17 May Federal Regulatory Update
CFPB SUPERVISORY HIGHLIGHTS
On April 26, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued its Spring Supervisory Highlights which includes, among other things, observations related to the Ability-to-Repay Rule and servicing.
The Ability-to-Repay Rule
The Ability-to-Repay Rule (“ATR Rule”) under the Truth in Lending Act (“TILA”) outlines minimum requirements for making determinations of ability to repay and identifies factors a creditor must consider when making an ability to repay (“ATR”) determination. The CFPB indicated that it will evaluate whether a creditor’s ATR determination is reasonable and in good faith by reviewing relevant lending policies and procedures and a sample of loan files and assessing the facts and circumstances of each extension of credit in the sample.
The ATR Rule generally requires that creditors verify the information that they will rely upon to determine the consumer’s repayment ability. When assessing a creditor’s compliance with ATR Rule requirements, the CFPB determines whether the creditor considered the required underwriting factors in determining the ability to repay. CFPB examiners then determine whether the creditor properly verified the information it relied upon in making that determination. Records a creditor uses for verification, including to verify income or assets, must be specific to the individual consumer.
The ATR Rule provides that a creditor may base its determination of ability to repay on current or reasonably expected income from employment or other sources, assets other than the dwelling (and any attached real property) that secures the covered transaction, or both. The income and/or assets relied upon must be verified. In situations where a creditor makes an ATR determination that relies on assets and not income, CFPB examiners would evaluate whether the creditor reasonably and in good faith determined that the consumer’s verified assets suffice to establish the consumer’s ability to repay the loan according to its terms, in light of the creditor’s consideration of other required ATR factors.
A down payment cannot be treated as an asset for purposes of considering the consumer’s income or assets under the ATR Rule. The size of a down payment does not directly indicate a consumer’s ability to repay the loan on a going-forward basis because a down payment is not an asset available for this purpose. Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay. The CFPB cannot anticipate circumstances where a creditor could demonstrate that it reasonably and in good faith determined ATR for a consumer with no verified income or assets based solely on the down payment size.
Servicers are generally prohibited from making the first notice or filing for foreclosure if a consumer timely submits a “facially complete” loss mitigation application. The CFPB found that some servicers did not properly classify loss mitigation applications as facially complete after receiving the documents and information requested in the loss mitigation acknowledgment notice and failed to afford these eligible consumers with foreclosure protections. Servicers may not make a first notice or filing after receiving documents and information from a borrower until they review the documents and information and determine that they do not comprise a facially complete application.
Servicers were also cited for:
• Paying the consumer’s insurance premiums with escrow funds from another borrower’s escrow account; and
• Issuing vague periodic statements that were not specific enough to comply with Regulation Z.
Finally, public enforcement actions are identified with a summary of the remediated activities relating to:
• Credit scores;
• Referral kickbacks;
• Failure to provide foreclosure relief options; and
• Misleading and deceptive advertising.