CFPB Releases First Three Final Mortgage Rules, More Expected

On Jan. 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued the first three final mortgage rule changes required by the Dodd-Frank Act. These final rules cover requirements to consider the member’s ability to repay before a mortgage loan can be approved, escrow requirements for higher-priced mortgage loans, and changes to high-cost mortgage loan requirements.

While Northwest Credit Union Association (NWCUA) Compliance Bulletins will be coming out soon with detailed analysis of these rules, here is a general overview of the requirements in the final rules.

Mortgage Ability to Repay

Effective Jan. 10, 2014, credit unions will need to determine the member’s ability to pay back both the principal and interest over the loan term. This means lenders will no longer be able to offer low-doc or no-doc loans. At a minimum, lenders must consider eight underwriting standards:

  • Current income or assets;
  • Current employment status;
  • Credit history;
  • The monthly payment of the mortgage;
  • The monthly payment on any other loans associated with the property;
  • The monthly payment for other mortgage related obligations (such as property taxes);
  • Other debt obligations; and
  • The monthly debt-to-income ratio or residual income the borrower would be taking on with the mortgage.

The final rule provides the definition of a Qualified Mortgage. Lenders will be presumed to have complied with the Ability to Repay rule if they issue Qualified Mortgages. The special features of a Qualified Mortgage are:

  • No excess upfront points and fees;
  • No toxic loan features:
    • No interest-only loans;
    • No negative-amortization loans;
    • No loans with terms longer than 30 years
  • Cap on how much income can go toward debt of less than or equal to 43 percent.
  • No loans with a balloon payment except for those made by smaller creditors in rural or underserved areas.

While credit unions can still offer loans that have those features, the loans would not meet the definition of Qualified Mortgage and therefore not provide the credit unions with the safe harbor protection.

Higher-priced Mortgage Loan Escrow Requirements

Effective June 1, 2013, the final rule makes changes to the current requirement to maintain escrow accounts for higher-priced mortgage loans secured by a first lien on the member’s principal dwelling. The major changes to the current rule are:

  • An escrow account is established before consummation. The escrow account should include payments for property taxes and insurance (including PMI, homeowner’s, etc). The escrow account cannot be canceled for at least five years.
  • There are new exemptions to the rule for certain loan transactions.
  • There are new exemptions to the rule for credit unions that serve rural or underserved areas, as defined by the CFPB.

High-Cost Mortgage Loan Requirements

Effective Jan, 10, 2014, credit unions will need to be aware of the updated High-Cost Mortgage loan requirements. The first change is the revision of the HOEPA coverage, a mortgage loan is a High-Cost mortgage if any of these tests are met:

  • If the APR is greater than the APOR for:
    • For a first lien transaction, 6.5 percentage points greater than the APOR;
    • For a first lien transaction of less than $50,000 in which the dwelling is personal property (such as a manufacture home), 8.5 percentage points greater than the APOR;
    • For a subordinate-lien transaction; 8.5 percentage points greater than the APOR
  • If the transaction’s total points and fees exceed:
    • For loans in the amount of $20,000 or more, 5 percent of the total loan amount;
    • For loans in the amount of less than $20,000, 8 percent of the total loan or $1,000
  • If under the terms of the loan contract or open-end credit agreement, the creditor can charge or collect a prepayment penalty more than 36 months after the account opening or consummation of the loan. Or if the prepayment penalties, in aggregate, can exceed more than 2 percent of the amount prepaid.

If the loan is a high-cost mortgage then the loan terms may not include:

  • Balloon payments (a payment that is more than two times a regular periodic payment) except for:
    • A mortgage transaction with a payment schedule that is adjusted to the seasonal or irregular income of the consumer;
    • Short term bridge loans;
    • Made by creditors meets specific requirements including operating in rural or underserved areas;
  • Negative amortization;
  • Advance payments;
  • Increased interest rate after the default of the member (variable rate plans are ok);
  • Rebates – A refund that is calculated by a method less favorable than the actuarial method;
  • Prepayment penalties; or
  • Acceleration of debt demand feature.

The final rule also requires lenders to provide a list of homeownership counseling organizations to members within three business days of applying for the mortgage loan. The list will be made available on the CFPB’s website. Lenders will also be required to verify that member’s have obtained pre-loan counseling before taking out a high-cost mortgage loan.

The Association expects the CFPB to release four more final rules before Jan. 21, anticipating final rules on mortgage loan originator compensation, mortgage servicing, higher-risk mortgage appraisal and Reg B appraisal disclosure requirements.

Interested in Learning More?

The Business Lending School (TBLS) offers immersion-level lending training specifically designed for credit unions through a rigorous program spread over six months of classroom instruction and credit union mentoring. Enrollment is now open online for classes beginning Feb. 25.

The school’s instructors and the NWCUA have promised the intense training program will improve the graduates’ business-lending skills upon graduation—or tuition will be refunded.

The instructors, James Devine and Robert Hogan, have 30 years of experience offering commercial-lending training programs. Their students include not only credit union professionals but also bankers and regulators, and their company, Hipereon, Inc., partnered with the NWCUA to begin offering the long-term training program in 2010.

This year the classroom sessions will be held near Seattle during the weeks of Feb. 25, March 25, May 6, June 10, July 22 and Aug. 14. Students will be assigned projects to work on between classes and will be paired with mentors from within the credit union environment.

Registration information and a complete agenda are available online.


Questions? Contact the Compliance Hotline: 1.800.546.4465,

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