15 U.S.C. § 1639c — Minimum standards for residential mortgage loans

(a) Ability to repay. (1) In general. Under regulations from the Bureau^*, a creditor^* may make a residential mortgage loan only if the creditor reasonably and in good faith decides, using verified and documented information, that when the loan is completed the consumer can reasonably repay the loan under its terms, including all applicable taxes, insurance (including mortgage-guarantee insurance), and assessments. (2) Multiple loans. If the creditor knows or has reason to know that one or more residential mortgage loans secured by the same dwelling will be made to the same consumer, the creditor must reasonably and in good faith decide, using verified and documented information, that the consumer can reasonably repay the combined payments on all those loans under their terms, including all applicable taxes, insurance (including mortgage-guarantee insurance), and assessments. (3) Basis for determination. The creditor’s decision must consider the consumer’s credit^* history, current income, income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the income left after non-mortgage debt and mortgage-related obligations, employment status, and other financial resources. It may not count the consumer’s equity in the dwelling or other real property securing the loan. The creditor must use a payment schedule that fully pays off the loan over its term. (4) Income verification. The creditor must verify the income or assets it relies on, including expected income or assets, by reviewing a W-2, tax returns, payroll receipts, financial-institution records, or other third-party documents that give reasonably reliable evidence. Any use of the consumer’s income history must also verify that income using (A) IRS tax-return transcripts, or (B) a third-party method that quickly and effectively verifies income documents and is subject to Bureau rules. (5) Exemption. For loans made, guaranteed, or insured by the Federal departments or agencies identified in (b)(3)(B)(ii), those departments or agencies may exempt a streamlined refinancing from this income-verification rule if all these conditions are met: (A) The consumer is less than 30 days past due on the old residential mortgage loan. (B) The refinancing does not increase the old loan’s outstanding principal, except for fees and charges allowed by the department or agency making, guaranteeing, or insuring the refinancing. (C) Total points and fees payable for the refinancing, as defined in section 1602(aa)(4) of this title, excluding bona fide third-party charges not kept by the mortgage originator, creditor, or an affiliate, do not exceed 3 percent of the new loan amount. (D) The new interest rate is lower than the old rate, unless the borrower changes from an adjustable-rate loan to a fixed-rate loan, under guidelines set by the department or agency. (E) The refinancing has a payment schedule that fully pays it off, as required by that department’s or agency’s regulations. (F) The refinancing terms do not create a “balloon payment,” as defined in (b)(2)(A)(ii). (G) Both the old loan and the refinancing meet all requirements of the department or agency making, guaranteeing, or insuring the refinancing. (6) Nonstandard loans. (A) Variable-rate loans that defer principal or interest. To decide whether a consumer can repay such a variable-rate loan, the creditor must use a schedule that fully pays it off. (B) Interest-only loans. For a loan allowing or requiring interest-only payments, the creditor must use the payment needed to pay off the loan by its final maturity. (C) Negative amortization. The creditor must also consider any increase in the balance caused by a negative-amortization provision. (D) Calculation process. The creditor must calculate the monthly principal-and-interest payment as if (i) all loan proceeds were paid out when the loan was completed; (ii) the loan were repaid in substantially equal monthly principal-and-interest payments over its whole term with no balloon payment, unless the contract requires faster repayment, including a balloon payment. If faster repayment is required, the calculation must be (I) under Bureau regulations for a loan whose annual percentage rate, when the rate is set, is no more than 1.5 percentage points above the comparable average prime offer rate for a first-lien loan or 3.5 points above it for a subordinate-lien loan, or (II) under the contract’s repayment schedule for a loan whose rate is at least 1.5 points above that average for a first-lien loan or 3.5 points above it for a subordinate-lien loan; and (iii) the rate for the whole term were fixed at the fully indexed rate when the loan closed, without using the introductory rate. (E) Refinancing hybrid loans with the current creditor. When a creditor considers refinancing an existing hybrid loan into a standard loan from that same creditor, the monthly payment would decrease, and the mortgagor has not missed a payment on the existing loan, the creditor may (i) consider the mortgagor’s good standing; (ii) consider whether the new credit would prevent a likely default when the old mortgage resets and give that concern higher priority as an acceptable underwriting practice; and (iii) offer the mortgagor rate discounts and other favorable terms available to highly rated new customers because of that practice. (7) Fully indexed rate defined. “Fully indexed rate” means the index rate prevailing when the residential mortgage loan is made plus the margin that applies after any introductory interest rate ends. (8) Reverse mortgages and bridge loans. This subsection does not apply to a reverse mortgage or to a temporary or bridge loan lasting 12 months or less, including a loan to buy a new dwelling when the consumer plans to sell another dwelling within 12 months. (9) Seasonal income. If documented income, including small-business income, will repay the loan, the creditor may account for that income’s seasonal and irregular nature when underwriting and scheduling payments.

