CFPB Announces Changes to Ablity-to-Repay Rule


Consumer Financial Protection Agency has, as it promised earlier,
released changes to the Ability-to-Repay rule due to go into effect
in January 2014. Today’s amendments are intended to facilitate
lending by certain small creditors and community lenders and also
revise rules on how to calculate loan origination compensation for
certain purposes. The amendments are to the Final Rule on
Ability-to-Repay which was finalized in January of this year.

Ability-to-Repay rule was crafted to promote responsible lending
practices,” said CFPB Director Richard Cordray. “Today’s
amendments embody our efforts to make reasonable changes to the rule
in order to foster access to responsible credit for consumers.”

The rule
establishes that most new mortgages must comply with basic
requirement to insure borrowers do not commit to lones they do not
have the financial resources to repay. Lenders are assumed to have
met this rule
if they issue Qualified Mortgages (QM) that meet
certain requirements including limitations on risky features of the
type that led to the financial crisis.

The amendments
released today reflect public input requested by CFPB and exempt
certain nonprofit and community-based lenders from the
Ability-to-Repay rules. Exempted are generally those small creditors
that make no more than 200 loans per year and lend only to low- and
moderate-income borrowers. Loans made through a housing finance
agency or some homeownership stabilization and foreclosure prevention
programs are also exempted.

Another amendment
makes several adjustments to the rule to facilitate lending by small
creditors including community banks and credit unions with less than
$2 billion in assets
and which make 500 or fewer first mortgage loans
each year. This amendment will extend Qualified Mortgage status to
loans that these institutions hold in their portfolios even if they
exceed the 43
percent debt-to-income ratio required by the QM
definition. The final rule also provides a two-year transition
period during which small lenders can continue to make certain
balloon mortgages and also allows small lenders to charge a higher
annual percentage rate for some QMs while still maintaining a safe
harbor under the Ability-to-Repay requirements.

The amendments
also provide some exceptions to the Dodd-Frank Act requirements that
set limits on compensation to loan originators. Under the revised
rule, the compensation paid by a mortgage broker to a loan originator
employee or paid by a lender to a loan originator employee does not
count towards the points
and fees threshold. This amendment does not
the January 2013 final rule under which compensation paid by a
creditor to a mortgage broker must be included in points and fees, in
addition to any origination charges paid by a consumer to a

These amendments
will take affect at the same time as the remainder of the
Ability-to-Repay rule on January 10, 2014. CFPB also announced a
delay in the effective date for another rule which was originally
scheduled to go into effect on June 1. This provision of the
Dodd-Frank Act prohibited creditors from financing certain credit
insurance premiums in connection with mortgage loans. Earlier this
month CFPB suspended the June implementation date and has not
rescheduled it for January 20, 2014. In the meantime the agency will
seek comments on how this prohibition might apply to credit insurance
products with periodic payment features.

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