Ability-to-Repay: Regulating or Underwriting? (Magazine Article)

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

I think you may be interested in reading my article in the June 2011 edition of National Mortgage Professional Magazine, entitled:

Ability-to-Repay: Regulating or Underwriting?

The article is Part I of a two-part magazine series.

As you may know, on May 11, 2011, the Federal Reserve Board (FRB) issued a proposed rule (Rule) to implement ability-to-repay requirements for closed-end residential loans.

The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010.  Comments on the Rule are to be received by no later than July 22, 2011. 

But, having published the proposed Rule, the FRB will soon retire from its involvement in this matter, because it will hand over its rulemaking authority in the subject statute to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.

Thus, the promulgation of the final Rule will be under the aegis of the CFPB.

In this article, I explore some of the salient features of this Rule, noting particularly that, as a revision to Regulation Z (the implementing regulation of the Truth in Lending Act), it requires creditors to determine a consumer's ability to repay a mortgage before making the loan and would also establish minimum mortgage underwriting standards.

The Rule applies to any consumer credit transaction secured by a dwelling, except an open-end credit plan,  timeshare plan, reverse mortgage, or temporary loan or ''bridge'' loan with a term of 12 months or less. It includes a closed-end home improvement loan on a vacation residence.

It appears that the Rule applies to purchase money and refinances, but not modifications of existing mortgages.

There is a prohibition on prepayment penalties unless the mortgage is a prime, fixed rate, qualified mortgage, and unless the amount of the prepayment penalty is limited.

As a courtesy, I am sharing this magazine article with you. I hope you enjoy reading it! 

Excerpt # 1

Complying with the requirements of the ability-to-repay Rule is essential, because borrowers in a foreclosure proceeding will likely claim that the creditor failed to comply with the Rule as a defense by way of recoupment or set off, without regard to the normal statute of limitations under the Truth-in-Lending Act (TILA). 

A violation of the Rule subjects the creditor to the TILA civil monetary penalties, plus the same enhanced civil remedies that apply to violations of TILA's high-cost loan rules, and TILA also would authorize state attorneys general to bring actions for violations of the Rule for a period of up to three years.

Excerpt # 2

A loan that is a covered transaction must qualify, among other things, as a "qualified mortgage" (QM) if the creditor wishes to include a prepayment penalty in the loan.

The Rule provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a ''qualified mortgage,'' which does not contain certain risky features and limits points and fees on the loan.

Furthermore, one feature of a higher-risk mortgage loan (i.e., subject to enhanced appraisal requirements under Dodd-Frank § 1471) is the loan may not be a QM.  (Under Dodd-Frank § 941, a "qualified residential mortgage" may not be broader in scope than a QM as defined in the Rule.) 

Ability-to-Repay: Review and Discussion

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

On Thursday of this week (6/23/11), I will be speaking at the Empire State Mortgage Bankers Association.

Topic

Ability-to-Repay: 

Regulating or Underwriting?

Time and Venue

This speaking engagement will coincide with the publication of my forthcoming article on this subject in the National Mortgage Professional Magazine.

On May 11, 2011, the FRB issued a proposed rule (Rule) intended to implement ability-to-repay requirements for closed-end residential loans.

The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010. Comments on the Rule are to be received by no later than July 22, 2011.

We notified you recently about this proposed Rule here, here, and here.

In my remarks, I will explore some of the salient features of the Rule, noting particularly that, as a revision to Regulation Z, it requires creditors to determine a consumer's ability to repay a mortgage before making the loan and would also establish certain minimum mortgage underwriting standards.

We will review how violations of the Rule would be incurred, the exposure to regulatory risk, and the ways by which a loan originator may be deemed or presumed to be in compliance with the Rule. I will also discuss how Qualified Mortgages (QMs) offer a safe harbor.

Attendants will receive:

• Ability-to-Repay Chart
• Magazine Article
• Complete June Edition 

I look forward to seeing you soon!

Boom or Bust?

COMMENTARY

Jonathan Foxx

President and
Managing
Director

There is an astonishing contrast regarding the condition of the housing market as depicted by the FRB, the Obama Administration, the ratings agencies, and many real estate and mortgage industry resources. 

