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.

Ability to Repay Rule

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:

  • Current employment status
  • Monthly mortgage transactions, simultaneous loans and mortgage-related obligation payments
  • Current debt obligations, alimony and child support
  • Monthly debt-to-income ratio or residual income
  • Credit history

Qualified Mortgage Rule

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:

  • Loan terms fewer than 30 years
  • Points and fees less than 3 percent of the loan amount for loans greater than or equal to $100,000 (thresholds for smaller loans apply)
  • Substantially equal periodic payments that do not allow for negative amortization, principal deferral or result in balloon payments
  • Proper calculation of the mortgage payment, using the maximum rate applicable in the first five years of payment transactions
  • Overall debt ratio less than 43 percent

Alternative Qualified Mortgage Rules

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:

  • Property in a designated, rural or underserved area
  • Originated by an institution with assets less than $2 billion
  • Originated by an institution with fewer than 500 first-time mortgages annually and with at least 50 percent of their mortgages in rural or underserved areas
  • Hold the respective loan in its portfolio for at least three years
  • Have a fixed rate with amortization at fewer than 30 years and a minimum five-year term
  • Meet certain standard underwriting criteria, excluding the 43 percent debt-to-income ratio

New Proposals

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.

To learn more, contact our dedicated Financial Institutions Group CPAs in Troy, Mich., or Houston, Texas.