“Qualified Mortgages”, Section 1026.43(e)
Creditors are provided with a “safe harbor” from liability when they make loans that meet the definition of a “qualified mortgage”. A” qualified mortgage” is a mortgage other than a “higher priced mortgage” (subprime mortgage) as defined by Regulation Z that has been underwritten to meet the ability to repay requirements, as previously defined, and where the consumer’s total monthly debt ratio does not exceed 43%.
Also, a “qualified mortgage” cannot have any of the following terms: negative amortization; interest-only payments, balloon payments, or terms exceeding 30 years. In addition, “qualified mortgages” cannot be “no doc” loans (i.e. loans where the applicant’s income and employment are not verified).
Alternatively, certain mortgage loans, other than jumbo loans, that meet the product feature prerequisites for a “qualified mortgage” and also satisfy the underwriting requirements of and are eligible to be purchased, guaranteed or insured by either; (1) the GSE’s (FNMA, FHLMC) while they are operating under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, or the Department of Agriculture or Rural Housing Service, may qualify for the protections of a “qualified mortgage” even though the underwriting requirements for these entities may be somewhat more flexible than those outlined for a “qualified mortgage”. For example, the 43% debt to income limit does not apply for these loans. In addition, this exception allows loans with higher risk loan features, such as negative amortization and interest only features, to meet the definition of a “qualified mortgage” if they are eligible to be insured or guaranteed by one of the above agencies. This alternative will expire when the above agencies establish regulations that define “qualified mortgages” for their purposes or in seven years, whichever occurs first.
Creditors that originate at least 50% of their first-lien mortgages in counties that are rural or underserved, have less than $2 billion in assets, and originate no more than 500 first-lien mortgages each year can originate balloon-payment mortgages that may also meet the definition of a “qualified mortgage”. The CFPB will publish an annual listing of the designated rural or underserved counties.
While “higher-priced” mortgages cannot be “qualified mortgages”, the new rule does provide for a rebuttable presumption that a creditor is in compliance with the ability- to-repay requirements for “higher priced” mortgages. This means that the burden of proof that the creditor did not comply rests on the consumer to show that at the time the loan was originated the consumer’s income and debt obligations did not leave sufficient residual income or assets to meet living expenses.
Points and Fees, Section 1026.43(e)(3)
In general, loans where the points and fees paid the consumer exceed 3% of the total loan amount cannot be “qualified mortgages”. The definition of points and fees for the purpose of determining whether a mortgage is a “qualified mortgage” is the same as the definition of points and fees under section 1032, which defines HOEPA or “high-cost” mortgages. However, the Dodd-Frank Act substantially expanded the scope of compensation included in points and fees for both the “high-cost” and “qualified mortgage” thresholds. The Act requires that all compensation paid directly or indirectly by a consumer or creditor to a mortgage originator from any source be included in points and fees. This broad definition means that even compensation paid to other mortgage originators, including the creditor’s own employees (i.e. loan officers) must be included if the compensation can be attributed to that particular transaction at the time the interest rate is set.
Different thresholds for the maximum points and fees that can be assessed for a loan to meet the definition of a “qualified mortgage” exist for smaller loans:
- For loan amounts greater than or equal to $60,000, but less than $100,000, the total points and fees cannot exceed $3,000;
- For loan amounts greater than or equal to $20,000, but less than $60,000, the total points and fees cannot exceed 5% of the total loan amount;
- For loan amounts greater than or equal to $12,500, but less than $20,000, the total points and fees cannot exceed $1,000; and
- For loan amounts less than $12,500, the total points and fees cannot exceed 8% of the total loan amount.
Certain discount points (points paid by the consumer to reduce the interest rate in accordance with established industry practices) do not have to be included in the calculation of total points based on the relationship of the loan interest rate to the average prime offer rate. For both “high-cost” mortgages and “qualified mortgages”, the definition of points and fees generally excludes “bona third party charges” that are not retained by the mortgage originator. The definition of what constitutes these bona fide third party fees can be found in section 1026.32(b)(1)(i); the definition used for” higher-cost” or HOPEA mortgages.
