CFPB’s Final Mortgage Regulations:Ability-to-Repay and Qualified Mortgage Rules
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CFPB’s Final Mortgage Regulations:Ability-to-Repay and Qualified Mortgage Rules

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Andy Keeney made this presentation before NAFCU on March 6, 2013.

Andy Keeney made this presentation before NAFCU on March 6, 2013.

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CFPB’s Final Mortgage Regulations:Ability-to-Repay and Qualified Mortgage Rules CFPB’s Final Mortgage Regulations:Ability-to-Repay and Qualified Mortgage Rules Presentation Transcript

  • CFPB’sFinal Mortgage Regulations: Ability-to-Repay and Qualified Mortgage Rules March 6, 2013 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.
  • Ability-to-Repay and Qualified Mortgage Rules
  • E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.comMeagan J. ThomassonKaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3014mjthomasson@kaufcan.com
  • ons Mo Uni … Cre re B it are in m expe dit or edions r n … or cte U ro ag to ni w r Cdit u 2012 tg d on er fo cre in r by ion e lo sur an pa s s eaated bill or s s fo Tu Y in 00 in re r M rn t ig a rd orig p $1 o es to at c ns d- o io o r o c ag to br rt e tg dR or cte Credit Unions Hit Another is yea akin gag th e M pe r… g $ e ex 10 s Mortgage Record: Callahan 0 b …credit unions originated $84.5 billion in housing finance il li on loans…activity through the first six months totaled $157 billion. Credit Unions Experience Record Breaking Loan Quarter Since 2007, credit unions have originated more than 105 million loans, amounting to $1.5 trillion.
  • # of 1st Mortgages Originated Through 3Q 330,023 463,584 341,113 345,002 536,729 Source: Callahan & Associates
  • $56,462,353,519 $77,066,186,748 $55,997,564,511Source: Callahan & Associates $54,315,197,762 $89,251,359,972 $ of 1st Mortgages Originated Through 3Q
  • HistoryProposed Regulation: 474 pages Comments Received: 1800 Final Regulation: 804 pagesEffective Date: January 10, 2014Number of Days Remaining: 317 Let’s Roll!
  • Overview• Applies to all credit unions offering mortgage loans• Must determine a consumer’s ability to repay a mortgage before making the loan.• Regulation covers all consumer mortgages except home equity (HELOCs), timeshare plans, reverse mortgages or temporary loans.• General overview of Ability-to-Repay determination and underwriting considerations• Closer look at the individual underwriting considerations• Qualified mortgages and a “Safe Harbor”• Exemptions from Ability-to-Repay rule for refinancing non-standard mortgages
  • Background• Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (“CFPB”) and consolidated the rulemaking authority for federal consumer financial laws in the CFPB• The CFPB has undertaken large regulatory reform efforts since its inception, including issuing new regulations governing mortgage lending requirements, the “Ability-to-Repay and Qualified Mortgage Rule”
  • Background• Other CFPB regulatory reform efforts implementing requirements under title XIV of the Dodd-Frank Act relating to mortgages include new rules on mortgage loan servicing, escrow accounts, HOEPA, loan origination compensation, and appraisals• Many NAFCU webinars are already scheduled.
