Consistent with recent rumors that adoption of a final ability-to-repay/qualified mortgage rule would be delayed until after the November election, the CFPB has reopened the comment period on the proposed rule. (The original comment period closed on July 22, 2011.) The CFPB’s notice of the reopening, issued on May 31, 2012, seeks specific data and loan information by July 9, 2012.
The CFPB is seeking comment and additional loan data to better assess factors associated with loans that become delinquent by 60 or more days and to better inform the CFPB as it develops what will be a qualified mortgage that is entitled to either a rebuttable presumption of compliance with the ability-to-repay requirements or a safe harbor.
As explained below, the CFPB is not seeking comment expressly on the merits of a rebuttable presumption versus a safe harbor, but instead seeks comment and data on litigation and related costs relevant to the consideration of a rebuttable presumption or safe harbor.
The CFPB advises that it received loan data from the Federal Housing Finance Authority (FHFA) and also acquired commercially available data on mortgages securitized into private-label securities. However, the CFPB notes that the data do not provide information on certain non-collateral factors, such as liquid financial reserves, that would enable it to examine the relationship of such factors with loan performance and the ability of a consumer to repay a loan. Data in this area would, for example, help the CFPB assess recommendations by interested parties that a qualified mortgage be defined broadly enough to include a loan above a certain debt-to-income (DTI) ratio if the borrower had a certain amount of liquid assets.
With regard to loan performance and related factors, the CFPB seeks the following:
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Comment on the FHFA data and commercially available data on mortgages securitized into private-label securities—including the data source, parameters, and whether other data or studies are available or more appropriate for the specific loan performance—and qualified mortgage assessment noted by the CFPB
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Data or tabulations for loans not covered in the FHFA data that would be appropriate for such assessment
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Comment and data on any measures of loan performance and their relationship to a consumer’s DTI ratio
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Comment and data on any measures of residual income, the use of such measures in loan underwriting, the relationship of such measures to loan performance, and the relationship of such measures to measures of consumer expenditures
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Comment and data regarding any measures of the amount of liquid financial reserves available to meet mortgage-related obligations or current obligations, the use of such measures in loan underwriting, and the relationship of the measures to loan performanceComment and data regarding any measures of stable income and timely housing payments, the use of such measures in loan underwriting, and the relationship of the measures to loan performance
The CFPB is also seeking comment on litigation costs and other costs related to allegations of a failure to comply with the ability-to-repay requirements—both when it is conceded that a loan is not a qualified mortgage and when it is claimed that a loan is a qualified mortgage. Industry and consumer representatives differ sharply in their views of the potential for litigation and the associated costs to the industry, and the CFPB apparently wants more information to better assess the merits of the competing claims.
The CFPB believes that estimates of serious delinquency and the number of loans entering foreclosure are critical to measuring the potential costs of ability-to-repay litigation. While the CFPB believes a 60-day delinquency threshold is an appropriate metric to evaluate whether a consumer had the ability to repay a loan, it seeks comment on the appropriate measure of delinquency for purposes of calculating the potential costs associated with ability-to-repay litigation in the foreclosure context. The CFPB also seeks comment on estimates of potential lawsuits asserting a violation of the ability-to-repay requirements that would be brought within the first three years after consummation in cases in which the borrower has not become delinquent.
Other litigation-related issues on which the CFPB seeks comment or data include:
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With regard to the number of potential litigants and complaints, comment or data on the number of lawsuits asserting a violation of the ability-to-repay requirements when it is conceded that the loan is not a qualified mortgage and when it is claimed that the loan is a qualified mortgage
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The likelihood of potential outcomes of litigation, such as dismissal, summary judgment, settlement, or judgment after trial, and the effect on costs under various scenarios, including when it is conceded that the loan is not a qualified mortgage and when it is claimed that the loan is a qualified mortgage
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In addition to the major element of damages for violation of the ability-to-repay requirements—all finance charges and fees paid by the borrower—the effect of other aspects of damages, such as the consumer’s attorney fees and the lender’s litigation costs
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Other potential costs of ability-to-repay litigation, including costs associated with risks that loans are “put-back” to originators by secondary-market participants due to a potential ability-to-repay claim or proven violation, and costs associated with extended foreclosure timelines due to ability-to-repay litigation
The reopening of the comment period on these specific issues reflects that the CFPB is being deliberate in its consideration of weighty issues regarding the ability-to-repay requirements, and that the CFPB understands that missteps in crafting the final rule could constrain access to credit in a manner that would harm the very consumers the rule is intended to protect.
Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial residential 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, nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).
The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided on the right.
For more information, please contact one of the Practice Leaders of the Mortgage Banking Group: 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 202.661.2234 or waldronm@ballardspahr.com.
