The Ability to Repay (ATR)/Qualified Mortgage (QM) rule attempts to add certainty and clarity around the ambiguous “reasonable and good faith” standard that lenders must make when determining a borrower’s ability to repay. If lenders make loans within QM standards, they will receive certain protections against borrower claims. However, in order to meet QM status, a loan cannot have points and fees in excess of 3% of the loan balance.
An early concern with the initial ATR/QM standards announced earlier this year was the inclusion of loan originator (LO) compensation as a separate item in the points and fees threshold associated with QM determination. Prior to a recent amendment, the Dodd-Frank Act included a provision that required LO comp to be included in the calculation—even if it was not paid up-front by the consumer directly to the LO.
In an example of the industry and government’s collaboration to avoid overly restrictive regulations while still providing strong consumer protection, the Consumer Financial Protection Bureau (CFPB) amended the ATR/QM rule on May 29 to exclude LO compensation paid by a consumer to a mortgage broker when that payment has already been counted towards the 3% points and fees thresholds.
Industry Concern
The CFPB and industry had initial concerns when the Dodd-Frank Act required LO comp to be included in the QM points and fees test. Questions were raised as to how, especially in circumstances where a creditor pays compensation to a mortgage broker or to its own employees, there would be a simple way to determine whether the compensation is paid from money collected from up-front fees, or from the interest rate. Lenders needed to avoid situations where they could be stuck double counting the compensation fees depending on whether someone counted LO compensation as up-front fees, which are included in the test, or as part of the APR, which would not count towards the test.
In an effort to help lenders comply with the intent of the Dodd-Frank Act without causing a major disruption in the origination process, the CFPB issued a request for comments on how to best handle the logistical issues of determining the amount of LO comp—and how to calculate the total for QM purposes—on each loan.
The Final Rule’s Impact
Following a period of notice and comment, the CFPB released amendments to the ATR/QM rule clarifying how LO comp should be treated in the three percent points-and-fees cap outlined in the QM requirement. In the amended final rule, compensation is excluded from a QM’s 3% points-and-fees calculation including:
- Compensation paid to a mortgage broker when that payment has already been included in the points and fees threshold;
- Compensation paid by a mortgage broker to its employees because that compensation is already included in the points and fees paid by the consumer or by the creditor to the broker; and
- Compensation paid by a creditor to its loan officers.
The CFPB retained the “additive” approach for calculating LO comp paid by a creditor to an LO that is not the creditor’s employee. This will require the creditor to include points and fees paid to a broker that are in addition to fees paid up-front by the consumer to the creditor that are already included in the points and fees threshold. The CFPB listened and understood the industry’s concern regarding the difficulty of calculating individual employee compensation early in the origination process.
Engage with the CFPB
The bureau continues to accept comments on rules, while issuing commentary and amendments based on both consumer and mortgage industry feedback. It will continue to monitor the market and determine if there are additional consumer protections that can be enacted within the consistency of the Dodd-Frank Act that will improve the financial services marketplace for all parties.
Although the ATR/QM rule faces
Don’t be a passive observer. Engage with the CFPB to ensure that new rules and amendments provide clear guidelines for lenders while also protecting the interests of consumers.
