15 USC 1639c - Minimum standards for residential mortgage loans

U.S Code last checked for updates: Apr 27, 2024

§ 1639c.

Minimum standards for residential mortgage loans

(a)

Ability to repay

(1)

In general

(2)

Multiple loans

(3)

Basis for determination

(4)

Income verification

A creditor making a residential mortgage loan shall verify amounts of income or assets that such creditor relies on to determine repayment ability, including expected income or assets, by reviewing the consumer’s Internal Revenue Service Form W–2, tax returns, payroll receipts, financial institution records, or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets. In order to safeguard against fraudulent reporting, any consideration of a consumer’s income history in making a determination under this subsection shall include the verification of such income by the use of—

(A)

Internal Revenue Service transcripts of tax returns; or

(B)

a method that quickly and effectively verifies income documentation by a third party subject to rules prescribed by the Bureau.

(5)

Exemption

With respect to loans made, guaranteed, or insured by Federal departments or agencies identified in subsection (b)(3)(B)(ii), such departments or agencies may exempt refinancings under a streamlined refinancing from this income verification requirement as long as the following conditions are met:

(A)

The consumer is not 30 days or more past due on the prior existing residential mortgage loan.

(B)

The refinancing does not increase the principal balance outstanding on the prior existing residential mortgage loan, except to the extent of fees and charges allowed by the department or agency making, guaranteeing, or insuring the refinancing.

(C)

Total points and fees (as defined in section 1602(aa)(4) 1

 See References in Text note below.

of this title, other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of the creditor or mortgage originator) payable in connection with the refinancing do not exceed 3 percent of the total new loan amount.

(D)

The interest rate on the refinanced loan is lower than the interest rate of the original loan, unless the borrower is refinancing from an adjustable rate to a fixed-rate loan, under guidelines that the department or agency shall establish for loans they make, guarantee, or issue.

(E)

The refinancing is subject to a payment schedule that will fully amortize the refinancing in accordance with the regulations prescribed by the department or agency making, guaranteeing, or insuring the refinancing.

(F)

The terms of the refinancing do not result in a balloon payment, as defined in subsection (b)(2)(A)(ii).

(G)

Both the residential mortgage loan being refinanced and the refinancing satisfy all requirements of the department or agency making, guaranteeing, or insuring the refinancing.

(6)

Nonstandard loans

(A)

Variable rate loans that defer repayment of any principal or interest

(B)

Interest-only loans

(C)

Calculation for negative amortization

(D)

Calculation process

For purposes of making any determination under this subsection, a creditor shall calculate the monthly payment amount for principal and interest on any residential mortgage loan by assuming—

(i)

the loan proceeds are fully disbursed on the date of the consummation of the loan;

(ii)

the loan is to be repaid in substantially equal monthly amortizing payments for principal and interest over the entire term of the loan with no balloon payment, unless the loan contract requires more rapid repayment (including balloon payment), in which case the calculation shall be made (I) in accordance with regulations prescribed by the Bureau, with respect to any loan which has an annual percentage rate that does not exceed the average prime offer rate for a comparable transaction, as of the date the interest rate is set, by 1.5 or more percentage points for a first lien residential mortgage loan; and by 3.5 or more percentage points for a subordinate lien residential mortgage loan; or (II) using the contract’s repayment schedule, with respect to a loan which has an annual percentage rate, as of the date the interest rate is set, that is at least 1.5 percentage points above the average prime offer rate for a first lien residential mortgage loan; and 3.5 percentage points above the average prime offer rate for a subordinate lien residential mortgage loan; and

(iii)

the interest rate over the entire term of the loan is a fixed rate equal to the fully indexed rate at the time of the loan closing, without considering the introductory rate.

(E)

Refinance of hybrid loans with current lender

In considering any application for refinancing an existing hybrid loan by the creditor into a standard loan to be made by the same creditor in any case in which there would be a reduction in monthly payment and the mortgagor has not been delinquent on any payment on the existing hybrid loan, the creditor may—

(i)

consider the mortgagor’s good standing on the existing mortgage;

(ii)

consider if the extension of new credit would prevent a likely default should the original mortgage reset and give such concerns a higher priority as an acceptable underwriting practice; and

(iii)

offer rate discounts and other favorable terms to such mortgagor that would be available to new customers with high credit ratings based on such underwriting practice.

