by Amy Kleinschmit, Director of Compliance

DATES: The rule is effective January 10, 2014.

Final rule and CFPB material can be found here: http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/

This final rule adds new §1026.43, Minimum standards for transactions secured by a dwelling to Regulation Z.  Qualified Mortgages is found under §1026.43(e).  As noted above, a creditor or assignee of a QM that is not a higher-priced covered transaction complies with the repayment ability requirements of §1026.43(c).  In other words: safe harbor.

A “higher-priced covered transaction” is defined as “a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, or by 3.5 or more percentage points for a subordinate-lien covered transaction.”

If the QM is a “higher-priced covered transaction,” the creditor or assignee of the QM is presumed to comply with the repayment ability requirements.  In other words, not a complete safe harbor, only presumption of compliance.  This presumption can be rebutted, even if the creditor otherwise meets the definition of QM, if it is proven that the creditor did not make a reasonable and good faith determination of the consumer’s repayment ability at the time of consummation, by showing that the consumer’s income, debt obligations, alimony, child support, and the consumer’s monthly payment (including mortgage-related obligations) on the covered transaction and on any simultaneous loans of which the creditor was aware at consummation would leave the consumer with insufficient residual income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan with which to meet living expenses, including any recurring and material non-debt obligations of which the creditor was aware at the time of consummation.

For example, a consumer may rebut the presumption of compliance with the ability to repay requirements with evidence demonstrating that the consumer’s residual income was insufficient to meet living expenses, such as food, clothing, gasoline, and health care, including the payment of recurring medical expenses of which the creditor was aware at the time of consummation, and after taking into account the consumer’s assets other than the value of the dwelling securing the loan, such as a savings account.  However, the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, the less likely the consumer will be able to rebut the presumption based on insufficient residual income and prove that, at the time the loan was made, the creditor failed to make a reasonable and good faith determination that the consumer had the reasonable ability to repay the loan.

In general a QM is defined as a “covered transaction” that provides for regular periodic payments that are substantially equal, except for the effect that any interest rate change after consummation has on the payment in the case of an adjustable-rate or step-rate mortgage.  The payments cannot result in an increase of the principal balance (negative amortization), deferral of principal repayment or a balloon payment.  Graduated payment mortgages, for example, allow deferral of principal repayment in this manner and therefore may not be qualified mortgages. Also, a single-payment transaction cannot be a qualified mortgage.

To meet the definition of QM, the loan term cannot exceed 30 years and the total points and fees payable in connection with the loan cannot exceed the amounts specified in the regulation.  Also, the creditor must underwrite the loan, taking into account the monthly payment for mortgage-related obligations, using: (A) The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due; and (B) Periodic payments of principal and interest that will repay either: the outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate as provided for under this regulation, assuming the consumer will have made all required payments as due prior to that date; or the loan amount over the loan term.

A QM requires that the creditor consider and verify at or before consummation the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; and the consumer’s current debt obligations, alimony, and child support.  Both of these steps must be made in accordance with the requirements that are set forth in the regulation including new Appendix Q.  Finally, a QM requires that the ratio of the consumer’s total monthly debt to total monthly income at the time of consummation does not exceed 43 percent.

As noted above, the covered transaction’s total points and fees cannot exceed certain thresholds, otherwise it would not qualify as a QM. “Points and fees” are defined under §1026.32(b)(1) which refers to Requirements for certain closed-end home mortgages.  This final rule also amended this existing section of Regulation Z and expanded the definitions found under it. These thresholds will be adjusted annually on January 1.

There is an alternative definition for certain covered transaction to be a QM.  However, these special rules are subject to expiration and/or a sunset provision which is discussed below.  This alternative definition requires that a covered transaction provides for regular periodic payments that are substantially equal as discussed above; do not exceed 30 years; and  the total points and fees payable in connection with the loan do not exceed the amounts specified in the regulation, (also, as discussed above).  In addition, to meet this alternative definition of QM, the covered transaction must satisfy one or more of the following criteria:

·       A loan that is eligible to be purchased or guaranteed by “Fannie Mae” or “Freddie Mac” (or any limited-life regulatory entity succeeding the charter of either) operating under conservatorship or receivership. (The special rule will not apply if Fannie Mae or Freddie Mac (or any limited-life regulatory entity succeeding the charter of either) has ceased operating under the conservatorship or receivership of the Federal Housing Finance Agency);

·       A loan that is eligible to be insured by the U.S. Department of Housing and Urban Development under the National Housing Act (12 U.S.C. 1707 et seq.);

·       A loan that is eligible to be guaranteed the U.S. Department of Veterans Affairs;

·       A loan that is eligible to be guaranteed by the U.S. Department of Agriculture pursuant to 42 U.S.C. 1472(h); or

·       A loan that is eligible to be insured by the Rural Housing Service.

This alternative definition only requires that the covered transaction be eligible (i.e., meet the criteria) for such purchase, guarantee, or insurance. I t is not required that the loan be purchased, for example, by Fannie Mae.  This special rule expires on the effective date of a rule issued by each respective agency in which that agency will define QM. Nevertheless, this special rule/definition of QM is available only for covered transactions consummated on or before January 10, 2021.

Balloon-payment exception for certain creditors.  This exception generally applies to creditors that operate in “rural” or “underserved” areas and uses the same exception requirements as was discussed with the final rule on escrow requirements for higher-priced mortgages loans.  These requirements are found under (new) § 1026.35(b)(2)(iii)(A), (B), and (C) and requires that (A) during the preceding calendar year, the creditor extended more than 50 percent of its total covered transactions, secured by a first lien, on properties that are located in counties designated either “rural” or “underserved” by the Bureau; (B) during the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions, secured by a first lien; and (C) as of the end of the preceding calendar year, the creditor had total assets of less than

$2,000,000,000 (adjusted annually).  Similar to requirements under the escrow account rules, to retain the QM designation the loan cannot be subject, at consummation, to a commitment to be acquired by another person, other than a person that also satisfies these “rural” or “underserved” requirements.

In addition, the loan with balloon payment terms must provide for regular periodic payments that do not result in an increase of the principal balance; must have a loan term that does not exceed 30 years; must have total points and fees that do not exceed specified thresholds; and must consider and verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; and the consumer’s current debt obligations, alimony, and child support.  This consideration and verification of the consumer’s income or assets and debt obligations must be conducted in accordance with the regulation.  Several other requirements must be met for a QM to be able to include a balloon payment, or in other words, for a loan with a balloon payment to have the designation of a QM.

This final rules places additional restrictions when a balloon payment QM is sold, assigned or otherwise transferred.  The status of QM is lost when sold, assigned or transferred unless one of four situations arises.  This includes, as was discussed above, that the creditor to whom the loan is transferred also meets the “rural/underserved” requirements.  Another situation includes that the balloon-payment QM can sold, assigned or otherwise transferred to another person three years or more after consummation of the balloon-payment qualified mortgage.

Should you have any questions or concerns on this or any other compliance issue, please do not hesitate to contact Amy Kleinschmit at akleinschmit@cuad.coop or 701.214.9721.