Supplementary Information, under the final rule, a loan is eligible for the QRM exemption if it meets one of the QM definitions issued under section 129C of TILA, as may be amended from time to time. Meeting the QM criteria is also one of several ways that a lender can choose to satisfy the minimum underwriting standards for the ability- to-repay requirements under TILA.
Because QM loans may provide greater protection from potential legal liability under TILA, many lenders are
incentivized to make QMs.322
Community-Focused Lending Exemption
In addition to the classes of
transactions exempt from the ability-to- repay requirement under the Dodd- Frank Act, such as HELOCs, reverse mortgages, timeshares or temporary or
‘‘bridge’’ loans of 12 months or less, the CFPB exempted certain additional categories of loans made by certain lenders from the ability-to-repay rules, under its regulatory authority to exempt classes of transactions to help ensure borrowers continue to have access to affordable mortgage credit. The CFPB used its regulatory authority to exempt these lenders because they typically use flexible and unique underwriting standards that differ from the minimum underwriting standards of the ability-to- repay or QM criteria, and the types of loans exempted are important sources of credit for LMI, minority and first-time homebuyers.323Loans exempt from the ability-to-repay requirement fall into the following categories:
• An extension of credit made pursuant to a program administered by a Housing Finance Agency, as defined under 24 CFR 266.5 (HFA).324
• An extension of credit made by an entity creditor designated by the U.S.
Treasury as Community Development Financial Institution, as defined under 12 CFR 1805.104(h) (CDFI).
• An extension of credit made by a HUD-designated Downpayment Assistance through Secondary
Financing Provider (DAP), pursuant to 24 CFR 200.194(a), operating in accordance with HUD regulations.
• An extension of credit made by a HUD-designated Community Housing Development Organization, as defined under 24 CFR 92.2 (CHDO), provided it has entered into a commitment with a participating jurisdiction and is
undertaking a project pursuant to HUD’s HOME Investment Partnership Program, pursuant to 24 CFR 92.300(a).
• An extension of credit made by certain non-profit organizations that extend credit no more than 200 times
325See 79 FR 25730 (May 6, 2014). The CFPB’s proposed rule would exclude from the 200 originations count certain forgivable or deferred second lien loans.
32612 U.S.C. 5211; 5219.
32715 U.S.C. 78o–11(c)(1)(G)(iii). See also Part
IV.B of this Supplementary Information. 32815 U.S.C. 78o–11(e)(2).
annually,325provide credit only to LMI consumers, and follow their own written procedures to determine that consumers have a reasonable ability to repay their loans (Eligible Nonprofits)
• An extension of credit made pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (EESA).326
As a result, loans made by these entities do not need to comply with the ability-to-repay requirement, for which QM is one way to comply.
The agencies received several comments regarding some of the above extensions of credit. One commenter requested that the agencies clarify that the proposed exemption from risk retention for asset-backed securities issued or guaranteed by states, municipalities, and public
instrumentalities of states (state and municipal securitization exemption)327 would include asset-backed securities issued by HFAs and other state agencies and collateralized by loans financed by HFAs. This commenter also asked for clarification on whether the use of private servicers in those transactions would affect the availability of the exemption. A few commenters requested that the agencies
automatically classify all state HFA loans as QRMs. One commenter observed that the CFPB granted HFA loans an exemption from the ability-to- repay requirement because of a strong record of lending to LMI borrowers, so that compliance with the ability-to- repay requirement would be of little benefit and could impede access to credit by LMI borrowers. Another commenter also asserted that strong credit performance from HFA loans would mean that risk retention is not necessary to protect investors. This commenter further expressed concern that if any HFA loans were subject to risk retention, other securitization structures employed by the HFA that may not technically qualify for the state and municipal securitizations
exemption would then be subject to risk retention, with negative consequences for access to credit for underserved borrowers.
Several commenters similarly observed that CDFIs and nonprofit lenders are an important source of mortgage credit for LMI borrowers and play a key role in neighborhood
stabilization and community
development. These commenters stated that loans made by these entities frequently would not fit the QM criteria because they use flexible underwriting standards that consider an individual borrower’s unique circumstances and use homebuyer education and housing counseling to support homeowners throughout the mortgage process. These commenters raised the concern that the risk retention requirement would impose disproportionate compliance burdens on these entities and could be a significant barrier to obtaining investment in these lending programs.
