On January 10, the Consumer Financial Protection Bureau (CFPB) released a final rule (ATR Rule) to implement provisions related to the ability to repay (ATR) standards and the definition of a “qualified mortgage” (QM) as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The final rule becomes effective in January 2014.
With respect to the ATR Rule, the final rule describes certain minimum requirements for creditors in making ability-to-repay determinations. The eight underwriting factors a residential mortgage lender must consider include: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history. Although such factors must be considered, no particular underwriting models are required.
As set forth in the Dodd-Frank Act, QMs are entitled to a presumption that the creditor making the loan satisfied the ATR rules. The final rule provides a safe harbor for loans that satisfy the definition of a QM and are not “higher priced” as generally defined in a prior Federal Reserve rule. Specifically, consumers could show a violation of the ATR requirements with regard to a subprime qualified mortgage if they were able to show that, when the loan was originated, the consumer’s income and debt obligations left insufficient residual income or assets to meet living expenses. For higher-priced mortgage loans, there is a rebuttable presumption with respect to the QM definition. With respect to prime loans, if certain QM criteria are satisfied, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumer’s ability to repay.
Certain residential mortgage loans cannot be QMs. Those include mortgages with negative amoritization schedules, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, “no doc” loans cannot be QMs. Finally, residential mortgage loans where the points and fees paid by a consumer exceed 3% of the total loan amount are generally prevented from being QMs. With respect to underwriting criteria, a QM must have monthly payments calculated based on the highest payment that will apply in the first five years of the loan and that the consumer has a total debt-to-income ratio (DTI) that is less than or equal to 43%. For loans where the DTI is above 43%, the CFPB believes that those need to be evaluated on an individual basis rather than in the blanket presumption that the ATR requirements have been met.
Simultaneously with the release of the ATR Rule, the CFPB also issued proposed exemptions and modifications to the rule for public comment. Specifically, the CFPB proposes to exempt from the ATR Rule extensions of credit made (i) pursuant to a program administered by a housing finance agency, (ii) by certain types of nonprofit creditors (including those designated as Community Development Financial Institutions by the Department of Treasury) and (iii) pursuant to an Emergency Economic Stabilization Act program (such as extensions of credit made pursuant to a State Hardest Hit Fund program). In addition, the proposal exempts from the ATR requirements a refinancing that is (i) eligible to be insured, guaranteed or made pursuant to a program administered by the Federal Housing Administration, US Department of Veteran Affairs or the US Department of Agriculture, or (ii) eligible to be purchased or guaranteed by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation, if certain requirements are met. The proposal sets forth a fourth category of “qualified mortgages” and includes certain loans originated by creditors with assets of $2 billion or less that made 500 or fewer first-lien covered transactions during the previous calendar year. Finally, the proposal also sets forth for comment rules that would allow small creditors operating predominantly in rural or underserved areas to offer first-lien balloon loans with a higher annual percentage rate and still benefit from a conclusive presumption of compliance with the ATR Rule (the “safe harbor”). Comments are due by February 25, 2013, although a final rule related to these proposals is scheduled to become effective on January 10, 2014.
More information is available here.
Please see “Agencies Issue Final Rule on Appraisals for Higher-Priced Mortgage Loans” in Banking below.