Alert January 15, 2013

CFPB Issues Final Rule on Ability-to-Repay Standards and Qualified Mortgage Exception

The CFPB issued a final rule on ability-to-repay standards and a qualified mortgage exception.  The Dodd-Frank Act requires creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling.  The rule provides creditors with minimum requirements for making such ability-to-repay determinations.  Creditors are required to consider the following eight underwriting factors: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (4) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony and child support; (7) the monthly debt-to-income ratio or residual income; and (8) credit history.

While the Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor satisfied the ability-to-repay requirements, the final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not “higher priced.” Higher-priced loans are subject to a rebuttable presumption.  A “qualified mortgage” is a loan that does not contain certain risky features, such as negative amortization, interest-only payments, balloon payments, a term exceeding 30 years, has a debt-to-income ratio of not more than 43%, and for which the creditor considers and verifies the consumer’s current debt obligations, alimony, and child support. The rule is effective January 10, 2014.

In conjunction with the final rule, the CFPB also issued a proposal to amend portions of the ability-to-repay rule for small creditors holding loans in portfolio.  The proposal would allow small creditors to originate loans with a debt-to-income ratio greater than 43% and still qualify as qualified mortgages.  The proposal would also allow small creditors to originate loans with higher annual percentages rates and still avail themselves of the qualified mortgage safe harbor.  A small creditor would be defined as a creditor having total assets of $2 billion or less and, together with its affiliates, originated 500 or few first-lien covered transactions during the previous calendar year.  Comments on the proposal are due February 25, 2013.

The CFPB has published a summary and fact sheet for the final rule and concurrent proposed amendments.