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Friday, January 15, 2021

Ability to Repay and Qualified Mortgage Rule: “Seasoned QM”

QUESTION
As a Compliance Manager, I am charged with keeping our policies and procedures current. We are a small lender in the Midwest. 

Recently, I have read that the ATR/QM rule has changed. We have a policy for this rule, and our Quality Control firm provides a report of any issues. We also rely on our LOS to ensure compliance. 

However, I have read that there were some changes recently. I have not been able to find a good summary of the changes. I wonder if you would offer a summary. 

By the way, we are an avid reader of your FAQs. Thank you for providing this service to everyone.

My question: would you please provide a summary of the new ATR/QM rule? 

ANSWER
I am grateful that you read our FAQs. We have been publishing them for many years. They are one of several expressions of our commitment to the mortgage community. We appreciate your continuing interest in our articles.

I will summarize the update to the Ability to Repay and Qualified Mortgage Rule (“Rule”). Keep in mind that often “the devil is in the details.” So, navigating the Rule requires careful consideration of the applicable statute's many components. If you need assistance in drafting this policy document, we can help. We’ll get it done painlessly and at minimum cost! Contact Us Here.

A quick but relatively cursory summary is provided in the Final Rule published in the Federal Register on December 29, 2020.[i] The effective date is March 1, 2021. The mandatory compliance date is July 1, 2021. The CFPB is applying the mandatory compliance date to the date on which a creditor receives a consumer’s QM loan application. Starting on the effective date (viz., March 1, 2021) and until July 1, 2021, compliance with the General QM Final Rule is optional.

First, I will provide the Final Rule and Official Interpretation published in the Federal Register. Get ready for a whole lot of terms, phrases, lawyerly language, and even a new term (viz., “Seasoned QM”). Here it is:

“With certain exceptions, Regulation Z requires creditors to make a reasonable, good faith determination of a consumer's ability to repay any residential mortgage loan, and loans that meet Regulation Z's requirements for “qualified mortgages” (QMs) obtain certain protections from liability. Regulation Z contains several categories of QMs, including the General QM category and a temporary category (Temporary GSE QMs) of loans that are eligible for purchase or guarantee by government-sponsored enterprises (GSEs) while they are operating under the conservatorship or receivership of the Federal Housing Finance Agency (FHFA). The Bureau of Consumer Financial Protection (Bureau) is issuing this final rule to create a new category of QMs (Seasoned QMs) for first-lien, fixed-rate covered transactions that have met certain performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with general restrictions on product features and points and fees, and meet certain underwriting requirements. The Bureau's primary objective with this final rule is to ensure access to responsible, affordable mortgage credit by adding a Seasoned QM definition to the existing QM definitions.”

To those of you who are not used to reading such texts, it can be an arduously annoying experience. Fortunately, I have spent a good part of my adult life immersed in these issuances. I guess I’m used to them. So, let me untangle the foregoing legalistic summary, provide a brief overview of the Rule, and hopefully thereby provide my own summary that is a bit less overtly fustian.

High Level Synopsis

The CFPB issued two final rules to amend the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule:

  • The General QM Final Rule replaces the existing 43 percent debt-to-income (DTI) ratio limit in the General QM definition with price-based thresholds and makes other changes to the ATR/QM Rule.
  •  The Seasoned QM Final Rule creates a new category of qualified mortgage, the Seasoned QM.

General QM Final Rule

The General QM Final Rule amends the General QM definition. Therefore, among other things, it replaces the existing 43 percent DTI limit with a price-based limit and removes Appendix Q as well as any requirements to use Appendix Q for General QM loans. However, the General QM Final Rule retains the Rule’s “consider and verify” requirements and clarifies how they apply under the revised General QM definition. The General QM Final Rule also retains the existing product-feature and underwriting requirements and limits on points and fees.

Price-Based Limit

A loan meets the revised General QM definition only if the Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR) for a comparable transaction by less than the applicable threshold set forth in the General QM Final Rule as of the date the interest rate is set. Generally, this threshold is 2.25 percentage points.

But the General QM Final Rule provides higher thresholds for loans with smaller loan amounts, for certain manufactured housing loans, and for subordinate-lien transactions. The thresholds set forth in the General QM Final Rule are:

  • For a first-lien covered transaction with a loan amount greater than or equal to $110,2603, 2.25 percentage points
  • For a first-lien covered transaction with a loan amount greater than or equal to $66,156 but less than $110,260, 3.5 percentage points
  • For a first-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points
  •  For a covered transaction secured by a manufactured home with a loan amount less than $110,260, 6.5 percentage points
  • For a covered transaction secured by a manufactured home with a loan amount equal to or greater than $110,260, 2.25 percentage points
  • For a subordinate-lien covered transaction with a loan amount greater than or equal to $66,156, 3.5 percentage points
  • For a subordinate-lien covered transaction with a loan amount less than $66,156, 6.5 percentage points

If a loan’s interest rate may or will change in the first five years after the date on which the first regular periodic payment will be due, the creditor must treat the highest interest rate that may apply during that five years as the loan’s interest rate for the entire loan term when determining the APR for purposes of these thresholds. Additional information on determining the APR, the APOR, and the applicable threshold is available in the General QM Final Rule.

