MBA Compliance Essentials℠

Ability to Repay (ATR) and
Qualified Mortgage (QM)
Resource Guide

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MBA Compliance Essentials℠:
ATR/QM Resource Guide

TABLE OF CONTENTS
AUTHOR BIOGRAPHIES AND INFORMATION ABOUT THE FIRM ......
MBA Compliance Essentials℠:
ATR/QM Resource Guide
B. Compliance Department ..................................................
MBA Compliance Essentials℠:
ATR/QM Resource Guide
D. Portfolio Requirement ..................................................
MBA Compliance Essentials℠:
ATR/QM Resource Guide

SUMMARY OF REQUIREMENTS AND IMPLICATIONS
Overview
The Rule provides tha...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
dwelling where the consumer plans to sell a current dwelling within 12 m...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
household limit as established by regulations prescribed by HUD pursuant...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
III. Roles and Responsibilities
A. Board of Directors124
The Company’s B...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
C. Employees
Each Company employee is responsible for understanding and ...
MBA Compliance Essentials℠:
ATR/QM Resource Guide


A construction phase of 12 months or less of a construction-to-perman...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
and moderate-income household limit as established by regulations prescr...
MBA Compliance Essentials℠:
ATR/QM Resource Guide


The maximum interest rate that may apply during the first five years ...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
determination of a consumer’s ability to repay. The Company follows the ...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
o

The principal loan amount (subtracting any downpayment),

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Plus any...
MBA Compliance Essentials℠:
ATR/QM Resource Guide


Maximum Allowable Points and Fees =

Step 3: Calculate the Total Poin...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
accurate by performing pre-closing and post-closing audits and
making ap...
MBA Compliance Essentials℠:
ATR/QM Resource Guide
a. Seasonal income is considered uninterrupted, and may be used to quali...
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MBA Compliance Essentials ATR/QM Resource Guide

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This 115-page resource guide which has more than 80 pages dedicated to practical tools and resources was developed by Mitchel H. Kider, Managing Partner, along with other staff at Weiner Brodsky Kider P.C. Learn more at http://www.mbaeducation.org/CE-AbilitytoRepay/QualifiedMortgage.htm

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Transcript of "MBA Compliance Essentials ATR/QM Resource Guide"

  1. 1. MBA Compliance Essentials℠ Ability to Repay (ATR) and Qualified Mortgage (QM) Resource Guide .m w w w uc ed ba Presented by MBA and Weiner Brodsky Kider PC Mitchel H. Kider Managing Partner, Weiner Brodsky Kider PC Leslie A. Sowers Associate, Weiner Brodsky Kider PC © 2013 Weiner Brodsky Kider PC n. io at Alexandra M. Karram Associate, Weiner Brodsky Kider PC g or mbaeducation.org/compliance 13376
  2. 2. MBA Compliance Essentials℠: ATR/QM Resource Guide TABLE OF CONTENTS AUTHOR BIOGRAPHIES AND INFORMATION ABOUT THE FIRM .................. 6  INTRODUCTION .................................................................................................. 8  STATUTORY AND REGULATORY BACKGROUND .......................................... 9  SUMMARY OF REQUIREMENTS AND IMPLICATIONS .................................. 11  Overview ...................................................................................................................... 11  Covered Transactions and Exemptions ................................................................... 11  w w General Ability to Repay ............................................................................................ 13  The Eight Factors ..................................................................................................... 13  Developing Underwriting Standards ......................................................................... 14  w Penalties ...................................................................................................................... 15  .m Qualified Mortgages ................................................................................................... 16  Safe Harbor vs. Rebuttable Presumption ................................................................. 16  uc ed ba General Requirements for All Categories of QM ...................................................... 17  The General QM Option ........................................................................................... 18  The Temporary QM Option....................................................................................... 18  Fannie Mae and Freddie Mac to Purchase Only QMs ............................................. 20  HUD’s QM Rule ........................................................................................................ 20  Small Creditor QM Options....................................................................................... 22  n. io at Certain Refinancing Transactions ............................................................................ 23  Points and Fees .......................................................................................................... 24  What is Included? ..................................................................................................... 25  Charges Paid by Third PartiesSeller’s Points and Lender Credits ........................ 27  The “Paid to an Affiliate” Issue ................................................................................. 29  g or A Note on LLPAs and Bona Fide Discount Points.................................................... 29  Prepayment Penalty Restrictions .............................................................................. 31  No Cure Provision for QMsPre-Closing QC Critical ............................................ 32  Record Keeping Requirements ................................................................................. 32  DRAFT POLICY AND PROCEDURES .............................................................. 34  I.  Introduction .................................................................................................... 34  II.  Scope and Purpose of Policies and Procedures ......................................... 34  III.  Roles and Responsibilities ............................................................................ 35  A. Board of Directors........................................................................................ 35  3 ©2013 Weiner Brodsky Kider PC
