Regulation Z Amended Allow for Cure of Qualified Mortgage Points and Fees Violations
There’s welcome news on the residential mortgage lending front. After assessing nearly a year’s worth of real-world experience, the Consumer Financial Protection Bureau (CFPB) came to the conclusion that it had to do something about the reluctance of many mortgage lenders to offer qualified mortgages with points and fees close to the limit imposed by the federal Truth in Lending regulations. Under Regulation Z, in order for a loan of $100,000 or more to meet the qualified mortgage standard, the total points and fees cannot exceed three percent (3.0%) of the total loan amount. For loans less than $100,000, the points and fees cannot exceed the applicable limit described on a graduated dollar/percentage scale. Regulation Z amended to address this.
The CFPB recognized that many lenders have been unwilling to take the risk that a loan intended to be a qualified mortgage might inadvertently exceed the points and fees threshold, and have been either overpricing their loans to account for the higher risk or self-imposing a lower points and fees threshold in order to ensure compliance with the Qualified Mortgage rule. To address this shortcoming, the CFPB amended its qualified mortgage rules by publishing in the Federal Register on November 3, 2014 (79 FR 65300) a Final Rule designed to make it more palatable for lenders to expand their product offerings to cover the full range of points and fees permitted under the qualified mortgage rules. This limited “right to cure” amendment was effective upon publication of the Final Rule.
In the Supplementary Information published with the November 3, 2014 Final Rule, the CFPB noted that “…the complex nature of the points and fees calculation and the potential liability associated with non-qualified mortgages have caused some creditors to impose operational buffers on points and fees that are well under the limits in the rule….” It went on to say that “…creditors that are uncertain of the qualified mortgage status of loans near the applicable points and fees limit may overprice the risk of the loan, passing on the costs of legal uncertainty to the consumer….” Industry sources and the CFPB’s analysis revealed that, rather than incur potential problems with sales to the secondary market, and the greater risk of liability posed by a non-qualified mortgage, many lenders have elected not to offer loans in that price range, or to charge higher rates for qualified mortgages with points and fees near the maximum qualifying limits.
The CFPB concluded that lenders have been unwilling to price loans near the qualified mortgage points and fees threshold because, once a loan has been consummated, it’s too late to make any adjustments to the points and fees. At that point, regardless of the lender’s intent, the loan either is – or isn’t – a qualified mortgage. What was needed was the ability to rectify an inadvertent overcharge. As noted in the preamble to the Final Rule, the CFPB agreed with lending industry groups that allowing a points and fees cure “…would provide creditors the opportunity to achieve precise compliance after consummation, which in turn would allow creditors to approve more loans, or provide loans at a lower cost to, consumers at the boundaries of the points and fees limits under the rule.” From the perspective of the CFPB, an added benefit of the new rule is that “…the cure provision will encourage some creditors to undertake or strengthen rigorous post-consummation review[s] of loans…,” which will result in more consumers receiving cure payments than would otherwise have been the case.
The CFPB amended Regulation Z by adding a new subsection (12 CFR 1026.43(e)(3)(iii)) to provide lenders with “…a limited, post-consummation cure mechanism for loans that exceed the points and fees for qualified mortgages, but that meet the other requirements for being a qualified mortgage loan at consummation.” The new rule, which took effect November 3, 2014, gives lenders greater incentive to offer mortgage products that cover the full qualified mortgage footprint.
The new “points and fees cure” rule gives lenders a window of opportunity after a loan has been consummated to ensure that the total points and fees charged in connection with that loan did not exceed the applicable limits outlined in Regulation Z (§ 1026.43(e)(3)(i)). If a lender determines during its post-closing review that a loan intended to be a qualified mortgage included points and fees that exceed the threshold applicable to that loan, the lender can cure the defect by paying the consumer the amount of the overcharge, plus interest on that amount, within 210 days of loan closing. Payments of an overcharge after 210 days cannot result in a loan being a qualified mortgage.
The rule specifies certain events that can curtail the opportunity for the lender to cure an overcharge during the 210-day window. The lender cannot cure the defect, even if it pays the amount of the overcharge to the consumer if the consumer institutes any legal action in connection with the loan; or if the consumer furnishes a written notice to the lender (or the assignee or servicer) that the total points and fees exceed applicable limits; or if the consumer becomes 60 or more days past due on the loan during the 210-day period. The CFPB’s rationale for terminating the cure option under these circumstances is that if any of these conditions arise during the first 210-days after a loan has been consummated, it wasn’t a qualified mortgage.
Under the new rule, payment to the consumer of the overage plus interest “…may be made by any means mutually agreeable to the consumer and the creditor or assignee, as applicable, or by check” (Regulation Z Commentary, § 1026.43(e)(3)(iii)-1). If payment is made by check, the lender satisfies the requirement by delivering or placing the check in the mail within 210-days after the loan has closed.
The relatively short 210-day window (which is further shortened by the potential for a loan to become 60 or more days delinquent in as little as half that time) means that time is of the essence. To take advantage of the qualified mortgage cure rule, lenders are encouraged to establish post-consummation policies and procedures that expedite the detection of potential points and fee violations. Recognizing that it may not be practical for a lender or assignee to conduct a review of every qualified mortgage, the new rule allows lenders to skip loans where it is confident that the total points and fees are within tolerance and focus only on those where the total points and fees are close to the maximum points and fees thresholds. This is intended to allow lenders to quickly identify and cure problem loans.
With this Final Rule, lenders have the opportunity to fine-tune their qualified mortgage product offerings. A targeted set of policies and procedures that focus solely on the points and fees assessed in connection with a loan can quickly reveal which loans have met that aspect of the qualified mortgage standards, and which have not (more comprehensive loan reviews can be performed under their normal time frames). Lenders can then decide whether to pay the amount of any overcharge to the consumer (along with interest on that amount at the note rate from the date of consummation to the date of repayment), thereby ensuring that the loan is a qualified mortgage, or take no action and assume the risks associated with holding a non-qualified mortgage. But in either case, lenders will know precisely where they stand with respect to their qualified mortgage portfolios and can price loans accordingly.
By providing lenders with the opportunity to take full advantage of the qualified mortgage safe harbor, the CFPB hopes that the new cure provision will result in more consumers receiving loans with better rates, and at lower costs. That’s a win-win situation for lenders and their customers and a welcome change to the regulatory landscape.