CFPB Issues Balloon Mortgage and Other Small Creditor Ability-to-Repay Relief

On May 29, 2013, the Consumer Financial Protection Bureau (CFPB)issued a final rule amending the Ability-to-Repay(ATR)and Qualified Mortgage (QM)rules it issued on January 10,2013. Within this final rule are twonew categories of small creditor QMs. The first, for small creditor portfolio loans, was adopted exactly as proposedalongside the January ATR rule and permits small creditors in all markets to make portfolio loans that are QMs even though the borrower’s DTI ratio exceeds the general QM 43% cap. As a reminder, small creditors for these purposes are thosewith less than $2 billion in assets at the end of the preceding calendar year that, together with their affiliates, made 500 or fewer covered first-lien mortgages during that year.

The second new QM is a welcome even if only temporary category of balloon mortgages. Unlike the small creditor portfolio QM, this interim QM wasnot an express part of the so-called “concurrent proposal” issued in January.This issimply but significantly a QM that meets all of the existing rural balloon-payment QM requirements exceptthe controversial limitation that the creditor operate primarily in “rural” or “underserved” areas.

As written, the new balloon QM categoryexpires two years after the ATR rules take effect on January 10, 2014. The CFPBcharacterizes this two-year window as a “transition period” useful for two purposes: (1)itwill give the CFPBtime to consider whether itsdefinitions of “rural” and “underserved” are in fact too narrow for the needs of the rural balloon-payment QM rule and (2) it will give creditors time to “facilitate small creditors’ conversion to adjustable-rate mortgage products or other alternatives to balloon-payment loans.” The CFPBtook pains to argue thatCongress “made a clear policy choice” not to extend QM status to balloon mortgages outside of rural and underserved areas, and the agencyreiterated its belief thatadjustable-rate mortgages pose less risk to consumers than balloons: “The Bureau believes that balloon-payment mortgages are particularly risky for consumers because the consumer must rely on the creditors’ nonbinding assurances that the loan will be refinanced before the balloon payment becomes due. Even a creditor with the best of intentions may find itself unable to refinance a loan when a balloon payment becomes due.” For these reasons, creditors may expect future CFPB scrutiny intended to bury, not save, balloon mortgages.

This final rule alsoraises the small creditorQM average prime offer rate (APOR) thresholddistinguishing safe harbor QMsfrom rebuttablepresumption of compliance QMs(those that are “higher-priced covered transactions”) from 1.5 percentto 3.5 percent above APOR for first-lien loans (this threshold was already 3.5 percent for subordinate-lien loans). This changealso has consequences for underwriting balloons under the general ATR rule, where creditors must conclude thatconsumershave the ability to make any balloon payment scheduled to occur as part of a higher-priced covered transaction but only those scheduled to be made within the first 5 years of other balloons.

Other QM changes unveiledas part of this final ruleinclude, as clarifications, the following exclusions from the amounts counting toward the QM points and fees test:loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted (aspart of the finance charge); compensation paid by a mortgage broker to an employee of the mortgage broker (as it is already counted as loan originator compensation paid by the consumer or the creditor to the mortgage broker); and compensation paid by a creditor to its own loan officers (in light of the operational andother complexities this would pose). Observers had expressed concern that, as issued, the QM rules would have double-counted some of these amounts.

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