  3. 3. MBA Compliance Essentials℠: ATR/QM Resource Guide B. Compliance Department .............................................................................. 35  C. Employees ................................................................................................... 36  IV.  Covered Transactions and Exemptions ....................................................... 36  A. Covered Transactions ................................................................................. 36  B. Exemptions .................................................................................................. 36  V.  Definitions ....................................................................................................... 38  VI.  Prepayment Penalty Restrictions ................................................................. 41  VII.  Record Keeping Requirements ..................................................................... 43  w w VIII.  Quality Control ............................................................................................... 43  IX.  Vendor Management ...................................................................................... 44  X.  General Ability to Repay Procedure ............................................................. 45  w A. Overview...................................................................................................... 45  .m B. Verification Using Reasonably Reliable Third-Party Records ..................... 45  C. Assessment of Eight Factors ....................................................................... 46  General QM Procedure .................................................................................. 55  uc ed ba XI.  A. Product Requirements ................................................................................. 55  B. Points and Fees Cap ................................................................................... 55  C. Underwriting Requirements ......................................................................... 56  D. Safe Harbor or Rebuttable Presumption ..................................................... 58  XII.  Temporary QM Procedure ............................................................................. 61  n. io at A. Product Requirements ................................................................................. 61  B. Points and Fees Cap ................................................................................... 61  C. Underwriting Requirements ......................................................................... 62  D. Safe Harbor or Rebuttable Presumption ..................................................... 63  g or XIII.  Small Creditor Portfolio QM Procedure ....................................................... 66  A. Product Requirements ................................................................................. 66  B. Points and Fees Cap ................................................................................... 67  C. Underwriting Requirements ......................................................................... 67  D. Portfolio Requirement .................................................................................. 69  E. Safe Harbor or Rebuttable Presumption ..................................................... 70  XIV.  Small Creditor Balloon QM Procedure ......................................................... 72  A. Product Requirements ................................................................................. 72  B. Points and Fees Cap ................................................................................... 73  C. Underwriting Requirements ......................................................................... 73  4 ©2013 Weiner Brodsky Kider PC
  4. 4. MBA Compliance Essentials℠: ATR/QM Resource Guide D. Portfolio Requirement .................................................................................. 75  E. Safe Harbor or Rebuttable Presumption ..................................................... 76  XV.  Refinance a Non-Standard Mortgage into a Standard Mortgage Procedure ........................................................................................................ 78  XVI.  Points and Fees Calculation Procedure ....................................................... 81  XVII.  Sample Compliance Checklist ...................................................................... 92  XVIII.  Appendix Q Procedure for General QM ....................................................... 96  n. io at uc ed ba .m w w w g or 5 ©2013 Weiner Brodsky Kider PC
