CFPB Issues Small Entity Compliance Guide for Ability-to-Repay Rule
On April 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued a Small Entity Compliance Guide (the “Guide”) for its Ability-to-Repay/Qualified Mortgage final rule (the “ATR/QM Rule”) that is slated to go into effect on January 10, 2014. According to the CFPB, its “goal with [the] guide is to provide a comprehensive rule summary in a plain language and FAQ format, which makes the content more accessible and consumable for a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff.” The CFPB also published, in tandem with the Guide, a General Comparison chart of the Ability-to-Pay Requirements with the requirements for originating Qualified Mortgage (QM) loans. Although its title refers to “small entities,” the Guide serves as a useful tool for all creditors.
In January 2013, the CFPB issued standards to define a QM under the Bureau’s “ability to repay” rules. The ATR/QM Rule amended Regulation Z, which implements the Truth in Lending Act, to require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for QMs. In making this determination, the lender will have to consider various factors, such as the borrower’s income, employment status, child support and alimony obligations, if any, and obligations on certain other loans that the lender knows, or has reason to know, will be made to the borrower.
The Guide contains commentary regarding ways that creditors can provide loans that receive either a safe harbor from litigation or a rebuttable presumption of compliance with the ATR/QM Rule. This distinction is primarily based on whether the QM is determined to be high-priced or non-higher-priced. The Guide also analyzes the grounds for rebutting the presumption for higher-priced mortgages, principally whether the consumer’s income, debts, and loan payments leave the borrower with sufficient income or assets to live on.
Practical Impact
The purpose of the Guide is to provide an easy-to-use summary of the ATR/QM Rule. To that end, it uses bulleted lists and straightforward language to paint a rudimentary picture of: (a) the ability-to-repay standard and factors; (b) the definition and types of QM; and (c) the impact of the ATR/QM Rule on both. The Guide is an admirable attempt at “dumbing down” the CFPB’s complex new mortgage rules. In practice, however, lenders and mortgage companies will be required to fully understand and apply the rules to their internal procedures since, as the CFPB notes, “although each guide summarizes a rule, it is not a substitute for the underlying rule.”
More significantly, the ATR/QM Rule and Guide may alter the landscape of the U.S. mortgage industry through its interrelation with the Dodd-Frank Act’s requirement that banks retain five percent of the risk of all new mortgages made. Under the Act, ability-to-pay QMs are exempt from this risk rule. Industry observers have noted that many lenders will be hesitant or even refuse to make loans subject to the five percent risk; therefore, in essence, making the ATR/QM Rule’s guidelines for QMs the de facto threshold for loan approval.
The CFPB has stated that it plans to publish similar, “plain language” compliance guides for each of its new mortgage rules, discussed previously here by Troutman Sanders, over the next several weeks. The guides will be accessible on the CFPB’s individual mortgage rule pages.
About Troutman Sanders
Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions, including mortgage originators and servicers, financial institutions and nonbank entities whose consumer complaints are now subject to public disclosure as a result of the CFPB’s decision to expand public access to the Portal. Troutman Sanders’ CFPB Team monitors the development and activities of the CFPB on its CFPB Report blog, advises clients on CFPB and Dodd-Frank issues and also provides compliance audits for consumer financial service providers regulated by the CFPB. Additionally, Troutman Sanders’ State Attorneys General practice group has successfully represented consumer finance service providers responding to attorney general investigations.
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