CFPB Tweaks Ability to Repay Rule for Small Portfolio Creditors, Housing Assistance Programs, and Nonprofits
By: Kristie D. Kully , Andrew L. Caplan
On May 29, 2013, the CFPB finalized certain amendments to its January 2013 Ability to Repay/Qualified Mortgage Rule. In addition to clarifying how loan originator compensation will be factored into the QM’s three percent limit on points and fees (as discussed in a recent K&L Gates Consumer Financial Services Watch blog post), the May 2013 amendments (which will become effective at the same time as the QM Rule, in January 2014) will exempt new categories of creditors and transactions from the Rule’s ability to repay requirements; expand the definition of QM to include a new set of loans made by small portfolio lenders; and create a two-year window in which certain balloon payment loans will enjoy QM status, without requiring that such loans be made to borrowers in rural or underserved areas.
First, the new amendments will exempt from the ability to repay requirement loans made by certain nonprofit and community-based lenders that serve low and moderate income consumers. Specifically, creditors designated by the Treasury Department as Community Development Financial Institutions, or by HUD as either a Community Housing Development Organization or Downpayment Assistance Provider of Secondary Financing, will be exempt from the requirement to determine the consumer’s ability to repay. In addition, other 501(c)(3) organizations that serve moderate and low-income borrowers will be exempt, so long as they do not extend credit more than 200 times annually and comply with certain additional requirements. The CFPB indicated that exposing those organizations and their mortgage loan programs to either the ability to repay requirement or QM boundaries would “undermine or frustrate [their] uniquely tailored underwriting requirements,” and would force the organizations to divert significant resources away from their mission.
Additionally, the CFPB will exempt from the ability to repay requirement loans refinanced through certain homeownership stabilization programs and foreclosure prevention programs created by the Emergency Economic Stabilization Act (e.g., the Treasury HAMP program). However, the CFPB decided not to create an exempt category for refinancings made under other federal programs (e.g., those administered by FHA, VA, or USDA, or the HARP program administered by Fannie Mae and Freddie Mac (the GSEs)), in order to protect borrowers under those programs from predatory practices like loan flipping and equity stripping. Most of those refinancings will, in any case, satisfy the criteria for the temporary federal agency/GSE QM (i.e., they are eligible for insurance, guaranty, or purchase by an agency or GSE). The CFPB also did not create any exemptions for refinancings undertaken for purposes of foreclosure avoidance by a lender outside of government-related programs.
Second, the amendments will add a new category of QMs for certain mortgage loans made and held in portfolio for at least three years (subject to certain exceptions) by small creditors. For purposes of this requirement, “small creditor” means one with no more than $2 billion in assets that along with any affiliates originates no more than 500 first-lien mortgages covered by the ability to repay rule per year. While this new category of small creditor portfolio loans would generally have to meet the basic QM criteria, they will not be subject to any DTI ratio limit. Moreover, while the APR for standard first-lien QMs would have to fall within 1.5 percentage points of the APOR in order to enjoy a safe harbor of compliance (as opposed to a rebuttable presumption of compliance), first-lien, small creditor portfolio QMs may have an APR as high as 3.5 percentage points above the APOR and still be protected by the safe harbor. (This safe harbor protection for higher interest rate first-lien, small creditor portfolio QMs has also been extended to first-lien balloon payment QMs, discussed immediately below).
Third, the amendments provide a two-year transition period under which small lenders may make balloon payment mortgage loans that will receive QM treatment, without having to make such loans predominantly in “rural or underserved areas.” After receiving significant feedback from commenters, the CFPB will examine whether the definitions of “rural” or “underserved” need to be adjusted. The CFPB reportedly expects to reincorporate the “rural or underserved areas” requirement for small portfolio creditor balloon payment mortgage QMs at the end of the two-year period, albeit under a modified framework. The CFPB declared that broadening the scope of the QM category and the safe harbor for small portfolio creditors is necessary because they may be unlikely to originate non-QM loans.