  5. 5. MBA Compliance Essentials℠: ATR/QM Resource Guide SUMMARY OF REQUIREMENTS AND IMPLICATIONS Overview The Rule provides that a creditor must not make certain loans unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.17 This requirement applies to all “covered transactions” for which applications are received on or after the Rule’s effective date of January 10, 2014.18 w w w The Rule is enacted as part of Regulation Z, the implementing regulation of the Truth in Lending Act. Therefore, if a transaction is not covered by Regulation Z, it is not covered by the Rule. Regulation Z’s definitions also generally apply, unless otherwise provided in the Rule. The Rule applies to covered transactions made by a creditor, and Regulation Z defines “creditor” as “a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a downpayment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement where there is no note or contract.”19 uc ed ba .m To comply with the requirement to make an ability to repay determination, a creditor can originate a transaction by following the General Ability to Repay (ATR) requirements or by originating a “Qualified Mortgage” (QM). There are four different QM alternatives (each of which has its own requirements): (1) the General QM; (2) the Temporary QM; (3) the Small Creditor Portfolio QM; and (4) the Small Creditor Balloon QM. For refinance transactions that meet certain conditions, a creditor can alternatively satisfy specific ATR requirements when refinancing a non-standard mortgage into a standard mortgage. Covered Transactions and Exemptions n. io at The Rule generally applies to closed-end consumer credit transactions secured by a dwelling, including any real property attached to the dwelling. Accordingly, the Rule generally applies to closed-end mortgage loans that are primarily for personal, family, or household purposes and that are secured by a first or subordinate lien on a dwelling. For closed-end loans that are for nonowner occupied rental property or other closed-end loans for investment or business purposes, the Rule applies only if the loan is subject to Regulation Z.20 g or The Rule does not apply to a home equity line of credit (HELOC) subject to Regulation Z § 1026.40, which applies to open-end credit plans secured by the consumer’s dwelling.21 The Rule also does not apply to a mortgage transaction secured by a consumer’s interest in a timeshare plan, as defined in 11 U.S.C. § 101(53(D)). However, the Rule expressly prohibits evasion of the Rule by structuring a closed-end extension of credit as an open-end plan.22 In addition, the Rule exempts certain transactions from the ability to repay requirements,23 but not from the Rule’s prepayment penalty restrictions.24 Specifically, the Rule’s ability to repay requirements do not apply to a reverse mortgage subject to Regulation Z § 1026.33; a temporary or bridge loan with a term of 12 months or less, such as a loan to finance the purchase of a new 17 12 C.F.R. § 1026.43(c)(1). Conversely, HUD’s final qualified mortgage rule applies to case numbers assigned on or after January 10, 2014. See 78 Fed. Reg. 75215, 75231 (Dec. 11, 2013). 19 12 C.F.R. § 1026.2(17). 20 See 12 C.F.R. § 1026.3. 21 12 C.F.R. § 1026.43(a). 22 12 C.F.R. § 1026.43(h). 23 12 C.F.R. § 1026.43(c)-(f). 24 12 C.F.R. § 1026.43(g). 18 11 ©2013 Weiner Brodsky Kider PC
  6. 6. MBA Compliance Essentials℠: ATR/QM Resource Guide dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling; or a construction phase of 12 months or less of a construction-to-permanent loan. The CFPB also exempts from the ability to repay requirements certain creditors and lending programs offering mortgage loans to low-to-moderate-income consumers. It appears that these exemptions were added so that requiring compliance with the Rule would not undermine or frustrate application of the unique underwriting requirements employed by these creditors and programs. The exemptions are narrowly tailored and may still require compliance with different specified requirements. The transactions subject to these exemptions also still must comply with the Rule’s prepayment penalty restrictions. w w w First, the ability to repay requirements do not apply to an extension of credit made pursuant to a program administered by a Housing Finance Agency, as defined under 24 C.F.R. § 266.5. This exemption applies to both extensions of credit made by such housing finance agencies as well as extensions of credit made by intermediaries (e.g., private creditors) pursuant to a program administered by a housing finance agency, regardless of whether the program is funded by federal, state, or other sources. .m Second, the ability to repay requirements do not apply to an extension of credit made by a creditor designated as: A Community Development Financial Institution, as defined under 12 C.F.R. § 1805.104(h);  A Downpayment Assistance through Secondary Financing Provider, pursuant to 24 C.F.R. § 200.194(a) operating in accordance with regulations prescribed by HUD applicable to such persons; or  A Community Housing Development Organization provided that the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME program, pursuant to the provisions of 24 C.F.R. § 92.300(a), and as the terms community housing development organization, commitment, participating jurisdiction, and project are defined under 24 C.F.R. § 92.2. n. io at uc ed ba  g or Third, the ability to repay requirements do not apply to an extension of credit made pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. §§ 5211 and 5219). Specifically, this exemption applies to several programs designed to stabilize homeownership or mitigate the risks of foreclosure pursuant to the Troubled Asset Relief Program (TARP). Exempt programs include the Making Home Affordable program, which includes the Home Affordable Modification Program (HAMP) and the Hardest Hit Fund program. Finally, the ability to repay requirements do not apply to an extension of credit made by a creditor with a tax exemption ruling or determination letter from the Internal Revenue Service under 25 section 501(c)(3) of the Internal Revenue Code of 1986. However, the exemption only applies if the following conditions are met:   25 The creditor did not extend credit secured by a dwelling more than 200 times in the calendar year preceding the calendar year in which the consumer’s application was received; The creditor did not extend credit to any consumer whose income at the time the creditor received the consumer’s individual application exceeds the low-and moderate-income See 26 U.S.C. § 501(c)(3); 26 C.F.R. § 1.501(c)(3)-1. 12 ©2013 Weiner Brodsky Kider PC
