Among the amendments to the ability-to-repay/qualified mortgage (QM/ATR) rule issued by the CFPB on July 10 were changes to the detailed requirements in new Appendix Q for determining whether the consumer's monthly income and debt satisfies the 43% DTI limit for making a qualified mortgage (QM). As originally issued, Appendix Q was modeled on the FHA insurance underwriting manual, and the CFPB acknowledged that some provisions were not well suited to serve as strict regulatory requirements. The CFPB proposed the amendments in April in response to industry concerns in an attempt to ease the compliance difficulties. The amendments also include several changes and clarifications to the mortgage servicing and escrows rules that were issued last January. The amendments will be effective with the effective date of the mortgage rules on January 10, 2014.
Amendments to Appendix Q (Standards for Determining Monthly Debt and Income).
In order to satisfy the requirements for a QM under Reg. Z, the consumer's DTI ratio may not exceed 43%, and a creditor must use the standards in Appendix Q to verify and document a consumer's income and debt and calculate the DTI ratio. The amendments to Appendix Q deal with several different subjects including: stability of income and the requirement that the creditor evaluate the probability of the consumer's continued employment; the requirement that the creditor also determine whether the consumer's wages, salary or other forms of income can reasonably be expected to continue; creditor analysis of overtime, bonus, self-employment, and social security income; and requirements related to non-employment related income such as trust income and rental/investment property income.
When assessing the stability of a consumer's income, Appendix Q as originally issued required the creditor to evaluate the consumer's probability of continued employment by analyzing, among other things, the consumer's past employment record, qualifications for the job, and past training and education, and the creditor was required to obtain a confirmation from the employer that the consumer's employment would continue. The amendments eliminated those specific requirements. When analyzing a consumer's employment history and stability of income, the creditor must examine the consumer's past employment record verifying employment for the most recent two full years with allowances for school, seasonal employment and explained gaps in employment and obtain confirmation of current employment. A creditor may assume employment will continue if current employment is verified unless the verification indicates otherwise. Stability of income takes precedence over stability of employment, so job changes within the same line of work with advances in income or benefits may be favorably considered.
In one of the more significant changes, the CFPB eased the general requirement that a creditor determine that the consumer's income is "reasonably expected" to continue through at least the first three years of the loan. Under the amendments, the creditor must still determine whether the consumer's income level can be reasonably expected to continue, but the creditor may assume that salary or wage income can be reasonably expected to continue if it verifies current employment and income, and the verification does not indicate that employment has been or is set to be terminated.
The amendments also revise the standards for consideration of overtime, bonus, self-employment and social security income. A creditor will no longer be required to determine whether overtime or bonus income will continue, and may count such income provided it has not received documentation indicating that it will end. Overtime and bonus income can be used if it is documented that the consumer received it for the past two years and the documentation does not indicate it is likely to cease.
As originally issued, Appendix Q would have required social security income to be verified by either the Social Security Administration (SSA) or through Federal tax returns, the creditor to obtain a complete copy of the current awards letter, and the creditor to obtain proof of continuation of payments (for disability benefits, for example). Under the amendments, a creditor is only required to obtain a benefit verification letter from the SSA and may assume that social security benefits will continue and will not expire within 3 years unless the documentation indicates otherwise.
For self-employment income, Appendix Q as originally issued would have permitted the income to be considered if certain criteria were met, including various documentation requirements and analysis of the financial strength of the consumer's business. The documentation included a business credit report for corporations and 'S' corporations, and the analysis required included an analysis of the business's source of income and the general economic outlook of similar businesses in the geographic region. In response to industry comments that business credit reports are costly and difficult to obtain for small businesses and that the analysis would be imprecise, the CFPB eliminated those requirements. The standard as revised is considerably more straightforward – annual earnings that are stable or increasing are acceptable, while income from businesses that show significant decline over the analysis period is not.