If you feel a sense of confusion, perhaps it is because the differing views are like a patchwork quilt of political posturings, actual financial data, and too many opinions.

Housing Finance

Today, June 9, 2011, Standard & Poor's will hold a meeting in New York City, entitled Housing Summit 2011: Boom, Bust, & Beyond. It is all sold out.

The meeting will cover affordable housing, housing finance reform, limiting the government's role, government-sponsored programs, and insurance enhancements. The principal speaker will be Valerie White, S&P's Senior Director and Analytical Manager, who is an expert in the financing issues involving the U.S. affordable housing market in the aftermath of the 2008 housing bust. If you will not be attending, here is her view.

Essentially, Ms. White believes that interest rates, among other factors, are the most significant challenge still facing low to moderate income borrowers, because lower rates put credit pressure on bond programs.

What is Affordable?

While I think S&P's view is worth considering, I'm not so sure the housing market's sorry condition results from merely an interest rate issue. I realize that affordable housing is only one bell weather, but it is important and, in many ways, S&P's observation may be generalized to many aspects of the housing finance market.

Upside Down

It is one thing to have a large supply of foreclosed-on houses, or rate arbitrage issues, but it is quite another when millions of mortgaged houses are underwater. Negative equity - or, now its new sibling, "near-negative equity" (for less than 5% equity remaining in the property) - are riotously rampant, like a forest fire out of control with no fire fighters in sight.

Who does not know that negative equity occurs because of a decline in value, an increase in mortgage debt, or some combination of both?

CoreLogic issued a report for the first quarter 2011, released yesterday, in its ongoing series about negative equity. The report shows that 10.9 million (22.7%) of all residential mortgaged properties were in negative equity at the end of the first quarter of 2011, and an additional 2.4 million borrowers had near-negative equity.

Together, negative equity and near-negative equity accounted for 27.7% of all residential mortgaged properties!

By the way, that statistic has gone down infinitesimally: in the fourth quarter 2010, these two categories stood at 27.9%.

The Real Picture

I'll let CoreLogic's chart tell it like it is:

New Analysis Highlights The Role Of Home Equity Extraction In Negative Equity Risk
Page 4, 6/7/11, CoreLogic

Praising Limited Progress

Yet we continue to hear glowing reports from the Obama Administration, especially regarding the HAMP program, such as:

• "The Administration's efforts have helped millions of families deal with the worst economic crisis since the Great Depression."

• "Tens of thousands of new homeowners continue to receive real payment relief from HAMP every month."

• "Mortgage delinquencies continued a downward trend compared to early 2010 and foreclosure starts and completions remain below peak."

I have written extensively about the failure of HAMP, so I will not revisit my concerns. 

Please visit the Commentary section of our Archive to read my comments.

Positive Economic Growth or Negative Equity Growth

Negative equity is a critical indicator. Borrowers in negative equity positions may be willing and able to pay their monthly mortgage payments, but they are probably also enduring income shock, whether it be caused by loss of a job, divorce, or death - and, these borrowers continually are on the precipice of foreclosure and short sale.

High rates or low rates, the negative equity condition is not improving much at all. In fact, it has yet to crest.

If you want to believe the FRB, economic growth may be temporarily stalled, but will soon turn around. Economic recovery is just around the corner, or maybe the next corner. Obviously, a sustained growth in the economy will mitigate risk and bring down the negative equity condition as well as offer strengthening to borrowers' incomes.

But for the mortgage industry, negative equity and near-negative equity should be considered leading indicators, foretelling the presence or absence of any possible recovery to a robust housing finance market. Their very existence depresses sales and debilitates refinances.

If rates were the issue, the mortgage market would have long since revived!

What do you think?

I would welcome your comments.

Please feel free to email me at any time.

OTS and OCC Synchronizing

On May 25, 2011, the Office of the Comptroller of the Currency (OCC) issued a proposed rule implementing several provisions of the Dodd-Frank Act (Dodd-Frank), including the transfer of functions from the Office of Thrift Supervision (OTS) and changes to national bank preemption and the OCC's visitorial authority.