  7. 7. MBA Compliance Essentials℠: ATR/QM Resource Guide household limit as established by regulations prescribed by HUD pursuant to 24 C.F.R. § 570.3, also known as the “section 8 low-income limit” established by HUD; and  The creditor determines, in accordance with written procedures, that the consumer has a reasonable ability to repay the extension of credit. General Ability to Repay As discussed above, the Rule provides that a creditor must not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. One of the ways a creditor may satisfy this requirement is by considering eight specified underwriting factors using reasonably reliable third-party records. w w THE EIGHT FACTORS w When making a reasonable and good faith ability to repay determination, creditors must consider the following eight underwriting factors using reasonably reliable third-party records that are specific to the individual consumer: .m (1) The consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan; uc ed ba (2) If the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status; (3) The consumer’s monthly payment on the covered transaction, calculated using the greater of the fully indexed rate or any introductory interest rate and monthly, fully amortizing payments that are substantially equal (with special rules for loans with a balloon payment, interest-only loans, and negative amortization loans); n. io at (4) The consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made, taking into account any mortgage-related obligations and calculated in accordance with specific requirements depending on if the simultaneous loan is a covered transaction or a HELOC; (5) The consumer’s monthly payment for mortgage-related obligations; (6) The consumer’s current debt obligations, alimony, and child support; (7) The consumer’s monthly debt-to-income (DTI) ratio or residual income; and 26 g or (8) The consumer’s credit history. While the CFPB’s Rule and related commentary sets forth some minimum standards for considering the eight factors and requires certain payment calculations for determining the monthly mortgage payment, it does not provide comprehensive requirements or other technical underwriting criteria. For example, creditors have discretion to determine the appropriate DTI ratio or residual income threshold that may apply in a specific transaction and may consider compensating factors specific to a consumer. Creditors may already have underwriting policies, procedures, and internal controls that consider the eight factors generally. Such creditors must now ensure that they satisfy the minimum standards set forth for considering the eight factors. Notably, the General ATR option does not restrict particular loan terms or features. Creditors also are not prevented from considering additional factors. 26 12 C.F.R. § 1026.43(c). 13 ©2013 Weiner Brodsky Kider PC
  8. 8. MBA Compliance Essentials℠: ATR/QM Resource Guide III. Roles and Responsibilities A. Board of Directors124 The Company’s Board of Directors is responsible for ensuring that the Company complies with the Rule and has appropriate policies and procedures in place to ensure compliance with the requirements of agencies, investors, and other relevant parties with which the Company does business. The Board of Directors reviews these policies and procedures no less than annually and as appropriate in response to changes in laws, business operations, and the requirements of agencies, investors, and other relevant parties. w w B. Compliance Department125 .m w The Board of Directors delegates day-to-day oversight responsibilities for compliance with the Rule and these policies and procedures to the Compliance Department. The Compliance Department is responsible for the development of these policies and procedures based on the direction of the Board of Directors. The Compliance Department’s responsibilities include: Monitoring changes in laws and in policies and procedures of creditors, investors, and other relevant parties with which the Company does business, and assessing if changes to these policies and procedures should be recommended to the Board.  Ensuring management and employees are appropriately trained in and knowledgeable of the Rule’s requirements and these policies and procedures.  126 In accordance with the Company’s Vendor Management Program, ensuring any Company vendors and third-party service providers with responsibilities requiring compliance with the Rule’s requirements have appropriate policies and procedures and training programs to provide for compliance with the Rule and these policies and procedures.  Ensuring that pre-closing and post-closing reviews of covered transactions are conducted to ensure and assess compliance with the Rule and these policies and procedures, and ensuring that these policies and procedures, training, and other internal controls are appropriately updated as a result of audit findings and other applicable concerns.  Conferring with inside and outside legal counsel as appropriate regarding the Rule’s requirements.  Assisting with regulatory inquiries or audits addressing the Rule.  Monitoring compliance with the Rule and these policies and procedures through independent audits performed by the Company or by a third-party.  Periodically reporting to the Board of Directors regarding compliance with the Rule and these policies and procedures, including the results of audit findings as applicable. n. io at uc ed ba  g or 124 Note: Revise as necessary to reflect the appropriate governing party. Note: Revise as necessary to reflect the title of the applicable department or personnel responsible for compliance. 126 Note: Revise as applicable to reflect the title of the Company’s program or policy for supervising vendors and third-party service providers. 125 35 ©2013 Weiner Brodsky Kider PC
