By Timothy Raty, Regulatory Compliance Specialist – DocuTech Corporation
On May 31, 2012 the Consumer Financial Protection Bureau (CFPB) re-opened the comment period for the rules proposed by the Federal Reserve Board (FRB) in 76 FR 27390 on April 19, 2011, which, if enacted, would amend Regulation Z (12 CFR §§1026.1 et seq) in many significant ways.
Two significant changes include a new §1026.43, which would require creditors, in connection with a “covered transaction” (which is generally any consumer credit transaction that is secured by a dwelling, except from home equity lines of credit, a consumer’s interest in a timeshare plan, a reverse mortgage, or a temporary loan) to make a “reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability, at the time of consummation, to repay the loan according to its terms, including any mortgage-related obligations [e.g. property taxes and mortgage-related insurance premiums].”
Of course, the rule attempts to provide procedures for defining exactly how one determines whether a “reasonable and good faith determination” and “reasonable ability” have been executed in four Federal Register pages worth of regulations and 17 pages of commentary – though the convolution of these rules and commentary will make it necessary for the judicial system to add hundreds of more pages of case law to this determination.
The other significant change would, depending on which version of change the CFPB adopts, provide either a “safe harbor” or rebuttable presumption that a creditor has made a “reasonable and good faith determination” if the covered transaction being entered into is considered a “qualified mortgage.” For a covered transaction to be considered a “qualified mortgage,” it must be made according to and under the following conditions:
- It must have regular periodic payments that do not increase the principal balance, allow deferment of payment of principal, or result in a balloon payment;
- It must not be for a term of more than 30 years;
- The total points and fees of the loan (which will also be substantially redefined by this rule) do not exceed a certain amount (which is yet to be determined);
- The creditor underwrites the loan and takes into account any mortgage-related obligations; and
- Depending on which version is adopted, either:
- the creditor verifies the consumer’s current or expected income or assets to determine repayment ability; or
- the creditor consider and verifies the consumer’s income, assets (besides the subject property), employment status, loan payments, debt obligations, debt-to-income ratio, and credit history.
The original comment period for these proposed rules ended on July 21, 2011. The FRB, knowing that rulemaking authority for Regulation Z would be transferred to the CFPB on July 22nd of that year, explicitly stated that these rules would automatically become a proposed rule of the CFPB on this transfer date and would be finalized by this agency and not by the FRB.
In their notice concerning the re-opening of the comment period, the CFPB stated that it is only re-opening the period in order to request comments on data they have received from the Federal Housing Finance Agency (FHFA) and commercially available data on mortgages securitized into private label securities, as well as to collect information concerning the amount, costs, and outcomes of litigation that may arise under these new rules, particularly ones involving foreclosures.
This re-opened comment period ends on July 9, 2012. The CFPB, in their announcement concerning the notice, stated that they expect “to issue the final rule before the end of 2012. The rule is required under the Dodd-Frank Act [124 Stat. 1376] by January 2013.” This has led to some speculation in the mortgage industry that the final rules will be released following this year’s Presidential Election. While delaying a controversial rule such as this until after a determination of whether the CFPB’s current chief executive officer will remain in such position or not is a politically conservative, yet savvy move, the CFPB has not indicated that this is the case and issuance of the final rule may occur before Election Day (trick or treat?).