The amendments revise the standards pertaining to non-employment related income, such as trust income, income from notes receivable and rental income for purposes of determining and verifying a consumer's DTI. As originally issued, Appendix Q would have permitted consideration of trust income if guaranteed, constant payments will continue for at least the first three years of the loan and then provided a list of required documentation. Under revised Appendix Q, income from trusts may be used in constant payments will continue for at least the first three years of the loan as evidenced by trust income documentation. Required documentation includes the trust agreement or trustee statement confirming the amount of the trust, distribution frequency and duration of payments.
Under revised Appendix Q, notes receivable income may be used if the consumer provides a copy of the note confirming the amount and length of payment and evidence those payments have been consistently received for twelve months through cancelled checks, deposit slips, bank statements or tax returns. If the consumer is not the original payee, the creditor must establish that the consumer is able to enforce the note. As originally issued, Appendix Q would have required the creditor to establish that the consumer was a holder in due course and able to enforce the note.
Under the amendments, a creditor may count rental income from roommates or boarders in the consumer's primary residence as income. As originally issued January, the rule would have prohibited inclusion of this income unless the boarders were related by blood, marriage or law.
Revised Appendix Q permits a creditor to rely on standards established by Fannie Mae or Freddie Mac (GSEs) or by HUD, VA, the Department of Agriculture or Rural Housing Service as "a helpful resource in applying Appendix Q" if those standards are consistent with Appendix Q. In addition, when the Appendix Q standards do not resolve how to treat a specific kind of income or debt, revised Appendix Q allows a creditor to simply choose to "exclude the income or include the debt" or to rely on Federal agency or GSE guidance to resolve the issue.
The GSE/Federal Agency QM Alternative.
The CFPB also finalized amendments to the official commentary to Reg. Z that provide additional guidance on when a loan is considered to be a QM because it is eligible to be purchased by one of the GSEs or to be insured or guaranteed by a Federal agency. In determining eligibility, the CFPB clarified the rule to provide that:
- A creditor may rely on an underwriting recommendation provided by a GSE automated underwriting system (AUS) or compliance with a written guide of a GSE or Federal agency.
- A creditor may also rely on a written agreement between it and a GSE or Federal agency that permits variation from the standards of the written guides and/or AUSs (so-called "contract variances"). A correspondent lender in a relationship with a sponsor or aggregator that holds a contract variance may also rely on the negotiated contract variance.
- In using one of those methods, a creditor need not satisfy GSE or Federal agency requirements that are "wholly unrelated" to assessing a consumer's ability to repay (e.g., credit risk or underwriting of the loan), such as "requirements related to the status of the creditor rather than the loan, requirements related to selling, securitizing, or delivering the loan and any requirement that the creditor must perform after the consummated loan is sold, guaranteed, or endorsed for insurance such as document custody, quality control or servicing."
Although not included in the actual text of the revised rule or commentary, the CFPB stated in the preamble to the amendments its view that minor inaccuracies in input data that do not affect a loan's eligibility for purchase, guarantee or insurance should not affect the loan's QM status. Further, a repurchase or indemnification demand by a GSE or Federal agency will not automatically strip a loan of its QM status because "[s]ome repurchase or indemnification demands are not related to eligibility criteria at consummation."
Mortgage Servicing Amendments.
Preemption of State Law. The CFPB amended the mortgage servicing rules to clarify the extent to which the loss mitigation and other requirements adopted under RESPA preempt state mortgage servicing and foreclosure laws. Specifically, the CFPB said that state laws that are inconsistent with the federal requirements may be preempted, but state laws that give greater protection to consumers are not. The preemption provision was moved to a new section in Reg. X to make it clear that it applies to all of RESPA and not just the subpart dealing with mortgage settlements and escrow accounts. In addition, the CFPB revised the commentary to state that nothing in the servicing rules should be construed to preempt the entire field of regulation, so creditors will have to comply with both federal and state law in most cases.
ARM Rate Adjustment Notices. The CFPB also clarified that the new notice requirements for rate and payment adjustments on ARM loans apply to existing loans originated before the January 10, 2014, effective date of the rule as well as new loans originated after that date. Of course, no servicer is required to comply with the rule before the effective date.
