CFPB Announces Changes to Ablity-to-Repay Rule

The 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.

"Our 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 change 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 creditor.   

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.