THE CFPB’S REGULATION D

The Alternate Mortgage Transaction Parity Act (AMTPA) was enacted by Congress in 1982 to stimulate consumer access to credit and increase parity between state and federal creditors during an era of unusually high interest rates. In Senate hearings held in 1981, mortgage bankers testified that laws in 26 states either barred state housing creditors from originating alternative mortgage loans or imposed significantly greater restrictions on such loans than those that applied to federal housing creditors operating under federal regulations.

AMTPA established a sort of “piggybacking” regime under which state housing creditors could choose to comply with federal regulations applicable to their federally chartered counterparts if state law would otherwise prohibit or restrict a particular mortgage transaction.

The interim final rule applies to an alternative mortgage transaction if the creditor received an application for that transaction on or after July 22, 2011. If the creditor received the application before July 22, 2011, the alternative mortgage transaction is generally grandfathered and remains subject to the AMTPA provisions and regulations in effect at the time of application. Thus, a consistent set of requirements will apply from application to completion of an alternative mortgage transaction. The rule also clarifies that modifications, renewals, or extensions of alternative mortgage transactions do not result in a loss of AMTPA preemption. This clarification is intended to facilitate the modification of loans for distressed borrowers. However, refinancings are treated as new transactions that must independently meet the requirements for preemption in effect at the time of refinancing.

Consistent with the Dodd-Frank Act amendments to AMTPA, the interim final rule’s definition of “alternative mortgage transaction” is limited to transactions in which the interest rate or finance charge may be adjusted or renegotiated. As a result, previously preempted state consumer protection laws will apply to fixed-rate mortgage loans with interest-only payment periods or negative amortization features, fixed-rate balloon loans where the lender does not make a commitment to renew the loan, and certain other fixed-rate products that previously qualified as alternative mortgage transactions but no longer qualify because of the Dodd-Frank Act amendments.

The interim final rule also implements the Dodd-Frank Act’s amendment to the scope of preemption under AMTPA. Specifically, the rule provides that state laws are preempted only to the extent that they restrict the ability of a state housing creditor to adjust or renegotiate an interest rate or finance charge with respect to an alternative mortgage transaction or the ability of a state housing creditor to change the amount of interest or finance charges included in a payment as a result of the adjustment or renegotiation of the rate or charge. In addition, the interim final rule provides that general state laws regulating loan features or charges that are not integral to alternative mortgage transactions are no longer preempted. Accordingly, state law mortgage disclosure requirements and restrictions on late fees, rate increases as a result of late payment, prepayment penalties, interest-only payment periods, and negative amortization are no longer preempted under AMTPA with respect to alternative mortgage transactions. Furthermore, state laws prohibiting unfair or deceptive acts and practices generally are not subject to preemption under AMTPA.

The interim final rule also provides standards governing alternative mortgage transactions made by state housing creditors pursuant to AMTPA. The rule generally requires that adjustable rate mortgages utilize a publicly available index that is beyond the creditor’s control. In the alternative, a closed-end mortgage may use a formula or schedule identifying the amount and timing of interest rate increases. Renegotiable rate mortgages (also called renewable balloon-payment mortgages) must include a written commitment by the lender to renew the loan, subject to certain limitations. In addition, state housing creditors (like all other creditors) must comply with certain federal underwriting requirements.

Initially, these standards are applicable only to state housing creditors seeking to invoke preemption of certain state laws under AMTPA. However, because AMTPA is designed to promote parity between federal and state creditors, the Dodd-Frank Act amendments effectively require the CFPB to engage in a two-part rulemaking that: (1) Establishes standards for origination of alternative mortgage transactions by federally chartered housing creditors (federal housing creditors) under sources of law other than AMTPA; and then (2) designates such standards as applicable to state housing creditors that make alternative mortgage transactions under AMTPA. The interim final rule therefore relies on the Truth in Lending Act (TILA) to establish the minimum federal standards for alternative mortgage transactions.

The CFPB has provided a one-year extended compliance period (until July 21, 2012) and a temporary safe harbor for federal housing creditors and for state housing creditors that do not seek to invoke AMTPA preemption so that these lenders may continue to originate variable rate mortgages and other alternative mortgage transactions in accordance with other sources of law. However, the CFPB expects that its notice-and-comment rulemaking process to more fully implement the Dodd-Frank Act amendments will focus on the origination of alternative mortgage transactions across the broader marketplace, and seeks comment in anticipation of that rulemaking.

This interim final rule was effective July 22, 2011. Compliance with § 1004.4 of this interim final rule is optional until July 22, 2012 for federal housing creditors and for state housing creditors that are not relying on preemption of state law under § 1004.3. On July 22, 2012, compliance with § 1004.4 is mandatory for all creditors, except as provided in § 1004.4(d).

A copy revised Regulation D is located at: https://www.jackscomplianceresource.com/CFPB-Reg-D-Alternative-Mortgage-Transaction-Parity#_1004.2. The Federal Register copy is available at: https://www.jackscomplianceresource.com/CFPB-The-Inherited-Regulations.html.

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