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