  9. 9. MBA Compliance Essentials℠: ATR/QM Resource Guide C. Employees Each Company employee is responsible for understanding and complying with the Rule and these policies and procedures and must participate in the applicable training as designed by the Compliance Department regarding the Rule. IV. Covered Transactions and Exemptions A. Covered Transactions These policies and procedures apply to consumer credit transactions that are secured by a dwelling, including any real property attached to a dwelling, unless an exemption applies (“covered transactions”). w w w The Rule applies to closed-end mortgage loans primarily for personal, family, or household purposes that are secured by a first or subordinate lien on a dwelling unless otherwise exempt. Accordingly, the Rule generally applies to the following closed-end residential mortgage loans that are secured by a dwelling: Purchase money loans.  Refinance loans.  Home improvement loans. uc ed ba .m  To be a covered transaction, a transaction must be subject to the federal Truth in Lending Act (TILA) and its implementing Regulation Z. Regulation Z applies to a loan modification only if it is considered a refinancing under Regulation Z § 1026.20(a). A refinancing is a new transaction requiring new disclosures under Regulation Z, and generally occurs when an existing obligation is satisfied and replaced by a new obligation undertaken by the same consumer. If a loan modification is not considered a refinancing under Regulation Z, it is not subject to the Rule and therefore is not subject to these policies and procedures. n. io at B. Exemptions The Rule’s ability to repay and prepayment penalty provisions do not apply to the following transactions: Home equity lines of credit (HELOC) subject to Regulation Z § 1026.40.  A mortgage transaction secured by a consumer’s interest in a timeshare plan, as defined in 11 U.S.C. § 101(53)(D). g or  The following transactions are exempt from the Rule’s ability to repay provisions but are required to comply with the Rule’s prepayment penalty restrictions:  Reverse mortgages subject to Regulation Z § 1026.33.  A temporary or bridge loan with a term of 12 months or less, such as a loan to finance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling. Where a temporary or bridge loan is renewable, the loan term does not include any additional period of time that could result from a renewal provision provided that any renewal possible under the loan contract is for one year or less. For example, if a construction loan has an initial loan term of 12 months but is renewable for another 12-month loan term, the loan is exempt from the ability to repay requirements because the initial loan term is 12 months. 36 ©2013 Weiner Brodsky Kider PC
  10. 10. MBA Compliance Essentials℠: ATR/QM Resource Guide  A construction phase of 12 months or less of a construction-to-permanent loan. For such a loan, the construction phase and the permanent phase may be treated as separate transactions for purpose of compliance with the ability to repay requirements. The construction phase of the loan is exempt from the ability to repay requirements if the initial term is 12 months or less. Where the construction phase is renewable for a period of one year or less, the term of that construction phase does not include any additional period of time that could result from a renewal provision. For example, if the construction phase has an initial term of 12 months but is renewable for another 12-month term before permanent financing begins, the construction phase is exempt from the ability to repay requirements because the initial term is 12 months. Any renewal of one year or less also qualifies for the exemption. The permanent phase of the loan is treated as a separate transaction, is not exempt from the ability to repay requirements, and may be a qualified mortgage if it satisfies the appropriate requirements. w w An extension of credit made by the Company pursuant to a program administered by a Housing Finance Agency, as defined under 24 C.F.R. § 266.5. This exemption applies to extensions of credit made by the Company pursuant to a program administered by a Housing Finance Agency, regardless of whether the program is funded by federal, state, or other sources.  An extension of credit made by the Company pursuant to its designation as: .m w  A Community Development Financial Institution, as defined under 12 C.F.R. § 1805.104(h); o A Downpayment Assistance through Secondary Financing Provider, pursuant to 24 C.F.R. § 200.194(a), operating in accordance with regulations prescribed by the U.S. Department of Housing and Urban Development (HUD) applicable to such persons; or o A Community Housing Development Organization, provided that the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME program, pursuant to the provisions of 24 C.F.R. § 92.300(a), and as the terms community housing development organization, commitment, participating jurisdiction, and project are defined under 24 C.F.R. § 92.2. n. io at uc ed ba o An extension of credit made by the Company pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. §§ 5211 and 5219). This exemption applies to several programs designed to stabilize homeownership or mitigate the risks of foreclosure pursuant to the Troubled Asset Relief Program (TARP). Exempt programs include the Making Home Affordable program, which includes the Home Affordable Modification Program (HAMP) and the Hardest Hit Fund program.  An extension of credit made by the Company if the Company has a tax exemption ruling or determination letter from the Internal Revenue Service (IRS) under section 501(c)(3) of the Internal Revenue Code of 1986. However, the exemption only applies if the Company meets the following conditions: g or  o The Company did not extend credit secured by a dwelling more than 200 times in the calendar year preceding the calendar year in which the consumer’s application was received; o The Company does not extend credit to any consumer whose income at the time the Company received the consumer’s individual application exceeds the low- 37 ©2013 Weiner Brodsky Kider PC
