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Consumer Financial Protection Bureau issues new rules

Posted by: seth on 1/15/2013

On Thursday January 10th, the mortgage industry braced for rulings from the United State’s newest federal agency related to home lending, the Consumer Financial Protection Bureau (CFPB).  In his opening statement announcing the newest rules, CFPB’s Director, Richard Cordray said "Today, we’re issuing one of our most important rules to date, the Ability-to-Repay rule. It’s designed to assure the reliability of mortgages – making sure that lenders offer mortgages that consumers can actually afford to pay back. This is a simple, obvious principle that needs to be cemented in the housing market."

Thursday’s ruling came on the heels of an August, 2012 set of rules aimed at reforming lender compensation and incentives, as well as the fee and point structuring of mortgage products.  The CFPB, created in July of 2011, was formed through the Dodd-Frank Wall Street Reform and Consumer Protection Act and tasked with executing the regulatory vision of the Act. Thursday’s roll-out of the “Ability-to-Repay” rule, paired with amendments to the Home Ownership and Equity Protection Act (HOEPA) represented the most impactful action from the CFPB since its inception.

The “Ability-to-Repay” rule creates universal documentation requirements for qualifying mortgage factors such as income, assets, credit worthiness, long-term repayment potential, and other financial information. The rule also includes several proposed changes to Regulation Z and the Truth in Lending Act – most notably the creation of a definition for a “Qualified Mortgage”.

Highlights of what constitutes a qualified mortgage:

  • Meet the underwriting documentation requirements of the Ability-to-Repay rule.
  • May not use teaser or interest only periods for determining repayment ability.
  •  Adhere to guidelines for fair fee and pricing structures, including a 300 basis point (3 percent) limit on origination fees and points that lenders are permitted to charge.  
  • Borrower Debt-to-Income limits are required to be below 43%. The CFPB did qualify the debt-to-income requirement with a statement - “For a temporary transitional period, loans that do not have a 43 percent debt-to-income ratio but meet government affordability or other standards - such as they are eligible for purchase by [Fannie Mae or Freddie Mac] - will be considered Qualified Mortgages."
  • Increased escrow rules for higher priced mortgages, requiring a mandatory five year escrow relationship for some loan products.

The new rules are scheduled for a staged seven year implementation phase-in starting on January 1st, 2014. Regardless of the transition period allowance, it is clear that the CFPB is aiming to create higher underwriting standards, while also limiting the range of high-priced mortgage products in the mortgage market.

The new ruling does not limit the rights of consumers to legally challenge lenders for irresponsible lending behaviors. However, lenders who follow the Ability-to-Repay and Qualified Mortgage standards are likely to achieve some level of safe-harbor from legal liability resulting from mortgage product designs. 

Housing finance agencies  and small creditors (such as community banks and credit unions) across the United States successfully lobbied for amendments to the rulings allowing some exemptions for their programs for low-to-moderate income consumers.

To read the entire rule or learn more about the CFPB, visit their website at http://www.consumerfinance.gov/

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