Last week the Consumer Financial Protection Bureau (CFPB) issued proposed clarifications to one of its 2013 Finals Rules, the one applying to servicer-held escrows.  Today the Bureau issued an additional set of five proposed clarifications for public comment.  These deal with rules issued in January regarding Qualified Mortgages (QM) and mortgage servicing.  CFPB said the new proposals seek to address questions regarding the earlier rules because they believe they have "a responsibility not just to write a rule, but to see that it is implemented effectively."

The first proposal deals with the definition of debt-to-income (DTI) ratio.  The Bureau proposes revising the criteria for determining whether a consumer's income is stable for the purposes of DTI.  Comments on the rule concern whether the existing requirements for determining this are likely to result in compliance difficulty and exposure to litigation on the part of the creditor.   For instance, many employers are unlikely to be willing to confirm the permanency of an applicant's employment and creditors may be unqualified to evaluate a consumer's education, training, and job qualifications.

CFPB proposes to replace the requirement to obtain confirmation of continued employment through an employer, with one requiring verifying the "probability of continued employment."  Similarly the requirement that creditors consider qualifications, training, and education will be supplanted with a requirement to examine a consumer's past and current employment. 

The "General Policy on Consumer Income Analysis" in the existing rule states that customers must analyze the income of each consumer obligated by the loan to determine if his/her income level can be reasonably expect to continues through at least the first three years of the loan.  Also whether any overtime or bonus income will continue or exhibits a trend.

CFPB said it adopted this provision largely from existing FHA underwriting guidelines and believes they are unlikely to function properly as regulatory requirements and may frustrate the purpose of the regulations.  The Bureau proposes to amend the requirement to require creditors to evaluate only whether a consumer's income level would not be reasonably expected to continue based on the documentation provided with no three-year requirement. The Bureau is also proposing to eliminate the requirement that creditors determine whether bonus and overtime income "will continue but rather than creditors focus on those factors for the past two years."  The Bureau is also proposing clarifications to provisions explaining how to account for Social Security and self-employment income.

A second change involved a second type of QM that a lender can make under the ability-to-repay rule.  This requires the loan to be eligible either for purchase or guarantee by the government-sponsored enterprises Fannie Mae or Freddie Mac (the GSEs), or for guarantee or insurance by a federal agency such as the Federal Housing Administration or the Veterans Administration. The provision that allows this type of QM is temporary and will expire after seven years or earlier. Today's proposal would confirm that loans meeting eligibility requirements provided in a separate agreement between a creditor and a GSE or federal agency can be qualified mortgages, not just those that follow the general GSE or agency guidelines.

Another proposed change seeks to clarify whether a demand by a GSE or agency that a lender repurchase or indemnify a loan determines whether or not the loan is a QM.  The Bureau's proposed clarification would establish that a demand to repurchase or indemnify would not be dispositive in establishing mortgage status.  The Bureau said facts upon which eligibility was determined at or before consummation could later found to be incorrect and often a demand to repurchase or indemnify involve such issues.  The mere occurrence of a demand "does not necessarily mean that the loan is not a qualified mortgage."  The specific facts and circumstances of each loan should determine that.

Regulation X implements the Real Estate Settlement Procedures Act (RESPA). The preamble to the 2013 Mortgage Servicing Final Rules issued in January made clear that Regulation X does not preempt the field of possible mortgage servicing regulation by states, and the Bureau is proposing the addition of a comment to Regulation X to emphasize this.

The final change is to the small servicer exceptions in the servicing and other regulations.  These changes would clarify which mortgage loans to consider in determining whether a servicer qualifies as small; for example loans serviced on a charitable basis would be excluded.  Other examples are included to illustrate how the exemption would be applied to relationships between servicer and affiliate and between master servicer and subservicer. 

CFPB said the changes would apply the exemption to a larger number of firms which would benefit from lower costs although their customers may lose some of the protections embedded in the relevant rules.  The Bureau said that changes are very small and the lack of clarity they are designed to remedy was inadvertent.