Subtitle B: Minimum Standards for Mortgages
Ability to Repay Loans
Under regulations to be prescribed, CFPB would prohibit creditors from making residential mortgage loans unless creditor makes good faith determination, based on verified and documented information, that at time loan was consummated, consumer had reasonable ability to repay loan according to its terms, and all applicable taxes, insurance and assessments. Provides nothing in title should be construed as requiring depository institution to apply mortgage underwriting standards that do not meet minimum underwriting standards required by appropriate regulator of depository.
Provides if creditor knows or has reason to know that 1 or more loans secured by same dwelling will be made to consumer, also requires creditor to make reasonable and good faith determination based on verified and documented information that consumer has reasonable ability to repay combined payments of all loans on same dwelling according to terms of loans and all applicable taxes, insurance and assessments.
Basis for Determination
Requires that determination of consumer’s ability to repay residential mortgage loan shall include consideration of credit history, current income, expected income consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or residual income after paying non-mortgage debt and mortgage-related obligations, employment status and other financial resources other than consumer’s equity in dwelling or real property that secures repayment of loan. The creditor requires to determine ability of consumer to repay using payment schedule fully amortizing loan over its term.
Verification of Income
Requires creditor to verify amounts of income or assets including expected income or assets, by reviewing Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of consumer’s income or assets. Exempts certain streamlined loans made, guaranteed or insured by federal departments or agencies from verification requirements as long as certain conditions are met including:
- consumer is not more than 30 days past due on existing loan;
- refinancing does not increase principal balance outstanding on prior loan except for fees and charges allowed by department or agency making, guaranteeing, or insuring refinancing;
- total points and fees do not exceed 3 percent of total new loan amount;
- interest rate on refinanced loan is lower than interest rate of original loan, unless borrower is refinancing from adjustable rate to fixed-rate loan under department or agency guidelines; refinancing is subject to payment schedule that will fully amortize refinancing in accordance with agency or department regulations;
- no balloon payment,
- both residential mortgage loan being refinanced and refinancing satisfy all applicable requirements of department or agency making, guaranteeing or insuring the refinancing.
The title Includes rules for determining ability to repay for: nonstandard loans including loans that defer principal and interest and interest-only loans; calculations for negative amortization; calculation process for loans which do and do not have substantially equal monthly payments; and refinancing of hybrid loans with current lender. Also defines fully indexed rate as index rate at time loan is made plus margin. If documented income, creditor can consider seasonality and irregularity of income in underwriting process.
Section does not apply to any reverse mortgage or bridge loan with a term of 12 months or less.
Safe Harbor and Rebuttable Presumption of Ability to Repay for Qualified Mortgage
Permits creditor and any assignee of a residential mortgage loan subject to liability under title to presume loan meets ability to repay requirement if loan is a “qualified mortgage.” However, presumption is rebuttable.
3 Percent Limit – Calculation of Points and Fees – Qualified Mortgages
For purposes of calculating points and fees subject to 3% of loan amount limit for qualified mortgages, definition at section 103 (aa) (4) of TILA is used with following exclusions:
- up to and including 2 bona fide discount points if interest rate from which mortgage’s interest rate will be discounted does not exceed average prime offer rate by more than 1 percent, or 1 bona fide discount point if interest rate from which mortgage’s interest rate will be discounted does not exceed average prime offer rate by more than 2 percentage points;
- any government insurance premium and any private insurance premium up to amount of FHA insurance premium, provided PMI premium is refundable on a pro rata basis; and
- any premium paid by consumer after closing, e.g. monthly MI..
Smaller Loans – Qualified Mortgages
Requires CFPB to prescribe rules adjusting 3 percent of loan amount limitation on points and fees to permit lenders that extend smaller loans to meet requirements of presumption of compliance. Directs CFPB in prescribing rules to consider impact of rules on rural and other areas where home prices are lower.
Balloon Payment – Qualified Mortgages
Authorizes CFPB to determine qualified mortgage includes balloon loan under specified circumstances.
