The Consumer Financial Protection Bureau issued a proposed rule requesting public comments on several amendments to its recent mortgage regulations under the Truth in Lending Act (“TILA,” as amended by the Dodd Frank Act). One of those amendments would, if finalized, allow creditors a limited opportunity to “cure” a loan that inadvertently exceeds the three percent limit on points and fees for qualified mortgages (“QMs”).
By making a residential mortgage loan that meets the QM criteria spelled out in the Dodd-Frank Act and TILA regulations, a creditor is presumed to comply with its obligation to determine the consumer’s ability to repay the loan. Among those criteria, the points and fees for a QM are limited to three percent of the total loan amount. While keeping a loan’s points and fees below that amount is difficult, determining what amounts must be included in the calculation is no easy task either, particularly as a loan moves from its early application stage, through processing and underwriting, and ultimately to closing. The Bureau recognizes that “the calculation of points and fees is complex and can involve the exercise of judgment that may lead to inadvertent errors.” It uses the example of amounts mistakenly excluded as bona fide discount points or private mortgage insurance premiums, and of miscalculated loan- originator compensation. A creditor may, despite its best efforts, miscalculate or exclude an amount that is later determined to be included in “points and fees.”
There is no prohibition under the Dodd Frank Act or TILA regulations against originating loans with points and fees that exceed three percent, or that otherwise are non-QMs. However, a creditor of a non-QM loan must be able to demonstrate that it otherwise complied with the ability-to-repay determination, including the consideration of all the factors in the regulations, which may be difficult for a creditor that intended to originate a QM. The creditor also, of course, loses the protection of QM status, and becomes subject to the increased uncertainty of an accusation by the consumer or a regulator that it made the determination improperly. Importantly, a creditor that agreed to deliver only QM loans to an investor could be stuck with a repurchase demand, even though the creditor is willing to fix the error by making the consumer whole.
There is currently no express cure provision in TILA or its implementing regulations that addresses inadvertent QM classification errors. (TILA expressly allows for a cure only for certain disclosure errors, through notification of the person concerned and adjustments to the account to match the charges actually disclosed.) Accordingly, while a refund in the amount by which points and fees for a given loan exceeded the three percent limit would put the borrower in the same position as if he or she obtained a QM loan, there is no express language guarantying that a creditor or assignee would receive the protections true QM status would provide.
To ensure compliance with the regulations, and their promises to investors, creditors have reportedly dealt with this miscalculation risk by imposing a buffer – staying well under the three percent limit, and refusing to extend credit to consumers when the loan would exceed that lower threshold. However, this across-the-board buffer to address the risk of even small errors decreases consumers’ access to credit (and creates market pricing distortions). For that reason, the Bureau is proposing to permit a creditor or an assignee to cure an inadvertent excess over the QM points and fees limits by refunding to the consumer the amount of that excess.
The proposal would allow for a cure, in the form of a refund to the consumer by the creditor or assignee within 120 days after consummation of points and fees that exceed three percent, so long as the loan was originated “in good faith” as a QM. To demonstrate good faith, the creditor could show that it has, and follows, policies and procedures designed to ensure that points and fees are accurately calculated. Pricing on the loan that is consistent with QMs also would be evidence of good faith. The creditor must, in any event, maintain and follow policies and procedures for post-consummation quality control review of loans and for making refunds. However, the proposal does not address whether the cure provision for inadvertent errors will apply to good faith misinterpretations of the regulations or only to one-off mistakes.
It will be important for the industry to provide comments on this proposal, so the Bureau will understand how the lack of a cure provision affects the availability of affordable mortgage credit, and how such a provision will still ensure that consumers receive the benefits of QMs. Particularly, commenters may want to address whether evidence of good faith is necessary for ensuring that consumers receive QM loans, or whether requiring good faith will perpetuate the recognized problem of self-imposed points-and-fees buffers. Comments will be due 30 days after the proposal is published in the Federal Register (meaning the deadline will likely be in early June).
The Bureau also is considering ways that a creditor or assignee could fix an inadvertent error in calculating or documenting the debt-to-income ratio, which for QMs is limited to 43%. As with the points and fees calculation, the DTI calculation is a matter of exercising judgment and synthesizing complex (and, in some ways, incomplete) standards. Accordingly, many creditors only originate loans that are well below 43%, and the Bureau is concerned that such a DTI buffer is also partly responsible for constraints in the availability of credit.
The Bureau’s proposed rule also requests comments on other amendments to the TILA regulations — to provide an alternative definition of “small servicer” for a nonprofit entity that services loans on behalf of the organization, and would provide that certain interest-free contingent subordinate-lien loans originated by nonprofits would not be counted toward the credit extension limit exemption.
The proposed rule is available here.