CFPB Issues Small Entity Compliance Guide

The Consumer Financial Protection Bureau has issued a 45-page Small Entity Compliance Guide for the Ability-to-Repay (ATR) and Qualified Mortgage Rule. The guide, published on April 10, 2013, indicates that its purpose is to provide an easy-to-use summary of the rule that also highlights issues that small creditors, and those who work with them, might find helpful to consider. The guide also states that it meets the requirements of the Small Business Regulatory Enforcement Fairness Act of 1996, which requires that the CFPB issue small-entity guidance.

The CFPB stated in its press release that its goal for the guide was "to provide a comprehensive rule summary in a plain language and FAQ format, which makes the content more accessible and consumable for a broad array of industry constituents, especially smaller businesses with limited legal and compliance staff." Nevertheless, the CFPB cautions that the guide is not a substitute for the ATR rule.

The guide provides an overview of the rule's requirements, including implementation tips along the way. A tip concerning the eight ATR rule underwriting factors encourages creditors to document how they are considering those factors, even though there is no rule requiring validation of underwriting criteria concerning the general ATR rule. This appears to reflect a regulatory position that anyone who did not document compliance efforts did not engage in such efforts. The guide also highlights a number of areas that appear to present implementation and compliance challenges, particularly relating to the general ATR standard in the rule.

One of the biggest questions that the rule has raised is whether the industry will embrace the general ATR standard, or whether the general nature of the standard will cause creditors to originate only qualified mortgages, potentially causing the credit market to contract. In announcing the rule, CFPB Director Richard Cordray stated: "Our Ability-to-Repay rule will restore more certainty to a market that was deeply destabilized by the financial crisis. By providing common-sense discipline in the housing market, this rule creates a level of assurance for all participants that will open up more access to credit for consumers." He then focused, however, on the qualified mortgage provisions of the rule and not the general ATR standard. The guide reflects that there is flexibility regarding the standard, but the flexibility also creates uncertainty regarding whether steps taken by a creditor to evaluate a borrower's repayment ability will be deemed sufficient.

For example, the guide notes that while a creditor must consider the eight underwriting factors under the general ATR standard, the rule does not preclude creditors from considering additional factors. If a creditor makes a loan under that standard (i.e., a loan that is not a qualified mortgage), a consumer may challenge the loan on any grounds, and potentially a consumer may claim that the creditor did not include appropriate additional factors in evaluating the consumer's repayment ability.

The guide notes that if the creditor is aware that the consumer's repayment ability will change after consummation, the creditor must consider that information. The guide provides as examples situations in which a consumer plans to retire or plans to transition from full-time to part-time employment. Yet the guide also states that the creditor may not "make inquiries or verifications prohibited by Regulation B."

While the guide is intended to clarify the rule and provide small entities a road map to assist them in implementation, it is imperative that all creditors, not just small entities, recognize that this guide is not a replacement for the ATR rule or its official commentary. For example, if a qualified mortgage is in an amount subject to a percentage cap, the cap is computed based on the total loan amount. In addressing the calculation of the points and fees cap for a qualified mortgage the guide instructs the creditor to determine the "total loan amount" by taking the "amount financed minus any points and fees that are rolled into the loan amount." 

For purposes of the ATR rule, however,  the "total loan amount" is defined as the "amount financed" minus any "cost listed in § 1026.32(b)(1)(iii), (iv), or (vi) that is both included as a points and fees and financed by the creditor."  Sections (iii), (iv), and (vi) are real estate related charges (the 4(c)(7) fees), credit insurance premiums, and certain prepayment penalties, respectively. This means that not all points and fees financed by the creditor are deducted from the amount financed for purposes of computing the "total loan amount." Reading the guide will give creditors a basic understanding of the rule, but they should not implement a compliance system or program their systems based on the guide.

The guide is a step in the right direction for trying to absorb and understand the rule. The industry is still looking to the CFPB, however, for additional and more formal guidance on how to best implement the ATR rule without reducing mortgage options for consumers.

- Emily G. Miller

Building a Buzz: Legal Considerations for Social MediA

Want to start using Twitter to keep people informed? Considering creating a Facebook fan page to build a positive buzz about your latest development and overcome NIMBYism? What about employee policies associated with the use of social media? What do you do?

Attorneys from Ballard Spahr's Housing and Privacy & Data Security Groups will present a webinar on using social media to communicate with residents and the community at large as a tool for neighborhood development and transformation. The panel will also discuss factors to be considered when creating employee policies relating to the use of social media, as well as the application of a variety of existing laws.


Topics will include:


  • Establishing rules of participation and determining when it is appropriate to review comments prior to posting
  • Engaging third-party moderators and providing them with guidelines
  • Ensuring protection from liability by complying with the Digital Millennium Copyright Act, the Communications Decency Act, and defamation laws
  • Understanding unique marketing concerns that apply when using social media, including using comments and reviews for marketing purposes
  • Securing rights to posted content so that it can be used for other purposes
  • Devising a checklist to follow in implementing the use of social media channels

Date and Time

Wednesday, May 8, 2013
12:30 PM – 1:30 PM ET


Amy M. McClain
Monique Y. DeLapenha

For more information and to register, please click here.