(b) Presumption of ability to repay. (1) In general. A creditor for a residential mortgage loan, and an assignee liable under this subchapter, may presume that the loan meets (a) if it is a “qualified mortgage.” (2) Definitions. (A) Qualified mortgage. A “qualified mortgage” is a residential mortgage loan whose regular payments may not (i) (I) increase the principal balance, or (II) except as allowed by (E), let the consumer defer principal repayment; and (ii) except as allowed by (E), do not create a balloon payment. A “balloon payment” is a scheduled payment more than twice the average of earlier scheduled payments. The loan must also have (iii) verified and documented income and financial resources used to qualify the obligors; (iv) for a fixed-rate loan, underwriting based on a fully amortizing schedule covering the term and all applicable taxes, insurance, and assessments; (v) for an adjustable-rate loan, underwriting based on the highest rate allowed during the first 5 years and a fully amortizing schedule covering the term and those taxes, insurance, and assessments; (vi) compliance with Bureau rules or guidelines on total monthly debt compared with monthly income, or alternative measures of the ability to pay regular expenses after total monthly debt, considering income levels and other relevant factors consistent with (3)(B)(i); (vii) total points and fees, as defined in (C), of no more than 3 percent of the loan amount; (viii) a term of no more than 30 years, unless extended under (3), such as in high-cost areas; and (ix) if it is a reverse mortgage, compliance with Bureau qualified-mortgage standards, except that mortgages completely exempt from (a) are exempt from (a) for this purpose. (B) Average prime offer rate. “Average prime offer rate” means the average prime offer rate for a comparable transaction on the date the transaction’s interest rate is set, as published by the Bureau. (C) Points and fees. (i) In general. “Points and fees” means the points and fees defined in section 1602(aa)(4) of this title, excluding bona fide third-party charges not kept by the mortgage originator, creditor, or an affiliate. (ii) Computation. When calculating total points and fees, the calculation excludes either, but not both, of these amounts: (I) up to and including 2 bona fide discount points paid by the consumer if the rate from which the mortgage rate is discounted is no more than 1 percentage point above the average prime offer rate; or (II), unless 2 points were excluded under (I), up to and including 1 bona fide discount point if that starting rate is no more than 2 percentage points above the average prime offer rate. (iii) Bona fide discount points defined. These are loan discount points the consumer knowingly pays to reduce the mortgage’s interest rate or time-price differential and that actually produce that reduction. (iv) Interest-rate reduction. (I) and (II) do not apply to discount points used to buy a rate reduction unless the reduction is reasonably consistent with established industry norms and practices for secondary mortgage-market transactions. (D) Smaller loans. The Bureau must issue rules adjusting the (A)(vii) criteria so lenders making smaller loans can meet the presumption-of-compliance requirements. The Bureau must consider the possible effects on rural areas and places with lower home values. (E) Balloon loans. By regulation, the Bureau may include a balloon loan as a qualified mortgage if it (i) meets all (A) criteria except (i)(II), (ii), (iv), and (v); (ii) is one for which the creditor decides the consumer can make every scheduled payment except the balloon payment from income or assets other than the collateral; (iii) is underwritten using a schedule that fully pays it off within no more than 30 years and includes all applicable taxes, insurance, and assessments; and (iv) is extended by a creditor that (I) operates in a rural or underserved area, (II) with affiliates, stays within a Bureau limit on annual residential-mortgage originations, (III) keeps the balloon loans in its portfolio, and (IV) meets Bureau asset-size and other criteria consistent with this part. (F) Safe harbor. (i) Definitions. “Covered institution” means an insured depository institution or insured credit union that, with affiliates, has less than $10 billion in consolidated assets. “Insured credit union” has the meaning given in section 1752 of title 12. “Insured depository institution” has the meaning given in section 1813 of title 12. “Interest-only” means that one or more periodic payments may be applied only to accrued interest and not principal. “Negative amortization” means periodic payments that increase the principal balance under the legal obligation. (ii) Safe harbor. In this section, “qualified mortgage” includes a residential mortgage loan (I) (aa) originated and kept in the portfolio of a covered institution; (bb) complying with the prepayment-penalty limits in (c)(1) and (c)(3); (cc) complying with (A)(vii); (dd) having no negative-amortization or interest-only features; and (ee) for which the institution considers and documents the consumer’s debt, income, and financial resources as required by clause (iv). (II) Such a loan is treated as meeting (a). (iii) Exception for certain transfers. The loan loses this safe harbor if its legal title is sold, assigned, or transferred, unless the transfer is (I) because of the covered institution’s bankruptcy or failure; (II) to another covered institution that keeps it in its portfolio; (III) in a merger or acquisition and the recipient keeps it in its portfolio; or (IV) to a wholly owned subsidiary, if after transfer the loan is treated as an asset of the covered institution for regulatory accounting. (iv) Consideration and documentation. The requirements in (ii)(I)(ee) do not require compliance with or documentation under appendix Q to part 1026 of title 12, Code of Federal Regulations, or a successor rule, and allow multiple documentation methods. (3) Regulations. (A) In general. The Bureau must issue regulations carrying out this subsection. (B) Revision of safe-harbor criteria. (i) In general. The Bureau may revise, add to, or remove qualified-mortgage criteria if it finds the regulations necessary or proper to keep responsible, affordable mortgage credit available consistently with this section, necessary and appropriate to carry out this section and section 1639b, prevent evasion or circumvention, or facilitate compliance. (ii) Loan definition. In consultation with the Bureau, these agencies must issue rules defining the loans they insure, guarantee, or administer that qualify under (2)(A). Their rules may revise, add to, or remove those criteria if consistent with this section and section 1639b, preventing evasion or circumvention, and facilitating compliance: (I) Housing and Urban Development, for mortgages insured under the National Housing Act; (II) Veterans Affairs, for loans made or guaranteed by the Secretary of Veterans Affairs; (III) Agriculture, for loans guaranteed by the Secretary of Agriculture under section 1472(h) of title 42; and (IV) the Rural Housing Service, for loans it insures. (C) Property Assessed Clean Energy financing. (i) Definition. “Property Assessed Clean Energy financing” means financing home improvements that creates a tax assessment on the consumer’s real property. (ii) Regulations. The Bureau must issue regulations carrying out (a) and applying section 1640 to violations of (a) involving this financing, accounting for its unique nature. (iii) Information and consultation. The Bureau may collect needed information and data and must consult State and local governments and bond-issuing authorities.

