On January 10, the Consumer Financial Protection Bureau (CFPB) issued a final rule, as mandated by provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA), which requires mortgage lenders to consider a consumer’s ability to repay residential mortgages before extending credit (the Rule). The Rule also establishes the standards for a loan to be considered a “Qualified Mortgage.” The Rule will take effect on January 10, 2014, giving lenders a year to establish compliance procedures.
Ability to Repay. In making ability-to-repay determinations, the Rule requires that lenders meet certain minimum requirements including consideration of various underwriting factors as well as the use of reasonably reliable third-party records to verify the information used to evaluate such factors. The Rule does not require lenders to use any particular underwriting model, but lenders must at a minimum consider underwriting factors such as a consumer’s current or reasonably expected income or assets, current employment status, credit history, and monthly payment of the transaction, among other factors. The Rule also has provisions to encourage lenders to refinance “non-standard mortgages” into “standard mortgages.”
Qualified Mortgages. Generally, if a lender originates a Qualified Mortgage as defined by the Rule, it is presumed that the lender has “made a good faith and reasonable determination of the consumer’s ability to repay” and is therefore compliant with the Rule. Below is a summary of the definition of a Qualified Mortgage with some additional caveats for higher-priced loans and certain loans in rural areas.
Pepper Points: We will provide more extensive analysis of the Rule as we perform an in-depth review of its provisions. The CFPB’s issuance of the Rule gives lenders some much-needed clarity with regard to mortgage lending compliance under the DFA. However, it is sure to limit the availability of credit. Specifically, the Rule will create further disincentives for lenders to make loans that fall outside the Qualified Mortgage definition, so that subprime borrowers will have more difficulty obtaining mortgage loans going forward.
The Rule is only one piece of the puzzle, as the CFPB is expected to release at least six additional rules in the near future that will affect all aspects of mortgage banking. Pepper Hamilton has established a working group of experienced financial services attorneys who will closely follow the implementation of the new rules and provide insightful analysis to help our clients navigate the changing landscape of mortgage banking. We will continue to review the Rule and will be providing a more-detailed analysis of its provisions once we have completed our review.
Audrey D. Wisotsky, Richard P. Eckman and Ryan R. Tooley
More Resources on the Dodd-Frank Act
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The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.