Pub. 5 2014 Issue 4

www.wvbankers.org 10 West Virginia Banker I n October, the Consumer Financial Protection Bureau (“CFPB”) released amendments to its January 2014 mortgage rules that implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”). This most recent amendment expanded the mortgage servicing rules exemption for certain nonprofit small servicers, expanded the Ability-to-Repay exemption for nonprofits, and created a cure period for the 3% points and fees cap required for a Qualified Mortgage. This article re-caps the Qualified Mortgage, its purpose and the recent amendment. O ne of the perceived abuses leading up to the mortgage crisis was prolifera- tion of loans made without verifying a consumer’s income, debts or assets, the result of which was purportedly to saddle consumers with mortgage loans they could not repay. Dodd-Frank sought to address this issue by establishing a mortgage origination standard that would ensure the consumer’s ability to repay the debt. The Ability-to-Repay Rule (“ATR Rule”) requires the creditor to make a reasonable and good faith determination that the consumer has a reasonable ability to repay the loan before the loan is consummated. The ATR Rule generally applies to closed- end consumer credit transactions, secured by a residence, for which an application is received on or after January 10, 2014. It applies to subordinate loans as well as first lien mortgages. In order to show compliance with the ATR Rule, the lender is to consider eight underwriting factors: (1) current or reasonably expected income or assets; (2) employment status; (3) monthly debt-to-income ratio or residual income; (4) other debt obligations, alimony and child support obligations; (5) month- ly mortgage payment for the loan; (6) monthly payments for property taxes and insurance; (7) monthly payments for loans secured by the same property; and (8) credit history. The creditor must use reasonably reliable third-party records to verify the information it relies on to make the loan. The CFPB expects lenders to incorpo- rate these factors into its underwriting guidelines. In addition, in order to facilitate compliance with the ATR Rule, the Qualified Mortgage (“QM”) was created. If the loan made by the creditor meets the definition of a QM, then the creditor will enjoy certain protections from claims that it did not comply with the ATR Rule. In order to be a Qualified Mortgage, the loan cannot have certain characteristics perceived to have contributed to the mortgage crisis. The QM does not have a balloon payment or require interest-only payments; it is not a “no-doc” loan for which income and assets are not verified; and it does not have a negative amortiza- tion feature. A QM term cannot exceed 30 years; the total points and fees to the originator, creditor or affiliates cannot exceed 3%; and the debt-to-income ratio cannot exceed 43%. The QM is intended to protect consumers from risky mortgages. But more impor- tantly, it is intended to provide a creditor some degree of certainty that the creditor has complied with the ATR Rule. A QM operates as a rebuttable presumption that the creditor has complied with the ATR Rule if the mortgage is a higher-priced mortgage (as defined in Dodd-Frank). For all other mortgages, a court will conclu- sively presume the creditor has complied Curing the QM: The CFPB’s Recent Amendments to the ATR/QM Rule By Debra Lee Hovatter, Spilman Thomas & Battle, PLLC