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Since it is unusual for CFPB annual adjustments to result in reduced thresholds, we want to remind blog readers of the reduced HOEPA and QM points and fee limits that will be effective January 1, 2016.

Effective January 1, the lower limits will be:

  • The total loan amount thresholds that determine whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount will be, respectively, $20,350 and  $1,017.
  • The points and fees limits that a loan must not exceed to satisfy the requirements for a QM and related loan amount limits will be:
    • For a loan amount greater than or equal to $101,749 (currently $101,953), points and fees may not exceed 3 percent of the total loan amount
    • For a loan amount greater than or equal to $61,050 (currently $61,172) but less than $101,749, points and fees may not exceed $3,052
    • For a loan amount greater than or equal to $20,350 (currently $20,391) but less than $61,050, points and fees may not exceed 5 percent of the total loan amount
    • For a loan amount greater than or equal to $12,719 (currently $12,744) but less than $20,350, points and fees may not exceed $1,017
    • For a loan amount less than $12,719 (currently $12,744), points and fees may not exceed 8 percent of the total loan amount

Also effective January 1 are revisions to the definitions of “small creditor” and “rural areas” in  Regulation Z and a new requirement to include the assets of the creditor’s affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status.

See our previous blog posts for more information on the adjustments and revisions.

Recently, the Independent Community Bankers of America (ICBA) and a 45-member coalition of state and regional banking associations submitted a letter to the Consumer Financial Protection Bureau (Bureau) urging the agency to expand the small creditor exemptions under certain Title XIV mortgage rules that went into effect in January 2014. The ICBA argues that changes are needed to ensure community banks can continue to serve their respective mortgage markets without being burdened by expensive compliance costs.

Specifically, the ICBA would like mortgage loans that small creditors hold in their respective portfolios to automatically receive qualified mortgage safe harbor status as long as the loans are held in portfolio. The letter also calls for a small creditor exemption from escrow requirements for higher-priced mortgage loans held in portfolio. The ICBA claims that the current escrow and qualified mortgage rules make it too cumbersome and expensive to originate loans to certain consumers.

Under the current mortgage rules, small creditors are exempt if they originate 500 or fewer first lien mortgages in the preceding calendar year and have less than $2 billion in total assets at the end of the preceding calendar year. The ICBA believes the loan threshold is too low and notes that many community banks do not qualify for the exemption because they originate more than 500 loans annually.

In support of expanding the exemption, the ICBA argues that community banks operate differently than large creditors. The letter states that community banks know their customers personally, underwrite loans based on personal relationships, and keep a large number of nontraditional loans in their own portfolios. Finally, the ICBA contends that community banks serve a set of consumers that would be unable to get loans through traditional channels.

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.

The CPFB recently issued another update to the Small Entity Compliance Guide for the Ability-to-Repay and Qualified Mortgage Rule, to reflect changes from the October 2013 Final Rule.  The updated guide clarifies several aspects of the QM points and fees calculation, per the October 2013 Final Rule.  A new provision is included, which emphasizes that while a charge paid by a third party, and not by the consumer, might not be included in the finance charge element of points and fees (i.e., § 1026.32(b)(1)(i)), the charge may still be included in the other points and fees elements (i.e., § 1026.32(b)(1)(ii)-(vi)).  Two provisions are also included that clarify the treatment of compensation paid to or by a manufactured home retailer for the purpose of what must be counted as loan originator compensation that is included in the points and fees calculation. 

While not altered by the October 2013 Final Rule, the updated guide clarifies, with respect to Balloon-Payment QMs made by small creditors under § 1026.43(e)(6) and (f), that when making the determination of a consumer’s ability to make scheduled payments, unlike the calculation of balloon loan monthly payments for determining ATR, the Balloon-Payment QM calculation excludes the balloon payment even if the loan is a higher-priced loan.

As anticipated, HUD recently issued its proposed rule defining a qualified mortgage (QM) for HUD insured and guaranteed single family mortgages.  Under the proposed rule, published in the Federal Register on Monday, Title II single family mortgages that do not meet the points and fees requirement under the CFPB’s general QM definition will not be eligible for insurance under the National Housing Act (not including HECMs).

Keeping in line with the CFPB’s QM definition, HUD’s proposed rule defines both a safe harbor QM and a rebuttable presumption QM.  Further, as stated above, HUD’s QM definition also adopts the points and fees limitation scale from the CFPB’s final rule. 

