On May 29, 2013 the Consumer Financial Protection Bureau (CFPB) published a final2 rule to amend a final rule published in January 2013 that generally prohibits a creditor from making a mortgage loan unless the creditor determines that the consumer will have the ability to repay the loan.. The final2 rule provides an exemption to these requirements for creditors with certain designations, loans pursuant to certain programs, certain nonprofit creditors, and mortgage loans made in connection with certain Federal emergency economic stabilization programs. The final2 rule also provides an additional definition of a qualified mortgage for certain loans made and held in portfolio by small creditors and a temporary definition of a qualified mortgage for balloon loans. Finally, the final rule modifies the requirements regarding the inclusion of loan originator compensation in the points and fees calculation.
The final2 rule provides exemptions from the ability-to-repay requirements for extensions of credit made by creditors designated:

  • By the U.S. Department of the Treasury as Community Development Financial Institutions;
  • By the U.S. Department of Housing and Urban Development as either a Community Housing Development Organization or a Downpayment Assistance Provider of Secondary Financing;
  • As nonprofit organizations under section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) that extend credit no more than 200 times annually, provide credit only to low-to-moderate income consumers, and follow their own written procedures to determine that consumers have a reasonable ability to repay their loans.

Other exemptions from the ability-to-repay requirements include extensions of credit made pursuant to:

  • Programs administered by a housing finance agency; and
  • An Emergency Economic Stabilization Act program, such as extensions of credit made pursuant to a State Hardest Hit Fund program.

Small Creditor Portfolio Loans and Balloon-Payment Qualified Mortgages
The final2 rule:

  • Adds a new, fourth category of qualified mortgages for certain loans originated and held in portfolio for at least three years (subject to certain limited exceptions) by small creditors (creditors with no more than $2 billion in assets that (along with affiliates) originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year), even if they do not operate predominantly in rural or underserved areas. The loans must meet the general restrictions on qualified mortgages with regard to loan features and points and fees, and creditors must evaluate consumers’ debt-to-income ratio or residual income. However, the loans are not subject to a specific debt-to-income ratio as they would be under the general qualified mortgage definition.
  • Raises the threshold defining which qualified mortgages receive a safe harbor under the ability-to-repay rules for loans that are made by small creditors under the balloon-loan or small creditor portfolio categories of qualified mortgages. Because small creditors often have higher cost of funds, the final rule shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR.
  • Provides a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment qualified mortgages if they hold the loans in portfolio.

Points and Fees
The January rule provided that compensation paid to a loan originator be included in the calculation of points and fees. I many cases this instruction would result in doubting of the fee. The final2 rule excludes from points and fees:

  • Loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted toward the points and fees thresholds as part of the finance charge under § 1026.32(b)(1)(i);
  • Compensation paid by a mortgage broker to an employee of the mortgage broker because that compensation is already included in points and fees as loan originator compensation paid by the consumer or the creditor to the mortgage broker.
  • Compensation paid by a creditor to its loan officers.

Both the final rule published in January and the final2 published this week are effective on January 10, 2014.
A copy of the final2 rule is available here.
2 – While this appears to be a footnote it is actually indicating final squared. Microsoft Word does not like “final final,” it shows up as a grammatical error. So instead we now refer to final final as final2.