QUESTION
I am the Director of Compliance at
a community bank. Recently, there were substantive changes to the Qualified
Mortgage requirements, under Regulation Z. From my reading of the new rule, community
banks would benefit because it makes our portfolio loans de facto Qualified
Mortgages. My concern is whether we must ensure that our loans meet certain Qualified
Mortgage criteria. Like most community banks, we do not intend to sell our
loans. What criteria does a community bank have to meet to use the new Qualified
Mortgage exemption?
ANSWER
This is a very good question. I will provide a concise response. Section 129C(b) of the Truth-in-Lending Act
(TILA), added by the Dodd-Frank Wall Street Reform and Consumer Protection Act,
offers “qualified mortgages” (QMs) a presumption that the lender has satisfied
the Ability-to-Repay Rule as implemented in Regulation Z § 1026.43. The
Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCP
Act) inserted a special QM for community banks.
Section 101 of the EGRRCP Act
amends the ability-to-repay (ATR) and qualified mortgage (QM) provisions in
TILA § 129C to specify that certain mortgage loans made by an insured
depository institution or insured credit union with less than $10 billion in
total consolidated assets (the Act’s apparent definition of a “community bank”)
are QMs that automatically satisfy the ATR requirements. In other words, they
qualify as loans for which the creditor need not fuss with the detailed
provisions of the CFPB’s ATR regulation.
Although this section might
appear simple, it is not.
To fall within this bucket of
QMs, a mortgage loan must have several features typical of other QMs and
generally must be held in portfolio. The loan:
- Must comply with
TILA’s limitations on prepayment penalties for qualified mortgages, that
is, any prepayment penalty imposed during the first year of the loan may
not exceed 3 percent of the outstanding balance, during the second year
may not exceed 2 percent of the outstanding balance, during the third year
may not exceed 1 percent of the outstanding balance, and after the end of
the third year may not exceed 0 percent of the outstanding balance (i.e.,
no prepayment penalty after the third year).
- Must not have total
points and fees exceeding 3% of the total loan amount.
- Must not have negative
amortization or interest-only features.
- Must have been
subjected to consideration and documentation requirements regarding debt,
income, and financial resources of the consumer. Section 101 gives a creditor
flexibility in determining these requirements. Section 101 specifies that
multiple methods of documentation are permitted, and a creditor need not
comply with Appendix Q of Regulation Z, which specifies standards for
determining monthly debt and income.
- Generally, must be held in portfolio and not sold to another person.
The statute offers an exception
from the portfolio retention requirement for certain transfers of the loan’s
legal title, including a transfer by reason of bankruptcy or failure of the
lender, transfer to another insured depository institution or insured credit
union with less than $10 billion in total consolidated assets so long as that
institution holds the loan in portfolio, transfer pursuant to a merger so long
as the loan is retained in portfolio, or transfer to a wholly-owned subsidiary
of the lender provided that after the transfer the loan is considered to be an
asset of the parent lender for regulatory accounting purposes.
Thus, if a community bank wishes
to take advantage of the Section 101 exemption, it must do the following for
each mortgage loan it would like to exclude from the standard ATR requirements
(unless the loan already qualifies as a QM):
- Comply with the
prepayment penalty limitations.
- Ensure that the
loan does not have total points and fees exceeding 3% of the total loan
amount.
- Not include
negative amortization or interest-only features.
- Apply the bank’s own consideration and documentation requirements regarding debt, income, and financial resources.
- Hold the loan in portfolio.
Jonathan Foxx
Managing Director
Lenders Compliance Group
