WASHINGTON–The Consumer Financial Protection Bureau has issued an interpretive rule it said is designed to provide guidance to creditors and other persons involved in the mortgage origination process about how the Bureau determines which counties qualify as “underserved” for a given calendar year.
Separately, the Bureau has issued two Notices of Proposed Rulemaking (NPRMs) it said are aimed at addressing the impending expiration of the Government-Sponsored Enterprises Patch (GSE Patch).
The Bureau noted its annual list of rural and underserved counties and areas is used in applying various provisions under Regulation Z, which implements the Truth in Lending Act. These provisions include the exemption from the requirement to establish an escrow account for a higher-priced mortgage loan and the ability to originate balloon-payment qualified mortgages and balloon-payment high cost mortgages, the Bureau sated.
“Regulation Z states that an area is ‘underserved’ during a calendar year if, according to Home Mortgage Disclosure Act (HMDA) data for the preceding calendar year, it is a county in which no more than two creditors extended covered transactions secured by first liens on properties in the county five or more times,” the CFPB said in a statement. “The Bureau previously interpreted how HMDA data would be used to determine which areas meet this standard using a method set forth in the commentary to Regulation Z. However, portions of this method have become obsolete because they rely on data elements that were modified or eliminated by certain 2015 amendments to the Bureau’s HMDA regulations, which became effective in 2018.”
Supersedes ‘Outdated’ Methodology
The CFPB said the interpretive rule describes the HMDA data that will instead be used in determining that an area is “underserved” for purposes of the standard described in Regulation Z, and that the interpretation supersedes the outdated methodology set forth in the commentary to Regulation Z.
The list of rural and underserved counties, using the HMDA data described in the interpretive rule, can be found here.
The interpretive rule can be found here.
2 Notices of Proposed Rulemaking Around GSE Patch
Separately, the Bureau has issued two Notices of Proposed Rulemaking (NPRMs) it said are aimed at addressing the impending expiration of the Government-Sponsored Enterprises Patch (GSE Patch).
The GSE Patch is scheduled to expire in January 2021 or when the GSEs (Fannie Mae and Freddie Mac) exit conservatorship, whichever comes first.
The Bureau noted the Dodd-Frank Act amended the Truth in Lending Act (TILA) to establish ability-to-repay (ATR) requirements for most residential mortgage loans. TILA identifies factors a creditor must consider in making a reasonable and good faith assessment of a consumer’s ATR. TILA also defines a category of loans called qualified mortgages (QMs), which are presumed to comply with the ATR requirements.
The Bureau said it completed an ATR/QM rule that established a general QM standard for loans where the consumer’s debt-to-income (DTI) ratio is 43% or less and the loan meets the other statutory QM requirements.
Still Eligible
The Bureau further explained the ATR/QM rule also created the GSE Patch as a temporary QM definition that also provides QM status to certain mortgage loans eligible for purchase or guarantee by either of the GSEs (Temporary GSE QM loans). These Temporary GSE QM loans are eligible for QM status even if the DTI ratio exceeds 43%, it said.
“Last year, the Bureau released an assessment of its ATR/QM Rule and found that Temporary GSE QM loans represent a large and persistent share of mortgage originations. As noted above, the GSE Patch is scheduled to expire soon, and absent regulatory action the Bureau estimates that approximately 957,000 mortgage loans would be affected by the expiration of the GSE Patch,” the CFPB said.
The Bureau added it estimates that, after the Patch expires, many of these loans would either not be made or would be made but at a higher price.
‘More Transparent’
“The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” said CFPB Director Kathleen L. Kraninger. “The Bureau is proposing to replace the Patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. The Bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch.”
In releasing the two NPRMs, the Bureau said it is taking steps to ensure a smooth and orderly transition away from the Temporary GSE QM loan definition and to maintain access to responsible, affordable mortgage credit upon its expiration.
In the first NRPM, the Bureau is proposing to amend the General QM definition in Regulation Z to replace the DTI limit with a price-based approach. The Bureau said it is proposing a price-based approach because it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a strong indicator and more holistic and flexible measure of a consumer’s ability to repay than DTI alone.
The Proposals
For eligibility for QM status under the General QM definition, the Bureau is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers, the CFPB said. The NPRM also proposes that lenders take into account a consumer’s income, debt, and DTI ratio or residual income and verify the consumer’s income and debts.
In the second NPRM, the Bureau is proposing to amend Regulation Z to extend the GSE Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z. The Bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM.
To read the NPRM on the General QM loan definition, click here.
To read the NPRM on the proposed extension of the QM Patch, click here.