Mortgage reform amends ‘Ability-to-Repay’ rule


Federal Ability-to-Repay rule amendments and modifications should help garner greater access to credit by creating certain exemptions for small creditors, community development leaders and housing stabilization programs.

Another amendment to the reams of new mortgage reform regulations coming down the pike, includes changes that rejigger how to calculate loan origination compensation for certain purposes, according to a recent announcement from Consumer Financial Protection Bureau (CFBP).

First, the final rules amend CFPB’s Ability-to-Repay rule, which was finalized in January of this year.

Ability-to-Repay rules were mandated by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act to be deployed by the Consumer Financial Protection Bureau.

The rules are central to a batch of seven new federal mortgage reform efforts. The reform is designed to protect consumers from irresponsible, abusive and predatory mortgage lending and servicing practices.

All the rules are effective in January 2014. In part, the rules codify as federal law the existing National Mortgage Settlement, a $25 billion federal-state-mortgage industry agreement some mortgage servicers still frequently ignore.

All the new mortgage reform rules are effective in January 2014.


Under the Ability-to-Repay rule, new mortgages must comply with basic requirements that protect consumers from loans they can’t afford.

“Our Ability-to-Repay rule was crafted to promote responsible lending practices,” said CFPB Director Richard Cordray.

“Today’s amendments embody our efforts to make reasonable changes to the rule in order to foster access to responsible credit for consumers,” Cordray added.

Lenders are presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages” (QMs).

QMs must meet certain requirements, including prohibitions or limitations on the risky features that harmed consumers in the mortgage crisis. Those features also helped crash the housing market and bring down the economy.

Both the Ability-to-Repay rule and QMs are central to the regulatory overhaul for mortgage reform.

Ability-to-Repay amendments

The new amendments:

Exempt certain nonprofit creditors – Qualified nonprofit and community-based lenders serving low- and moderate-income consumers, provided they make no more than 200 loans per year, are exempt.

Also exempt are mortgage loans made by or through a housing finance agency or through certain home ownership stabilization and foreclosure prevention programs.

Facilitate lending by certain small creditors – To facilitate lending by small creditors, including community banks and credit unions that have less than $2 billion in assets and make 500 or fewer first-lien mortgages each year, the amendments:

  • Generally extend QM status to certain loans that these creditors hold in their own portfolios. That’s true even if the consumers’ debt-to-income ratio exceeds 43 percent.
  • Provide a two-year transition period during which small lenders can make balloon loans under certain conditions. Those loans will qualify as QMs.
  • Allow small creditors to charge a higher annual percentage rate for certain first-lien QMs while maintaining a safe harbor for the Ability-to-Repay requirements.

Establish how to calculate loan origination compensation – Dodd-Frank mandates that QMs have limited points and fees. It also says compensation paid to loan originators, such as loan officers and brokers, must be included in disclosed points and fees.

Under the revised rule, the compensation paid by a mortgage broker to a loan originator employee or paid by a lender to a loan originator employee does not count towards the points and fees threshold.

This amendment does not change the January 2013 final rule under which compensation paid by a creditor to a mortgage broker must be included in points and fees, in addition to any origination charges paid by a consumer to a creditor.

Credit insurance premiums

In a separate action, CFPB issued a rule delaying implementation of a credit insurance premium rule. That rule prohibits creditors from financing certain credit insurance premiums in connection with certain mortgage loans.

The rule would have taken effect on June 1, but the CFPB issued a proposal to suspend the effective date while it sought public comment. The comment period will help determine on how the Dodd-Frank Act requirements apply to credit insurance products with certain periodic payment features.

Under the new rule, the prohibition will tentatively take effect on January 10, 2014, with other rules in the larger mortgage reform package. However, the CFPB will seek public comment on an appropriate effective date when it issues a proposed clarifications for public comment.

Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act

CFPB Final Rule Credit Insurance Effective Date Delay

DeadlineNews.Com’s mortgage reform coverage

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