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14.3 Minimum Standards for Mortgages

<< Title XIV Overview

14.3 Minimum Standards for Mortgages

The following links provide expanded analysis within this section:


14.3.     Minimum Standards for Mortgages.  

                        14.3.1.    Ability to Repay Standards. In accordance with regulations to be issued by the Fed, before making a loan, a creditor must make a good faith determination, based on verified and documented information, that the consumer has a reasonable ability to repay the loan and all applicable taxes, insurance and assessments. [§1411]  In a case where a creditor has reason to know that there is more than one mortgage on the same property, the creditor must evaluate the consumer's ability to make payments for all mortgages combined.

This evaluation is to include consideration of the consumer's credit history, current income, expected future income, and other sources of funds for repayment. Creditors must meet standards for income verification, including reviewing documents that provide reasonably reliable evidence of the consumer's income or assets. If documented income is a source for repayment, the creditor may consider the seasonality of such income and its irregularity.  The creditor must use a fully amortizing repayment schedule for the purposes of determining a consumer's ability to repay a loan.

                                    14.3.1.1.           Exemption for Certain Federal Loans. Streamlined refinancing loans made, guaranteed, or insured by certain Federal departments or agencies may be exempted by those agencies from the income verification requirement so long as certain provisions are met. These requirements include that the consumer is not more than 30 days past due on the prior mortgage and the refinancing does not increase the principal balance on the prior mortgage, among others.

                                    14.3.1.2.           Nonstandard Loans.

                                                            14.3.1.2.1.         Variable Rate Loans. The determination of a consumer's ability to repay a variable rate loan that defers repayment of any principal or interest must include a fully amortizing repayment schedule.

                                                            14.3.1.2.2.         Additional Requirements for Interest-Only Loans. In determining a consumer's ability to repay an interest-only loan, the creditor must use the payment amount required to amortize the loan by its final maturity, and must take into account any payment increases that may result from negative amortization.

                                                            14.3.1.2.3.         Calculation Process.      The Act also contains requirements for the calculation process for the monthly payment amount for principal and interest on any residential mortgage loan. The creditor must assume that the loan proceeds are fully disbursed on the date the loan is consummated, among other requirements.

                                                            14.3.1.2.4.         Refinancing of Hybrid Loans with Current Lender. When refinancing a hybrid loan into a standard loan, the creditor may consider the borrower's good standing on the existing mortgage and whether the new loan would prevent a likely default should the original mortgage reset, so long as there would be a reduction in the monthly payment and the borrower has not been delinquent on any payment on the existing hybrid loan. In such a circumstance, the creditor may also offer rate discounts and other favorable terms available to new customers with high credit ratings. 

                                                            14.3.1.2.5.         Reverse Mortgages and Bridge Loans. The ability to repay requirements do not apply with respect to a reverse mortgage or bridge loan with a term of 12 months or less, including to any loan to purchase a new dwelling where the consumer plans to sell a different dwelling within 12 months.

                        14.3.2.    Safe Harbor Provision.  The Act establishes a rebuttable presumption that, if a loan is a "qualified mortgage," then the consumer has the ability to repay. [§1412]

                                    14.3.2.1.           Definition of a "Qualified Mortgage". A qualified mortgage must meet certain criteria, including those described below.  Regular periodic loan payments may not result in an increase in the principal or as a general matter allow the consumer to defer repayment of principal. A qualified mortgage also generally may not have balloon payments, which are defined as a scheduled payment that is greater than twice the amount of the average earlier scheduled payments.  In order to be a qualified loan, the income and financial resources to qualify for the  mortgage must be verified, and the payment schedule must take into account all applicable taxes, insurance, and assessments, among other requirements.  The loan must meet any guidelines or regulations established by the Fed relating to debt-to-income, taking into account income level and other factors the Fed may determine relevant.  The total points and fees on the loan may not exceed 3 percent of the loan amount.

                                                14.3.2.1.1.         Smaller Loans. The Fed is to publish rules adjusting the criteria in order to permit lenders of smaller loans to meet the requirements for the presumption of compliance. The Fed must consider the potential impact of such rules on rural areas and other areas where home values are lower.

14.3.2.1.2.         Exemption. Balloon loans may be exempt for some of the requirements for a qualified mortgage, if the creditor determines the consumer can make all scheduled payments, except the balloon payment, out of income or assets other than collateral. Also, the payment schedule must fully amortize the loan over a period of no more than 30 years. Finally, the creditor of such a balloon loan must operate predominantly in rural or underserved areas and must not exceed, with its affiliates, total annual mortgage loan originations to be set by the Fed. The creditor must also keep the balloon loans in its portfolio and meet any asset size threshold or other criteria set by the Fed.

