Prohibitions on Financing Credit Insurance Premium
- It will likely be 3-4 months before any potential amendments are released; I mention this simply because it demonstrates the CFPB’s willingness and desire to fully understand an issue before going live. Originally scheduled to go in effect June 1, 2013, the rule prohibits creditors from financing premiums or fees for credit insurance products in connection with any residential mortgage loan or any open-ended credit plan secured by a principal dwelling. This applies to credit life, disability, unemployment, credit property insurance and similar products. The provision included vague language related to not prohibiting credit insurance or credit unemployment when premiums and fees are paid in full on a monthly basis, reasonable, the creditor is not compensated, there’s a separate insurance contract and premiums/fees are not paid to an affiliate. This led to several interpretive questions from industry stakeholders. The CFPB did the right thing and delayed implementation until 01/10/2014, consistent with implementation of other provisions. Additionally, the CFPB will be publishing a proposal to seek further comments from consumers and industry stakeholders.
Qualified Mortgage Job Verification Standard
- This was another one that makes to pitch yourself and wonder if you’re dreaming. The ATR and QM Standards included a provision that required lender to determine a borrower’s “probability of continued employment”. The infamous “Appendix Q” outlined the many hoops lenders needed to jump through to, maybe, adequately verify “probability of continued employment”. But do you really know. What is the borrower is fired 2 months later; do I kiss my safe harbor protection good-bye? Once again the CFPB brought some common sense and clarity on this topic. Lenders must verify the borrower is employed and that the employer has no immediate plans to eliminate the position. OK, that’s doable.
Now the 5% they got wrong…
Ability-to-Repay (ATR) and Qualified Mortgage (QM) Standards
- In my opinion, the CFPB didn’t go far enough in their exemption of small banks and credit unions. The 500 or fewer 1st lien loans per year are not enough loans. Maybe if they specified 500 or fewer portfolio 1st mortgage loans. Due to traditional means of generating fee income being decimated by the financial crisis, numerous small banks and credit unions turned to the traditional secondary market mortgage space as means to generate reliable fee income. This has been a successful strategy for most but the need to provide non-traditional mortgage products to support their small business customers’ remains. By limiting the exemption to those institutions funding just 500 or fewer loans per year the CFPB is substantially limiting small banks and credit unions ability to serve their small business customers and the communities they serve.
- Interest Only Loans should have been included in the ATR and QM Standards exemption for small banks and credit unions. While interest only financing, especially in the Alt-A and Sub-prime space, certainly contributed to financial crisis, interest only financing is still a viable product and an effective cash-flow product for self-employed borrowers. When qualified appropriately utilizing fully amortized payments, small banks and credit unions can provide sound interest only financing and better serve the overall borrowing and cash-flow needs of their small business customers. They should be able do so and still retain their safe harbor protections.
All in all, the recent release of final rules, clarifications and extensions are positive signs. They demonstrate the CFPB is looking closely at the provisions included in Dodd Frank, considering their impact on the market, listening to industry stakeholders and consumers and making informed decisions related to amendment and implementation.
Vince Furey is the SVP of Lending Solutions at OpenClose, a pioneer of Software as a Service (SaaS) computing solutions for the financial industry since 1999. OpenClose, built in modern (.NET) technology is supported by mature, service-over-sales approach delivery. It provides a variety of Web-based solutions for credit unions, banks, and mortgage lenders from loan origination software, loan pricing, website design, analytics reporting, imaging and social media marketing. For more information about loan origination systems, visit OpenClose