  • The CFPB’s Mortgage Reform Webcast Series• CFPB’s Final Mortgage Regulations – On-Demand• CFPB Ability to Repay/Qualified Mortgages Wednesday, March 6 I 2:00 p.m. – 3:30 p.m. EST• Digging Deeper: CFPB’s Mortgage Rules Wednesday, March 27 I 2:00 p.m. – 3:30 p.m. EST• What new requirements apply to HELOCs? Wednesday, April 10 I 2:00 p.m. – 3:30 p.m. EST• Mortgage Periodic Statements Wednesday, April 17 I 2:00 p.m. – 3:30 p.m. EST• Consumer Information Request & Error Resolution Procedures Wednesday, May 15 I 2:00 p.m. – 3:30 p.m. EST• Mortgage Loan Origination Wednesday, August 21 I 2:00 p.m. – 3:30 p.m. EST• CFPB Compliance Update by NAFCU’s Compliance Team Wednesday, November 6 I 2:00 p.m. – 3:30 p.m. EST
  • Ability to Repay and Qualified Mortgage Rule• In January 2013, the CFPB amended Regulation Z (implementing the Truth in Lending Act) by issuing new regulations governing mortgage lending requirements, known as the “Ability-to-Repay and Qualified Mortgage Rule”
  • Ability to Repay and Qualified Mortgage Rule• Regulation Z currently prohibits lenders from making a higher-priced or higher-cost mortgage loan without regard for the consumer’s ability to repay the loan• New Rule establishes minimum requirements for all lenders to make an ability-to-repay determination prior to extending a residential mortgage loan
  • Ability to Repay and Qualified Mortgage Rule• New Ability-to-Repay Rule applies to all closed-end mortgage loans (home purchases, refinancings, home equity loans, vacation home loans, etc.)• Does not apply to open-end credit plans, time share plans, reverse mortgages or temporary loans (i.e., 12 months or less)• New Rule goes into effect on January 10, 2014• But, some rule changes may be in the works
  • Ability to repay determinations (at a minimum credit unions must consider 8underwriting factors in determining a borrower’s ability to pay)
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loans
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loans5. The monthly payment for mortgage-related obligations
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loans5. The monthly payment for mortgage-related obligations6. Current debt obligations, alimony and child support
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loans5. The monthly payment for mortgage-related obligations6. Current debt obligations, alimony and child support7. The monthly debt-to-income ratio or residual income
  • Minimum Underwriting Factors1. Current or reasonably expected income or assets2. Current Employment Status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loans5. The monthly payment for mortgage-related obligations6. Current debt obligations, alimony and child support7. The monthly debt-to-income ratio or residual income8. Credit history
  • Current or Reasonably ExpectedIncome or Assets Determination• Section 1026.43(b)(4) prescribes the manner in which the creditor verifies the borrower’s assets or income• May review specified records to satisfy this requirement – Tax returns – IRS Form W-2 (or similar forms) – Employer records – Government agency records (e.g., Social Security Administration “proof of income” letter)
  • Current or Reasonably ExpectedIncome or Assets Determination• May review specified records to satisfy this requirement (cont.) – Financial institution records – Check cashing receipts – Receipts from consumer’s use of funds transfer services• Credit union needs to verify only the income/assets actually relied upon in making its determination of whether to extend credit
  • Qualified Mortgages
  • Qualified Mortgages - GeneralQualified mortgage: a residential mortgage thatprovides for regular, substantially equal payments anddoes not include any of the following - – Negative amortization loans – Interest-only loans – Balloon payment loans (with some exceptions) – Loan with a term exceeding 30 years – “No-doc” loans (where creditor does not verify income or assets) – Points and fees in excess of or exceeding 3% of total loan amount (for loans over $100,000)
  • Qualified Mortgages – Safe Harbor• Presumption of Compliance• Higher-Priced Covered Transaction
  • Qualified MortgagesFinancial Institutions are not required to issue onlyQualified Mortgages. CFPB Director RichardCordray indicated to financial industryrepresentatives that it would be a mistake forprudential regulators to examine institutions in away that steers them toward providing onlymortgages defined as “qualified” under the ability-to-repay rule. Cordray said the CFPB wants othertypes of mortgages to flourish as well. BUT…
  • Qualified Mortgages – Special Rules
  • Qualified Mortgages – Limits on Points and FeesPoints and fees on qualified mortgages cannotexceed 3% on loans of $100,000 or more(varies for loans less than $100,000)
  • Qualified Mortgage Presumption• Rule provides a presumption that “qualified mortgages” satisfy the ability-to-repay requirements: – Conclusive presumption (i.e., a safe harbor) for qualified mortgages that are not higher-priced / subprime – Rebuttable presumption for qualified mortgages that are higher-priced / subprime• Benefits?
