May 9, 2014
Authored by: Amy Thompson
On May 6, 2014, the CFPB issued proposed amendments to the mortgage rules under the Truth in Lending Act (TILA) affecting Regulations Z and X. The proposed amendments affect the small servicer/small creditor exceptions to the mortgage rules and the “Qualified Mortgage” determination. The CFPB proposes to partially re-define who may qualify as a “small servicer” under § 1026.41 of Regulation Z (incorporated by cross reference in Regulation X), revise the scope of the nonprofit small creditor exemption from the ability-to-repay rule in § 1026.43(a)(3)(v)(D) of Regulation Z, and establish a limited cure procedure where a creditor inadvertently exceeds the “Qualified Mortgage” points and fees limits.
Amendment to the “Small Servicer” Definition: The CFPB originally presumed that most nonprofits would qualify for the “small servicer” exemptions. However, during implementation of the mortgage rules, the CFPB learned that certain nonprofits might not qualify as “small servicers” because they were part of a larger association of nonprofits that are separately incorporated but that may operate under mutual contractual obligations, share a charitable mission, and use a common name or trademark. In order to save resources, such associations sometimes consolidate servicing activities, with one of the associated entities providing loan servicing to one or more others, for a fee. Under current rules, such nonprofit servicers would not qualify for the “Small Servicer” exemptions because they service, for a fee, loans on behalf of a non-“affiliated” entity. The CFPB proposes to amend the definition of “Small Servicer” so as not to exclude qualified nonprofit entities within such formal associations where certain requirements are met. Related changes to the section’s formal comments are also proposed.
Amendment to the Nonprofit Small Creditor Ability-to-Repay Rule: Current rules give an exemption from the ability-to-repay requirements for nonprofit small creditors (those that extended credit secured by a dwelling no more than 200 times during the preceding calendar year). The current rule does not distinguish between first and subordinate liens for purposes of the exemption, nor does it distinguish between loans on which interest is charged and those on which it is not, or on the basis of whether the loan definitively has to be repaid. Concern has arisen that certain nonprofits, which at times offer subordinate-lien loans on which no interest is charged and/or on which repayment may be forgivable or of a contingent nature, must include even such no-interest/no-repayment loans in their loan limit count. Such creditors could be forced to curtail such subordinate-lien programs or more generally limit their lending activities to avoid exceeding the 200-loan limit because they do not have the resources to comply with the ability-to-repay rules. The proposed amendment would provide that certain consumer loans involving deferred or contingent, interest-free subordinate liens need not be included when counting the number of loans made by the nonprofit for purposes of qualifying for the exemption.
Amendments to the “Qualified Mortgage” Rules: Current rules, set out in §1026.43(e)(3)(i), provide that a covered transaction is not a “Qualified Mortgage” for purposes of the presumption of compliance with ability-to-repay rules if the transaction’s total points and fees exceed certain limits. Because calculation errors can sometimes lead to a loan inadvertently exceeding the points and fees limits, the CFPB is proposing an amendment that would allow a creditor a limited right to “cure” such an error under certain conditions, including that the loan was made in good faith as a qualifying loan and that the excess points and fees are repaid to the borrower within 120 days of the loan consummation. The CFPB is also requesting public comment on whether it should propose an additional amendment granting a similar right to “cure,” inadvertent debt-to-income overages.
The CFPB is requesting public comment on all of the proposed amendments by June 5, 2014.