The Consumer Financial Protection Bureau issued final mortgage rules last week related to servicing mortgage loans. The rules fall under both Reg. X and Reg. Z and cover nine topics. One area addresses the “ability to repay” and how lenders prove that a potential borrower can afford the mortgage they are applying for.
The final rule expands the “ability to repay” provisions currently found in Reg. Z for higher priced mortgage loans (HPMLs) and high cost mortgage loans (Section 32 HOEPA loans) to any consumer credit transaction that is secured by a dwelling, including any real property attached to a dwelling. (Dwelling is defined as a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.) Home equity lines of credit and mortgages secured by time share plans are expressly excluded from coverage.
All creditors making consumer credit transactions secured by a dwelling must comply with the general ability to pay requirement.
The basic premise is a creditor will have to ensure borrowers the ability to repay covered transactions. To do this, lenders must document and verify eight underwriting standards including: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income (DTI) ratio or residual income; and (8) credit history.
The final rule sets criteria for application of many of the eight underwriting criteria. For example, creditors must generally use reasonably reliable third-party records to verify the information they use in the underwriting process such as W-2’s, paystubs, audited financial statements, credit reports, etc. In addition, the rule requires when calculating the borrower’s projected monthly mortgage payments, the creditor must calculate the payment by assuming that the loan is repaid in substantially equal monthly payments during its term. For adjustable-rate mortgages, the monthly payment must be calculated using the fully indexed rate or an introductory rate, whichever is higher. The general ability to pay rule does not, however, establish maximum monthly DTI ratios, minimum down payment requirements or other underwriting criteria.
This, and additional final rules released by the Consumer Financial Protection Bureau, will be discussed in detail on Tuesday, February 26 when the IBA Compliance Department presents a compliance webinar, “Final CFPB Mortgage Lending Rules”. For more information or to register click here.