(7)

Fully-indexed rate defined

(8)

Reverse mortgages and bridge loans

(9)

Seasonal income

(b)

Presumption of ability to repay

(1)

In general

(2)

Definitions

For purposes of this subsection, the following definitions shall apply:

(A)

Qualified mortgage

The term “qualified mortgage” means any residential mortgage loan—

(i)

for which the regular periodic payments for the loan may not—

(I)

result in an increase of the principal balance; or

(II)

except as provided in subparagraph (E), allow the consumer to defer repayment of principal;

(ii)

except as provided in subparagraph (E), the terms of which do not result in a balloon payment, where a “balloon payment” is a scheduled payment that is more than twice as large as the average of earlier scheduled payments;

(iii)

for which the income and financial resources relied upon to qualify the obligors on the loan are verified and documented;

(iv)

in the case of a fixed rate loan, for which the underwriting process is based on a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments;

(v)

in the case of an adjustable rate loan, for which the underwriting is based on the maximum rate permitted under the loan during the first 5 years, and a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments;

(vi)

that complies with any guidelines or regulations established by the Bureau relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the Bureau may determine relevant and consistent with the purposes described in paragraph (3)(B)(i);

(vii)

for which the total points and fees (as defined in subparagraph (C)) payable in connection with the loan do not exceed 3 percent of the total loan amount;

(viii)

for which the term of the loan does not exceed 30 years, except as such term may be extended under paragraph (3), such as in high-cost areas; and

(ix)

in the case of a reverse mortgage (except for the purposes of subsection (a) of this section, to the extent that such mortgages are exempt altogether from those requirements), a reverse mortgage which meets the standards for a qualified mortgage, as set by the Bureau in rules that are consistent with the purposes of this subsection.

(B)

Average prime offer rate

(C)

Points and fees

(i)

In general

(ii)

Computation

For purposes of computing the total points and fees under this subparagraph, the total points and fees shall exclude either of the amounts described in the following subclauses, but not both:

(I)

Up to and including 2 bona fide discount points payable by the consumer in connection with the mortgage, but only if the interest rate from which the mortgage’s interest rate will be discounted does not exceed by more than 1 percentage point the average prime offer rate.

(II)

Unless 2 bona fide discount points have been excluded under subclause (I), up to and including 1 bona fide discount point payable by the consumer in connection with the mortgage, but only if the interest rate from which the mortgage’s interest rate will be discounted does not exceed by more than 2 percentage points the average prime offer rate.

(iii)

Bona fide discount points defined

(iv)

Interest rate reduction

(D)

Smaller loans

(E)

Balloon loans

The Bureau may, by regulation, provide that the term “qualified mortgage” includes a balloon loan—

(i)

that meets all of the criteria for a qualified mortgage under subparagraph (A) (except clauses (i)(II), (ii), (iv), and (v) of such subparagraph);

(ii)

for which the creditor makes a determination that the consumer is able to make all scheduled payments, except the balloon payment, out of income or assets other than the collateral;

(iii)

for which the underwriting is based on a payment schedule that fully amortizes the loan over a period of not more than 30 years and takes into account all applicable taxes, insurance, and assessments; and

(iv)

that is extended by a creditor that—

(I)

operates in rural or underserved areas;

(II)

together with all affiliates, has total annual residential mortgage loan originations that do not exceed a limit set by the Bureau;

(III)

retains the balloon loans in portfolio; and

(IV)

meets any asset size threshold and any other criteria as the Bureau may establish, consistent with the purposes of this part.

(F)

Safe harbor

(i)

Definitions

In this subparagraph—

(I)

the term “covered institution” means an insured depository institution or an insured credit union that, together with its affiliates, has less than $10,000,000,000 in total consolidated assets;

(II)

the term “insured credit union” has the meaning given the term in section 1752 of title 12;

(III)

the term “insured depository institution” has the meaning given the term in section 1813 of title 12;

(IV)

the term “interest-only” means that, under the terms of the legal obligation, one or more of the periodic payments may be applied solely to accrued interest and not to loan principal; and

(V)

the term “negative amortization” means payment of periodic payments that will result in an increase in the principal balance under the terms of the legal obligation.

