On July 10, the Consumer Financial Protection Bureau (“Bureau”) finalized important amendments (the “Amendments”) to its ability-to-repay / qualified mortgage rule (the “QM / ATR Rule”) that are intended to ease certain compliance challenges with making qualified mortgages (“QMs”).1 In response to industry concerns on the extensive underwriting requirements in Regulation Z’s new Appendix Q, the Bureau acknowledged that certain of its provisions were “not well-suited to function as regulatory requirements”2 and, as a result, finalized major revisions to the methodology for determining a consumer’s monthly debt and income for purposes of making a QM under the 43% debt-to-income (“DTI”) underwriting alternative.
The Amendments, which had been proposed in April of this year (the “April Proposal”),3 also finalize clarifications to its mortgage servicing and escrows rules that were issued this January.4 Like the mortgage rules themselves, the Amendments will take effect on January 10, 2014.
Separately, on the same date, the Bureau, together with the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (the “Agencies”) issued proposed amendments to their January 2013 final rule governing appraisal practices.5
AMENDMENTS TO THE QM / ATR RULE
Amendments to Appendix Q (Standards for Determining Monthly Debt and Income)
Appendix Q contains detailed rules regarding what and how to consider income and liability items for purposes of calculating the borrower’s DTI ratio, as well as how such items must be verified. Among the more significant changes, the Amendments ease the general requirement that a lender determine that the consumer’s income is “reasonably expected” to continue through at least the first three years of the loan. When assessing the stability of a consumer’s income, the Amendments also eliminate the requirements that a lender analyze both a consumer’s probability of continued employment and the consumer’s training, education, and qualifications for the job. Other amendments to Appendix Q include:
Moreover, the Bureau permits creditors to rely on standards established by Fannie Mae or Freddie Mac (the “GSEs”) or by the Department of Housing and Urban Development, Department of Veterans Affairs, Department of Agriculture, Rural Housing Service (the “Federal Agencies”) as “a helpful resource in applying appendix Q” so long as those standards are consistent with Appendix Q’s requirements.6 With respect to the treatment of items that are not covered by Appendix Q, the Bureau revised the introduction to Appendix Q to provide that a creditor may choose to “exclude the income or include the debt” or rely on GSE or Federal Agency guidance on how to resolve the issue.7
Clarifications Related to the GSE / Federal Agency Alternative
The Bureau finalized amendments that provide guidance on when a loan is a QM because it meets the underwriting requirements to be purchased by the GSEs or insured or guaranteed by a Federal Agency (the “GSE / Federal Agency” alternative).8 To determine eligibility, the Bureau clarifies that:
The Preamble to the Amendments also states the Bureau’s view that minor inaccuracies in input data that do not affect the loan’s eligibility for purchase, guarantee or insurance should not affect its QM status, although this clarification is not expressed in the text of the amended regulation or commentary.12 Further, a repurchase or indemnification demand by a GSE or Federal Agency would not automatically strip a loan of its QM status because “[s]ome repurchase or indemnification demands are not related to eligibility criteria at consummation.”13
The Bureau indicated that among the 73 comments it received on the April Proposal, many requested guidance on other significant aspects of the QM / ATR Rule, such as how to comply with the QM / ATR Rule in light of the use of the disparate impact theory in light of the use of fair lending enforcement and how to calculate residual income for purposes of making rebuttable presumption QMs.14 The Bureau did not address these concerns, emphasizing that the Amendments were intended to “focus on specific narrow implementation issues, and broader policy changes would not be appropriate as part of this process.”15
MORTGAGE SERVICING AMENDMENTS
Preemption of State Law. The Amendments respond to questions about the extent to which the loss mitigation and other requirements adopted under the Real Estate Settlement Procedures Act preempt State mortgage servicing and foreclosure laws. Specifically, the Bureau states that, although State laws that are inconsistent with the Bureau’s requirements may be preempted, State laws that give greater protection to consumers are not. The Bureau also states that nothing in its rules should be construed to preempt the entire field of regulation. 16