  11. 11. MBA Compliance Essentials℠: ATR/QM Resource Guide and moderate-income household limit as established by regulations prescribed by HUD pursuant to 24 C.F.R. § 570.3, also known as the “section 8 low-income limit” established by HUD; and o V. The Company determines, in accordance with written procedures, that the consumer has a reasonable ability to repay the extension of credit. The Company makes such determinations in accordance with the attached General Ability to Repay Procedure. Definitions w w For purposes of these policies and procedures, the following terms have the meanings set forth below. These definitions are for convenience and reference purposes only. The official definitions may be found in Regulation Z. “Adjustable-rate mortgage” means a transaction secured by real property or a dwelling for which the annual percentage rate may increase after consummation. w .m “Affiliate” means any company that controls, is controlled by, or is under common control with another company as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. § 1841 et seq.).127 uc ed ba “Amortizing loan” means a loan in which payment of the periodic payments does not result in an increase in the principal balance under the terms of the legal obligation. A “balloon payment” is a payment that is more than two times a regular periodic payment. A “bona fide discount point” for closed-end credit means an amount equal to 1% of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. n. io at “Consummation” means the time that a consumer becomes contractually obligated on a credit transaction, as provided in Regulation Z § 1026.2(13). “Covered Transaction” means a consumer credit transaction secured by a dwelling (including any real property attached to a dwelling) that is subject to the Rule, other than a transaction exempt from coverage under the Rule, as provided in the Covered Transactions and Exemptions section of these policies and procedures. g or “Creditor” means a person who regularly extends consumer credit that is subject to a finance charge or is payable by written agreement in more than four installments (not including a downpayment), and to whom the obligation is initially payable, either on the face of the note or contract, or by agreement when there is no note or contract, as further defined in Regulation Z § 1026.2(17). “Dwelling” is a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. A “dwelling” also includes a boat if it is used as a residence. “Finance charge” means the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the borrower and imposed directly or indirectly by the creditor as 127 Note: The Company should consult with inside or outside legal counsel as appropriate to determine if there is an affiliation based on the particular facts and circumstances. 38 ©2013 Weiner Brodsky Kider PC
  12. 12. MBA Compliance Essentials℠: ATR/QM Resource Guide  The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due, regardless of whether the maximum rate is reached at the first or subsequent adjustment during the five-year period; and  Periodic payments of principal and interest that will repay either: o The outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate that may apply during the first 5 years, assuming the consumer will have made all required payments as due prior to that date; or o The loan amount over the loan term. w w The Company accounts for any periodic interest rate adjustment cap that may limit how quickly the interest rate can increase under the terms of the legal obligation. Where a range for the maximum interest rate during the first five years is provided, the highest rate in that range is the maximum interest rate. .m w To ensure the loan also meets the general ability to repay assessment requirements if the loan is found to not be a Qualified Mortgage after consummation, the Company also underwrites adjustable rate mortgage credit as provided under Factor 3 under Section C of the attached General Ability to Repay Procedure using: The fully indexed rate or any introductory interest rate, whichever is greater; and  Monthly, fully amortizing payments that are substantially equal. uc ed ba  2. Consumer’s Income or Assets At or before consummation, the Company considers and verifies the consumer’s current or reasonably expected income or assets, other than the value of the dwelling including any real property attached to the dwelling that secures the loan. n. io at The Company considers and verifies the consumer’s income and assets in accordance with the Company’s procedures for complying with Factor 1 under Section C of the attached General Ability to Repay Procedure. If the Company relies on the consumer’s income from employment in making a repayment ability determination, the Company considers the consumer’s current employment status in accordance with Factor 2 under Section C of the attached General Ability to Repay Procedure. 3. Consumer’s Debt Obligations, Alimony, and Child Support g or At or before consummation, the Company considers and verifies the consumer’s current debt obligations, alimony, and child support. The Company considers and verifies the consumer’s debt obligations in accordance with the Company’s procedures for complying with Factor 6 under Section C of the attached General Ability to Repay Procedure. 4. Debt-to-Income Ratio or Residual Income The Company will consider either the consumer’s monthly debt-to-income (DTI) ratio or the 143 consumer’s monthly residual income. Under Regulation Z, a specific ratio is not required for the Small Creditor Portfolio QM, but the Company will determine the appropriate threshold for a consumer’s monthly DTI ratio or monthly residual income in making a reasonable and good faith 143 Note: The Company may require use of only one method: either DTI or residual income. 68 ©2013 Weiner Brodsky Kider PC
