CFPB Final Ability-To-Repay Rule Prompts Cautious Optimism from Industry

by Ballard Spahr LLP

The CFPB has issued its long-awaited ability to repay/qualified mortgage rule, and at first glance, it appears to warrant cautious optimism for the mortgage industry. The industry fought hard for the creation of a safe harbor for qualified mortgages, and the rule includes one for lower-priced qualified mortgages.

The rule was issued on January 10, 2013, and 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.

At a public field hearing held by the CFPB in Baltimore, government officials, consumer representatives, and industry representatives addressed the rule. As expected, consumer representatives generally did not favor the adoption of a safe harbor for qualified mortgages with lower interest rates, while industry representatives applauded the outcome.

Director Cordray stated that not only would the rule stop lenders from making loans that borrowers cannot afford, it also would address the current tight credit market by giving consumers access to affordable credit. He did not fully explain exactly how adding regulatory requirements, even with a safe harbor for lower-rate qualified mortgages, will open up the credit markets.

Consistent with recent expectations, the CFPB adopted a two-prong approach to the treatment of a qualified mortgage based on the interest rate. Loans that satisfy the qualified mortgage criteria and have an annual percentage rate that does not exceed the applicable average prime offer rate by 1.5 or more percentage points (3.5 or more percentage points for junior lien loans) will be entitled to a safe harbor. The safe harbor is structured as a conclusive presumption of compliance with the rule.

A consumer could challenge whether the loan is in fact such a qualified mortgage loan. A consumer could not otherwise raise issues of non-compliance with the rule, but would not be precluded from raising claims under other laws. The industry strongly supported a safe harbor approach, noting that an approach that provided less certainty for the industry would curtail the availability of credit to only highly credit-worthy borrowers, and product selection would be limited.

Loans that satisfy the qualified mortgage criteria and have an annual percentage rate that exceeds the applicable average prime offer rate by 1.5 percentage points or more (3.5 percentage points or more for junior lien loans) will be entitled to a rebuttable presumption of compliance with the rule. A consumer could challenge whether the loan is in fact such a qualified mortgage loan, and also could demonstrate non-compliance by showing that his or her debt obligations were so high that they left insufficient income or assets to meet living expenses.

The commentary to the final rule provides, however, that the longer the time period that the consumer demonstrates the actual ability to repay the loan by making timely payments, without a modification or accommodation, the harder it will be for the consumer to rebut the presumption of compliance.

A potential problem with this approach is that it does not account for the typically higher rates for jumbo mortgage loans—those that exceed the maximum loan amount that Fannie Mae and Freddie Mac will buy. The CFPB considered and rejected adopting a higher threshold for jumbo loans, and believes that the application of the 1.5 percentage point threshold to jumbo loans will not create any credit accessibility problems. That remains to be seen.

The general criteria for qualified mortgage loans include:

  • The loan must provide for regular periodic payments, with no interest-only, negative amortization, or balloon payment features.
  • The loan term may not exceed 30 years.
  • The consumer's debt-to-income ratio may not exceed 43 percent, with the calculation of the ratio being tied to specific criteria under the rule that are based on Federal Housing Administration (FHA) guidelines. The creditor must consider and verify the income or assets and debt, alimony, and child support obligations of the consumer.
  • The lender must underwrite the loan based on the maximum interest rate that may apply during the five-year period after the first regular periodic payment is due, and based on a periodic payment of principal and interest. These payments must cover either the principal balance over the term remaining after the date when the rate adjusts to the maximum rate that may apply during this period, or the loan amount over the entire loan term.
  • The points and fees may not exceed 3 percent of the loan amount, although there is an exclusion for certain bona fide discount points. Compensation paid to both employee loan originators and mortgage brokers directly or indirectly by a consumer or creditor that is attributable to the transaction is included in the 3 percent amount, as are any third-party charges to the extent retained by the creditor, a loan originator, or affiliate of either.

The industry strongly opposed the inclusion in points and fees of compensation paid to a loan originator employee and fees, such as appraisal or title fees, if paid to an affiliate. In the concurrent proposals, the CFPB addresses loan originator compensation (see below) but not affiliate fees. The provisions of the final rule, and proposed clarifications, regarding the inclusion of loan originator compensation in points and fees are overly complex. They are in need of a complete reassessment.