  • Qualified Mortgage Presumption Cont. • Rule establishes underwriting criteria for qualified mortgages: – Monthly payments must be calculated based on the highest payment that will apply in the first five years of the loan – Consumer has a total debt-to-income ratio that is less than or equal to 43%
  • Qualified Mortgage & Fannie/Freddie Underwriting Standards • Compliance with Fannie Mae / Freddie Mac underwriting guidelines alone does not necessarily mean a loan is a Qualified Mortgage • However, there is a temporary special rule (sunset date no later than 1/10/2021) where a loan that meets Fannie/Freddie underwriting standards PLUS additional criteria will be considered a Qualified Mortgage
  • Qualified Mortgage & Fannie/Freddie Underwriting Standards • A loan that satisfies Fannie/Freddie underwriting standards is considered a Qualified Mortgage if it also meets the following requirements: – Regular, substantially equal periodic payments – Term is 30 years or less, and – Total points and fees do not exceed prescribed thresholds
  • Higher Priced Covered TransactionDefined as a covered transaction with an APRthat exceeds the average prime offer rate for acomparable transaction as of the date theinterest rate is set by 1.5 or more percentagepoints for a first-lien covered transaction, or by3.5 or more percentage points for asubordinate-lien transaction
  • Balloon – Payment Qualified MortgagesA qualified mortgage may provide for a balloon-payment, provided:•No increase in principal balance (negativeamortization)•Term does not exceed 30 years•Total points and fees do not exceed 3% (forloans greater than $100,000)
  • Balloon – Payment Qualified Mortgages (Cont.)• Credit union should first consider: – Borrower’s current or reasonably expected income or assets (other than the dwelling that secured the loan) – Borrower’s current debt obligations, alimony and child support
  • Balloon – Payment Qualified Mortgages (Cont.)• Credit union determines borrower can make all of the scheduled payments together with the monthly payments for mortgage-related obligations and excluding the balloon payment• Credit union considers debt-to-income ratio and verifies debt obligations and income• Regular, scheduled payments are substantially equal• Term must be at least 5 years
  • Balloon – Payment Qualified Mortgages (Cont.)• Credit unions meet specific requirements: – At least 50% of first-lien covered transactions in rural or underserved counties in previous year • Predominantly rural or underserved areas – Rural: a county that is neither: » Metropolitan area, nor » Micropolitan area adjacent to a metropolitan area – Underserved: a county in which no more than 2 creditors have extended five or more first-lien mortgages.
  • Balloon – Payment Qualified Mortgages (Cont.) • Predominantly rural or underserved areas (cont.) – A list of “rural” and “underserved” counties will be designated each year • NCUA definition: The Federal Credit Union Act defines an underserved area as a local community, neighborhood, or rural district that is an “investment area” as defined in Section 103(16) of the Community Development Banking and Financial Institutions Act of 1994. Examples of underserved areas: An area where the percentage of population living in poverty is at least 20%, unemployment rate is at least 1.5 times the national average, etc.
  • Balloon – Payment Qualified Mortgages (Cont.)• Credit unions meet specific requirements (cont.): – No more than 500 first lien covered transactions in previous year, and – Had less than $2 billion in the previous calendar year
  • Balloon – Payment Qualified Mortgages (Cont.)Generally, balloon payment qualified mortgages cannot betransferred or assigned without losing their exempt status.This restriction does not apply where:1.Sales/assignments occurring at least 3 years afterconsummation of the loan2.Buyer/assignee operates predominantly in rural orunderserved area3.Buyer/assignee originated 500 or fewer first-lienmortgages4.Buyer/assignee had less than $2 billion in assets at endof preceding year
  • Balloon Payment Qualified Mortgage (Cont.)For higher-priced covered transactions (i.e., APR isgreater than average prime offer rate for comparabletransaction) with a balloon payment, the creditor mustconsider the consumer’s ability to repay the loan basedon the payment schedule, including any requiredballoon payment. For loans with a balloon payment thatare not higher-priced covered transactions, the creditorshould use the maximum payment scheduled during thefirst five years of the loan following the date on whichthe first regular periodic payment will be due.
  • Balloon Payment Qualified Mortgage Example 1Assume a loan that provides for regular monthlypayments and a balloon payment due at theend of a six-year loan term. The loan isconsummated on August 15, 2014, and the firstmonthly payment is due on October 1, 2014.The first five years after the first monthlypayment end on October 1, 2019.
  • Balloon Payment Qualified Mortgage Example 1 (Cont.)The balloon payment must be made on the duedate of the 72nd monthly payment, which isSeptember 1, 2020. For purposes ofdetermining the consumer’s ability to repay theloan under § 1026.43(c)(2)(iii), the creditor neednot consider the balloon payment that is due onSeptember 1, 2020.
  • Balloon Payment Qualified Mortgage Example 2Loan agreement provides for a fixed interestrate of 6 percent, which is below the APOR-calculated threshold for a comparabletransaction; thus the loan is not a higher-pricedcovered transaction. The loan amount is$200,000, and the loan has a three-year loanterm but is amortized over 30 years.
  • Balloon Payment Qualified Mortgage Example 2 (cont.)The monthly payment scheduled for the firstthree years following consummation is $1,199,with a balloon payment of $193,367 due at theend of the third year. For purposes of§ 1026.43(c)(2)(iii), the creditor must determinethe consumer’s ability to repay the loan basedon the balloon payment of $193,367.
