By Lisa M. Goolik, J.D.
The Department of Veterans Affairs has issued an interim final rule to clarify which VA-guaranteed loans are “Qualified Mortgages” as used by the Truth in Lending Act in order to eliminate uncertainty and “ensure that veterans’ benefits are delivered without interruption.” Accordingly, the rule provides that almost all VA loans that meet current VA underwriting standards will be safe harbor qualified mortgages with regard to the revised TILA Ability to Repay provisions. The interim final rule takes effect upon publication in the Federal Register.
Background. Section 1412 of the Dodd-Frank Act amended section 129C of the Truth in Lending Act to include a definition of a “qualified mortgage.” Although the qualified mortgage definition applies generally to loans subject to TILA, a number of federal agencies, including VA, are required to prescribe rules defining the types of loans they insure, guarantee, or administer, as the case may be, that are qualified mortgages.
On Jan. 30, 2013, the CFPB published a final rule establishing a definition of “qualified mortgage.” The rule also generally prohibits a creditor from making a mortgage loan unless the creditor determines that the consumer will have the ability to repay the loan. The rule created a temporary qualified mortgage applicable to VA-guaranteed loans, among other agency guaranteed loans. Under these rules, VA-guaranteed loans could be qualified mortgages even if they did not meet the 43 percent debt-to-income ratio applicable to many other types of qualified mortgages. Since that time, the CFPB has issued multiple rulemaking documents related to its original final rule, including a final rule interpretation in July 2013, revising the temporary qualified mortgage provision applicable to loans eligible for government-sponsored enterprise and federal agency purchase, insurance, or guaranty, including VA guaranty.
Eliminating uncertainty. According to the VA, it has attempted to eliminate the uncertainty by explaining to stakeholders that the subsequent rulemaking documents have not changed the way debt-to-income ratio affects the underwriting of VA-guaranteed loans. “Some stakeholders continue to advise, however, that the issue goes beyond education or training. They seek legal certainty, and advise that in the absence of the legal certainty they seek, they are concerned whether investors will continue to view VA-guaranteed loans as high-quality investments that warrant premium pricing,” the VA noted.
While the VA does not have authority to state with legal effect the proper interpretation of CFPB’s rules, the VA is attempting to provide clarification by defining which VA loans satisfy the qualified mortgage requirements, notwithstanding other limitations.
“Since VA’s goal is to ensure that veterans’ benefits are delivered without interruption, additional burden, or cost to veterans, VA intends through this interim final rule to quell such concerns by specifying exactly what is required for a VA loan to be considered a qualified mortgage with safe harbor protections,” the VA states in the rule.
Restrictions on the sale of assets. The interim final rule provides that the VA is amending its rules to establish that almost all VA loans that meet current VA underwriting standards will be safe harbor qualified mortgages with regard to the revised TILA Ability to Repay provisions. The VA defines safe harbor qualified mortgage as one that meets the Ability-to-Repay requirements of sections 129B and 129C of TILA regardless of whether the loan might be considered a high cost mortgage transaction as defined by TILA. In addition, subject to certain exceptions pertaining to Interest Rate Reduction Refinance Loans (IRRRLs), any guaranteed or insured loan made in compliance with this subpart is a safe harbor qualified mortgage.
With regard to the loans that are subject to the ability-to-repay provisions to the extent there are differences between CFPB’s definition and VA’s, the VA intends for its definition of qualified mortgage to loans guaranteed, insured, or made by VA to preempt rules that may seem contrary to VA’s, including those loans which would fit under VA’s definition, but not necessarily under the CFPB definition, such as negative amortization, documentation requirements for IRRRLs, minimum FICO score documentation, and in one possible legal interpretation, debt-to-income ratios.
Special requirements for IRRLs. The rule provides that while all VA IRRRLs will be considered qualified mortgages, not all will be safe harbor qualified mortgages. The ones that are not safe harbor qualified mortgages, are qualified mortgages entitled to a presumption that they meet the Ability-to-Repay requirements of the Dodd-Frank Act. A rebuttable presumption qualified mortgage provides the borrower with the opportunity to argue that the lender did not make a good faith determination that the borrower would have a reasonable ability to repay the loan.
In order for an IRRRL to be considered a safe harbor qualified mortgage, the loan must meet all of the following requirements:
- the loan being refinanced was originated at least six months before the new loan’s closing date, and the veteran has not been more than 30 days past due during the six months preceding the new loan’s closing date;
- the recoupment period for all allowable fees and charges financed as part of the loan or paid at closing does not exceed 36 months; and
- all other VA requirements for guaranteeing an IRRRL are met.
The VA is also exercising its authority under section 1411 of the Dodd-Frank Act to exempt IRRRLs from many of the income verification requirements of TILA.
“VA’s goal through this rulemaking is to protect the integrity of the Home Loan program and provide veterans an assurance that they are truly improving their financial position when proceeding with an IRRRL. The seasoning and recoupment requirements discussed above, as well as the income verification exemption provided when certain criteria are met, all serve to further this goal,” the rule states.
MainStory: TopStory BankingOperations CFPB DoddFrankAct Mortgages TruthInLending
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