In a recent amendment to Regulation Z,[1] the CFPB offers a tonic to mortgage lenders and their assignees that have struggled with the “points and fees” calculation for Qualified Mortgages (QMs). The CFPB’s cure allows lenders or assignees of covered loans to reestablish the QM status of a loan for which the amount of points and fees inadvertently exceeds the thresholds set by the CFPB’s Ability to Repay (ATR)/QM Rule.[2] The cure is available for loans consummated on and after November 3, 2014, but it expires January 10, 2021.[3]

Under the ATR/QM Rule, a creditor of a closed-end, consumer purpose mortgage loan generally must make a reasonable and good faith determination that the borrower has a reasonable ability to repay the loan.[4] A creditor that originates a QM is entitled to a safe harbor or rebuttable presumption of compliance with the ATR/QM Rule, depending on the loan’s pricing. One criterion of a QM (of each of the several varieties of QM, actually) is that the consumer must not be required to pay “points and fees” in excess of 3% of the loan amount (for loans of $100,000 or more, with tiered thresholds applying to smaller loans).

Since the CFPB finalized its ATR/QM Rule on January 10, 2013,[5] mortgage industry participants have put significant time, money, and effort into building compliance systems to calculate points and fees accurately for every loan. Those systems are not wholly new, as the concept of points and fees dates back to 1995, when the Federal Reserve first issued rules for high-cost (HOEPA) mortgages.[6] The ATR/QM Rule, however, meaningfully amended the definition of “points and fees”[7] for purposes of both QM and HOEPA loans, introducing several areas in which the definition is ambiguous, subjective, or depends on factors outside the creditor’s control. For example, creditors may have to determine: (i) whether certain fees are reasonable,[8] (ii) whether upfront charges for private mortgage insurance are refundable on a pro rata basis;[9] (iii) whether discount points are bona fide;[10] or (iv) whether, in brokered transactions, any charges go to a broker’s affiliate.[11] None of those determinations is clear-cut.  If the creditor’s interpretation is later determined to be incorrect, the recalculation of points and fees could exceed 3% and disqualify the loan from being a QM, removing the presumption of compliance and possibly jeopardizing the creditor’s assurances to investors.

Congress recognized the ill effects of a mistake in calculating points and fees in connection with HOEPA loans. The Dodd-Frank Act amended the Truth in Lending Act in a manner that appears to allow a creditor to cure a “good faith” violation, in connection with a loan that inadvertently exceeds the HOEPA points and fees threshold, by making “appropriate restitution” and (among other options the consumer may choose) “change the terms of the loan in a manner beneficial to the consumer so that the loan will no longer be a high-cost mortgage.”[12] The CFPB declined to provide much guidance as to the circumstances in which this cure opportunity actually is available, though, so it is unclear how useful it will be.

The CFPB recognized that the uncertainty in interpreting and calculating points and fees in connection with QMs, and the risk that a loan could lose its QM status for even a small error in that calculation, may cause some creditors to become overly conservative, either setting an even lower points and fees threshold as a buffer, or choosing not to take advantage of certain exclusions from the calculation–such as for bona fide discount points. As a result, lenders may have been unable or unwilling to make certain loans that actually would have constituted QMs, limiting the availability of mortgage credit to worthy borrowers.[13]

To counter any adverse effects that uncertainty over the points and fees definition might have on access to mortgage loans for creditworthy borrowers, the CFPB proposed to allow creditors or assignees to refund amounts that inadvertently exceeded the points and fees threshold, and reestablish the QM status of a loan, if: (i) the loan was originated in good faith as a QM and otherwise met all QM requirements, (ii) the creditor or assignee refunded the excess within 120 days after consummation, and (iii) the creditor or assignee maintains and follows policies and procedures for post-consummation review of loans and refunding overages to consumers.[14]

The CFPB’s final rule is similar to that proposal, but differs in a number of key respects. (A chart comparing the proposed and final rules follows at the end of this alert.)

First, the CFPB eliminated the “good faith” criterion, recognizing that such a requirement would introduce ambiguity and subjectivity, with the possibility of the same over-conservative response by creditors and a resulting decreased access to credit.[15] The good faith requirement also could have easily become a flashpoint for ATR/QM Rule litigation.[16] Accordingly, the CFPB’s new cure appears to be available not only for errors in calculation of points and fees (the CFPB’s initial target), but also errors in interpretation of the points and fees definition, without the creditor having to make an ambiguous showing of good faith. (As indicated above, the HOEPA cure provision includes a “good faith” requirement, as it appears to apply only to a creditor that acted in good faith when it failed to comply with the high-cost mortgage requirements.  That “good faith” criterion derives from the Dodd Frank Act itself, so perhaps the CFPB felt hard-pressed to eliminate it, in spite of its ambiguity.)

