FPB Amends Ability-to-Repay/QM Rule

By Richard Owen, Executive Director, VMLA

On Wednesday, the CFPB amended the initial (ATR) rules in several ways. Among other things, the revision establishes certain new exceptions for loan originator compensation and provides relief to smaller creditors who originate balloon notes held in portfolio.

By way of background, The Dodd-Frank Act (D-F) mandates that Qualified Mortgages (QM) under the Ability to Repay Rules (ATR) have limited points and fees and certain types of loan originator compensation (MLO Comp) must be included in those fee calculations. When the Consumer Financial Protection Bureau (CFPB) issued rulesunder (ATR) earlier this year to factor MLO comp into the APR equation, the initial rulemaking left the mortgageindustry in a state of ambiguity, created operational complexity for lenders, and caused an avalanche of concern over negative impacts on the cost and availability of credit.

Factoring MLO Comp into APR
Under the revised rule, the compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee does not count towards the points and fees threshold.

Importantly, the amended rule also excludes from points and fees loan originator compensation paid by a consumer to a mortgage broker when that payment has “already been counted toward the points and fees thresholds as part of the finance charge under § 1026.32(b)(1)(i).” This amendment does not change the January 2013 final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor.

Revised Balloon Note Exemption
The ability-to-repay rule that was established in January also has a requirement that borrowers must have a debt-to-income ratio of 43% or less in order to achieve QM status. Originally, these rules would have banned balloon loans unless they were originated in certain rural or undeserved areas. To establish the definition for what constitutes a rural area under the exemption, the CFPB initially used the USDA’s Urban Influence codes. For many good reasons, that strategy was meet with significant push-back from community based lenders that hold these types of loans in portfolio. Based on Wednesday’s revisions, the final rule now gives QM status to banks that offer certain balloon loans held in portfolio, have $2 billion of assets or less, and make fewer than 500 loans annually. For now, these banks will now have two years to continue originating these types of loans and the final rule allows small creditors to charge a higher annual percentage rate (APR) and still receive QM /safe harbor status. It is expected that the CFPB will continue to study this area as it works to establish more of a long-term strategy to ensure that borrowers can continue to access fair credit solutions.

Exemption for Lenders Serving Low and Moderate Income Customers
In addition to the new balloon loan exception, the CFPB revised its rule to exempt certain nonprofits and community lenders from the ability-to-repay provision entirely. The exemption applies to lenders that make fewer than 200 home loans per year and serve only low- and moderate-income consumers. This threshold had originally been established at 100 loans per year or less.

Click here to link to the CFPB’s 279 page revised ATR rules. Click here for a summary of the amendments.

On Wednesday, the CFPB also issued a rule delaying the effective date of a provision that prohibits creditors from financing certain credit insurance premiums in connection with certain mortgage loans. More information can be found on the CFPB’s website at www.cfpb.gov.

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