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CFPB Proposes Significant Changes to Regulation Z’s Ability to Repay Requirements

michaelchristians • June 24, 2020

On Monday, the Consumer Financial Protection Bureau (CFPB) made good on its promise to amend the ability to repay requirements found under Regulation Z. Let’s walk through the specifics of the CFPB’s two proposed rules…

Proposed Rule #1: Extension of the GSE Patch

Currently, a creditor may originate a loan as a qualified mortgage (QM) with a debt-to-income (DTI) ratio over 43% under the temporary GSE QM exception, often referred to as “the patch.” The exception provides that if a loan with a DTI ratio that exceeds 43% is eligible for sale to the secondary market at the time of consummation, the loan may be retained in the creditor’s portfolio as a QM so long as the remaining QM requirements are met.

The patch is currently scheduled to sunset on January 10 ^th of next year. In its proposed rule, the CFPB is extending the sunset date of the patch to correspond with the effective date of its proposed amendments to the general definition of a QM (discussed below).

Comments on this proposed rule will be accepted by the CFPB for a period of 30 days following the rule’s publication in the Federal Register.

Proposed Rule #2: Changes to the QM Requirements

Currently, in order for a loan to be considered a QM it must meet the following requirements:

The loan agreement calls for regular, periodic payments;
The term of the loan does not exceed 30 years;
The points and fees that may be charged in connection with the transaction are capped; and
The borrower’s DTI ratio does not exceed 43%.

Under the CFPB’s proposed rule, classification of a loan as a QM would be based on a new four-part test.

Product Test
First, the proposed rule retains the requirement that a QM must call for regular, periodic payments and may not have a term that exceeds 30 years.

Points and Fees Test
Second, the proposed rule also retains the requirement that the points and fees charged in connection with a QM may not exceed certain thresholds (determined by loan amount).

Pricing Test
Third, the proposed rule establishes a new pricing test that a loan must meet in order to be considered a QM. Generally speaking, the annual percentage rate (APR) charged in connection with a QM may not exceed the value of the Average Prime Offer Rate (APOR) index by more than 2%. The rule establishes alternative thresholds for first lien loans of less than $109,898 and subordinate lien loans.

Underwriting Test
Finally, while the proposed rule eliminates the requirement that the borrower’s DTI ratio not exceed 43%, it does require the creditor to consider and verify the borrower’s income, assets, and debt obligations.

The rule does away with the overly prescriptive underwriting requirements found in Appendix Q. In its place, the rule establishes a new safe harbor for creditors when it comes to the verification requirement. The rule proposes that a creditor who adheres to underwriting standards promulgated by Fannie Mae, Freddie Mac, the Federal Housing Administration, the United States Department of Veterans Affairs or the United States Department of Agriculture will have successfully verified the borrower’s income, assets and debt obligations for purposes of the ability to repay rule.

In addition, the rule requests comment on the following alternative approaches to the underwriting test:

Retain a maximum DTI ratio in connection with a QM; however, increase it to a specific threshold between 45% and 48%; or
Using a hybrid approach, such as applying a maximum DTI ratio limit to loans that are above a specific rate spread.

Comments on this proposed rule will be accepted by the CFPB for a period of 60 days following the rule’s publication in the Federal Register.

The post CFPB Proposes Significant Changes to Regulation Z’s Ability to Repay Requirements appeared first on Michael Christians Consulting, LLC.

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