Second, the Bureau extended the time period for which the refunding cure is available, from 120 days, as proposed, to 210 days, in light of comments submitted by industry participants indicating that a longer period might be necessary to engage in significant quality control efforts and make cure payments to consumers.[17] However, certain triggers will cut off a creditor or assignee’s ability to cure a points and fees overage, including initiation of any consumer action in connection with the loan (regardless of the nature of that action), receipt of written notice from the consumer specifically addressing the overage by the creditor, assignee, or servicer, or the loan becoming 60 days past due.[18] These cutoffs are intended to prevent creditors from selectively curing only those loans that are likely to become subject to a challenge under the ATR/QM Rule, and to mirror the structure of other limited cure provisions under Regulation Z.[19] While an action by or notice from a consumer will cut off the ability to cure a points and fees overage, an action by or notice from a regulator will not cut off that opportunity. 

Third, the Bureau clarified the methods for making the cure payment to a borrower, and increased the amount of the required cure payment. The final rule provides that the cure: (i) may be made by check or by any other means “mutually agreeable to the consumer and the creditor or assignee, as applicable”[20] and (ii) must be in an amount equal to the overage plus interest on the overage calculated using the contract interest rate applicable from consummation to the date of the cure (offset by any tolerance cure under the Real Estate Settlement Procedures Act (RESPA) related to the points and fees that caused the overage).[21] A creditor or assignee may apply the cure payment to the mortgage loan balance if that option is agreed to by the consumer.[22]

Fourth, the Bureau modified procedural requirements for post-consummation quality control reviews and refunds. Under the Bureau’s proposal, a creditor would have had to maintain and follow “policies and procedures for post-consummation review of loans and refunding to consumers amounts that exceed the [“points and fees” thresholds for QM status under the ATR/QM Rule.]”[23] The final rule reduces the scope of those requirements from “review of loans” to “review of points and fees,” clarifying that a creditor is not required to engage in a broader review for compliance in order to take advantage of the points-and-fees cure.[24] Moreover, creditors’ policies and practices need not call for post-consummation review of 100% of loans, or for refunding overages in all discovered cases.[25] Whether it was the Bureau’s intention or not, these clarifications are consistent with an underlying principle that originating a non-QM loan is not itself a violation of law, so a cure should be voluntary rather than compulsory.

As mentioned above, the cure is available for loans consummated between November 3, 2014 (the date on which the rule was published in the Federal Register) and January 10, 2021.[26] The cure is not available retroactively because the CFPB’s stated goal is to reduce incentives for creditors to restrict access to credit (i.e., lending decisions for prior loans have already been made).[27] As for the sunset date, the CFPB explained that creditors and other mortgage industry participants will eventually acquire sufficient experience with determining points and fees under Regulation Z to render the cure unnecessary.[28]

Finally, the CFPB had asked for comments on another possible QM cure relating to miscalculations of a consumer’s debt-to-income (DTI) ratio.[29] DTI ratios are relevant for certain varieties of QM, for which the consumer’s DTI ratio may not exceed 43%, calculated according to rules set out by the CFPB in Appendix Q to Regulation Z. Appendix Q can cause severe headaches.  However, the CFPB did not finalize a cure for an inadvertent DTI miscalculation, although it promises to continue considering the issue.[30]

The ATR/QM Rule has been a bitter pill for compliance and legal personnel since early 2013. This recent “points and fees” fix does not cure all the industry’s ills in connection with the Rule, but perhaps it is a positive sign that the CFPB may be willing to make some common sense tweaks. Perhaps lenders could even dare to hope for Appendix Q guidance. Until then, lenders can at least rest a little easier knowing that “points and fees” mistakes are no longer uncorrectable after consummation.

Notes:

[1] See “Amendments to the 2013 Mortgage Rules under the Truth in Lending Act (Regulation Z); Final Rule,” 79 Fed. Reg. 65,300 (Nov. 3, 2014) (hereinafter, the “Final Rule”). Note that, in addition to addressing a cure for “points and fees” overages, the Final Rule also amended provisions of Regulation Z regarding exemptions from the ATR/QM Rule and the definition of a “small servicer” for the purposes of exemptions from certain loan servicing requirements under Regulation Z. This alert addresses only the portions of the Final Rule regarding the “points and fees” cure.

[2] See Final Rule, 79 Fed. Reg. at 65,323.