The CFPB has made changes to section 1026.32 for “high cost” mortgages to clarify that the points and fees that are subject to these limitations are in connection with closed-end transactions and include only points and fees known at or before consummation of the loan. While credit unions do not typically originate mortgage loans with points and fees that exceed these thresholds, the Official Interpretation to section 1026.32(b)(1) does include examples of fees and charges that are and are not known at or before consummation and of fees that are or are not included in the calculation of the total fees. You should note that the points and fees referenced here may include a portion of private mortgage insurance premiums paid at closing.
As noted above the sum of the points and fees generally cannot exceed 3% of the total loan amount in order for the loan to be considered a “qualified mortgage”. The total loan amount is determined by taking the amount of credit extended to or on behalf of the consumer and subtracting any financed points and fees. See section 1026.32(a)(1)(ii)-1 for more guidance on this calculation.
Fully-Indexed Rate, Section 1026.43(e)(2)(i)
Monthly payments for qualified mortgages must be calculated using the fully-indexed interest rate (or the initial rate or premium rate if that is higher than the fully-indexed rate) at the time of closing and be based on the highest payment that will apply in the first five years of the loan. See section 1026.43(c)(5)(i) for more detail about determining the fully-indexed rate. The consumer cannot have a total debt-to-income ratio of more than 43%.
Definition of Dwelling, Section 1026.43(a)
Creditors must determine consumers’ ability to repay a residential mortgage loan. A residential mortgage loan, with some exceptions, means any consumer credit transaction secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling. A dwelling means a residential structure or mobile home that contains no more than four residential units, as well as individual units in condominiums and cooperatives. The residence may be the consumer’s primary residence, but also includes a second home or vacation home. A dwelling would not include a timeshare residence or an investment property. In addition, the definition does not include open-end mortgages, reverse mortgages or temporary or bridge loans with terms of 12 months, or less or loans secured by vacant land.
Prepayment Penalties, Section 1026.43(g)
Federally-chartered credit unions are not permitted to assess prepayment penalties. However, some states permit state-chartered credit unions to impose prepayment penalties and so these state-chartered credit unions should be aware of a new restriction. The final rule generally prohibits prepayment penalties except for certain fixed-rate, “qualified mortgages” where the penalties satisfy specific restrictions and the creditor (or the creditor through its mortgage broker) has offered the consumer an alternative loan product that does not include a prepayment penalty. The CFPB has included a new provision that states that a prepayment penalty does not include a waived third-party fee that the creditor imposes if the consumer pays off the loan sooner than 36 months after consummation.
“Non-Qualified” ARMs, Section 1026.43(c)(5)(i)
The new rule requires that creditors use the fully-indexed interest rate and the full loan amount to calculate the monthly payment for determining the consumer’s ability to repay ARM loans that do not meet the underwriting requirements for “qualified mortgages”.
“Non-Qualified” Mortgages with Balloon Payments, Section 1026.43(c)(5)(ii)(A)(1)
The ability to repay determination for “non-qualified” mortgage loans with balloon payments that are not “higher-priced” mortgages must be based on the maximum payment that may be assessed in the first five years after the first regular payment due date. A creditor that makes a balloon payment mortgage that is not a “higher priced” mortgage where the balloon payment is due in less than five years and where there is a clear obligation to renew the loan can avoid the ability to repay determination by including the renewal period in the loan term so that the balloon payment occurs after five years.
Record Retention, Section 1026.25(a)&(c)
Creditors must retain evidence of compliance with the new rule for three years. This doesn’t mean that a creditor has to retain actual paper copies, but the creditor must be able to accurately reproduce the records.
Civil Liability Provisions, TILA section 130(a)
Consumers who bring timely actions against creditors for violations of the ability to repay requirements may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material. In addition, the consumer may be able to recover: (1) any actual damages; (2) statutory damages in an individual action or class action up to a set threshold; and (3) court costs and attorneys’ fees.
Statute of Limitations, TILA section 130(e)
The statute of limitations for violations to the new rule is three years from the date of the occurrence of the violation (for most TILA violations the limit is just one year). In addition, a consumer can assert a violation of this section against a creditor, an assignee, or other holder or their agent who initiates a foreclosure action. There is no time limit on the use of a violation defense in a foreclosure situation.