Compliance

CFPB Adds to Stack of Mortgage Rules

Here’s a six-point overview of the CFPB’s new mortgage lending regulations.

February 28, 2013
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2. Mortgage lenders must comply with new “ability-to-repay” requirements.

This new section of Regulation Z (Truth in Lending Act) will require credit unions to obtain and verify specific pieces of financial information about the applicant to consider when determining whether the borrower can repay the loan over the long term, including: income or assets; employment status; proposed and current monthly mortgage payments; other current debt obligations including alimony and child support; monthly debt-to-income (DTI) ratio or residual income; and credit history.

This rule applies to any closed-end first-lien or subordinatelien loan secured by a dwelling (both the borrower’s primary residence or second home).

A credit union will be presumed to have complied if it makes a “qualified mortgage” that requires: no excessive up-front points and fees (more than 3% of the loan amount); no “toxic provisions” (such as interest-only, negative amortization, or a maturity longer than 30 years); generally no balloon payment (but with an exception for most credit unions in rural areas); and generally not more than a 43% debt-to-income ratio (but with an exception for loans meeting certain government affordability standards).

There are also restrictions of prepayment penalties.

Qualified mortgages for higher-priced loans (typically for consumers with insufficient or weak credit histories) allow borrowers to later challenge whether the lender properly assessed their ability to repay the loan (a “rebuttable presumption” of compliance).

Qualified mortgages for lower-priced loans cannot be successfully challenged for compliance with the ability-to-repay rules, providing a compliance “safe harbor.” It’s difficult to assess how this different legal treatment on evaluating lenders’ assessment of an applicant’s ability to repay a loan might affect the mortgage market in the future.

CFPB is considering whether to include another category of “qualified mortgages” that would cover certain loans originated by credit unions with $2 billion or less in assets that originate 500 or fewer first-lien transactions annually and that are held in portfolio for at least three years.

All requirements other than the 43% debt-to-income ratio would have to be met.

The comment period on the CFPB proposal closed at the end of February, and the bureau expects to make a decision this spring.

Next: New mandates

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