CFPB Flashcards
What does CFPB mean?
Consumer Financial Protection Bureau
Authorized the **Dodd-Frank Act **
Qualified mortgage rule
(AKA: Final Rule)
A QM is a loan transaction that
- Provides for substantially-equal periodic payments (a change in payment amount resulting from a change in the interest rate in an adjustable-rate or step-rate mortgage does not disqualify a loan from being a QM) that does not:
- Provide for negative amortization
- Allow the deferral of the payment of principal, or
- Result in a balloon payment
- Has a loan term of no more than 30 years
- Does not provide for points and fees that exceed 3% of the total loan amount
- 3% is the general threshold limitation; that being said, there are variances in this limit based on loan amount. These variances adjust each year based on inflation; updated numbers are issued online by the CFPB
For a loan to be a QM, the creditor must determine ATR, taking into account the monthly payment for mortgage-related obligations using
- The maximum interest rate that will apply during the first five years of the loan’s term, and
- Periodic payments that will either repay
- The principal balance over the remaining term of the loan, calculated using the maximum rate possible during the first five years of the loan, or
- The loan amount over the loan term
What does QM mean?
Qualified mortgage
As defined by the Qualified Mortgage Rule
Implemented by the CFPB
QM categories
- General QMs
- Seasoned QMs
As defined by the Qualified Mortgage Rule
General QMs
A loan will meet the general QM definition only if, along with meeting the previously outlined underwriting requirements, the APR exceeds the average prime offer rate (APOR) for a comparable transaction by no more than 2.25%. This is a general limitation; the actual percentage will vary based on loan amount, house type, and lien position.
Specifically, a loan is a general QM if its APR exceeds the APOR for a comparable transaction by no more than:
- 2.25%, for a first-lien loan greater than or equal to $130,461
- 3.5%, for a first-lien loan greater than or equal to $78,277 but less than $130,461
- 6.5%, for a first-lien loan less than $78,277
For loans secured by a manufactured home:
- 6.5%, for a loan amount less than $130,461
- 2.25%, for a loan amount greater than or equal to $130,461
For subordinate liens:
- 3.5%, for a loan amount greater than or equal to $78,277
- 6.5%, for a loan amount less than $78,277
These amounts will be adjusted annually for inflation.
If the loan features an interest rate that may or will change within the first five years after the date on which the first regular periodic payment is due, the creditor must conduct their analysis of this threshold based on the highest interest rate that may apply during this five-year period.
Seasoned QMs
A residential mortgage loan is a seasoned QM and benefits from the conclusive presumption of compliance with the ATR/QM Rule if it:
- Satisfies certain product restrictions
- Does not exceed a points and fees limit
- Satisfies underwriting requirements
- Is held in portfolio until the end of the seasoning period (with limited exceptions), and
- Meets certain performance standards at the end of the seasoning period
A loan made by any creditor, of any size, is eligible to become a seasoned QM if it meets these standards at the end of its seasoning period. This includes loans that satisfied any other QM definition when they were consummated.
The applicable product restrictions are as follows:
- The loan must be a first lien
- The loan must have a fixed interest rate
- Adjustable-rate and step-rate loans are not acceptable for this category
- The loan has regular, substantially equal, fully amortizing payments that repay the loan over its term
- The loan does not allow for:
- Negative amortization
- Balloon payments
- The loan term does not exceed 30 years
- The loan is not a high-cost mortgage as defined by HOEPA
- Higher-priced mortgage loans may be seasoned QMs if they meet all other prerequisites described here
- The points and fees do not exceed the threshold set out in the ATR/QM Rule (generally 3%, though variable based on loan amount)
These product restrictions include an exception for qualifying changes that are made to a loan during or after a temporary payment accommodation needed due to a “…disaster or pandemic-related national emergency,” even if the change involves, for example, a balloon payment or lengthened loan term.
