United States

CFPB finalizes QM points and fees cure


The Consumer Financial Protection Bureau (CFPB or Bureau) finalized its proposed rule originally published on May 6, 2014, that included three amendments to Regulation Z. Two of the amendments related to nonprofit entities will not be discussed in this article. The third amendment provides for a cure for inadvertent violations of the points and fees limitations related to qualified mortgages (QMs).

The cure provision was finalized as it was proposed with some modifications and additions that address concerns of some commenters and provide clarification. Generally, the final rule eliminates the condition that the loan was originated in good faith as a QM, it increases the cure period from 120 days to 210 days, it ends of the ability to cure an error in certain situations, it requires the payment of interest on the overage, and it sunsets on Jan. 10, 2021. The final rule became effective upon publication in the Federal Register on Nov. 3, 2014, and it amends section 1026.43(e)(3) of Regulation Z.

The final rule applies to covered transactions consummated on or after Nov. 3, 2014, and on or before Jan. 10, 2021. Specifically, the rule provides that covered transactions consummated before the sunset date of the rule in which the creditor or assignee determines after consummation that the transaction's total points and fees exceed the applicable limit set forth in paragraph 1026.43(e)(3)(i) of Regulation Z are not precluded from being a QM, provided:

  • The loan otherwise meets the requirements of any of the categories of QM under paragraphs  (e)(2) – general QM, (e)(4) – transitional QM, (e)(5) – small creditor portfolio  QM, (d)(6) – temporary balloon-payment QM, or (f) – balloon-payment QM of section 1026.43 of Regulation Z. (The requirement that the loan was originated in good faith was eliminated in favor of the clearer requirement to meet the conditions of one of the categories of QMs, which was believed to indicate the intent that the loan was originated with the expectation that it was a QM.)
  • The creditor or assignee pays, to the borrower, at least the dollar amount that the total points and fees exceed the applicable limit on points and fees under section 1026.43(e)(3)(i) plus interest on that amount calculated using the contract interest rate applicable during the time period from consummation until the payment is made. (Although the cure only requires the payment of the overage plus interest at the applicable contract rate, the Bureau specifically clarified that the payment could exceed this amount.)
  • The payment of the overage plus interest must be made within 210 days of the consummation, and before any of the following events:
    • The consumer's institution of any legal action in connection with the loan.
    • The creditor, assignee, or servicer receiving written notice from the consumer that the transaction's total points and fees exceed the applicable limit.
    • The consumer becomes 60 days past due on the legal obligation.
  • The creditor or assignee must also maintain and follow policies and procedures for a post-consummation review of points and fees and for making refunding overages to consumers as required under the cure provisions.

The final rule also adds three new comments to the official interpretations of section 1026.43. The comments clarify that payment may be made in any manner that is mutually agreeable to the consumer and creditor or assignee, or by check. This provides the opportunity to credit the payment to the loan. The explanatory provisions of the final rule clarify that payment may be made by check without the consumer's consent. If payment is made by check, it must be "delivered or placed in the mail to the consumer within 210 days after consummation" to be considered timely made. The comments also provide assistance in understanding how to determine if a consumer is 60 days past due and guidance as to the content of the policies and procedures required by the rule. 

Lest we think that the cure provision is a QM get out of jail free card, in the preamble to the final rule, the Bureau indicated "…that a repeated pattern of inappropriate underwriting could be viewed as a potential violation of other consumer protection laws. The Bureau intends to monitor the use of the cure provision for potential abuses and will consider changes to the rule to prevent abuses, as appropriate."

The Department of Housing and Urban Development (HUD) is only accepting part of the CFPB's amendments in this final rule. In an Announcement of Change, HUD adopted the Bureau's changes related to nonprofit entities. However, HUD stated that it would not adopt the Bureau's points and fees cure provision for mortgages that are originated with the expectation of having QM status. 

In the announcement, HUD stated that it could not adopt the points and fees cure for a variety of reasons. First, the Bureau's cure requires the cured loan to meet the Bureau's definition of a QM, and HUD has codified its own definition. Additionally, HUD explained that allowing a lender to return funds to a borrower or pay down the principal balance of a loan insured by the FHA "could result in a violation of the statutorily required borrower minimum cash investment" or of other FHA requirements. HUD also reminded FHA lenders that through the existing Notice of Return/Notice of Non-Endorsement process, lenders are able to cure errors and resubmit mortgages for insurance endorsement as long as all eligibility criteria are met at the time of the insurance endorsement. According to the announcement, "FHA believes that the existing ability to cure errors is sufficient and is consistent with the attachment of qualified mortgage status at endorsement." HUD also "does not believe any further ability to cure is warranted."