CFPB Proposes Amendments to Mortgage Rules

On April 30, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed targeted amendments to the Dodd-Frank Act mortgage rules that took effect in January 2014. Comments are due 30 days after publication of the proposal in the Federal Register.

Ability-to-Repay/Qualified Mortgage

• Points and fees cure. The CFPB proposed a post-consummation cure mechanism for loans that are originated with the good faith expectation of qualified mortgage (QM) status but exceed the points and fees limit for QMs. Specifically, the Bureau’s proposal would allow the loan to retain QM status if the excess points and fees are refunded to the borrower within 120 days after consummation by the creditor or assignee.
  
  In proposing this amendment, the Bureau acknowledged that “[t]he calculation of points and fees is complex and can involve the exercise of judgment that may lead to inadvertent errors.” The Bureau further acknowledged that “some creditors may not originate, and some secondary market participants may not purchase, mortgage loans that are near the [QM] limits on points and fees because of concern that the limits may be inadvertently exceeded at the time of consummation.” As a result, creditors seeking to originate QMs may establish buffers to avoid exceeding the points and fees limit and “refuse to extend mortgage credit to consumers whose loans would exceed the buffer threshold, either due to the creditors’ concerns about the potential liability attending loans originated under the general ability-to-repay standard or the risk of repurchase demands from the secondary market if the qualified mortgage points and fees limit is later found to have been exceeded.” The Bureau expressed concern that such buffers would negatively affect the cost and availability of credit.

• Debt-to-income cure. The Bureau did not propose a cure for loans that inadvertently exceed the 43% debt-to-income ratio (DTI) requirement for QMs made under Appendix Q. The Bureau did, however, request comment on the question, noting concerns that creditors may establish DTI buffers that would affect access to credit. For a DTI cure provision to be considered, the Bureau stated that “creditors would need to maintain and follow policies and procedures of post-consummation review of loans to restructure them and refund amounts as necessary to bring the debt-to-income ratio within the 43-percent limit.” However, the Bureau expressed skepticism that creditors could realistically meet such a requirement.
  
  The Bureau stated that it would also consider allowing creditors or assignees to correct DTI overages that result solely from errors in documentation of debt or income. However, the Bureau expressed concern that such a process might lead to post-consummation underwriting and requested comment on “whether or how a debt-to-income cure or correction provision might be exploited by unscrupulous creditors to undermine consumer protections and undercut incentives for strict compliance efforts by creditors or assignees.”

• Non-profit small creditor exemption. The CFPB proposed to amend the exemption for non-profit lenders that make 200 or fewer dwelling-secured loans in a year to exclude from that limit certain interest-free, contingent subordinate liens commonly offered by affordable homeownership programs.

• Other small creditor exemptions. The Bureau requested feedback and data from smaller creditors regarding the 500 loan limit on first lien mortgages for “small creditor” status, the implementation of the Dodd-Frank Act mortgage rules by small creditors, and how small creditors’ origination activities have changed in light of the new rules.

Mortgage Servicing

• Non-profit small servicer exemption. The CFPB proposed to provide an alternative definition of “small servicer,” that would apply to certain non-profit entities that service for a fee loans on behalf of other non-profit chapters of the same organization that do not fall within the Bank Holding Company Act definition of “affiliate.” Adoption of the proposal would exempt these entities would be exempt from the Regulation Z periodic statement requirements as well as certain provisions in Regulation X regarding force-placed insurance, servicing policies and procedures, and loss mitigation.

Additional Amendments

The CFPB also stated that it expects to issue additional proposals to address other topics relating to the Dodd-Frank Act mortgage rules, including the definition of “rural and underserved” for purposes of certain mortgage provisions affecting small creditors.

Questions regarding the matters discussed may be directed to any of our lawyers listed in this alert, or to any other Orrick attorney with whom you have consulted in the past.