(ii)

Safe harbor

In this section—

(I)

the term “qualified mortgage” includes any residential mortgage loan—

(aa)

that is originated and retained in portfolio by a covered institution;

(bb)

that is in compliance with the limitations with respect to prepayment penalties described in subsections (c)(1) and (c)(3);

(cc)

that is in compliance with the requirements of clause (vii) of subparagraph (A);

(dd)

that does not have negative amortization or interest-only features; and

(ee)

for which the covered institution considers and documents the debt, income, and financial resources of the consumer in accordance with clause (iv); and

(II)

a residential mortgage loan described in subclause (I) shall be deemed to meet the requirements of subsection (a).

(iii)

Exception for certain transfers

A residential mortgage loan described in clause (ii)(I) shall not qualify for the safe harbor under clause (ii) if the legal title to the residential mortgage loan is sold, assigned, or otherwise transferred to another person unless the residential mortgage loan is sold, assigned, or otherwise transferred—

(I)

to another person by reason of the bankruptcy or failure of a covered institution;

(II)

to a covered institution so long as the loan is retained in portfolio by the covered institution to which the loan is sold, assigned, or otherwise transferred;

(III)

pursuant to a merger of a covered institution with another person or the acquisition of a covered institution by another person or of another person by a covered institution, so long as the loan is retained in portfolio by the person to whom the loan is sold, assigned, or otherwise transferred; or

(IV)

to a wholly owned subsidiary of a covered institution, provided that, after the sale, assignment, or transfer, the residential mortgage loan is considered to be an asset of the covered institution for regulatory accounting purposes.

(iv)

Consideration and documentation requirements

The consideration and documentation requirements described in clause (ii)(I)(ee) shall—

(I)

not be construed to require compliance with, or documentation in accordance with, appendix Q to part 1026 of title 12, Code of Federal Regulations, or any successor regulation; and

(II)

be construed to permit multiple methods of documentation.

(3)

Regulations

(A)

In general

(B)

Revision of safe harbor criteria

(i)

In general

(ii)

Loan definition

The following agencies shall, in consultation with the Bureau, prescribe rules defining the types of loans they insure, guarantee, or administer, as the case may be, that are qualified mortgages for purposes of paragraph (2)(A), and such rules may revise, add to, or subtract from the criteria used to define a qualified mortgage under paragraph (2)(A), upon a finding that such rules are consistent with the purposes of this section and section 1639b of this title, to prevent circumvention or evasion thereof, or to facilitate compliance with such sections:

(I)

The Department of Housing and Urban Development, with regard to mortgages insured under the National Housing Act [12 U.S.C. 1701 et seq.].

(II)

The Department of Veterans Affairs, with regard to a loan made or guaranteed by the Secretary of Veterans Affairs.

(III)

The Department of Agriculture, with regard 3

 So in original. Probably should be followed by “to”.

loans guaranteed by the Secretary of Agriculture pursuant to section 1472(h) of title 42.

(IV)

The Rural Housing Service, with regard to loans insured by the Rural Housing Service.

(C)

Consideration of underwriting requirements for Property Assessed Clean Energy financing

(i)

Definition

(ii)

Regulations

(iii)

Collection of information and consultation

In prescribing the regulations under this subparagraph, the Bureau—

(I)

may collect such information and data that the Bureau determines is necessary; and

(II)

shall consult with State and local governments and bond-issuing authorities.

(c)

Prohibition on certain prepayment penalties

(1)

Prohibited on certain loans

(A)

In general

(B)

Exclusions

For purposes of this subsection, a “qualified mortgage” may not include a residential mortgage loan that—

(i)

has an adjustable rate; or

(ii)

has an annual percentage rate that exceeds the average prime offer rate for a comparable transaction, as of the date the interest rate is set—

(I)

by 1.5 or more percentage points, in the case of a first lien residential mortgage loan having a original principal obligation amount that is equal to or less than the amount of the maximum limitation on the original principal obligation of mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the 6th sentence of section 1454(a)(2) of title 12;

(II)

by 2.5 or more percentage points, in the case of a first lien residential mortgage loan having a original principal obligation amount that is more than the amount of the maximum limitation on the original principal obligation of mortgage in effect for a residence of the applicable size, as of the date of such interest rate set, pursuant to the 6th sentence of section 1454(a)(2) of title 12; and

(III)

by 3.5 or more percentage points, in the case of a subordinate lien residential mortgage loan.

