Ability to Repay: Small Creditors

QUESTION

I heard that the Consumer Financial Protection Bureau (“CFPB”) recently issued new rules regarding small creditors. How exactly has the definition of a “small creditor” changed with regard to the Ability to Repay (“ATR”) rules and Qualified Mortgages (“QM’s”)?

ANSWER 

Before responding to the question, it may be helpful to briefly revisit the recent past. 

In 2013, the CFPB issued the ATR rule (effective January 2014) which requires lenders to make a reasonable and good faith determination that borrowers have the ability to repay their loans. QM’s are a category of loans which prohibit risky loan features and are therefore presumed to have complied with ATR requirement. The CFPB cut out certain exemptions from the definition of QM’s for small creditors, noting that they want them to be able to continue to play a vital role in rural and underserved areas. 

Effective January 1, 2016, the CFPB modified the definition of a small creditor in two material ways. First, the origination volume limit for small creditor status was increased from 500 to 2,000 first-lien mortgages, excluding loans held in portfolio by a creditor and its affiliates. [1026.35 (b)(2)(iii)(B)]  

Second, assets of a creditor’s mortgage affiliates are now included when calculating a creditor’s total assets which are limited to $2 billion in order to qualify as a small creditor. [1026.35 (b)(2)(iii)]    

An advantage of being deemed a small creditor under the ATR rule is that Qualified Mortgage status is extended to loans that small creditors hold in their own portfolios, even if the consumers’ debt-to-income ratio exceeds 43 percent. [1026.43(e)(5)(i)(B)] Regardless of small creditor status, the loan must be underwritten based on a fully-amortizing schedule, using the maximum rate permitted during the first five years after the date of the first periodic payment, and the underwriter must consider and verify the consumer’s income or assets, debts, alimony and child support as applicable. [1026.43(c)(5)(ii)(A)]  

Further, the loan may not be subject to an agreement made at or prior to consummation in which the creditor agrees to sell the loan after consummation unless it is to another small creditor. [1026.43(e)(5)(i)(C)]

Small creditor QMs lose their QM status if the loan is sold or transferred to a creditor that does not fall within the small creditor requirements and the sale or transfer is less than three years after consummation. [1026.43(e)(5)(ii)]

All small creditors may currently originate Qualified Mortgages with balloon payments (even though balloon payments are otherwise not allowed with Qualified Mortgages), provided they do not have negative amortization or interest only features and comply with the points and fees test as well. [1026.43(f)] After April 1, 2016 only small creditors operating in predominantly rural or underserved areas will be able to continue making balloon payment QMs. [1026.43(e)(6), as amended].  

In order to be a creditor that operates predominantly in rural or underserved areas for 2016, a creditor would need to extend more than 50 percent of its total first-lien covered transactions on properties located in rural or underserved areas in calendar year 2015. [1026.35(b)(2)(iii)(A)] The new CFPB rules have broadened the definition of a rural area to include census blocks that are not in urban areas as defined by the Census Bureau. [1026.35(b)(2)(iv), as amended] Additionally, the loan must have a fixed interest rate and periodic payments (other than the balloon payment) and cannot have a term less than five years. [Idem]

Michael Barone

Executive Director/Lenders Compliance Group

Director/Legal & Regulatory Compliance

Fair Housing Exclusions

QUESTION

A church in our area owns a residential building consisting of rentals and condominiums. It does not allow its housing to be rented by or sold to anybody who is not a member of their church. Isn’t that a housing violation?

ANSWER

The Fair Housing Act is the federal Act that, among other things, prohibits discrimination on the basis of various protected categories, such as on the basis of religion, with respect to the sale, rental, or advertising of dwellings, provision of services of facilities in connection with the sale or rental of a dwelling, and availability of residential real estate-related transactions (i.e., mortgage loans, appraisals, and so forth). 

[24 CFR §§ 100.5, 100.50, 100.110]

A dwelling is any building, structure, or portion thereof that is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land that is offered for sale or lease for the construction for the construction or location thereon of any such building, structure, or portion thereof. [24 CFR § 100.20]

The Act does not prohibit a religious organization, association or society, or any non-profit organization operated, supervised, or controlled by or in conjunction with a religious organization, association or society, from limiting the sale, rental or occupancy of dwellings that it owns or operates for other than a commercial purpose to persons of the same religion, or from giving preference to such persons, unless membership in such religion is restricted because of race, color or national origin.