“Consider and Verify” Requirements

The revised General QM definition retains the “consider and verify” requirements.

First, it requires that creditors consider the consumer’s current or reasonably expected income or assets (other than the dwelling's value that secures the loan and any real property attached to that dwelling), debt obligations, alimony, child support, and DTI ratio or residual income.

Second, it requires that creditors verify the consumer’s current or reasonably expected income or assets (other than the value of the dwelling that secures the loan and any real property attached to that dwelling), as well as the consumer’s debt obligations, alimony, and child support. A creditor must verify such amounts using reasonably reliable third-party records and reasonable methods and criteria. A creditor may only consider amounts that it has verified in accordance with the verification requirements.

However, the General QM Final Rule does not prescribe specifically how a creditor must consider the monthly DTI ratio or residual income, a particular monthly DTI ratio or residual income threshold, or specific methods of underwriting that a creditor must use (other than to require that verification methods and criteria must be reasonable). Furthermore, the General QM Final Rule provides some flexibility for a creditor to consider additional factors relevant to determining a consumer’s ability to repay a loan.

To prevent uncertainty that may result from Appendix Q’s removal, the General QM Final Rule clarifies the “consider and verify” requirements in the revised General QM definition. The General QM Final Rule includes a list of specific verification standards that the creditors may use to meet the revised General QM definition’s verify requirement. If a creditor satisfies the verification standards in one or more specified manuals, the creditor has a safe harbor for compliance with the verification requirement in the revised General QM definition.

Seasoned QM Final Rule

The Seasoned QM Final Rule creates a new category of QMs, the Seasoned QM. A residential mortgage loan is a Seasoned QM and receives a safe harbor from liability under the ATR/QM Rule if

(1) the loan satisfies certain product restrictions,

(2) does not exceed a points-and-fees limit,

(3) satisfies underwriting requirements, is

(4) held in portfolio until the end of the seasoning period (subject to certain enumerated exceptions), and

(5) meets certain performance standards at the end of the seasoning period.

A loan made by any creditor, regardless of size, is eligible to become a Seasoned QM if, at the end of the seasoning period, it meets the requirements in the Seasoned QM Final Rule. Loans that satisfy another QM definition at consummation also can be Seasoned QM loans, as long as the requirements for Seasoned QMs are met.

Friday, January 8, 2021

Open-End Credit in Loss Mitigation

QUESTION

I am the Associate General Counsel of a mid-size lender. Subpart C of Regulation X applies to any “mortgage loan,” to mean any federally related mortgage loan, subject to certain exemptions, except that it does not apply to “open-end lines of credit (home equity plans).”

Although the Regulation X provision does not define “open-end,” the contexts of its use in Regulation X suggest that the term should be defined as it is in Regulation Z. For example, Regulation X cross-references the Regulation Z definition.

I am particularly interested in how Regulation X applies loss mitigation procedures to open-end credit. How does Regulation X apply loss mitigation procedures to what a creditor claims is open-end credit?

ANSWER

Let’s first get some citations in place, so we know what we’re referencing.

First, let’s go to the Truth-in-Lending Act (TILA) and Regulation Z, its implementing regulation, which defines the term “open-end credit” to mean consumer credit extended by a creditor under a plan in which:

(1) the creditor reasonably contemplates repeated transactions;

(2) the creditor may impose a finance charge from time to time on an outstanding unpaid balance; and

(3) the amount of credit that may be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid.

Any consumer credit that does not fit within this definition is considered “closed-end” credit.

Second, with respect to Subpart C of Regulation X – which is the implementing regulation of the Real Estate Settlement Procedures Act (RESPA) – this section applies to any “mortgage loan,” defined by 12 CFR § 1024.31 to mean any federally related mortgage loan, subject to the exemptions of 12 CFR § 1024.5(b), except – as you quote – it does not apply to “open-end lines of credit (home equity plans).”

And third, although this Regulation X provision does not define “open-end,” the usage context in Regulation X suggests that the term may be defined as it is in Regulation Z. For instance, Regulation X § 1024.6(a)(2) cross-references the Regulation Z definition.

As readers of my Mortgage FAQ articles know, I often like to illustrate responses by utilizing real-world examples. So, my response will briefly discuss a relatively recent federal district court decision in Arizona that considered the application of Regulation X § 1024.41’s loss mitigation procedures to what a creditor claimed was open-end credit.

