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Thursday, December 12, 2013

What is an Affiliate under the Qualified Mortgage rule?

QUESTION 
What is the definition of an “affiliate,” with respect to the QM 3% Points and Fees cap under the Ability-to-Repay and Qualified Mortgage rule?

ANSWER  
The CFPB’s Ability-to-Repay/Qualified Mortgage’s (QM) rule contains a cap or limit on points and fees to qualify as a QM loan. The calculation of points and fees includes certain charges paid to affiliates of creditors. To qualify as a QM, a loan over $100,000 is limited to points and fees up to 3% of the loan amount. The 3% limit is increased on a sliding scale for loans under $100,000. 

In the Small Entity Compliance Guide, the CFPB defines “affiliate” as “any company that controls, is controlled by, or is under common control with, your company” (Ability to Repay and QM Rule, Small Entity Compliance Guide, p. 34). The CFPB also issued “unofficial staff guidance” in a webinar on October 17, 2013, in which it was stated that the definition of an affiliate is any company that controls, is controlled by, or is under common control with, another company  as set forth in the Bank Holding Act of 1956 (the “Act”). 

The Act states that any company has control over a bank or over any company if -  

(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; 

(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or 

(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. [12 USC Section 1841(a)(2)]

Although (A) and (B) are straightforward, (C) is vague and the “unofficial staff guidance” (hopefully “official guidance” will be available down the line”) is just as vague as terms such as “controlling influence” are not specifically defined and are subjective in nature.

It is noteworthy that the CFPB has not made any indication that the definition of “affiliate” will mirror the definition as set forth in RESPA. The RESPA definition is far broader in nature.

To determine whether there is an affiliate relationship under QM, the management and ownership interests of the creditor and the affiliate need to be analyzed in great detail. Only then can the specific facts be applied to the definition set forth in the Act and an answer to the question above determined. It is suggested that you spend the time required to perform an analysis, document your findings and reasoning for the determination. Most importantly, be aware of investor overlays as they may very well exceed the “unofficial guidance” provided by the CFPB.

Michael Barone
Director / Legal and Regulatory Compliance
Lenders Compliance Group