  13. 13. MBA Compliance Essentials℠: ATR/QM Resource Guide determination of a consumer’s ability to repay. The Company follows the DTI or residual income ]. requirements imposed by applicable state law as set forth in [ For both the residual income and DTI ratio calculation, the following definitions apply:  The consumer’s total monthly debt obligations means the sum of: The consumer’s monthly payments on the covered transaction being originated calculated in accordance with Payment Underwriting procedures set forth above under Section C.1 of this Small Creditor Portfolio QM Procedure; o The consumer’s monthly payment on any simultaneous loans calculated under Factor 4 in Section C of the Company’s attached General Ability to Repay Procedure; w w o o The consumer’s current debt obligations, alimony, and child support calculated under Factor 6 in Section C of the Company’s attached General Ability to Repay Procedure. .m The consumer’s total monthly income means the sum of: o uc ed ba  w o The consumer’s monthly payment for mortgage-related obligations calculated under Factor 5 in Section C of the Company’s attached General Ability to Repay Procedure; and The consumer’s current or reasonably expected income or assets calculated under Factor 1 in Section C of the Company’s attached General Ability to Repay Procedure. If the Company relies on the consumer’s income from employment in making a repayment ability determination, the Company will consider the consumer’s current employment status in accordance with Factor 2 in Section C of the Company’s attached General Ability to Repay Procedure. n. io at For the monthly residual income calculation, the Company will consider the consumer’s remaining income by taking the consumer’s total monthly income and subtracting the consumer’s total monthly debt obligations. For the monthly DTI ratio calculation, the Company will compare the consumer’s total monthly debt obligations to the consumer’s total monthly income. g or The Company may consider factors in addition to the monthly DTI ratio or residual income in assessing a consumer’s repayment ability. For example, the Company may reasonably and in good faith determine that a consumer has the ability to repay despite a higher DTI ratio or lower residual income in light of the consumer’s assets (other than the dwelling and real property attached to the dwelling securing the loan, such as a savings account). D. Portfolio Requirement The Small Creditor Portfolio QM cannot be subject, at consummation, to a commitment or agreement to be acquired by another person, other than a person that meets the definition of “small creditor.” Therefore, the Small Creditor Portfolio QM can only be subject to a forward commitment agreement to another small creditor able to also originate Small Creditor Portfolio QMs. Generally, a Small Creditor Portfolio QM immediately loses its status as a Qualified Mortgage if legal title to the loan is sold, assigned, or otherwise transferred to another person (at initial sale, 69 ©2013 Weiner Brodsky Kider PC
  14. 14. MBA Compliance Essentials℠: ATR/QM Resource Guide o The principal loan amount (subtracting any downpayment), o Plus any other amounts financed by the creditor that are not already included in the principal loan amount and not part of the finance charge, o Subtract any prepaid finance charges. Amount Financed =  Deduct from the Amount Financed the following costs that are both included as points and fees under Step 3 below and financed by the Company: o w w The real estate-related fees included in points and fees under Category 3 of the definition, where the Company receives direct or indirect compensation in connection with the charge, or the charge is paid to an affiliate of the Company. o w o The premiums or other charges payable at or before consummation included in points and fees under Category 4 of the definition. uc ed ba .m The total prepayment penalty incurred by the consumer if the consumer refinances the existing mortgage loan with the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either, included in points and fees under Category 6 of the definition. Total Loan Amount (Amount Financed – Financed Points and Fees) =  Multiply the Total Loan Amount by the Applicable Percentage Cap to determine the Maximum Allowable Points and Fees in a dollar amount. Maximum Allowable Points and Fees (Total Loan Amount x Percentage Cap) = n. io at For an example total loan amount calculation, assume the principal loan amount is $105,000, the consumer pays a $400 appraisal fee to the creditor that is financed but not included in the principal loan amount and $3,000 in prepaid finance charges at closing. Because the $105,000 loan amount is greater than $100,000, the Applicable Cap is 3% of the “total loan amount.” To determine the “total loan amount,” first determine the amount financed by taking: $105,000 principal loan amount,  Plus $400 appraisal fee as other amounts financed by the creditor (because it is not already included in the principal loan amount and it is not part of the finance charge),  Subtract $3,000 in prepaid finance charges paid at closing. The amount financed = $102,400 ($105,000 + $400 - $3,000). g or  Second, deduct from the amount financed the costs that are included in points and fees in Categories 3, 4, and 6 under Step 3 below and that are also financed by the creditor:  $102,400 amount financed,  Subtract $400 appraisal fee financed by the creditor and included in points and fees. The total loan amount = $102,000 ($102,400 amount financed - $400 in financed points and fees). The Maximum Allowable Points and Fees = $3,060 (3% of $102,000). 82 ©2013 Weiner Brodsky Kider PC
  15. 15. MBA Compliance Essentials℠: ATR/QM Resource Guide  Maximum Allowable Points and Fees = Step 3: Calculate the Total Points and Fees for the covered transaction. To calculate points and fees for a closed-end transaction, add together the amounts known at or before consummation for the 6 categories of fees or charges as defined below. Unless otherwise specified, a charge or fee is known at or before consummation if the Company knows at or before consummation that the charge or fee will be imposed in connection with the transaction, even if the charge or fee is scheduled to be paid after consummation. w w To ensure a transaction meets the applicable points and fees cap at or before consummation, the Company performs the calculation at the following times during the loan process, as applicable: Initial disclosures;  Revised disclosures;  Final disclosures/closing instructions; and/or  Funding. .m w  uc ed ba For each upfront fee or charge paid in connection with the covered transaction, the Company documents:  Who pays the fee or charge;  If the fee or charge is paid to an affiliate of the Company; and  Who retains the fee or charge. 