CFPB’s Major Overhaul of Mortgage Rules to Take Effect January 10, 2014

Consumer Finance   |   December 1, 2013

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Dodd-Frank required the CFPB to adopt specific mortgage rules, and pursuant to that authority, several mortgage-related rules were enacted by the CFPB. The new rules are targeted at eliminating factors that are believed by the CFPB to have contributed to the 2008 mortgage meltdown, including the making of mortgage loans to persons who could not afford to pay them, inadequate disclosures of loan terms, steering of consumers to higher priced loans by tying loan originator compensation to loan terms, and inadequate record keeping by mortgage servicers, among others. Here are highlights of the key rules taking effect in January:

• The Ability to Repay/Qualified Mortgage Rule. This Rule requires financial institutions to make a reasonable good faith determination that a consumer has a reasonable ability to repay the loan, considering factors such as the consumer’s income or assets and employment status and the mortgage loan payment and other ongoing expenses related to the mortgage or property. "Qualified Mortgages" (QM) are presumed to comply with the ability to repay requirements. Generally, a mortgage loan with a debt to income ratio which does not exceed 43% is a QM. QMs also must not contain risky features such as allowing interest only payments, negative amortization, or in most cases, balloon payments. Loans eligible for purchase by a GSE such as the FHA or VA are presumed to be QMs.
• The Home Ownership and Equity Protection Act (HOEPA) Rule. This Rule requires additional disclosures and pre-loan counseling for consumers for "high-cost" mortgages, home equity lines, and other loans secured by a consumer’s dwelling. The APR, points and fees, and pre-payment penalties factor in to determining whether the transaction is subject to the HOEPA high-cost mortgage requirements. For example, a transaction is considered a high cost mortgage if its APR exceeds the average prime offer rate for comparable loans by 6.5 points.
• The Loan Originator Rule. This Rule prohibits compensation to a loan originator based on the terms of the loan transaction, or a "proxy" for the terms of the transaction. Thus, any rate or cost of a loan which is a term of transaction cannot be the basis for compensation. Under the proxy analysis, pricing of a transaction may relate not only to the terms of loan, but also on whether the originator has discretion to steer the consumer toward a product with different terms. The Rule also imposes qualifications on loan originators, who must either be licensed and registered under the SAFE Act or other state or federal law.
• The Mortgage Servicing Final Rules. These Rules affect mortgage servicing under and amend the Real Estate Settlement Procedures Act (RESPA, as implemented by Reg X), and the Truth in Lending Act (TILA, implemented by Reg Z). Small servicers (servicing 5,000 or fewer mortgages) are exempt from certain provisions of the new servicing rules.

The new RESPA Rule imposes detailed requirements for responding to consumer requests for information and for resolution of errors; placement of force-placed insurance; creation of servicing files and record retention; early intervention and continued contact with delinquent customers including providing them with loss mitigation options; and establishment of loss mitigation procedures which require assisting customers in completing loss mitigation applications and refraining from foreclosure while a customer is being evaluated for loss mitigation options.

The new TILA Rule addresses interest rate adjustment notices for adjustable rate mortgages, crediting of mortgage payments and responses to requests for payoff amounts, and periodic billing statements. Among other things, the Rule requires at least 210 days notice before a first interest rate adjustment, prescribes the content of such notices, as well as the content, delivery and frequency of periodic billing statements. It also requires payments be credited as of the date of receipt, and that accurate payoff balances be provided within 7 days of the consumer’s request.