United States

CFPB issues amendments to Ability-To-Repay Rule


On May 29, 2013 the Consumer Financial Protection CFPB (CFPB) issued a Final Rule to create specific exemptions and modifications to the CFPB's Ability-to-Repay rule for small creditors, community development lenders, and housing stabilization programs. The amendments also include revised rules on how to calculate loan origination compensation for certain purposes. This Final Rule amends the CFPB's Ability-to-Repay rule, which was finalized on Jan. 10, 2013. The amendments will take effect with the Ability-to-Repay rule on Jan. 10, 2014.

The Ability-to-Repay rule established that most new mortgages must comply with basic requirements to help ensure consumers have the financial means to pay back the loan. Lenders are presumed to have complied with the Ability-to-Repay rule if they issue Qualified Mortgages (QMs), which must meet certain requirements.

 The amendments in the May 29, 2013 Final Rule include:

  1. Exemptions for Certain Creditors and Nonprofits as well as Certain Lending Programs - The final rule provides an exemption from the ability-to-repay requirements for:
  • Extensions of credit made pursuant to programs administered by a housing finance agency and for an extension of credit made pursuant to an Emergency Economic Stabilization Act program, such as extensions of credit made pursuant to a State Hardest Hit Fund program.
  • Certain nonprofit and community-based lenders that work to help low- and moderate-income consumers obtain affordable housing.  Creditors designated by the U.S. Department of the Treasury as Community Development Financial Institutions and creditors designated by the U.S. Department of Housing and Urban Development as either a Community Housing Development Organization or a Down payment Assistance Provider of Secondary Financing are exempt from the ability-to-repay requirements, under certain conditions.
  • Creditors designated as nonprofit organizations under section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) that extend credit no more than 200 times annually, provide credit only to low-to moderate income consumers, and follow their own written procedures to determine that consumers have a reasonable ability to repay their loans.
  1. Small Creditor Portfolio and Balloon-Payment Qualified Mortgages - The final rule provides an exemption from the ability-to-repay requirements for small creditors, which are defined as creditors with no more than $2 billion in assets that (along with affiliates) originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year. The CFPB had previously exercised authority under the Dodd-Frank Act to allow certain balloon-payment mortgages to be designated as qualified mortgages if they were originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. In this final rule, the CFPB is:
  • "Creating a new, fourth category of qualified mortgages for certain loans originated and held in portfolio for at least three years (subject to certain limited exceptions) by small creditors, even if they do not operate predominantly in rural or underserved areas. The loans must meet the general restrictions on qualified mortgages with regard to loan features and points and fees, and creditors must evaluate consumers' debt-to-income ratio or residual income. However, the loans are not subject to a specific debt-to-income ratio as they would be under the general qualified mortgage definition.
  • Raising the threshold defining which qualified mortgages receive a safe harbor under the ability-to-repay rules for loans that are made by small creditors under the balloon loan or small creditor portfolio categories of qualified mortgages."  The final rule shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR. This change was made because small creditors often have higher cost of funds.
  • Providing a two-year transition period during which small creditors that do not operate predominantly in rural or underserved areas can offer balloon-payment qualified mortgages if they hold the loans in portfolio.
  1. Loan Originator Compensation and the Points and Fees Calculation
  • Under the Dodd-Frank Act, in general points and fees on a qualified mortgage may not exceed 3 percent of the loan balance and points and fees in excess of 5 percent will trigger the protections for high-cost mortgages under the Home Ownership and Equity Protection Act or HOEPA. The Dodd-Frank Act includes a provision requiring that loan originator compensation be counted toward these thresholds, even if it is not paid up-front by the consumer directly to the loan originator. There was concern regarding how to apply the requirements in situations where payments pass from one party to another over the course of a mortgage transaction. In particular, there was concern regarding situations in which "the creditor pays compensation to a mortgage broker or its own loan originator employees because there is no simple way to determine whether the compensation is paid from money the creditor collected from up-front charges to the consumer (which would already be counted against the points and fees thresholds) or from the interest rate on the loan (which would not be counted toward the thresholds)."

The final rule excludes from points and fees any loan originator compensation paid by a consumer to a mortgage broker when that payment has already been counted toward the points and fees thresholds as part of the finance charge (i.e. no double counting required). "The final rule also excludes from points and fees compensation paid by a mortgage broker to an employee of the mortgage broker because that compensation is already included in points and fees as loan originator compensation paid by the consumer or the creditor to the mortgage broker.

The final rule excludes from points and fees compensation paid by a creditor to its loan officers, as the CFPB concluded that there were significant operational challenges to calculating individual employee compensation accurately early in the loan origination process, which may and that those challenges may lead to irregular results for consumers. The final rule retains an additive approach for calculating loan originator compensation paid by a creditor to a loan originator other than an employee of creditor. Under the additive approach, § 1026.32(b)(1)(ii) requires that a creditor include in points and fees compensation paid by the creditor to a mortgage broker, in addition to up-front charges paid by the consumer to the creditor that are included in points and fees under § 1026.32(b)(1)(i)."

To access the final rule amending the Ability-to-Repay rule, please see: http://files.consumerfinance.gov/f/201305_cfpb_final-rule_atr-concurrent-final-rule.pdf.  

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Kelly Housh
Regulatory Compliance National Support
Minneapolis, MN


Ty Beasley
Regulatory Compliance National Leader
Dallas, TX