Specifically, those loss mitigation procedures lie within Subpart C of Regulation X and, therefore, do not apply to “open-end” lines of credit. The case I have in mind is Bowler v Wells Fargo Bank.[i]

For almost 20 years, the Bowlers owned their home in Arizona. In 2006, they obtained a home equity line of credit (HELOC) from Wells Fargo, secured by a deed of trust on their home. In 2009, Wells Fargo restricted the Bowlers' ability to use the line to obtain additional credit extensions. In January 2010, the Bowlers and Wells Fargo signed a modification in which the Bowlers consented to a permanent termination of their ability to draw additional amounts on the credit line. About a year later, they agreed to another modification, which again did not allow the Bowlers to draw additional amounts on the credit line.

But, in 2018, the Bowlers defaulted. In 2019, they applied for a loan modification and included supporting documents. In August 2019, the bank called the Bowlers and asked for more documentation, such as pay stubs and Social Security information, which the Bowlers sent three or four days later. On August 5th, the Bowlers also sent a narrative letter the bank had requested.

The bank prepared an August 9th letter that listed “next steps” for the Bowlers, including a table showing the status of the documents Wells Fargo needed from them to complete the application. The table indicated that some of the requested documents had not been received, some had been received but were incomplete, and other documents had been received and were complete. The Bowlers claimed they never received the letter.

On August 14th, the bank called the Bowlers and asked for the “same documents.” The Bowlers said they’d already provided all of the documents. In response, a bank employee promised to see whether she could find them. On September 5th, the bank told the Bowlers it had not received the “additional documentation” and would again look for them. The Bowlers then faxed “the requested documents” to Wells Fargo.

On September 13th, the bank drafted a letter stating that the bank was no longer reviewing the account for assistance options, as it had not received all of the documentation it needed. The Bowlers claimed they never received this letter, too.

On September 18th, the bank told the Bowlers that their application was “no longer in review.” The Bowlers frantically called the bank but were told there was nothing the bank could do to stop a foreclosure sale. The bank sold the property at the sale. Throughout the next week, Mr. Bowler “became increasingly anxious and upset,” and his blood pressure, previously well-controlled, increased to the high 180s/120s. He visited his doctor, who increased his blood pressure medication.

The Bowlers sued the bank for negligence, negligent infliction of emotional distress (“NIED”), and RESPA violations.

The court dismissed the claims. The negligence claims failed because Wells Fargo did not owe the Bowlers a duty of care. For those of you who are not familiar with this term, it is a legal requirement that a person act toward others and the public with the watchfulness, attention, caution, and prudence that a reasonable person in the circumstances would use. So, if a person's actions do not meet this standard of care, then the acts are considered negligent, and any damages resulting may be claimed in a lawsuit for negligence – that’s just a heavily ladened way of saying that the duty of care is a legal obligation to always act in the best interest of individuals and others, and not act or fail to act in a way that results in harm.

This litigation took place in Arizona, and the federal district courts in Arizona have routinely held that lenders and loan servicers have a non-contractual duty towards borrowers; that said, the duty is narrow and generally limited to the duty to disclose the correct amount of monthly payments, a duty not relevant to the Bowlers’ claims.

Thus the NIED claim failed because: (1) the Bowlers failed to plausibly allege that the husband’s mental anguish was in “the zone of danger so as to be subject to an unreasonable risk of bodily harm created by” Wells Fargo’s foreclosure proceedings; (2) the Bowlers did not even attempt to allege that Wells Fargo knew or should have known that either of the Bowlers was susceptible to an illness or bodily harm; and (3) while the Bowlers plausibly alleged Wells Fargo caused the husband’s emotional distress, Wells Fargo’s conduct did not involve an unreasonable risk in causing it.

Now, as to RESPA, the court rejected Wells Fargo’s argument that RESPA’s loss mitigation provisions did not apply to the Bowlers’ loan because it was an open-end line of credit; and, furthermore, the HELOC became a closed-end loan because of the modifications the parties made to disallow the Bowlers from drawing additional amounts. The court also concluded that the Bowlers’ allegations insufficiently alleged that they had supplied Wells Fargo with all the documents it requested for processing the loan modification.

The bank argued that the Bowlers had waived their RESPA claim by not obtaining an injunction before 5 PM on the day before the foreclosure sale. In support of this argument, the bank cited an Arizona statute that provides: “The trustor…shall waive all defenses and objections to the sale not raised in an action that results in the issuance of a court order granting relief pursuant to rule 65, Arizona rules of civil procedure, entered before 5:00 p.m. mountain standard time on the last business day before the scheduled date of the sale.”

The court rejected this purported waiver based on the Supremacy Clause of the U.S. Constitution. This clause makes the Constitution and all laws on treaties approved by Congress in exercising its enumerated powers the supreme law of the land. Thus, judges in state court must follow the Constitution or federal laws and treaties, if there is a conflict with state laws.

In this case, the court held that the Supremacy Clause prevented state laws, such as Arizona’s, from interfering with substantive federal law, including RESPA. Accordingly, the Arizona statute did not govern, and the Bowlers did not waive the RESPA claim.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group


[i] Bowler v Wells Fargo Bank, 2020 U.S. Dist. (D. Ariz. July 24, 2020)