Under Dodd-Frank, the OCC is required to assume responsibility for the ongoing examination, supervision, and regulation of Federal savings associations on July 21, 2011.

This Notice of Proposed Rulemaking (NPR) is the first step in the OCC's review of its own regulations and those of the OTS to determine what changes are needed to facilitate a smooth regulatory transition. The NPR was published in the Federal Register on May 26, 2011.

Comments Due: June 27, 2011

REVISIONS

The NPR would:

• Revise OCC rules that are central to internal agency functions and operations immediately upon the transfer of supervisory jurisdiction for Federal savings associations, including rules related to OCC organization, the availability and release of information, and post-employment restrictions for senior examiners.
• Amend the OCC's assessment fee rule to include Federal savings associations. Following a transition period, the proposal provides a single assessment schedule for both national banks and Federal savings associations. Banks and thrifts would be subject to identical assessment methodologies, rates, fees, and payment due dates.

Fee Schedule

As part of the transition of Federal thrift supervision from the OTS to the OCC, the OCC would compute assessment fees under both the OCC and OTS schedules for assessments charged in September 2011 and March 2012, and Federal savings associations will pay the lesser of the two fees.

Beginning with assessments charged in September 2012, the OCC will assess institution fees based on a single fee schedule regardless of charter.

Transfer Date

As part of the integration of the aforementioned OTS functions into the OCC, the OCC also plans to issue an Interim Final Rule with a request for comments, effective on the transfer date, that republishes those OTS regulations the OCC has the authority to promulgate and enforce as of the transfer date, renumbered and issued as new OCC rules, with nomenclature and other technical amendments to reflect OCC supervision of Federal thrifts.

The OCC will consider more comprehensive substantive amendments to these regulations, as appropriate, after the transfer date.

Preemption and Non-Preempted State Laws

Included in the NPR are changes to the OCC's regulations necessary to implement certain revisions to the banking laws that took effect on the enactment of Dodd-Frank.

These changes include implementation of a moratorium on changes in control of credit card banks and trust banks, revisions to Federal branch and agency rules to reflect the permanent increase in deposit insurance coverage, and amendments to OCC rules pertaining to preemption and visitorial powers.

These preemption-related amendments would:

• Eliminate preemption for national bank operating subsidiaries.

• Apply national bank and national bank subsidiary preemption standards, as well as the visitorial powers standards applicable to national banks, to Federal thrifts and their subsidiaries.

• Eliminate any ambiguity concerning the preemption standards in OCC regulations by removing language from OCC rules that provides that state laws that "obstruct, impair or condition" a national bank's powers are preempted.
• Revise the OCC's visitorial powers rule to conform to the holding of the Supreme Court's Cuomo decision, as incorporated by Dodd-Frank, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.

Visit Library

Office of the Controller of the Currency (OCC):
Office of Thrift Supervision Integration (OTS)
(Dodd-Frank Act Implementation)
Federal Register - Vol. 76, No. 102
May 26, 2011

CFPB: Announces Forthcoming Rules Transfer

As required by the Consumer Financial Protection Act (Act) of 2010, the Consumer Financial Protection Bureau (CFPB) published a list of the rules and orders that it will enforce.  Section 1063(i) of the Act required publication in the Federal Register. The issuance is dated May 31, 2011.

A final list will be published not later than July 21, 2011, the Designated Transfer Date of the enumerated laws. Any orders for inclusion in the list should be noted by the deadline for comments. After considering any public comments, the CFPB will publish a final list in the Federal Register not later than the Designated Transfer Date.

 Comment Period Deadline: June 30, 2011

TRANSFER OF AUTHORITIES *

* Issuance contains specific citations.

Visit Library (See Below)

Under the Act, certain consumer financial protection authorities will transfer from seven (7) transferor agencies to the CFPB, and the CFPB will also assume certain new authorities.

Subject to the limitations and other provisions of the Act, the CFPB will be authorized to enforce, inter alia, rules and orders issued by the transferor agencies under the enumerated consumer laws.