Generally, the seasoning period to qualify as a seasoned QM is 36 months, beginning from the date on which the first periodic payment is due after consummation. The seasoning period may end later in either of these two scenarios:
- The borrower is delinquent for a period of 30 days or more at the end of the final month of seasoning, in which case the seasoning period is extended until there is no more delinquency, or
- The borrower obtains a temporary payment accommodation in connection with a disaster or pandemic-related national emergency, the time for which does not apply to the seasoning period
- The seasoning period will only resume after the temporary payment accommodation ends and delinquency, if any, is cured through the loan’s original terms or through a qualifying change
At consummation, the loan must not be subject to a commitment to be acquired by another person. The creditor must hold the loan in its portfolio for the entire seasoning period, other than subject to certain supervisory sales, mergers, and acquisitions.
The Rule does allow for one single transfer during the seasoning period, provided that the loan is not securitized as part of the transfer or at any time before the seasoning period ends.
At the end of its seasoning period, the loan must have:
- No more than two delinquencies of 30 or more days, and
- No delinquencies of 60 or more days
- Delinquency here means failure to make a periodic payment sufficient to cover principal, interest, and escrow (if any) for a given billing cycle by the date on which it is due. It does not include failure to pay late fees, for the purposes of loan performance standards.
- A periodic payment is 30 days delinquent if it is not paid before the due date of the next scheduled periodic payment.
- It is 60 days delinquent if the consumer is more than 30 days delinquent on the first of two sequential periodic payments and fails to make both before the date of the next (i.e., a third) scheduled periodic payment
What does QM mean?
Qualified mortgage
As defined by the Qualified Mortgage Rule
Implemented by the CFPB
What does ATR mean?
Ability to Repay
As defined by the Ability to Repay Rule
Implemented by the CFPB
Ability to repay rule
The ATR Rule requires a creditor to make a reasonable, good faith determination that a person applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms.
A creditor that fails to make this determination may be subject to penalties, as a consumer that defaults on their mortgage loan may use that failure as an affirmative defense and could be awarded up to three years of finance charges, in addition to legal fees
A QM always complies
Implemented by the CFPB
What does the ATR cover?
Applies to any consumer credit secured by a dwelling (residential structure)
- containing one to four units
- an individual condominium unit
- a cooperative unit
- a mobile home
- a trailer
whether or not the structure is attached to real property
What does the ATR not cover?
- Home equity lines of credit (HELOCs)
- Timeshares
- Reverse mortgages
- Temporary or bridge loans with terms of less than 12 months
- Construction loans of 12 months or less that are part of construction-to-permanent loans, and
- Loans made by a housing finance agency or other governmental agency
ATR factors to consider
- Current or reasonably-expected income or assets, other than the value of the property that secures the loan
- Current employment status
- Monthly mortgage payment for the loan, calculated using the introductory or fully-indexed rate, whichever is higher, and monthly payments that are substantially equal and that fully amortize the loan
- Monthly payment on any simultaneous loans secured by the same property
- Monthly payments for mortgage-related obligations (e.g., property taxes, hazard insurance, homeowner’s association fees, or ground rent)
- Debts, alimony, and child support obligations
- Monthly debt-to-income ratio or residual income (i.e., the total of all the mortgage- and non-mortgage-related obligations as a ratio to gross monthly income)
- Credit history
In verifying a loan applicant’s income and/or assets, a creditor must utilize reasonably-reliable third-party records, such as paystubs, tax returns, employment information, and records from financial institutions
Prepayment penalties
Prohibited on
* High-cost home loans
* HPMLs
Under the ATR/QM Rule, a mortgage loan may not include a prepayment penalty unless:
- The loan is a fixed-rate qualified mortgage loan
- The penalty is permitted by law
- The transaction has an APR that may not increase after consummation, and
- The fee does not exceed:
- If prepaid during the first two years of the loan, 2% of the outstanding balance prepaid, or
- If prepaid during the third year of the loan, 1% of the outstanding balance prepaid
Prepayment penalties may not be imposed after the first three years of the loan term.
Loan Originator Compensation Rule
A CFPB-issued a rule regarding loan originator compensation
Define: Loan originator
An individual or entity that performs origination activities for compensation, such as
- taking an application
- offering credit terms
- negotiating credit terms on behalf of a consumer
- obtaining an extension of credit for a consumer
- advertising that the person can perform such activities.
Per to the Loan Originator Compensation Rule