The significant departure from the CFPB’s definition is the way in which HUD differentiates the APR dividing line between safe harbor and rebuttable presumption QMs.  Under HUD’s proposed rule, for a Title II single family loan to be a safe harbor QM, the loan must have an APR that does not exceed the average prime offer rate (APOR) for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium (MIP) and 115 basis points for a first-lien mortgage.  QM loans with higher APRs would qualify for the rebuttable presumption.  In contrast, under the CFPB’s approach to QMs, a first-lien loan must have an APR that is lower than 1.5 percentage points over the APOR to fall within the safe harbor.  By basing the APR cap for safe harbor loans on a combination of basis points plus annual MIP, the proposed rule alleviates concerns over the premiums kicking APR for many loans above the safe harbor cap under the CFPB’s approach to QMs. 

Apparently HUD believes that on average the annual MIP will add approximately 135 basis points to the APR.  Effectively, the proposal would permit on average an FHA loan with an APR no more than 2.5 percentage points above the APOR to fall within the safe harbor.  However, based on complexities associated with calculating the safe harbor based on a combination of basis points plus the annual MIP, the industry may well request HUD to adopt a simpler approach that uses a single percentage point amount, such as 2.5 percentage points, and not a combination of basis points and the annual MIP.

The proposed rule also designates Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans, covered by the rulemaking, to be safe harbor qualified mortgages. 

Please note that HUD has provided a short, 30-day comment period for the proposed rule.  Comments are due on or before October 30th.

In keeping with its promise to provide further guidance to the industry on the recent mortgage loan rules, the CFPB recently issued proposed clarifications and changes to the ability to repay/qualified mortgage rule and the servicing rules. Comments on the proposal will be due 30 days after it is published in the Federal Register.

The CFPB notes that it received questions that it does not plan to address because it believes that the questions are already answered by the final rules. One example of such a question provided by the CFPB is whether residual income considerations have any effect on the status of a qualified mortgage that is not a higher-priced loan under the safe harbor. The CFPB advised that it believes the rule is already clear that residual income is relevant only to rebutting the presumption of compliance for qualified mortgages that are higher-priced loans, and has no effect on the safe harbor status of qualified mortgages that are not higher-priced loans. Despite the CFPB’s belief that the rule is clear in this area, the industry would prefer to see greater clarity in the rule on what may and may not be raised in court or other forums with regard to both the safe harbor and rebuttable presumption for qualified mortgages.

The proposal also includes clarifications and changes regarding the temporary qualified mortgage provisions for loans eligible for sale to Fannie Mae or Freddie Mac, including that a repurchase or indemnification demand, and even a resolution of a repurchase or indemnification demand, is not dispositive of qualified mortgage status. Whether the loan was eligible for sale to Fannie Mae or Freddie Mac would depend on the facts and circumstances.

The CFPB also proposes changes to the standards in Appendix Q, which provide guidance on the determination of a consumer’s debt and income for purposes of calculating whether the consumer satisfies the maximum 43% debt-to-income ratio applicable to the general qualified mortgage provisions. The proposed changes would address that Appendix Q is based on flexible underwriting standards that were not designed as a rigid debt-to-income rule, and simplify and clarify certain income determination obligations.

The CFPB also proposes to clarify that the mortgage servicing rules in Regulation X under the Real Estate Settlement Procedures Act do not create field preemption with regard to state servicing laws. Additionally, the CFPB clarifies the nature of the small servicer exemption and proposes technical revisions to the exemption. Please read more about the proposal in our e-alert.

On January 10, 2013, the CFPB issued the long-awaited ability to repay/qualified mortgage rule and, while the devil will be in the details, it appears that cautious optimism for the mortgage industry is warranted. The industry fought hard for the creation of a safe harbor for qualified mortgages and the rule includes a safe harbor for lower-priced qualified mortgages. The final rule is effective January 10, 2014. The CFPB also issued concurrent proposals to address particular concerns under the final rule. Comments on the proposals are due February 25, 2013. Please see our alert regarding the final rule.

We note, the CFPB held a public hearing to address the final rule at Westminster Hall in Baltimore, MD, which is the site of Edgar Allen Poe’s burial place. According to unconfirmed reports, during the portion of the hearing when the CFPB was explaining how the rule would prevent mortgage loans being made without regard to repayment ability, a raven was heard to say “never more”.