The Consumer Financial Protection Bureau has issued a 45-page Small Entity Compliance Guide for the Ability-to-Repay (ATR) and Qualified Mortgage Rule. The guide, published on April 10, 2013, indicates that its purpose is to provide an easy-to-use summary of the rule that also highlights issues that small creditors, and those who work with them, might find helpful to consider. The guide also states that it meets the requirements of the Small Business Regulatory Enforcement Fairness Act of 1996, which requires that the CFPB issue small-entity guidance.
The CFPB stated in its press release that its goal for the guide was "to provide a comprehensive rule summary in a plain language and FAQ format, which makes the content more accessible and consumable for a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff." Nevertheless, the CFPB cautions that the guide is not a substitute for the ATR rule.
The guide provides an overview of the rule's requirements, including implementation tips along the way. A tip concerning the eight ATR rule underwriting factors encourages creditors to document how they are considering those factors, even though there is no rule requiring validation of underwriting criteria concerning the general ATR rule. This appears to reflect a regulatory position that anyone who did not document compliance efforts did not engage in such efforts. The guide also highlights a number of areas that appear to present implementation and compliance challenges, particularly relating to the general ATR standard in the rule.
One of the biggest questions that the rule has raised is whether the industry will embrace the general ATR standard, or whether the general nature of the standard will cause creditors to originate only qualified mortgages, potentially causing the credit market to contract. In announcing the rule, CFPB Director Richard Cordray stated: "Our Ability-to-Repay rule will restore more certainty to a market that was deeply destabilized by the financial crisis. By providing common-sense discipline in the housing market, this rule creates a level of assurance for all participants that will open up more access to credit for consumers." He then focused, however, on the qualified mortgage provisions of the rule and not the general ATR standard. The guide reflects that there is flexibility regarding the standard, but the flexibility also creates uncertainty regarding whether steps taken by a creditor to evaluate a borrower's repayment ability will be deemed sufficient.
For example, the guide notes that while a creditor must consider the eight underwriting factors under the general ATR standard, the rule does not preclude creditors from considering additional factors. If a creditor makes a loan under that standard (i.e., a loan that is not a qualified mortgage), a consumer may challenge the loan on any grounds, and potentially a consumer may claim that the creditor did not include appropriate additional factors in evaluating the consumer's repayment ability.
The guide notes that if the creditor is aware that the consumer's repayment ability will change after consummation, the creditor must consider that information. The guide provides as examples situations in which a consumer plans to retire or plans to transition from full-time to part-time employment. Yet the guide also states that the creditor may not "make inquiries or verifications prohibited by Regulation B."
While the guide is intended to clarify the rule and provide small entities a road map to assist them in implementation, it is imperative that all creditors, not just small entities, recognize that this guide is not a replacement for the ATR rule or its official commentary. For example, if a qualified mortgage is in an amount subject to a percentage cap, the cap is computed based on the total loan amount. In addressing the calculation of the points and fees cap for a qualified mortgage the guide instructs the creditor to determine the "total loan amount" by taking the "amount financed minus any points and fees that are rolled into the loan amount."
For purposes of the ATR rule, however, the "total loan amount" is defined as the "amount financed" minus any "cost listed in § 1026.32(b)(1)(iii), (iv), or (vi) that is both included as a points and fees and financed by the creditor." Sections (iii), (iv), and (vi) are real estate related charges (the 4(c)(7) fees), credit insurance premiums, and certain prepayment penalties, respectively. This means that not all points and fees financed by the creditor are deducted from the amount financed for purposes of computing the "total loan amount." Reading the guide will give creditors a basic understanding of the rule, but they should not implement a compliance system or program their systems based on the guide.
The guide is a step in the right direction for trying to absorb and understand the rule. The industry is still looking to the CFPB, however, for additional and more formal guidance on how to best implement the ATR rule without reducing mortgage options for consumers.