The Consumer Financial Protection Bureau (the “CFPB”) has released a final rule amending Regulation Z to implement minimum underwriting standards that require mortgage lenders, including banks, to obtain and verify certain information to determine whether a consumer can afford to repay the home mortgage loan for which the consumer has applied. The final rule published on January 10, known as the Ability-to-Repay rule, implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which requires lenders to make a reasonable, good faith determination of a consumer’s ability to repay any home mortgage loan (other than home equity loans, timeshare plans, reverse mortgages, or bridge loans) and establishes certain protections from liability for a loan that meets the statutory criteria to be considered a “qualified mortgage.” The Ability-to-Repay rule requires a lender to consider eight underwriting standards when determining a consumer’s ability to repay a home mortgage loan. A lender will be presumed to have complied with the Ability-to-Repay rule if the loan meets the criteria to be a qualified mortgage. The statutory criteria for qualified mortgages generally prohibit or limit certain features that are considered risky or potentially harmful to consumers. The Ability-to-Repay rule also permits a lender to refinance a borrower from certain home mortgage loans–such as an adjustable-rate mortgage, an interest-only loan, or a negative-amortization loan–to a more standard loan without undertaking the full underwriting process required by the new rule. The Ability-to-Repay rule will become effective on January 10, 2014.

Nutter Notes: A home mortgage loan may be considered a qualified mortgage under the Ability-to-Repay rule if it does not include negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. A so-called “no-doc” loan where the lender does not verify income or assets cannot be a qualified mortgage. A loan generally cannot be a qualified mortgage if the points and fees paid by the consumer would exceed 3 percent of the total loan amount, although certain “bona fide discount points” are excluded for prime loans. The final rule provides guidance on the calculation of points and fees and thresholds for smaller loans. The final rule also establishes underwriting criteria for qualified mortgages. For example, the rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total debt-to-income ratio that is less than or equal to 43 percent. The appendix to the final rule details the calculation of debt-to-income for these purposes and is based on Federal Housing Administration guidelines. In response to concerns that the Ability-to-Repay rule may chill the market for responsibly underwritten loans that do not meet the criteria for qualified mortgages, the final rule provides a second, temporary category of qualified mortgages that have more flexible underwriting requirements as long as they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by, Fannie Mae and Freddie Mac while they operate under federal conservatorship or receivership, or the U.S. Department of Housing and Urban Development, Department of Veterans Affairs, Department of Agriculture or Rural Housing Service.