[3] See Final Rule, 79 Fed. Reg. at 65,318, 65,323.  Note, however, that the cure provision does not: (i) cure points and fees overages for loans governed by the FHA or VA QM rules; or (ii) allow a lender to cure the high-cost or HOEPA status of a loan by refunding excessive points and fees. A separate, more limited cure provision for high-cost mortgages exists under Regulation Z at 12 C.F.R. § 1026.31(h), and is not affected by the CFPB’s current amendments.

[4] See 12 C.F.R. § 1026.43(c)(1).

[5] See “Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z); Final Rule,” 78 Fed. Reg. 6,408 (Jan. 30, 2013) (initially provided on the CFPB’s website on Jan. 10, 2013).

[6] See 12 C.F.R. § 226.32(b)(1) (2010).

[7] See 12 C.F.R. § 1026.32(b)(1).

[8] The reasonableness of the charge determines, in part, whether a real-estate related fee (or “4(c)(7)” fee), such as an appraisal fee or a document preparation fee, must be included in points and fees under the ATR/QM Rule.  See 12 C.F.R. § 1026.32(b)(1)(iii).

[9] See 12 C.F.R. § 1026.32(b)(1)(i)(C)(2).

[10] See 12 C.F.R. § 1026.32(b)(1)(i)(E).

[11] In brokered transactions, whether the payee is an affiliate of the creditor or loan originator determines, in part, whether a “bona fide third party charge” must be included in points and fees under the ATR/QM Rule.  See 12 C.F.R. § 1026.32(b)(1)(i)(D).

[12] 15 U.S.C. § 1639(v); 12 C.F.R. § 1026.32(h).

[13] See Final Rule, 79 Fed. Reg. at 65,307-08.

[14] See “Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z),” 79 Fed. Reg. 25,730, 25,751 (May 6, 2014) (hereinafter, the “Proposed Rule”).

[15] See Final Rule, 79 Fed. Reg. at 65,311.

[16] See id.

[17] See id. at 65,313.

[18] See id. at 65,313, 65,323 (to be codified at 12 C.F.R. § 1026.43(e)(3)(iii)(B)).

[19] See Final Rule, 79 Fed. Reg. at 65,313-14.

[20] See id. at 65,312-13, 65,325 (to be codified as Comment 43(e)(3)(iii)-1 to 12 C.F.R. Part 1026).

[21] See Final Rule, 79 Fed. Reg. at 65,316-17, 65,323 (to be codified at 12 C.F.R. § 1026.43(e)(3)(iv)), 65,325 (to be as Comment 43(e)(3)(iv)-2 to 12 C.F.R. Part 1026).  With respect to the offset for payments made as RESPA tolerance cures, consider a loan for which (i) a systems error resulted in no loan originator compensation being disclosed on the Good Faith Estimate (“GFE”), (ii) the consumer was charged a settlement fee, disclosed on the HUD-1 settlement statement, of 1% of the total loan amount for loan originator compensation, and (iii) the loan closed with total points and fees under the ATR/QM Rule in the amount of 4.5% of the total loan amount (for a loan where 3% would have been the threshold for QM status). As loan originator compensation is subject to a 0% tolerance under RESPA, the action of charging the consumer any amount greater than was disclosed on the GFE violates RESPA. However, RESPA and its implementing Regulation X provide that a creditor may cure the RESPA tolerance violation by refunding the excess amount (here, 1% of the total loan amount) to the consumer within 60 days after consummation. See 12 C.F.R. § 1026.19(e)(1)(i). Upon doing so, the creditor would be able to cure the “points and fees” overage by refunding to the borrower an amount equal to the cure amount if no RESPA tolerance cure been provided (i.e., 1.5% of the total loan amount, plus interest at the contract rate) less the amount already paid to the consumer as a RESPA tolerance cure (i.e., 1% of the total loan amount).

[22] See Final Rule, 79 Fed. Reg. at 65,312-13.

[23] See Proposed Rule, 79 Fed. Reg. at 25,751.

[24] See Final Rule, 79 Fed. Reg. at 65,323 (to be codified at 12 C.F.R. § 1026.43(e)(3)(iii)(C)).

[25] See Final Rule, 79 Fed. Reg. at 65,315-16.

[26] See id. at 65,318 (effective date), 65,323 (sunset date, to be codified at 12 C.F.R. § 1026.43(e)(3)(iii)).

[27] See Final Rule, 79 Fed. Reg. at 65,309.

[28] See id.

[29] See Proposed Rule, 79 Fed. Reg. at 25,743-45.

[30] See Final Rule, 79 Fed. Reg. at 65,300.