Commenters also indicated that exempting these entities from the risk retention requirement would be within the spirit of aligning QRM with QM.
A few other commenters also requested that the agencies similarly consider including under the definition of QRM the other categories of loans exempted by the CFPB from the ability- to-repay rules, or otherwise provide them with an exemption from risk retention. Commenters observed that CDFIs and nonprofit mortgage lenders are an important source of mortgage credit for LMI borrowers and play a key role in neighborhood stabilization and community development. The loans made by these entities are not covered transactions under the ability-to-repay rules (and therefore would not be classified as QMs in any case) but also frequently would not independently meet the type of underwriting standards in the CFPB’s QM criteria because they use flexible features that consider an individual borrower’s unique
circumstances. At the same time, these lenders use homebuyer education and housing counseling to support homeowners throughout the mortgage process. These commenters raised the concern that the risk retention requirements would be a
disproportionate compliance burden for these entities and could be a significant barrier to obtaining investment in these lending programs if an exemption was not provided.
Under section 15G of the Securities Act, the definition of a QRM can be ‘‘no broader than’’ the definition of a QM.
Because there are various and unique underwriting practices used to make the loans described above that are exempted from the ability-to-repay requirement, including significant variations in DTI ratios and other underwriting criteria, it is not possible for the agencies to determine that these loans generally are not ‘‘broader than’’ QM. Therefore, the agencies have concluded that they cannot include these community-
focused residential mortgages in the definition of QRM.
As discussed previously with respect to other exemptions (or requests for exemptions) from risk retention, however, the agencies may provide an exemption from risk retention if the exemption would: (i) help ensure high- quality underwriting standards for the securitizers and originators of assets that are securitized or available for
securitization; and (ii) encourage appropriate risk management practices by the securitizers and originators of assets, improve the access of consumers and businesses to credit on reasonable terms, or otherwise be in the public interest and for the protection of investors.328
For the reasons discussed below, and in response to concerns raised by commenters, the agencies are providing an exemption from risk retention under section 15G(e) of the Exchange Act for the categories of loans described above (community-focused exempted loans), other than extensions of credit made pursuant to a program authorized by sections 101 and 109 of the EESA.
Generally, the agencies have concluded that the loans made by lenders
identified above and covered by this exemption meet the requirements for an exemption under section 15G(e) because they are either government-certified, or originated by government-administered programs, or small non-profit programs that have a specific community mission.
As the primary mission of these lenders is building and strengthening at-risk communities, or building wealth for LMI families, strong underwriting procedures to maximize affordability and borrower success in keeping their homes has been integral to the programs that originate the community-focused exempted loans. Because the stated mission is integral to the lending programs administered by these lenders, the agencies believe these entities have the incentive to maintain strong underwriting standards to help ensure that they offer affordable loans to the borrowers they serve. The stated mission also helps to protect investors because of the incentives to maintain high underwriting standards and ensure that borrowers are given appropriate and affordable loans. Additionally, exemptions from risk retention for loans made by the above-listed entities serve the public interest because these entities have stated public mission purposes to make safe, sustainable loans available primarily to LMI communities, which helps to improve access to credit on reasonable terms for borrowers and is in
32915 U.S.C. 77c(a)(2).
330See 78 FR 35430, 35432–33 (June 12, 2013).
33112 CFR 1805.104(h).
332There were 874 CDFIs as of June 30, 2014.
CDFI Fund, CDFI Certification, visited August 1, 2014, available at: http://www.cdfifund.gov/what_
we_do/programs_id.asp?programID=9#certified.
33312 U.S.C. 1401 et seq.
33412 CFR 1805.201.
33578 FR at 35433, 35461 (June 12, 2013).
336There are 353 creditors certified by HUD as CHDOs. OneCPD, HUD Exchange, visited on August 1, 2014, available at: https://www.onecpd.info/
search.
the public interest. The agencies further observe that these programs are a significant source of credit to LMI communities. To the extent these loans are or will be securitized, an exemption helps to ensure that a risk retention requirement would not impede financing on reasonable terms for such borrowers.