  • Balloon Payment Qualified MortgageIf a qualified mortgage provides for a balloonpayment, the creditor must determine that theconsumer is able to make all scheduledpayments under the legal obligation other thanthe balloon payment.
  • Balloon Payment Qualified Mortgage Example 3Assume a loan in an amount of $200,000 thathas a five-year loan term, but is amortized over30 years. The loan agreement provides for afixed interest rate of 6 percent. The loanconsummates on March 3, 2014, and themonthly payment of principal and interestscheduled for the first five years is $1,199, withthe first monthly payment due on April 1, 2014.
  • Balloon Payment Qualified Mortgage Example 3 (cont.)The balloon payment of $187,308 is required onthe due date of the 60th monthly payment,which is April 1, 2019. The loan can be aqualified mortgage if the creditor underwritesthe loan using the scheduled principal andinterest payment of $1,199, plus the consumer’smonthly payment for all mortgage-relatedobligations, and satisfies the other criteria setforth in § 1026.43(f).
  • Refinancing LoansThe term refinancing has the same meaning asin § 1026.20(a). A refinancing occurs when anexisting obligation that was subject to Subpart Cof 12 C.F.R. § 1026 (closed-end creditrequirements) is satisfied and replaced by a newobligation undertaken by the same consumer.
  • Exemptions for Refinancing Non- Standard Mortgages• Refinancing a non-standard mortgage (i.e., an adjustable rate mortgage with introductory interest rate of at least 1 year, an interest-only loan or a negative amortization loan) into a standard mortgage may be exempt from the ability-to-repay rules if certain conditions are met• Standard mortgage has the following characteristics: – Regular periodic payments may not: • (1) increase principal, • (2) allow deferred payment of principal, or • (3) result in a balloon payment
  • Exemptions for Refinancing Non- Standard Mortgages• Standard mortgage has the following characteristics (cont.): – Total points and fees associated with the mortgage do not exceed 3% of the loan – Term is 40 years or less – Interest rate is fixed for first 5 years – Use of Loan Proceeds is restricted to: • Outstanding balance of non-standard mortgage • Closing or settlement charges
  • Exemptions for Refinancing Non- Standard Mortgages• Conditions for exemption from ability-to-repay requirements: – Credit union extending the standard mortgage is the current holder or servicer of the non-standard mortgage – Monthly payment is materially lower than non- standard mortgage monthly payment • “Materially lower” means more than a de minimus amount • 10% lower is always considered “materially lower”
  • Exemptions for Refinancing Non- Standard Mortgages• Conditions for exemption from ability-to-repay requirements (cont.): – Credit union receives borrower’s application for the refinancing no later than 2 months after non- standard mortgage is recast – Borrower has not made a late payment more than once in the preceding 12 month period, and – Borrower has not been more than 30 days late in making a payment in the preceding 6 month period
  • Yawning1. 2.3. 4.
  • VOTE1. Baby2. Monkey3. Grandpa4. Puppy
  • Record Retention• Must retain records evidencing compliance with ability-to-repay and prepayment penalty provisions for 3 years
  • Points and Fees
  • Points and FeesPoints and fees include the following that areknown at or before consummation:•All finance charges, except: – Interest; – premium/charge imposed in connection with any guaranty or insurance on borrower default; – Bona fide third party charge not retained by lender, loan originator, or affiliate or either.
  • Points and Fees• All finance charges, except (cont.): – 2 discount points where interest rate with discount does not exceed: • APR by more than 1%; or • For transactions secured by personal property, the average rate under National Housing Act by more than 1%. – 1 discount point where interest rate with discount does not exceed: • APR by more than 2%; or • For transactions secured by personal property, the average rate under the National Housing Act by more than 2%.
