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The Consumer Financial Protection Bureau (CFPB) recently amended the Truth in Lending Act to help strengthen protection for mortgage loan consumers. These amendments established the Ability to Repay rule and added guidance on the Qualified Mortgage rules. Effective Jan. 10, 2014, these modifications will require creditors to document consumers’ ability to repay mortgage loans, confirm that compliance measures for qualified mortgages have been taken, define product features and underwriting criteria, and provide alternative qualified mortgages.
The Ability to Repay rule is a significant change made under the Truth in Lending Act. Under the new rule, prior to loan obtainment, creditors must reasonably determine that the consumer will be able to repay the mortgage debt. In documenting this ability, creditors must take into consideration and verify through third-party sources various financial factors, including:
In tandem with the Ability to Repay rule is another set of requirements intended to clarify how lenders can avoid legal liability under the rule, which holds them accountable for ensuring consumers can repay their mortgage loans. The updated Qualified Mortgage rule also includes a set of characteristics that a loan must have in order to be considered a qualified mortgage and be in compliance with the Ability to Repay rule.
These attributes include:
To prevent constricting available credit in various mortgaging markets, a few alternative Qualified Mortgage rules have been established to accommodate the needs of these markets. This includes a temporary set of qualified mortgages and allowing balloon loans to be classified as qualified mortgages.
Temporary Secondary Set of Qualified Mortgages
Enabling flexibility in underwriting requirements, a temporary secondary set of qualified mortgages are now defined under the new regulations. This provision applies to loans meeting general product features for qualified mortgages and satisfying underwriting requirements. It is also applicable to loans eligible for purchase, guarantee or insurance by either Fannie Mae or Freddie Mac, while operating under federal conservatorship or receivership, or the United States Department of Housing and Urban Development, Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service. Temporary provisions are expected to phase out within seven years, as various agencies issue their own qualified mortgage rules or the end of receivership for Fannie Mae and Freddie Mac.
Rural Balloon Qualified Mortgages
To ensure credit availability in underserved rural areas, specific circumstances allow balloon loans to be classified as qualified mortgages. To be treated as a rural balloon qualified mortgage, the loan must fall under the following requirements:
Along with the Truth in Lending act, the CFPB seeks comments on the proposed rules for small community institutions and an exemption of certain loan programs:
Small Community Lenders
Similar to the rural balloon qualified mortgages, this proposal suggests small community institutions are eligible under the same qualifications applicable to rural balloon qualified mortgages.
Under the proposal, a higher threshold for the APR on first lien qualified mortgages originated by smaller community lenders will be allowed. Even with the higher threshold, these loans would still have the same conclusive presumption of compliance and safe harbor of standard first lien qualified mortgage loans.
Exemption of Certain Loan Programs
In addition to proposed changes impacting small community lenders, the CFPB recognizes that non-profit, homeownership stabilization programs, federal agency and Government-Sponsored Enterprise (GSE) refinancing programs have established requirements. Subjecting these programs to ability to repay and qualified mortgage rules would ultimately constrict credit availability and adversely impact the mortgage market. The CFPB is therefore seeking comments on exempting these types of programs from ability to repay and qualified mortgage rules.
The CFPB is seeking comments on for these proposals until Feb. 23. For further details on the new regulations and proposals, please visit the Consumer Financial Protection Bureau website.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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