On May 29, 2013, the CFPB adopted amendments to the final ability to repay rule. The CFPB had proposed the amendments on the same day that it issued the ability to repay rule in January 2013. The amendments are effective on January 10, 2014, the same date that the ability to repay rule becomes effective.
Among other changes, the amendments:
• Carve out from the inclusion of loan originator compensation in points and fees, the compensation paid by a mortgage broker to an employee loan originator and the compensation paid by a creditor to an employee loan originator. Although the CFPB had proposed to tie the ability to exclude compensation paid by a creditor to an employee loan originator to the amount of origination fees imposed by the creditor, the CFPB decided to simply exclude the compensation from points and fees without conditions. Compensation paid by a consumer or creditor to a mortgage broker will still be included in points and fees.
• Create a broader qualified mortgage for small creditors. The small creditor qualified mortgage is not subject to the strict 43% debt-to-income limit that applies to the general qualified mortgage. Also, the small creditor qualified mortgage is eligible for the safe harbor as long as the annual percentage rate does not exceed the applicable average prime offer rate by 3.5 or more percentage points for a first or subordinate lien loan. In contrast, the general qualified mortgage is eligible for the safe harbor only if the annual percentage rate does not exceed the applicable average prime offer rate by 1.5 or more percentage points (3.5 percentage points for a subordinate lien loan). To be a small creditor, a creditor must have assets less than $2.0 billion and make (together with its affiliates) 500 or fewer first lien loans per year that are subject to the rule.
• Create a transition period in which small creditors may make balloon qualified mortgages even if they do not satisfy the requirement that most of their transactions subject to the rule are made in rural or underserved areas. The transition period will end January 10, 2016. Balloon qualified mortgages also will be eligible for the safe harbor if the annual percentage rate does not exceed the applicable average prime offer rate by 3.5 or more percentage points for a first or subordinate lien loan. During the transition period the CFPB intends to assess whether the definitions of “rural” and “underserved” should be modified, and to work with small creditors to transition to alternative products, such as adjustable rate loans.
• Exempt from the ability to repay rule are loans:
• Made by a housing finance agency, or by private creditors pursuant to a program administered by a housing finance agency.
• Made by certain community development creditors and certain non-profit creditors, subject to conditions.
• Made pursuant to certain homeownership stabilization and foreclosure prevention programs authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 USC 5211, 5219), such as a State Hardest Hit Fund program.
The CFPB decided not to adopt a proposed exemption for a refinance loan made pursuant to an eligible targeted refinancing program and that was eligible to be purchased for Fannie Mae or Freddie Mac while they remain in conservatorship. The exemption would have covered HARP loans.
For more on the CFPB’s ability to repay rules, please see our prior blog posts, recent alert, and Mortgage Banking Update.