Discretion – Qualified Mortgages
Authorizes CFPB to prescribe regulations to revise, add to, or subtract from criteria that define qualified mortgage upon finding that such regulations are necessary or proper to ensure that affordable mortgage credit remains available to consumers in manner consistent with bill’s purposes.
Government Loans – Qualified Mortgages
Authorizes HUD, VA, Agriculture and Rural Housing Service in consultation with CFPB to prescribe rules defining types of loans they insure, guarantee or administer that are qualified mortgages which may revise add to, or subtract from criteria used to define qualified mortgages.
Defense to Foreclosure
Permits borrower to assert a defense to foreclosure against creditor or assignee or other holder of mortgage loan in judicial or nonjudicial foreclosure or any other action to collect debt in connection with mortgage loan when there is a violation of anti-steering and ability to repay provisions. Claim can lead to actual damages, statutory damages and enhanced damages including return of finance charges.
Additional Standards and Requirements
Prohibition on Prepayment Penalties
Prohibits prepayment penalties for all loans that are not qualified mortgages. Prepayment penalties must be phased out for qualified mortgages so during first year following consummation, prepays do not exceed three percent of outstanding loan balance, second year – two percent and third year – one percent, with no prepayment penalty imposed on a qualified mortgage after three years. Also, requires offering of loan without a prepayment penalty along with loan with prepayment penalty.
Single Premium Credit Life Insurance
Prohibits creditors from directly or indirectly financing any single premium credit life, credit disability, credit property insurance, or similar insurance in connection with any residential mortgage loan or open-end line of credit. Exempts unemployment insurance where lender or affiliate receives no compensation. Permits insurance premiums or debt cancellation or suspension fees calculated and paid in full monthly.
Prohibits provisions for mandatory arbitration in residential mortgages and open-end consumer credit secured by principal dwellings.
Requires disclosure and counseling for first-time borrowers prior to consummation of loans with negative amortization secured by “dwelling.”
Loss of Anti-Deficiency Protection
Requires creditors subject to state anti-deficiency law to provide notice before consummation describing protection provided by law and significance of loss of protection.
Disclosures Regarding Partial Payments
Requires disclosure prior to settlement (or upon becoming a creditor) creditor’s policy regarding acceptance of partial payments and if such payments are accepted, how they will be applied to mortgage and if they will be placed in escrow.
Rule of Construction
Clarifies that any amendments to TILA under this legislation are not to be construed as superseding or affecting any other rights or remedies of any person under any other provisions of TILA or other federal or state law.
Amendments to Civil Liability Provisions
Increases civil money penalties for certain violations under TILA and provides three-year statute of limitations for TILA Section 129 violations.
Lender Right Regarding Borrower Deception
Exempts creditors and assignees from TILA liability if borrower or co-borrower is convicted of obtaining residential mortgage loan by actual fraud.
Six Month Notice Before Hybrid ARM Reset
Amends TILA by requiring written notices to consumers at closing and during one-month period that ends six months prior to end of introductory period of hybrid ARM, that includes: index, explanation of new interest rate calculated, estimated monthly payment, etc.
Adds several new TILA disclosures for consumers including:
- under variable loans, maximum initial monthly payment amount
- for loans with escrows, initial monthly amounts to cover taxes and insurance
- aggregate amount of settlement charges for all services provided in connection with loan and amount of charges that are paid outside of closing and included in loan; rate of wholesale funds, total fees paid to mortgage originator, amount of fees paid directly by consumer; fees paid by creditor to originator; total amount of interest creditor will pay over life of loan.
Amends TILA §128 to require monthly statements noting principal balance, interest rate, next reset date, description of late fees, servicer’s telephone number or email, contact information for counseling agencies but exempts coupon books for fixed rate loans that provide substantially same information from requirement. Charges CFPB with developing and prescribing standard form to carry out requirement.
Requires Comptroller General to conduct study and report to Congress within one year on effects of legislation on availability and affordability of credit for consumers, small businesses, homebuyers and mortgage lending and effects of risk retention provisions on non-qualified mortgages and credit markets.