Categorized by their current, respective Agency oversight, the following is the list of enumerated authorities that will be transferred on the Designated Transfer Date.

Board of Governors of the Federal Reserve (FRB)  

1. Equal Credit Opportunity Act (Regulation B)

2. Home Mortgage Disclosure (Regulation C)

3. Electronic Fund Transfers (Regulation E)

4. Registration of Residential Mortgage Loan Originators (Regulation H, Subpart I) (12 CFR 208.101-105 & Appendix A to Subpart I)

5. Consumer Leasing (Regulation M)

6. Privacy of Consumer Financial Information (Regulation P)

7. Fair Credit Reporting (Regulation V), except with respect to §§ 222.1(c) (effective dates), 222.83 (Disposal of consumer information), 222.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 222.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

8. Truth in Lending (Regulation Z)

9. Truth in Savings (Regulation DD)

Federal Deposit Insurance Corporation (FDIC)  

1. Privacy of Consumer Financial Information

2. Fair Credit Reporting, except with respect to §§ 334.83 (Disposal of consumer information), 334.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 334.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

3. Registration of Residential Mortgage Loan Originators (12 CFR 365.101-.105 & Appendix A to Subpart B)

Office of the Comptroller of the Currency (OCC)   

1. Adjustable-Rate Mortgages (but only as applied to non- federally chartered housing creditors under the Alternative Mortgage Transaction Parity Act ("AMTPA"))

2. Registration of Residential Mortgage Loan Originators (12 CFR 34.101-.105 & Appendix A to Subpart F)

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 41.83 (Disposal of consumer information), 41.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 41.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

Office of Thrift Supervision (OTS)

1. Adjustments to home loans (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Alternative Mortgage Transactions (but only as it relates to AMTPA)

3. Registration of Residential Mortgage Loan Originators (12 CFR 563.101-.105 & Appendix A to Subpart D)

4. Fair Credit Reporting, except with respect to §§ 571.83 (Disposal of consumer information), 571.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 571.91 (Duties of card issuers regarding change of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Privacy of Consumer Financial Information

National Credit Union Administration (NCUA)     

1. Loans to members and lines of credit to members (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Truth in Savings

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 717.83 (Disposal of consumer information), 717.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 717.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Requirements for Insurance, but only with respect to §§ 741.217 (Truth in savings), 741.220 (Privacy of consumer financial information), & 741.223 (Registration of residential mortgage loan originators)

6. Registration of Mortgage Loan Originators

Federal Trade Commission (FTC)      

1. Telemarketing Sales Rule

2. Privacy of Consumer Financial Information

3. Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance

4. Mortgage Assistance Relief Services

5. Use of Prenotification Negative Option Plans

6. Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations

7. Preservation of Consumers' Claims and Defenses

8. Credit Practices

9. Mail or Telephone Order Merchandise

10. Disclosure Requirements and Prohibitions Concerning Franchising

11. Disclosure Requirements and Prohibitions Concerning Business Opportunities

12. Fair Credit Reporting Act (16 CFR Subchapter F, Parts 603 et seq.), except with respect to Part 681 (Identity Theft Rules), Part 682 (Disposal of Consumer Report Information and Records), & Appendix A to Part 681 (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

13. Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act

Department of Housing and Urban Development (HUD)      

1. Hearing Procedures Pursuant to the Administrative Procedure Act

2. Civil Money Penalties: Certain Prohibited Conduct (but only as applied to the Real Estate Settlement Procedures Act of 1974 ("RESPA") and the Interstate Land Sales Full Disclosure Act ("ILSA"))

3. Land Registration

4. Purchasers' Revocation Rights, Sales Practices, and Standards

5. Formal Procedures and Rules of Practice

6. Real Estate Settlement Procedures Act

7. Investigations in Consumer Regulatory Programs (but only as applied to RESPA and ILSA)

Visit Library for Issuance

Bureau of Consumer Financial Protection
Identification of Enforceable Rules and Orders, Notice for Public Comment
Federal Register, Vol. 76, No. 104.
May 31, 2011 - Rules and Regulations