Alert July 23, 2013

CFPB Finalizes Clarifications to Mortgage Rules

The CFPB finalized its amendments to the mortgage rules clarifying and making technical amendments to the ability-to-repay and mortgage servicing rules it finalized in January 2013 (see January 10, 2013 Alert for discussion of ability-to-repay rule and January 22, 2013 Alert for discussion of mortgage servicing rules). As highlighted in the April 30, 2013 Alert, the finalized amendments clarifies and make technical changes to several provisions in the rules. First, the CFPB clarified the extent to which Regulation X, the implementing regulation for RESPA, preempts state regulation. In particular, the CFPB clarified that Regulation X does not “occupy the field” of regulation or prohibit states from legislating or regulating on the same subject matter so long as state law does not conflict with Regulation X. Second, the CFPB specified that the implementation dates for the adjustable-rate mortgage provisions hinged upon when the first rate adjustment notice was required to be provided. For example, under the requirement that the rate adjustment notice be issued between 210 and 240 days before the first rate-adjusted payment is due, “servicers will not be required to provide the [] notice when such payment is due 209 or fewer days from the effective date.” Third, the CFPB clarified that construction loans, bridge loans and reverse mortgages are excluded from the ability-to-repay requirements and, to prevent a gap in coverage that would have resulted from the ability-to-repay rule, the CFPB temporarily amended, from June 1, 2013 to January 9, 2014, the escrows rule to ensure that construction loans, bridge loans, and reverse mortgages are excluded from the ability-to-repay requirements (see May 28, 2013 Alert). Fourth, the CFPB clarified that three types of mortgage loans will not be considered in determining small-servicer status: (1) loans voluntarily serviced for an unaffiliated entity; (2) reverse mortgages and (3) mortgage loans secured by a consumer’s interest in timeshare plans. The CFPB also confirmed that the definition of “mortgage loans” as used in the requirements governing periodic statements, refers only to “closed-end consumer credit transactions secured by a dwelling.” Fifth, the CFPB clarified that the rules granting qualified mortgage status to loans eligible for purchase or insurance by a GSE or the FHA only incorporated those GSE and FHA rules that had an impact on the borrower’s ability-to-repay—rules that are “wholly unrelated to credit risk or the underwriting of the loan” are not relevant to determination of qualified mortgage status.

Finally, and of import, the CFPB issued substantive revisions to Appendix Q of the mortgage rules to facilitate compliance with the ability-to-repay requirements. For example, the CFPB amended Appendix Q’s calculation of debt-to-income ratio to reduce the extent to which creditors must predict future income. The CFPB also replaced a requirement in the rules that creditors assess the borrower’s qualifications for, training for, and education applicable to a job in predicting probability of future employment. As amended, the requirements under the ability-to-repay rule require only that the creditor examine the borrower’s “past and current employment.”