[24 CFR § 100.10(a)(1)]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Telemarketing Liability

QUESTION

We are telemarketers and sell our leads to mortgage lenders. The issue for us is whether we can avoid liability if we are in error, such as if we place a call to a person who has made a request not to be called. What can be done to limit or avoid our liability in these instances?

ANSWER

The regulatory framework that is responsive to this inquiry is called the Telemarketing Sales Rule (“TSR”). The way to characterize this scenario is to emphasize that the call has been made in error either to a person who has requested a company not to call or where the person has listed the contact number in the National Do Not Call Registry. The former is known as a company-specific request.

A company-specific request to not be called must be maintained on a list. These are persons who have directly advised the company not to contact them by telephone. A seller that calls a person who is on (or should have been placed on) the seller’s company-specific do not call list engages in an abusive telemarketing practice in violation of the Telemarketing Sales Rule. [16 CFR § 310.4(b)(1)(iii)(A)]

The National Do Not Call Registry is the registry maintained by the FTC and FCC of persons who place their telephone numbers on it so as not to be called by any company subject to the do not call restrictions. [16 CFR § 310.4(b)(1)(iii)(B); 14 CFR § 64.1200 et seq.]

If a seller or telemarketer can establish that as part of its routine business practice it meets the following requirements, it may not be found liable for engaging in an abusive act or practice under the TSR if the seller or telemarketer, in error, calls a person who has made a company-specific request not to be called or calls a number on the National Do Not Call Registry:

1. The seller or telemarketer has established and implemented written procedures to honor requests that a person not be called;
2. The seller or telemarketer has trained its personnel, and any entity assisting the seller or telemarketer in its compliance, in the procedures;
3. The seller, telemarketer, or someone else acting on behalf of the seller has maintained and recorded a company-specific do not call list;
4. The seller or telemarketer uses, and maintains records documenting, a process to prevent calls to any telephone number on a company-specific do not call list or the National Do Not Call Registry, a copy of which Registry was obtained from the FTC no more than thirty-one days before the date of any calls made;
5. The seller, telemarketer, or someone else acting on behalf of the seller monitors and enforces compliance with the entity’s written do not call procedures; and
6. The call is a result of error. [16 CFR § 310.4(b)(1)(iv)] 

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Guidelines for Identity Theft Prevention Program

QUESTION

We are a non-bank, a mortgage banker, that was recently cited for not having an Identity Theft Prevention Program. We thought we were covered for it in our general fraud screening procedures. Apparently, there is a regulatory requirement for it that requires actions that are far more involved than just screening for fraud. What rule applies to our type of financial institution?

ANSWER

The Federal Trade Commission established rules regarding an Identity Theft Prevention Program (“Program”). The procedures must be in a written format and must be designed to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account. Procedurally, the Program is meant to be appropriate for a financial institution’s size, complexity, and scope of operations. [16 CFR § 681.1(d)(1)]

By “covered account,” the Program means accounts that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, such as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account or savings account. It also means any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks. So, clearly, the meaning of “covered account” is quite broadly applied. [16 CFR § 681.1(b)(3)]

Even more specifically, an “account” is a continuing relationship established by a person with a financial institution or creditor to obtain a product or service for personal, family, household or business purposes, including an extension of credit (i.e., purchase of property or services involving a deferred payment) and a deposit account. [16 CFR § 681.1(b)(1)]

There are four essential guidelines, each of which usually involves Red Flags – a marker for a pattern, practice, or specific activity that indicates the possible existence of identity theft.

1. Identify relevant Red Flags for the covered accounts that the financial institution or creditor offers or maintains, and incorporate those Red Flags into its Program;
2. Detect Red Flags that have been incorporated into the Program of the financial institution or creditor;
3. Respond appropriately to any Red Flags that are detected to prevent and mitigate identity theft; and
4. Ensure the Program (including the Red Flags determined to be relevant) is updated periodically, to reflect changes in risks to customers and to the safety and soundness of the financial institution or creditor from identity theft. [16 CFR 681.1(d)(2)]

There are four administrative components of the Program: 

1. Obtain approval of the initial written Program from either its board of directors or an appropriate committee of the board of directors;
2. Involve the Board of Directors, an appropriate committee thereof, or a designated employee at the level of senior management in the oversight, development, implementation and administration of the Program;
3. Train staff, as necessary, to effectively implement the Program; and
4. Exercise appropriate and effective oversight of service provider arrangements. [16 CFR 681.1(e)] 

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group