(2)

Publication of average prime offer rate and APR thresholds

The Bureau—

(A)

shall publish, and update at least weekly, average prime offer rates;

(B)

may publish multiple rates based on varying types of mortgage transactions; and

(C)

shall adjust the thresholds established under subclause (I), (II), and (III) of paragraph (1)(B)(ii) as necessary to reflect significant changes in market conditions and to effectuate the purposes of the Mortgage Reform and Anti-Predatory Lending Act.

(3)

Phased-out penalties on qualified mortgages

A qualified mortgage (as defined in subsection (b)(2)) may not contain terms under which a consumer must pay a prepayment penalty for paying all or part of the principal after the loan is consummated in excess of the following limitations:

(A)

During the 1-year period beginning on the date the loan is consummated, the prepayment penalty shall not exceed an amount equal to 3 percent of the outstanding balance on the loan.

(B)

During the 1-year period beginning after the period described in subparagraph (A), the prepayment penalty shall not exceed an amount equal to 2 percent of the outstanding balance on the loan.

(C)

During the 1-year period beginning after the 1-year period described in subparagraph (B), the prepayment penalty shall not exceed an amount equal to 1 percent of the outstanding balance on the loan.

(D)

After the end of the 3-year period beginning on the date the loan is consummated, no prepayment penalty may be imposed on a qualified mortgage.

(4)

Option for no prepayment penalty required

(d)

Single premium credit insurance prohibited

No creditor may finance, directly or indirectly, in connection with any residential mortgage loan or with any extension of credit under an open end consumer credit plan secured by the principal dwelling of the consumer, any credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract, except that—

(1)

insurance premiums or debt cancellation or suspension fees calculated and paid in full on a monthly basis shall not be considered financed by the creditor; and

(2)

this subsection shall not apply to credit unemployment insurance for which the unemployment insurance premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the unemployment insurance premiums, and the unemployment insurance premiums are paid pursuant to another insurance contract and not paid to an affiliate of the creditor.

(e)

Arbitration

(1)

In general

(2)

Post-controversy agreements

(3)

No waiver of statutory cause of action

(f)

Mortgages with negative amortization

No creditor may extend credit to a borrower in connection with a consumer credit transaction under an open or closed end consumer credit plan secured by a dwelling or residential real property that includes a dwelling, other than a reverse mortgage, that provides or permits a payment plan that may, at any time over the term of the extension of credit, result in negative amortization unless, before such transaction is consummated—

(1)

the creditor provides the consumer with a statement that—

(A)

the pending transaction will or may, as the case may be, result in negative amortization;

(B)

describes negative amortization in such manner as the Bureau shall prescribe;

(C)

negative amortization increases the outstanding principal balance of the account; and

(D)

negative amortization reduces the consumer’s equity in the dwelling or real property; and

(2)

in the case of a first-time borrower with respect to a residential mortgage loan that is not a qualified mortgage, the first-time borrower provides the creditor with sufficient documentation to demonstrate that the consumer received homeownership counseling from organizations or counselors certified by the Secretary of Housing and Urban Development as competent to provide such counseling.

(g)

Protection against loss of anti-deficiency protection

(1)

Definition

(2)

Notice at time of consummation

(3)

Notice before refinancing that would cause loss of protection

(h)

Policy regarding acceptance of partial payment

In the case of any residential mortgage loan, a creditor shall disclose prior to settlement or, in the case of a person becoming a creditor with respect to an existing residential mortgage loan, at the time such person becomes a creditor—

(1)

the creditor’s policy regarding the acceptance of partial payments; and

(2)

if partial payments are accepted, how such payments will be applied to such mortgage and if such payments will be placed in escrow.

(i)

Timeshare plans

(Pub. L. 90–321, title I, § 129C, as added and amended Pub. L. 111–203, title X, § 1100A(2), title XIV, §§ 1411(a)(2), 1412, 1414(a), (c), (d), July 21, 2010, 124 Stat. 2107, 2142, 2145, 2149, 2152; Pub. L. 114–94, div. G, title LXXXIX, § 89003(1), Dec. 4, 2015, 129 Stat. 1800; Pub. L. 115–174, title I, § 101, title III, § 307, May 24, 2018, 132 Stat. 1297, 1347.)

cite as: 15 USC 1639c