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

Comment on Items Not Addressed

The CFPB notes that it received questions that it does not plan to address because it believes that the final rules already answer those questions. As an example, the CFPB said it was asked with regard to the ability-to-repay rule whether residual income considerations have any effect on the status of a qualified mortgage and "specifically, whether a creditor's failure to verify adequate residual income can be raised to refute the safe harbor for qualified mortgages that are not higher-priced covered transactions . . . ."

The CFPB says 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. The industry, however, would prefer to see greater clarity in the rule on what may and may not be raised in court or other forums concerning both the safe harbor and rebuttable presumption.

Ability To Repay

Regarding the temporary qualified mortgage status for loans that are eligible for sale to Fannie Mae or Freddie Mac, the CFPB proposes some helpful changes, including:

• 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 depends on the facts and circumstances.
• Standards that are wholly unrelated to assessing a consumer's ability to repay do not have to be satisfied for purposes of the ability-to-repay rule, such as requirements relating to selling, securitizing, or delivering consummated loans and any requirement that the lender must perform after a loan is sold.
• For a lender that relies on the standards in the applicable Fannie Mae or Freddie Mac guides to determine eligibility for sale, the lender may rely on standards in a written agreement with Fannie Mae or Freddie Mac, which would include any variances from the standards of written guides.
• For a lender that relies on a Fannie Mae or Freddie Mac automated underwriting system to determine eligibility for sale, a loan is eligible for sale if the lender accurately enters information into the system, the system provides a specified underwriting recommendation, and the lender satisfies any requirements and conditions specified by the system that, if not satisfied, would invalidate the recommendation. A lender also could rely on an alternate automated underwriting system specified in a written agreement with Fannie Mae or Freddie Mac.

The CFPB also addresses the standards in Appendix Q. These standards provide guidance on the determination of a consumer's debt and income for purposes of calculating whether the consumer satisfies the maximum 43 percent debt-to-income ratio applicable to the general qualified mortgage provisions. Appendix Q is based on HUD Handbook 4155.1 on mortgage credit analysis. The CFPB notes that industry members raised concerns with Appendix Q, including:

• The provisions of Appendix Q may be properly suited for the purposes of a holistic and qualitative underwriting analysis—such as a determination of insurance eligibility where the Federal Housing Administration has discretion to grant waivers or variances based on a given set of facts or offer informal guidance—but are not well suited to function as regulatory requirements that are not subject to discretionary variance or waiver on an individual basis.
• Many of these provisions (such as requirements to evaluate a consumer's qualification for his or her job) provide little clarity or guidance for creditors to follow to comply with them. This is again a consequence of the original purpose of the provisions to function as discretionary "guidelines" and not bright-line requirements.
• The broad nature of the provisions could undermine the presumption of compliance available to creditors who make qualified mortgages, exposing creditors to significant litigation risk.

The CFPB agrees that certain Appendix Q provisions are not properly suited to function as regulations. The Bureau has proposed several changes, including:

• Removing the requirement that creditors obtain an employer's confirmation of continued employment and determine probability of continued employment. Instead, the creditor would be required to examine the past employment record and examine the employer's confirmation of current, ongoing employment. The creditor would be permitted to assume employment is ongoing if the employer verifies current employment and does not indicate that employment has been, or is set to be, terminated.
• Removing the requirement to determine that salary or wage income is expected to continue through at least the first three years of the loan. Instead, the creditor would be required to determine whether salary or wage income can reasonably be expected to continue. The creditor would be able to assume this is the case if the employer verifies current employment income and does not indicate that employment has been, or is set to be, terminated.
• Removing the requirement that, to rely on overtime or bonus income, the creditor must determine that the consumer has received such income for the past two years and that such income will continue. Instead, the creditor would be required to determine that the consumer has received overtime and bonus income for the past two years and that submitted documentation does not reflect that such income will cease.
• Removing the requirement to verify Social Security income through use of federal income tax returns. Instead, the creditor could obtain a benefit verification letter from the Social Security Administration. The CFPB also proposes that if the letter does not indicate that the benefit will cease within three years, the creditor shall consider the income effective and likely to continue.
• Removing the requirement that rental income from boarders is acceptable only if the boarders are related by blood, marriage, or law. (Roommate income in a single-family property occupied as a consumer's primary residence still would not be acceptable.)

Servicing

The CFPB proposes to clarify that the mortgage servicing rules in Regulation X under the Real Estate Settlement Procedures Act do not create field preemption regarding state servicing laws.

The CFPB also addresses the nature of the small servicer exemption from the servicing rules. It proposes clarifications to the exemption, including that reverse mortgages and loans secured by timeshare plan interests are not counted toward the cap on the number of loans serviced—5,000—that determines whether a servicer qualified as a small servicer. The CFPB also proposes that loans serviced on a voluntary basis for no compensation, which the CFPB refers to as "charitably serviced" mortgage loans, also do not count toward the 5,000 loan cap.

Ballard Spahr's Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr's Consumer Financial Services Group, which produces CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right.

For more information, contact Mortgage Banking Practice Leaders Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, John D. Socknat at 202.661.2253 or socknatj@ballardspahr.com, or Michael S. Waldron at 202.661.2234 or waldronm@ballardspahr.com.