Effective Date & Rate Adjustment Notices. The Bureau’s mortgage servicing rules take effect on January 10, 2014. The Bureau clarifies that, although the new notice requirements for adjustable rate mortgages (“ARMs”) apply to loans made before January 10, 2014, servicers are not required to comply with those requirements prior to that date.17
Exemptions for Small Servicers. A servicer that services 5,000 or fewer mortgage loans that it or an affiliate originated or owns is a “small servicer” and therefore exempt from certain requirements in the mortgage servicing rules, including periodic statements and some of the requirements regarding loss mitigation and lender-placed insurance. The Amendments clarify which loans must be considered when making this determination. In particular, all dwelling-secured closed-end consumer credit transactions must be considered (not just federally related mortgage loans) as well as loans serviced by an affiliate of the servicer.20
ESCROWS RULE AMENDMENTS
The Bureau provided more guidance on its recent amendments to its escrows rule which took effect on June 1.21 Specifically, the Amendments clarify that construction loans, bridge loans and reverse mortgages are not subject to the rule’s requirements regarding the ability-to-repay requirements and prepayment penalty provisions for higher priced mortgage loans (“HPMLs”).22
PROPOSED AMENDMENTS TO INTERAGENCY APPRAISAL RULE
Separately, on July 10, 2014, the Agencies issued proposed amendments to their January 2013 final rule.23 That rule requires creditors making HPMLs to obtain one or more written appraisals and to provide consumers with a notice regarding the use of appraisals and a free copy of each appraisal. The proposed amendments would exempt the following transactions from these requirements:
Comments are due by September 9, 2013.
Questions regarding the matters discussed may be directed to any of our lawyers listed in this alert, or to any other Orrick attorney with whom you have consulted in the past.
1Bureau of Consumer Financial Protection, Final Rule, Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) (July 10, 2013), http://files.consumerfinance.gov/f/201307_cfpb_final-rule_titlexiv.pdf (publication in the Federal Register forthcoming) [hereinafter “Amendments Release”].
2Amendments Release at 65.
3Bureau of Consumer Financial Protection, Proposed Rule with Request for Public Comment, Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation Z) and the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 25638 (May 2, 2013).
4Bureau of Consumer Financial Protection, Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696 (Feb. 14, 2013) [hereinafter “2013 RESPA Servicing Rule”]; Bureau of Consumer Financial Protection, Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 10902 (Feb. 14, 2013) [hereinafter “2013 TILA Servicing Rule”, and together with the 2013 RESPA Servicing Rule, “2013 Mortgage Servicing Rules”].
5 Bureau of the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency, Appraisals for Higher-Priced Mortgage Loans – Supplemental Proposal, Proposed Rule, http://files.consumerfinance.gov/f/201307_cfpb_appraisal-requirement-exemptions_fr-notice.pdf (July 10, 2013) (publication in the Federal Register forthcoming).
6New Appendix Q to Part 1026; Amendments Release at 123.
8 § 43(e)(4). Unless otherwise specified, this Alert hereafter uses shortened citations such as “§ 32” and “§ 43” to mean “12 C.F.R. § 1026.32” and “12 C.F.R. § 1026.43.” Similarly, unless otherwise specified, the shortened citations “Cmt. 32” and “Cmt. 43” refer to the Comments to 12 C.F.R. § 1026.32 and § 1026.43, respectively. We also distinguish between “New § 32” — which refers to the provisions of § 32 that will become effective in January 2014 — and “Current § 32.” Because there is no current version of § 43, we refer to it simply as “§ 43.”
9New Cmt. 43(e)(4)-4.
12 Id.; Amendments Release at 55.
13 New Cmt. 43(e)(4)-5.
14 Amendments Release at 8-9.
15 Id. at 9.
16New Cmt. 5(c)(1)-1.
17Amendments Release at 17.
20 Id. at 23-45.
21 Bureau of Consumer Financial Protection, Amendments to the 2013 Escrows Final Rule under the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 30739 (May 23, 2013).
22 New § 35(e).
23Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Bureau of the Consumer Financial Protection Bureau, Appraisals for Higher-Priced Mortgage Loans – Supplemental Proposal, Proposed Rule, http://files.consumerfinance.gov/f/201307_cfpb_appraisal-requirement-exemptions_fr-notice.pdf (July 10, 2013) (publication in the Federal Register forthcoming).