FTC Sends FCRA Warning to Providers of Rental Histories

The Federal Trade Commission continues to keep Fair Credit Reporting Act (FCRA) enforcement at the forefront of its activities, as shown by its recent warnings to operators of six websites that provide information about consumers' rental histories to landlords.

The warnings include a reminder that under the FCRA, the FTC has authority to seek injunctive relief and/or monetary penalties of up to $3,500 per FCRA violation. The FTC shares FCRA enforcement authority concerning nonbanks with the Consumer Financial Protection Bureau.

The six operators each received identical letters from the FTC warning that if they "assemble or evaluate information on individuals' rental histories and provide this information to landlords so that they can screen tenants," the operators are providing "consumer reports" and therefore acting as "consumer reporting agencies" (CRA) under the FCRA. The letters outline specific actions an operator must take if it is a CRA. These include taking reasonable steps to ensure the maximum accuracy of the reports and that each landlord who receives a report is using it for tenant screening and not obtaining it as a pretext for another purpose that is impermissible under the FCRA.

In addition, the letter describes an operator's obligations if it provides reports on a nationwide basis, such as providing a consumer with a free copy of his or her report annually, upon request. The letter also details an operator's obligations to landlords using the reports, as well as to the sources of the information for the reports.

While telling the operators it has not yet determined whether they are violating the FCRA, the FTC reserves its right to take action against them based on past or future law violations. The FTC further warns that the operators' practices could also be subject to laws enforced by other federal, state, or local authorities.

Although the FTC's warnings were directed at the providers of the rental histories, the FCRA also imposes obligations on landlords who use such histories or report information about their rental experiences with tenants to providers of such histories. For that reason, landlords should review their own use of rental histories and reporting procedures for FCRA compliance.

- Barbara S. Mishkin

President Releases Fiscal Year 2014 HUD Budget

President Obama is proposing to boost federal funding for many housing programs under his proposed budget for fiscal year 2014. Under the proposal released on April 10, 2013, the U.S. Department of Housing and Urban Development (HUD) would receive $47.6 billion in direct appropriations and other resources, a significant increase over the levels funded in fiscal year 2013.

The President's proposal of $2 billion for the public housing capital fund is slightly higher than the $1.78 billion funded in fiscal year 2013 under a set of automatic spending cuts known as sequestration. The public housing operating fund is funded at $4.6 billion, which the administration states is 90 percent of the amount needed to fully fund this program under the statutory formula. Funding of $17.9 billion for housing choice vouchers is intended to support renewal of all vouchers in use in 2013; however, HUD may offset allocations by the excess amount of agencies' reserves, as determined by HUD.

The budget proposes $400 million for the Choice Neighborhoods Program, a significant increase from funding levels in prior years. The budget includes language that would implement changes to the public housing program, including allowing full flexibility between the public housing operating and capital funds to high-performing housing authorities with HUD approval; a requirement for transitioning the calculation for flat rents for public housing to a floor of 80 percent of area median income; and language to permit consortia of housing authorities to operate public housing.

The budget document states that HUD will release legislation to Congress later this spring to substantially expand the Moving to Work Program to high-performing agencies.

For more information, read our detailed analysis of the budget.

Ballard Spahr will continue to monitor the appropriations process and track how Congress responds to the President's proposed funding levels and new programs.

- Mary Grace Folwell and Nydia M. Pouyes

Three More Agencies Adopt the Uniform State Test

Three more state agencies have announced that they will be adopting the new national MLO test with the Uniform State Content. The Tennessee Department of Financial Institutions will adopt the test effective July 1, 2013. Additionally, the Texas Department of Savings and Mortgage Lending and the Texas Office of Consumer Credit Commissioner will adopt the new test as of October 1, 2013. With these announcements, a total of 27 state agencies have adopted the new test and will no longer require a separate state-specific test as a prerequisite for MLO licensure.

Montana Amends Mortgage Licensing Exemptions

Montana recently amended its Mortgage Act to add new exemptions from mortgage licensure. Under the amendment, an individual who is an employee of a federal, state, tribal, or local government or housing finance agency acting as a loan originator only in accordance with his or her official duties is exempt. Additionally, bona fide nonprofit entities and their employees who only act as loan originators as part of their work duties are exempt from licensure to the extent that such duties are only performed regarding residential mortgage loans with terms that are favorable to the borrower.

In addition, the amendment exempts a person whose principal business is preparing abstracts or making title searches used as a basis for the issuance of title insurance, and who is regulated by the Montana Commissioner of Insurance. Employees of a retailer of manufactured or modular homes are exempt if they only perform administrative or clerical tasks in the sale or lease of such homes, and only if they do not receive any other compensation or gain from a mortgage lender or broker for such tasks. These amendments are effective October 1, 2013.

- Matthew Saunig

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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