In addition, the agencies below respond to concerns raised by commenters with respect to the exemption under section 15G of the Exchange Act and the final rule for asset-backed securities issued or guaranteed by states and their instrumentalities, or by municipal entities.
i. Housing Finance Agency Program Loans
State HFAs are state lending programs established to help meet the affordable housing needs of the residents of their states. Although their characteristics vary widely, such as their relationship to the state government, most HFAs are independent entities that operate under the direction of a board of directors appointed by each state’s governor.
They typically administer a wide range of affordable housing and community development programs, including providing first-time homebuyers with loans for existing and new construction and providing financing to build and revitalize affordable housing units, revitalize older neighborhoods and communities, and build shelters and transitional and supportive housing.
If an HFA is a public instrumentality of a state, then an asset-backed security issued or guaranteed by such HFA (or otherwise issued or guaranteed by the state that established the HFA or one of its public instrumentalities) is exempt from the registration requirements under section 3(a)(2) of the Securities Act329and should be exempt from risk retention under the state and municipal securitization exemption provided in section 19(b)(3) of the final rule.
Further, the use of a private-sector entity to service loans that collateralize such asset-backed securities would not, in and of itself, invalidate this
exemption. If an HFA is not a public instrumentality of a state whose securities are exempt from the
registration requirements under section 3(a)(2) of the Securities Act, then securitizations issued or guaranteed by the HFA would not automatically be exempt from risk retention unless another exemption applied.
Securitizations of loans made by HFAs through private-sector sponsors also
would not have an exemption from risk retention. The agencies understand that it is unclear whether there are any HFA securitizations currently occurring that are not covered under that state and municipal securitizations exemption in section 19(b)(3) of the final rule.
However, the agencies believe it may be possible that some future securitizations of HFA loans would not be covered and that an exemption under section 15G(e) of the Exchange Act would help ensure that HFA lending programs continue to have access to the financial markets, which in turn should help to ensure affordable access to credit for the borrowers that they serve.
Many HFA underwriting standards are similarly stringent or more stringent than those of the Enterprises or Federal government agencies thorough their program analyses of a consumer’s ability to repay.330The agencies believe that an exemption under section 15G(e) would encourage HFAs to continue providing sound underwriting and access to affordable credit for their communities.
In addition, as discussed above, the state HFA programs are established under public oversight under a specific state legal framework and provide a key source of affordable mortgage credit for LMI and first-time borrowers that is important to sustaining homeownership (and the public benefits that flow therefrom) in many communities.
ii. Community Development Financial Institution Loans
Creditors designated as CDFIs, as defined under Treasury regulations,331 include such entities as regulated banks, savings associations and credit unions as well as nonprofit funds and institutions.332The Community Development Banking and Financial Institutions Act of 1994,333defines a CDFI as an entity that (1) has a primary mission of promoting community development; (2) serves an investment area or targeted population; (3) provides development services in conjunction with equity investments or loans directly or through a subsidiary or affiliate; (4) maintains, through representation on its governing board accountability to residents of its area or target population; and (5) is a
nongovernmental entity. Treasury’s CDFI certification and application regulations incorporate the statutory definition requirements and contain
additional requirements for eligibility verification, applications, matching funds, and other standards. These requirements include that a CDFI must be certified by Treasury’s CDFI Fund Program.334Additionally, at least 60 percent of the financing activities of a CDFI must be targeted to one or more LMI or underserved communities.
Although CDFI securitization volume data is not available, at least one CDFI, the Community Reinvestment Fund, has issued securitizations in the past.
Access to the securitization market for CDFIs may help to ensure that these entities can continue to focus on their mission of providing community development and helping LMI borrowers by preserving access to the securitization market. In determining that these entities warranted an exemption from the ability-to-repay rules, the CFPB found that, although these entities do not have standardized underwriting criteria, they use a variety of compensating factors and compare the strength of different underwriting factors, such as credit history and income, to determine if the LMI consumer qualified.335Similar to state HFAs, an exemption from risk retention would assist CDFIs in continuing their mission of providing affordable credit to various communities by allowing them to access securitization markets without risk retention requirements if they were to seek such funding in the future.