To provide more guidance on the inclusion of loan originator compensation in points and fees, the CFPB seeks input on two proposed comments. These comments seek to clarify that payments from a consumer directly to a mortgage broker do not need to be counted twice towards the points and fees cap, and that payments from a mortgage broker to its loan originator employees also do not need to be included in the calculation, assuming the payment to the broker was already included. The CFPB also seeks input on two alternative proposed comments regarding the treatment of employee loan originator compensation.

Under the approach of the first proposed comment a creditor would need to include in points and fees all compensation paid by the consumer or creditor to the employee loan originator. Under this approach, for example, if a consumer paid an origination fee to the creditor, and part of the origination fee is paid to the loan originator, both the origination fee and the amount paid to the loan originator would be included—thus, the amount paid to the originator is included twice.

The second proposed comment calls for an approach in this situation under which the creditor could offset the amount of loan originator compensation by the amount of the origination fee charge paid by the consumer. Under this approach, only the amount of the origination fee would be included in points and fees, unless the amount paid to the loan originator exceeds the amount of the origination fee paid by the consumer, in which case the difference would also be included in points and fees.

Significantly, and perhaps based on a concern of how a narrow concept of qualified mortgage would affect an economy and housing market that still are far less than optimal, the final rule includes a temporary category of qualified mortgages that are not subject to the underwriting requirements generally applicable to such mortgages. To qualify for the temporary category of qualified mortgages, a loan must:

  • Satisfy the qualified mortgage criteria for regular periodic payments, maximum 30-year term, and maximum points and fees
  • Satisfy the underwriting requirements of, and thus be eligible for purchase, insurance, or guarantee by, Fannie Mae or Freddie Mac while they operate under federal conservatorship or receivership (or a limited-life regulatory entity that is a successor to Fannie Mae or Freddie Mac), or FHA, the Department of Veterans Affairs (VA), or the Rural Housing Service (RHS)

The temporary category will expire in seven years or earlier regarding Fannie Mae and Freddie Mac when they cease to be operated under such conservatorship (and there is no limited-life regulatory entity that is a successor to Fannie Mae or Freddie Mac), and with respect to FHA, VA, and RHS, when the respective agencies adopt their own guidelines for qualified mortgages (provided for in Dodd-Frank). This category will likely prolong the significant role of the federal government in the mortgage market, which may complicate the government's efforts to resolve Fannie Mae and Freddie Mac and lessen the role of the federal government in the mortgage market.

The CFPB also proposes an exemption from the ability to repay requirements for loans made under refinance programs of FHA, VA, or RHS, as long as such agencies have not adopted their own specific qualified mortgage requirements for such loans.

Loans that are not qualified mortgage loans must satisfy the general repayment ability requirements, and are not entitled to any special status (presumption or safe harbor) with regard to compliance. It is anticipated that the availability of such loans will be limited at best. A lender will need to consider the following eight underwriting factors, and use third-party records to verify the information used to evaluate them:

  • Current or reasonably expected income or assets
  • Current employment status
  • The monthly payment on the covered transaction
  • The monthly payment on any simultaneous loan
  • The monthly payment for mortgage-related obligations
  • Current debt obligations, alimony, and child support
  • The monthly debt-to-income ratio or residual income
  • Credit history

The CFPB seeks comment on these proposals:

  • Whether there should be an exemption for designated nonprofit lenders that help low- to moderate-income consumers obtain affordable housing
  • Whether there should be an exemption for housing finance agencies and lenders that participate in housing finance agency programs intended to foster community development
  • Whether there should be an exemption for homeownership stabilization programs that work to prevent foreclosures, such as programs that operate in conjunction with the Make Home Affordable program
  • Whether a more liberal qualified mortgage category should be available for small creditors, such as community banks and credit unions, that retain their mortgage loans

Director Cordray said during the public hearing that the CFPB will help lenders implement the rule and has hired a mortgage industry veteran to coordinate those efforts. The CFPB plans to publish plain-language translations of the rule in booklet and video form.

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 the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right.

We will be closely following the CFPB’s activity concerning the ability-to-repay rule. For more information, contact Richard J. Andreano, Jr., at 202.661.2271 or, John D. Socknat at 202.661.2253 or, or Michael S. Waldron at 202.661.2234 or

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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