(c) Prohibition on certain prepayment penalties. (1) Prohibited on certain loans. (A) In general. A residential mortgage loan that is not a “qualified mortgage” under (b)(2) may not require a consumer to pay a prepayment penalty for paying all or part of the principal after the loan is completed. (B) Exclusions. For this subsection, “qualified mortgage” does not include a residential mortgage loan that (i) has an adjustable rate, or (ii) has an annual percentage rate above the comparable average prime offer rate, when the rate is set, by (I) at least 1.5 points for a first-lien loan whose original principal is no more than the applicable maximum mortgage limit under section 1454(a)(2) of title 12; (II) at least 2.5 points for a first-lien loan whose original principal is above that limit; or (III) at least 3.5 points for a subordinate-lien loan. (2) Publication of rates and thresholds. The Bureau must publish and update average prime offer rates at least weekly, may publish multiple rates for different mortgage transactions, and must adjust the three thresholds when needed to reflect major market changes and carry out the Mortgage Reform and Anti-Predatory Lending Act. (3) Phased-out penalties on qualified mortgages. A qualified mortgage may not impose a prepayment penalty above (A) 3 percent of the outstanding balance during the first year after completion; (B) 2 percent during the next year; or (C) 1 percent during the following year. (D) After 3 years from completion, no penalty may be imposed. (4) No-penalty option. A creditor may not offer a loan product with such a penalty without also offering a residential mortgage product with no such penalty. (d) Single-premium credit insurance prohibited. A creditor may not directly or indirectly finance, with a residential mortgage loan or an open-end consumer credit plan secured by the consumer’s principal dwelling, credit life, disability, unemployment, or property insurance; other accident, loss-of-income, life, or health insurance; or payments for a debt-cancellation or debt-suspension agreement. (1) Monthly insurance premiums and debt-cancellation or suspension fees calculated and paid completely each month are not treated as financed. (2) The rule does not apply to credit-unemployment insurance if premiums are reasonable, the creditor receives no direct or indirect compensation for them, and they are paid under another insurance contract rather than to a creditor affiliate. (e) Arbitration. (1) In general. A residential mortgage loan or covered open-end credit extension may not require arbitration or another nonjudicial procedure to resolve controversies or claims from the transaction. (2) Post-controversy agreements. After a dispute or claim arises, the consumer and the creditor or assignee may agree to arbitration or another nonjudicial procedure. (3) No waiver of statutory cause of action. No loan provision or related agreement may be interpreted to stop the consumer from suing in an appropriate United States district court or other court with jurisdiction, under section 1640 or another law, for damages or other relief for an alleged violation of this section, this subchapter, or another Federal law. (f) Mortgages with negative amortization. A creditor may not extend credit under an open- or closed-end consumer credit plan secured by a dwelling, or residential real property containing a dwelling, other than a reverse mortgage, if its payment plan may cause negative amortization at any time, unless before completion (1) the creditor gives the consumer a statement saying (A) the transaction will or may cause negative amortization, (B) what negative amortization means as the Bureau prescribes, (C) it increases the account’s outstanding principal, and (D) it reduces the consumer’s equity; and (2) for a first-time borrower whose residential mortgage is not a qualified mortgage, the borrower gives enough documentation to show receipt of homeownership counseling from an organization^* or counselor certified by the Secretary of Housing and Urban Development as competent to provide it. (g) Protection against loss of anti-deficiency protection. (1) Definition. An “anti-deficiency law” is a State law that, after foreclosure on a consumer’s mortgaged residential property, makes the consumer not liable, within that law’s terms and limits, for the difference between the foreclosure sale price and the mortgage balance. (2) Notice at completion. For a loan that is or will be protected by such a law, the creditor or mortgage originator must give the consumer a written notice before completion describing the protection and what losing it would mean. (3) Notice before refinancing that loses protection. If an application is given to or received from the consumer for refinancing that would remove the protection, the creditor or originator must give that written description before the refinancing agreement is completed. (h) Policy on accepting partial payments. For a residential mortgage loan, the creditor must disclose before settlement—or when a person^* becomes creditor on an existing loan—the creditor’s policy on accepting partial payments and, if accepted, how they will be applied and whether they will be placed in escrow. (i) Timeshare plans. This section and its regulations do not apply to credit relating to a plan described in section 101(53D) of title 11.