  • Points and FeesPoints and fees include the following that are knownat or before consummation (cont.):•Compensation paid by consumer or creditor to loanoriginator•Real-estate related fees (e.g., title insurance, titleexamination, survey, loan-related documentpreparation, notary, appraisals, etc.), unless: – Reasonable charge – Not paid to lender – Not paid to an affiliate of lender
  • Points and FeesPoints and fees include the following that are knownat or before consummation (cont.):•Premiums/other charges for any life, creditdisability, unemployment, property, etc. insurancefor which lender is the beneficiary•Max prepayment penalty•Total prepayment penalty for refinancing•Loan level pricing adjustments
  • Total Loan Amount
  • Total Loan AmountCalculated by taking the amount financed anddeducting any finance charge, insurancepremium, or refinancing prepayment penaltythat is both (i) included as a point/fee, and(ii) financed by lender•Amount financed = principal loan amount +other amounts financed by lender that are notpart of the finance charge – any prepaid financecharge
  • Prepayment Penalty
  • Other Final Rule Provisions – Prepayment Penalties• New Rules generally prohibit prepayment penalties (except for certain fixed-rate, qualified mortgages where the penalties satisfy certain criteria and the creditor has offered the borrower an alternative loan without such penalties)• Credit unions are already restricted from charging prepayment penalties under Federal Credit Union Act and accompanying regulations
  • A Glossary of Other Key Terms or Definitions• Fully Indexed Rate• Higher Priced Covered Transaction• Maximum Loan Amount• Mortgage Related Obligations• Simultaneous Loan• Third Party Record• Repayment Ability
  • Fully Indexed RateThe interest rate calculated using the index orformula that will apply after recasting the loan,as determined at the time of loanconsummation, with the maximum margin thatcan be applied at any time during the loan term
  • Higher Priced Covered TransactionCovered transaction with an APR that exceedsthe average prime rate by more than:•1.5% for first-lien covered transaction•3.5% for a second-lien covered transaction
  • Maximum Loan AmountMeans the loan amount plus any increase inprincipal balance that results from negativeamortization assuming:•Consumer makes only minimum periodicpayment•Max interest rate is reached at earliest possibletime
  • Mortgage Related Obligations• Property taxes, premiums and similar charges required by the lender• Fees and special assessments imposed by a condo/homeowners association• Ground rent• Leasehold payments
  • Simultaneous LoanAnother covered transaction or open-end homeequity line of credit secured by the samedwelling made at or before consummation ofthe covered transaction or, if afterconsummation, will cover closing costs of firsttransaction
  • Third Party Record• Document/record prepared by appropriate person other than borrower, lender, mortgage broker or their agent• Tax return (federal or state)• Account records maintained by lender• If employee of lender or broker, a document regarding employment status or income maintained by lender or broker
  • Repayment AbilityGeneral requirement: Lender shall not make acovered-transaction loan unless it makes areasonable and good faith determination thatthe borrower will have a reasonable ability torepay the loan
  • Payment Calculations• Balloon Payment Loans• Interest Only Loans• Negative Amortization Loans• Simultaneous Loans
  • Calculation of Monthly Payment Amount• In general: a lender must determine monthly payment amount using the fully indexed rate or the introductory rate, whichever is greater.• Balloon payment loans: use maximum payment scheduled in first 5 years after closing• Interest-only loans: use substantially equal monthly payments of principal and interest to repay loan as of the date upon which interest-only payments expire• Negative amortization loans: use substantially equal monthly payments of principal and interest that will repay the maximum loan amount over the term of the loan as of the date the loan is recast
  • Monthly Debt-to-IncomeRatio or Residual Income
  • Determination of Debt-to-Income Ratio– Credit union is required to consider the borrower’s monthly debt-to-income ratio (“residual income”) prior to extending a mortgage loan– Lender must consider the borrower’s total monthly debt obligations, including mortgage loan payments, other loan payments, payment of any other mortgage-related obligations and any other debt obligations– The regulation does not prescribe a maximum debt-to- income threshold. The lender must use its discretion to make a good faith reasonable determination of whether a potential borrower’s debt-to-income ratio is too high and would adversely affect their ability to pay
  • What are the biggest challenges facing credit union leaders on a personal level? (Source: Anthony Demagone, SVP & COO for NAFCU)
  • Best Practices1. Sign up for the NAFCU Webcasts on Mortgage Lending2. Form an in-house credit union team that meets regularly3. Involve credit union management4. Hold the third part vendors accountable5. Involve NAFCU Compliance Team6. Review all policies and procedures7. Establish a timetable with achievable deadlines – stick to it
  • E. Andrew Keeney, Esq.Kaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3153eakeeney@kaufcan.comMeagan J. ThomassonKaufman & Canoles, P.C.150 West Main Street, Suite 2100Norfolk, VA 23510(757) 624-3014mjthomasson@kaufcan.com
  • CFPB’sFinal Mortgage Regulations: Ability-to-Repay and Qualified Mortgage Rules March 6, 2013 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.