Last month marked the one-year anniversary of the designated transfer date of authority to the Consumer Financial Protection Bureau (CFPB) that took place on Jan. 21, 2012, when President Barack Obama appointed Richard Cordray as director of the CFPB in a controversial recess appointment. The CFPB was required by the Dodd-Frank Act to release several final rules within one year from this date. Three final rules were released on January 10, 2013, followed by the other four promised final rules on January 22; one day later than the one-year anniversary due to a national holiday.
The three rules released on the 10th were the Ability-to-Repay Rule, High-Cost Mortgages and Homeownership Counseling Amendments and a rule related to Escrow Requirements for Higher Priced Mortgages under the Truth in Lending Act.
These rules are designed to protect consumers and add stability to the housing market. There is a hope that these rules will also remove uncertainty and help revitalize the housing market. At their best, these upcoming rules will provide some stability and confidence in how lenders must behave moving forward.
The Ability-to-Repay and Qualified Mortgage Standards rules are the regulations with the most potential impact on lenders’ operations. The goal of these rules is to mandate certain underwriting standards to ensure that lenders are making loans that consumers have the ability to repay. It requires that lenders make a good faith assessment of a borrower’s ability to repay their mortgage loan. They also give lenders protections from liability if they make “qualified mortgages” as defined in the rule. The rule, as released on Jan. 10, gives lenders eight underwriting factors they must consider when making an ability to repay determination.
The protections from liability are split into two different categories of qualified mortgages. The rule provides a “safe harbor” protection for qualified mortgages that are not categorized as “higher-priced” as defined by the 2008 Federal Reserve Board Truth-in-Lending amendments. “Higher-priced” qualified mortgages will receive a “rebuttable presumption” of compliance.
The final rule prohibits qualified mortgages from having negative amortization, interest-only payments, balloon payments or having a term exceeding 30 years. The rule prohibits “no-doc” loans where the lender does not verify the borrower’s income or assets. There is also a provision that prohibits qualified mortgages from having points and fees that exceed three percent of the loan amount, with certain exceptions.
The rule also sets requirements for debt to income ratios for qualified mortgages. The general rule requires that the payments be based on the highest payment that will apply in the first five years of the loan, and that the total debt to income ratio be less than or equal to 43 percent.
The CFPB recognized in the rule that creditors may be hesitant to make loans that are not qualified mortgages, and therefore included a temporary category of qualified mortgages with more flexible requirements to avoid a housing market disruption. For a temporary period the following loans will be considered “qualified mortgages”: loans eligible to be purchased, insured or guaranteed by either (1) the government-sponsored enterprises (GSEs) while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development (HUD), Department of Veteran Affairs, or Department of Agriculture or Rural Housing Service. It is anticipated that these provisions will phase out in the coming years. The effective date for this rule is January 10, 2014.
The second rule issued amends the Truth-in-Lending Act, which currently requires higher-priced mortgages loans to have escrow accounts for the payment of taxes and insurance for the first year of the loan. The new rule requires escrow accounts to be maintained for at least five years. This rule is effective June 1, 2013.
The third rule issued by the Bureau strengthens consumer protections dealing with high-cost mortgages under the Home Ownership and Equity Protection Act of 1994 (HOEPA.) The rule expands HOEPA coverage to include purchase-money mortgages, refinances, closed-end home-equity loans and open-end credit plans. It exempts loans made to finance the initial construction of a home, loans originated by Housing Finance Agencies, and USDA section 502 Direct Loan Program loans.
The rule implements Dodd-Frank revisions to the HOEPA coverage threshold tests and adds additional restrictions on balloon payments, prepayment penalties and late charges. It also mandates homeownership counseling for borrowers before obtaining a high-cost mortgage. The rule also implements new requirements regarding homeownership counseling for all loans. It requires lenders to provide a list of homeownership counseling organizations to borrowers within three business days of the loan application. The list must be obtained from a designated website or from data made available by HUD or the CFPB. The rule also requires lenders to obtain confirmation that all first time homebuyers have received counseling from a federally approved homeownership counselor. The rule also mandates certification of counseling for all borrowers who are applying for a loan with a negative amortization feature.
Of course, there may still be minor corrections leading up to implementation day as the final rules and clarifications are released. Lenders will have to determine how — if at all—they need to change processes to meet compliance standards. The good news is that many of the rules released last month already reflect changes lenders made in the wake of the 2008 mortgage crisis. The key now is formalizing the rules and documenting processes for compliance. Hopefully these new rules will help give lenders more certainty to project the future lending constraints and aide a potential housing recovery.