The CFPB also clarified some of the timing issues on giving ARM adjustment notices in transitioning to the new rules next January. In revised Reg. Z §1026.20(d), the mortgage servicing rules require a new early warning notice 210 to 240 days before the first payment is due after the first interest rate adjustment on an ARM. In the amendments, the CFPB clarifies that servicers will not be required to provide this notice when that new payment is due 209 or fewer days after the effective date of the rule change (i.e., on or before August 7, 2014).
Also under current Reg. Z §1026.20(c), a notice is required 25 to 120 days before the first payment is due after an interest rate adjustment causing a corresponding change in payment. The mortgage servicing rules issued last January revise the content of the § 1026.20(c) notice and require that the notice be provided 60 to 120 days before the new payment is due. In the preamble to the amendments, the CFPB said that "servicers already will have provided the §1026.20(c) notices required by the current rule when such payment is due 24 or fewer days from the January 10, 2014, effective date" (i.e., on or before February 3, 2014). Also, servicers will not be required to provide the § 1026.20(c) notice when such payment is due 25 to 59 days from the effective date" (i.e., from February 4 through March 10, 2014). It seems highly unlikely the CFPB really means that no notice is required for new payments that come due during this time period, and it would be wise for servicers to provide either the current or revised § 1026.20(c) notice in accordance with their schedule prior to the rule change (at least 25 days in advance).
Exemptions for Small Servicers. A servicer that services 5,000 or fewer mortgage loans that it or an affiliate originated or owns is a "small servicer" and therefore exempt from some of the more burdensome requirements of the mortgage servicing rules including the requirements for periodic statements and some of the requirements regarding loss mitigation and lender-placed insurance. In the amendments, the CFPB clarified what loans must be counted when making this determination. Specifically, all dwelling-secured closed-end consumer credit transactions must be counted, and not just "federally related" mortgage loans under RESPA, plus all such loans serviced by any affiliate of the servicer.
Escrow Rule Amendments
The amendments announced by the CFPB on July 10, 2013, also gave some additional guidance on the Bureau's recent amendments to the escrow rule which took effect on June 1, 2013. So now, we have amendments to the amendments, but at least the change is a helpful clarification. Specifically, the amendments clarify that construction loans, bridge loans and reverse mortgages are not subject to the rule's requirements regarding the ability-to-repay requirements and prepayment penalty provisions for higher priced mortgage loans ("HPMLs").
When the CFPB issued the escrow rule in January 2013, it revised the definition of the term "higher priced mortgage loan" by removing the exclusions for transactions to finance the initial construction of a dwelling, temporary or bridge loans with a term of twelve months or less and reverse mortgages from the definition. The Bureau removed those exclusions from the general definition of HPML and located them in the individual provisions regarding appraisal, escrow, ability to repay and prepayment penalty requirements. Then, in writing the amendments to the 2013 escrow rule that were issued in May, the Bureau changed some section numbering, and it is now concerned that the section re-numbering could have given the impression that the exclusion for construction loans, bridge loans and reverse mortgages from the HPML ATR and prepayment penalty requirements no longer applied. The latest amendment is to clarify that the exclusion continues to apply.
Proposed Amendments To Interagency Appraisal Rule
Separately, on July 10, 2014, the federal bank regulatory agencies issued proposed amendments to their January 2013 final interagency appraisal rule. That rule requires creditors making HPMLs to obtain one or more written appraisals and to provide consumers with a notice regarding the use of appraisals and a free copy of each appraisal. The agencies are proposing to amend the rule to exempt the following transactions from these requirements:
- Transactions secured solely by an existing manufactured home with no land;
- "Streamlined" refinances where the borrower or guarantor on the refinance is the current borrower or guarantor on the existing loan, provided that the payments on the refinance are not interest-only and do not result in negative amortization or a balloon payment, and no new money is advanced; and
- Transactions of $25,000 or less (with that amount increasing annually based on inflation).
The deadline for comments is September 9, 2013.
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