nonprofits receive fees to service loans for other associated nonprofit lenders. The CFPB notes that due to this unique structure, such nonprofits may not be able to qualify for the small servicer exemption. Thus, the Proposed Rule offers an alternative definition of a small servicer that would allow certain nonprofits to continue to consolidate their servicing activities with associated nonprofits while maintaining their exemption from some of the mortgage servicing provisions.
Nonprofit Lender Exemption from ATR Provisions
Under the ATR rule, certain nonprofits that make mortgage loans to low or moderate income borrowers are exempt from certain provisions of the rule if they make no more than 200 dwelling-secured loans per year. The nonprofit lenders must also currently meet other specific requirements. The Proposed Rule amends the exemption so that interest-free, forgivable, subordinate lien loans for down payment assistance and certain other purposes (so-called “soft seconds”) would not count toward the annual 200 loan limit.
Request for Additional Comments
The CFPB also requested comments on two additional issues: (1) whether and how to provide for a cure provision for QM loans that inadvertently exceed the 43% debt-to-income (DTI) ratio required under the ATR rule; and (2) feedback from small creditors regarding how the new rules have affected originations and operations.
Comments are due on the three substantive proposed changes to the final rule within 30 days after the rule is published in the Federal Register. Commenters have 60 days after publication to provide responses to the CFPB regarding the DTI cure provision and the impact the new mortgage rules have on small creditors. The CFPB proposes that the rules, once finalized, become effective 30 days after publication in the Federal Register, although the CFPB seeks comment on whether it should adopt an alternate effective date.