The Fed may issue regulations adjusting certain requirements of a qualified loan when necessary or appropriate. HUD, the Department of Veteran Affairs, and the Department of Agriculture must issues rules defining the types of loans they insure, guarantee or administer that are qualified mortgages.

                        14.3.3.    Defense to Foreclosure. A consumer may assert violations of the ability to repay standards or the prohibitions against steering as a defense in a foreclosure action and seek a recoupment or set-off for the damages of such a violation. [§1413]

                        14.3.4.    Prohibitions on Certain Prepayment Penalties. Loans that do not meet the requirements for a qualified mortgage may not have prepayment penalties, provided that for this purpose, a qualified mortgage loan does not include a mortgage that has an adjustable rate or a rate exceeding a specified amount in excess of comparable transactions. [§1414]

                                    14.3.4.1.     Phasing out of Prepayment Penalties for Qualified Mortgages. Prepayment penalties for qualified mortgages must be limited and phased out after three years of the loan.

                                    14.3.4.2.  Option for No Prepayment Penalty. Lenders who offer loans with pre-payment penalties must also offer loans without pre-payment penalties.

14.3.5.    Prohibitions on Single-premium Credit Insurance, Mandatory Arbitration, and Waiver of Statutory Causes of Action. Creditors are generally prohibited from direct or indirect financing of single-premium credit insurance. Mortgage loans or home equity lines of credit may not contain mandatory arbitration provisions. Also, mortgage loans may not waive statutory causes of action.

14.3.6.    Disclosures Required for Negative Amortization Loans.   Creditors of mortgages with negative amortization (other than reverse mortgages) must provide the consumer with disclosure that explains that the transaction will or may result in negative amortization, describes negative amortization, and states that negative amortization increases the principal balance and reduces the consumer's equity. [§1414]

                                    14.3.6.1.           Counseling for First Time Homebuyers. First time homebuyers entering into mortgages with negative amortization must receive HUD-certified homeownership counseling.

                        14.3.7.    Notice of Anti-Deficiency Laws. Creditors must also provide notice of any anti-deficiency laws available to the borrower and provide notice before any refinancing that would result in the loss of that protection.

                        14.3.8.    Amendments to TILA Civil Liability Provisions. Civil money penalties for certain penalties under TILA are doubled and the statute of limitations for Section 129 of TILA violations is extended to three years. [§1416]

                        14.3.9.    Lender Rights in the Context of Borrower Deception. A creditor, assignee, or securitizer is exempted from liability and rescission in the case of borrower fraud or deception.[§1417]

14.3.10. Hybrid Adjustable Rate Mortgages.  A six-month notice must be provided to the consumer before a hybrid adjustable rate mortgage is reset. [§1418]  The Fed may require similar notice for other adjustable rate mortgage loans.

                        14.3.11. Disclosures. The Act requires creditors to make a series of disclosures, including those discussed below. 

                                    14.3.11.1.         Required Disclosures for Variable Rate Mortgages with Escrow or Impound Accounts. Creditors must make disclosures for variable rate residential mortgage loans for which an escrow or impound account will be established to pay taxes, insurance and assessments, regarding the amount of monthly payment due for the payment of principal and interest and the amount of such payment deposited in the account for the payment of taxes, insurance and assessments. [§1419]

                                    14.3.11.2.          Disclosures for Other Mortgage Loans. Creditors must disclose for all residential mortgage loans the total amount of interest the consumer will pay over the life of the loan, the aggregate amount of fees paid to the mortgage originator in connection with the loan, and the amount paid for settlement services.

14.3.11.3.          Disclosures in Monthly Statements. Creditors, assignees, or servicers of a residential mortgage loan must send a monthly statement disclosing the amount of principal remaining on the mortgage, the interest rate on the loan, the next date the interest rate may adjust, any prepayment fee, a description of any late payment fees as well as contact information for home counseling. The Fed may require additional disclosures. Certain fixed rate mortgages are exempted if they provide the obligor with the information in another format. [§1420]

The Fed must issue regulations for a standard form for the information required in the monthly disclosure.

                        14.3.12. Comptroller General Study.  The Comptroller General must conduct a study to determine the effects that the Act's enactment will have on the availability and affordability of credit for consumers, small businesses, homebuyers and mortgage lending. The Comptroller General must report findings to Congress within a year of the enactment of the Act. The report must include an analysis of whether the credit risk retention provisions of Title IX have significantly reduced risks to the larger credit market. [§1421]

14.3.13. State Attorney Generals.   State attorney generals also have increased enforcement authority for certain provisions of TILA, including the new ability to repay requirements. [§1422]