On April 19, 2013, the Consumer Financial Protection Bureau (“CFPB”) issued proposed amendments and clarifications to its recently issued Ability to Repay Rule and Qualified Mortgage Rule and the Mortgage Servicing Rule. As readers of the CFPB-Lawblog recall, these rules were issued just days before Dodd-Frank Act’s January 21 deadline, so it is no surprise that CFPB is releasing these clarifications and amendments to clean up issues related to meeting that deadline. The purpose of these amendment and clarifications is, according to the CFPB, to “address purpose of these updates is to address important questions raised by industry, consumer groups, or other agencies” regarding these Rules.
These amendments and clarifications address: (1) the determination of qualified mortgages under the Ability to Repay rule through the purchase, guarantee or insurance of mortgages by GSEs or Federal agencies; (2) the calculation of a borrower’s debt-to-income ratio (“DTI”) for purposes of originating qualified mortgages under the Ability to Repay rule; (3) Regulation X preemption of state law concerning mortgage servicing; and (4) the scope and application of the small servicers exemption for the requirements under Regulation X. The CFPB also advised that is plans on issuing similar amendments and clarifications to other rules related to mortgages and mortgage servicing in the next few months. The CFPB claims that it is issuing these amendments and clarifications because of its “responsibility not just to write a rule, but to see that it is implemented effectively."
Amendments to Ability to Repay Rule in Regulation Z
The CFPB is proposing amendments to the methods for complying with the Ability to Repay rule. There are two methods by which a creditor can satisfy the Ability to Repay rule when originating mortgage loans. The first method of compliance is for a creditor to analyze the borrower’s financial condition to make the determination that the borrower has a reasonable ability to repay the loan. Part of this requirement is that the creditor verifies that the borrower has a DTI no greater than 43% in accordance with the underwriting standards set forth in Appendix Q. The second method for complying with the Ability to Repay rule is to originate a qualified mortgage. In circumstances where a mortgage loan satisfies the conditions of a qualified mortgage, creditors are relieved of the responsibility to make the determination of the borrower’s reasonable ability to repay under Appendix Q. As part of the proposed amendments issued on April 19, 2013, the CFPB has proposed the following revisions and clarifications to Regulation Z:
Amendments to Debt-to-Income Underwriting Requirements
Probability of Continued Employment: Appendix Q currently requires a creditor to make a determination of the probability of the borrower’s continued employment by examining the borrower’s qualifications for the position and previous training and education. The CFPB is proposing to replace this with a requirement that the creditor merely examine past and current employment.
Confirmation of Continued Employment: The CFPB is also proposing to remove the requirement that creditors obtain confirmation of continued employment. Rather, the proposed amendments to Appendix Q will require that the creditor confirm current and ongoing employment. The amendments would also clarify that ongoing employment may be assumed if the employer verified current employment and does not state that employment has been or will be terminated.
Continuation of Income: Instead of requiring creditors to determine whether a borrower’s income is reasonably expected to continue for the first three years of the loan, the CFPB is proposing to amend the rules to require creditors to merely determine whether the borrower’s income would not reasonably be expected to continue based on the documentation provided without any time period.
Bonus and Overtime Income: Rather than requiring creditors to determine whether bonus and overtime income will continue, creditors must focus on the last two years of bonus and overtime history to determine whether there is any evidence that such income is likely to cease.
Social Security Benefits: The CFPB’s amendments would also permit a Social Security benefits letter, as opposed to Federal tax returns, to constitute proof of social security income. Further, the amendments would permit the assumption that such income is ongoing absent evidence of expiration.
Self-Employed Borrowers: The CFPB is proposing to eliminate the requirement that borrowers provide business credit reports for corporations and “S” corporations. Similarly, the amendments would eliminate the requirement that creditors evaluate the source of a self-employed borrower’s business or the general economic outlook for such business.
Investment and Trust Income: To clarify the analysis of trust income used to calculate DTI, the CFPB proposes to clarify that such analysis is limited to only those documents specifically listed in Appendix Q. Further, the CFPB is proposing amendments to Appendix Q that would eliminate that the borrower be a holder in due course of notes receivable income. The amendment would instead only require that the borrower be able to enforce the note to allow inclusion of the income.
Rental Income: The amendments to the Ability to Repay rule would also eliminate the requirement that rental income be received from a boarder who is related by blood, marriage, or law for DTI purposes.
Amendments to Qualified Mortgage Requirements
An additional comment being proposed by the CFPB would clarify that a creditor is not required to comply with all GSE or Federal agency requirements for purchase, guarantee, or insurance to attain qualified mortgage status, such as selling, securitizing, or other post-consummation requirements, which are unrelated to a consumer’s ability to repay. A comment is also being proposed to explain that the use of a GSE automated underwriting system may be relied upon to demonstrate qualified mortgage status, provided that the servicer (1) accurately input the loan information; and (2) satisfied any accompanying requirements or conditions to obtain approval. The amendments would also clarify that a servicer may rely upon any written agreement between the creditor and GSE modifying the standards for purchase, guarantee, or insurance, when determining whether a loan constitutes a qualified mortgage. To this end, the CFPB’s proposed commentary would clarify that a demand to repurchase or indemnify a GSE would not by itself strip a loan of its qualified mortgage status. Rather, such a demand may be relevant in assessing whether a particular loan qualified as a qualified mortgage at consummation.
Amendments to Mortgage Servicing Rules in Regulation X
On January 17, 2013, the CFPB issued amendments to Regulation X setting forth the CFPB’s Mortgage Servicing Rules, which will become effective on January 10, 2014. As part of the proposed amendments issued on April 19, 2013, the CFPB has proposed the following revisions and clarifications to Regulation X:
In response to numerous inquiries regarding Regulation X’s possible preemption of state mortgage servicing rules, the CFPB is also proposing to add two comments to Regulation X clarifying that the CFPB’s mortgage servicing rules do not create a field preemption prohibiting state law concerning mortgage servicing. The first comment will clarify that state laws that are in conflict with RESPA or Regulation X may be preempted. The second comment will state that nothing in RESPA or Regulation X should be interpreted as preempting the entire field of regulation. The CFPB believes these comments will clarify that nothing in RESPA or Regulation X prevents states from providing broader protection to consumers.
Amendments to Small Servicer Exemption
The CFPB is also proposing to amendments to clarify how a servicer qualifies for the small servicer exception to certain mortgage servicing requirements under Regulation X. Currently, small servicer is defined as a servicer that services 5,000 or fewer mortgage loans. Specifically, the CFPB is proposing to revise 12 CFR 1026.41(a)(1) and add comments to 12 CFR 1026.41 (e)(4)(ii) to reiterate that the determination of whether a servicer qualifies as a small servicer is made by considering the servicer’s closed-end consumer credit transactions secured by a dwelling. The amendments would also clarify that reverse mortgage transactions, mortgage loans secured by an interest in timeshare plans, and charitably serviced mortgage loans should not be included in the determination of whether a servicer qualifies as a small servicer. Further, the CFPB is proposing to amend 12 CFR 1026.41(e)(4)(ii)(A) to clarify that the applicability of the small servicer exemption is determined not only by the loans a servicer services on its own, but also loans serviced by any affiliates of the servicer. Additionally, the proposed amendments would confirm that a small servicer will not lose its status as such, merely by retaining a subservicer.
The full text of the proposed amendments can be found at the CFPB website and will soon be open for public comment.