Furthermore CDFIs have a stated mission requirement to serve the community which requires them to maintain strong underwriting standards to protect the individual borrower and the organization, thus lowering risk for the public and investors.
iii. Community Housing Development Organizations and Downpayment Assistance Programs
To be a CHDO, an organization must qualify under HUD’s regulations for such designation and re-qualify every time it receives additional set-asides through the HOME program. HUD’s HOME Investment Partnership
Program336requires the allocation of 15 percent of funds to a CHDO to undergo HOME activities. A CHDO has 5 years to allocate the funds and its activities must be in compliance with both HUD’s and the awarding jurisdiction’s
requirements for use of the HOME
33724 CFR 92.254.
33878 FR at 35434, 35461 (June 12, 2013).
33924 CFR 92.254.
340Id.
341Id.
34212 CFR 1026.43(a)(3)(v)(B).
343There are currently 205 organizations certified as DAPs. HUD, Nonprofits, visited on August 1, 2014, available at: https://entp.hud.gov/idapp/html/
f17npdata.cfm.
344See 78 FR 35430, 35464 (June 12, 2014).
34512 CFR 1026.43(a)(3)(v)(D),
346The CFPB has proposed an amendment to exclude from the 200 originations count certain forgivable or deferred second lien loans. See 79 FR 25730 (May 6, 2014). Update if CFPB adopts change before this rule is finalized.
funds.337HUD’s requirements for being a CHDO and eligible for an award include: (1) being a private nonprofit organization; (2) having among its purposes the provision of decent housing that is affordable to LMI persons, as evidenced in its charter, articles of incorporation, resolutions or by-laws; (3) having a demonstrated capacity for carrying out housing projects assisted with HOME funds; and (4) having a history of serving the community within which housing to be assisted with HOME funds is to be located. Data indicates that lending at CHDOs totaled $64 million in 2011 with just under 500 loans.338
As with CDFIs, although CHDOs do not have standardized underwriting criteria, CHDOs use a variety of compensating factors, including an ability-to-repay analysis,339in
underwriting mortgage loans to ensure that the loan is appropriate for the borrower.340CHDOs use these factors in addition to standard underwriting factors, such as credit history and income, to determine if the LMI consumer qualifies.341CHDOs’ stated mission to serve LMI persons and requirements to qualify under the HUD program helps to ensure strong, but flexible underwriting of loans to sustain their mission.
For its loans to qualify for an exemption from the ability-to-repay rules, a Downpayment Assistance Provider must operate in accordance with applicable HUD regulations.342 Consequently, a DAP must be listed on HUD’s nonprofit organization roster by applying every two years and specifying the FHA activities it proposes to carry out.343The organization must comply with all requirements stated in the specific applicable provision of the single family regulations applicable to the FHA activity it undertakes. Similar to CHDOs, DAPs also use underwriting requirements that are tailored to the target LMI populations.344The DAPs’
mission requires them to tailor their programs to provide lending for LMI populations, but they must also follow HUD and program-specific requirements which encourage sound lending.
iv. Exempt Nonprofit Organizations To be exempt from the ability-to- repay rules, a nonprofit organization must have an IRS tax-exempt ruling or determination letter as a 501(c)(3) organization, and meet the following additional criteria:345(1) during the preceding calendar year, the
organization extended a maximum of 200 dwelling-secured loans;346(2) during the preceding calendar year, extended credit only to consumers with income that did not exceed the LMI household limit; (3) the extension of credit must be made to consumers with income that does not exceed the LMI household limit; and (4) the creditor has and uses written procedures to
determine the consumer’s reasonable ability to repay. Similar to the other categories of lenders exempted from risk retention because of their community- focused lending, as discussed above, these entities serve LMI consumers, and as non-profits, seek to provide
borrowers with loans that will be affordable to lower risk to the borrower and the non-profit. Additionally, such entities must maintain a written policy on determining ability to repay for the LMI consumers it serves.
For the reasons discussed above, under section 15G(e) of the Exchange Act, the agencies are exempting from risk retention loans made by the above entities that are also exempt from the ability-to-repay rules under the CFPB’s Regulation Z. As discussed above, the
For the reasons discussed above, under section 15G(e) of the Exchange Act, the agencies are exempting from risk retention loans made by the above entities that are also exempt from the ability-to-repay rules under the CFPB’s Regulation Z. As discussed above, the