151 The Company is an “affiliate” of the following businesses: n. io at Business Name Finance Charge g or Category 1. Services Provided Include:  All items included in the finance charge under Regulation Z § 1026.4(a) and (b). This includes points, loan fees, mortgage insurance premiums, etc. This also includes upfront 151 Note: For points and fees purposes, “affiliate” is defined as a company that controls, is controlled by, or is under common control with another company as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. § 1841 et seq.). The Company consults with inside or outside legal counsel as appropriate to determine if there is an affiliation based on the particular facts and circumstances. 83 ©2013 Weiner Brodsky Kider PC
  16. 16. MBA Compliance Essentials℠: ATR/QM Resource Guide accurate by performing pre-closing and post-closing audits and making appropriate adjustments to its procedures and employee training in response to such findings? If compliance issues are discovered in a pre-closing audit, does the Company have procedures to ensure the issue is appropriately escalated and resolved prior to closing to ensure the loan is a QM at consummation? When a QM has a Rebuttable Presumption, does the Company have procedures to ensure and document that the consumer has sufficient residual income to meet living expenses? n. io at uc ed ba .m w w w Points and Fees Does the Company require Private Mortgage Insurance (PMI)? Are the upfront premiums required to be refundable on a pro rata basis with the refund automatically issued upon notification of the satisfaction of the underlying loan and, if not, does the Company ensure that such upfront premiums are included in points and fees when required? Does the Company have procedures to ensure that the upfront portion of the PMI premium that exceeds the upfront amount that would apply under the FHA policies at consummation are included in points and fees? Does the Company have affiliates? Does the Company use its affiliates for any of the following services: title, preparing loan related documents, notary, credit report, property appraisal or inspection to assess the value or condition of the property performed prior to closing, or homeowners insurance? Does the Company ensure that such affiliate fees are included in the points and fees calculation to the extent required? Does the Company use mortgage brokers? Does the Company ensure that payments to mortgage brokers are included in points and fees when required? Does the Company document who pays each fee, if the fee is paid to an affiliate, and who retains each fee? Does the Company perform the points and fees calculation throughout the application process to ensure the transaction does not exceed the applicable cap at or before closing, including at initial disclosures, revised disclosures, final disclosures/closing instructions, and/or funding as applicable? Does the Company document the final points and fees calculation and supporting materials for the calculation in the loan file? Does the Company monitor compliance with the points and fees calculation by performing pre-closing and post-closing audits and making appropriate adjustments to its procedures and employee training in response to such findings? If compliance issues are discovered in a pre-closing audit, does the Company have procedures to ensure the issue is appropriately escalated and resolved prior to closing to ensure the loan is a QM at consummation? g or 95 ©2013 Weiner Brodsky Kider PC
  17. 17. MBA Compliance Essentials℠: ATR/QM Resource Guide a. Seasonal income is considered uninterrupted, and may be used to qualify the consumer, if the creditor documents that the consumer: i. Has worked the same job for the past two years, and ii. Expects to be rehired the next season. b. Seasonal employment includes, but is not limited to: i. ii. 6. Umpiring baseball games in the summer; or Working at a department store during the holiday shopping season. Primary Employment Less Than 40 Hour Work Week. w w a. When a consumer’s primary employment is less than a typical 40-hour work week, the creditor should evaluate the stability of that income as regular, ongoing primary employment. w 7. .m b. Example: A registered nurse may have worked 24 hours per week for the last year. Although this job is less than the 40-hour work week, it is the consumer’s primary employment, and should be considered effective income. Commission Income. uc ed ba a. Commission income must be averaged over the previous two years. To qualify commission income, the consumer must provide: i. Copies of signed tax returns for the last two years; and ii. The most recent pay stub. b. Consumers whose commission income was received for more than one year, but less than two years may be considered favorably if the underwriter can: n. io at i. ii.  Document the likelihood that the income will continue, and Soundly rationalize accepting the commission income. Notes: ii. A commissioned consumer is one who receives more than 25 percent of his/her annual income from commissions. iii. 8. Unreimbursed business expenses must be subtracted from gross income. A tax transcript obtained directly from the IRS may be used in lieu of signed tax returns. g or i. Qualifying Commission Income Earned for Less Than One Year. a. Commission income earned for less than one year is not considered effective income. Exceptions may be made for situations in which the consumer’s compensation was changed from salary to commission within a similar position with the same employer. b. A consumer’s income may also qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the consumer for the mortgage. 99 ©2013 Weiner Brodsky Kider PC
  18. 18. n. io at uc ed ba .m w w w g or View more MBA Compliance Essentials resource guides at mbaeducation.org/compliance

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