Pub. 2 2012-2013 Issue 5

18 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S CFPB Finalizes Ability-to-Repay Rule for Mortgage Lenders, Defines “Qualified Mortgage” and Proposes Exemption to Ability-to-Repay Rule for Community Banks and Credit Unions MARK GOLDSCHMIDT, partner, Denver office of Patton Boggs LLP, and SHAWN TURNER, senior associate, Denver office of Patton Boggs LLP. On Thursday, January 10, 2013, the Con- sumer Financial Protection Bureau (CFPB) released its final rule on the ability-to-repay requirements, including the definition of “Qualified Mortgage,” mandated by the Truth- in-Lending Act, as amend- ed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule re- quires lenders to determine whether prospective borrow- ers have the ability to repay their mortgage loans over the long term and seeks to prohibit the “risky lending practices” the CFPB believes contributed to the 2008 housing crisis. The new rule covers traditional residential mortgages and any consumer credit transaction secured by a dwelling. The CFPB also proposed an amendment to this rule that would add other exemptions from the ability-to-repay requirements. The rule will become effective on January 10, 2014. Rule Requirements In determining whether a borrower has the ability to repay both the principal and interest of a mortgage loan over the long term, lenders must obtain the borrower’s financial information from a reliable third-party. Lenders must document the borrower’s employment status, income and assets, current debt obligations, alimony, child support, credit history, monthly payments on the mortgage loan, monthly payments on any other mortgages on the same property andmonthly payments for mortgage-related obligations. No-doc or low-doc loans are no longer permissible, and the ability to repay teaser rates can no longer be the basis for determining whether to provide a mortgage loan. Borrowers attempting to refinance “non-standard” mortgages to “standard” loans are exempted from the ability-to-pay require- ments if certain conditions are met. “Non-standard” mortgages are those that can lead to payment “shock” resulting in default, such as adjustable rate mortgages, interest-only loans, and negative amortization loans. “Standard” mortgages must have required characteristics such as a fixed interest rate for five years, lower monthly payments and total points and fees that do not exceed three percent of the loan amount. Presumed Compliance - Quali fi ed Mortgages • Lenders will be presumed to have satisfied the ability-to- repay requirements with respect to “Qualified Mortgages,” which are mortgages that (i) generally are available only to people with debt-to-income ratios less than or equal to 43 percent, (ii) do not include points or fees in excess of three percent of the total loan amount, and (iii) do not include toxic loan features, such as terms that exceed 30 years, interest-only payments, balloon payments (except as described below), or negative-amortization payments. Balloon-payment mortgage loans originated by lenders in rural or underserved areas also qualify as QualifiedMortgages if they have a fixed interest rate, a term of at least five years and meet certain underwriting criteria. The lenders must have less than $2 billion in assets, originate at least 50 percent of their first-lien mortgage loans in rural or underserved counties and originate no more than 500 first-lien mortgage loans per year. The rule also includes a transitional provision expiring in a maximum of seven years that expands the definition of Quali- fied Mortgage to include loans that do not satisfy the 43 percent debt-to-income ratio threshold, but otherwise meet the stan- dards set by Fannie Mae, Freddie Mac or other government housing agencies. Two types of Qualified Mortgages have different protective fea- tures for borrowers and different legal consequences for lenders: • Qualified Mortgages with a rebuttable presumption. Lenders offering higher-interest mortgage loans (typically to borrowers with insufficient or weak credit history) are presumed to have determined that the borrower has an ability to repay the loan. However, borrowers can challenge that presumption by proving they