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CFPB Amends Ability-to-Repay Rule Exemptions for Some Community Banks

Financial Institutions Law Update Stanley F. Orszula, James I. Kaplan

On May 29th, the Consumer Financial Protection Bureau ("CFPB") finalized exemptions in its ability-to-repay rule found in TILA Regulation Z for certain community banks. The exemption applies to banks with less than $2 billion in assets that originate 500 or fewer first-lien mortgages covered under the ability-to-repay rule each year ("Exempt Banks"). The purpose of the exemptions is to facilitate consumer mortgage lending by smaller banks, and the rule is effective January 10, 2014.

Congress enacted an ability-to-repay rule and created a category of mortgages - called Qualified Mortgages - in 2010 as part of the Dodd-Frank Act. In 2013, the CFPB adopted a rule implementing the ability-to-repay and Qualified Mortgage provisions of Dodd-Frank. The ability-to-repay rule requires consumer mortgage lenders to evaluate and, effectively, document a borrower's ability to repay a loan. The consequences of failing to verify ability to repay are serious for a bank, since they include the inability to foreclose on the underlying mortgage and liability to the borrower under TILA. Qualified Mortgages are mortgages that automatically satisfy the ability-to-repay rule and can be sold or securitized in the secondary market.

The amended rule:

  • Extends Qualified Mortgage status to Exempt Banks for loans in which the borrower's debt-to-income ratio exceeds 43% under the ability-to-repay rule;
  • Allows Exempt Banks to make balloon loans that qualify as Qualified Mortgages for a two-year transition period; and
  • Allows Exempt Banks (and those in underserved / rural areas) to charge a higher than normally allowed interest rate for certain first-lien Qualified Mortgages while remaining in the ability-to-repay safe harbor.

These amendments are expected to somewhat ease the burden on Exempt Banks under the revised Regulation Z. Nonetheless, the verification and documentation requirements of Dodd-Frank still remain, even as amended, for community banks.

To see the CFPB's announcement, please click here.

To read the CFPB's actual rule, please click here.

For more information about these amendments, or Dodd-Frank's impact on community banks generally, please contact Stan Orszula at (312) 715-5123 /; Jim Kaplan at (312) 715-5028 /; Jim Friedman at (414) 277-5735 /; Anneke Diem at (312) 715-5092 / or your Quarles & Brady attorney.