Consumer FinancialConsumer Financial
Protection BureauProtection Bureau
The Good and the Bad AboutThe Good and the Bad Abo...
CFPBCFPB
The Good and The Bad About TheThe Good and The Bad About The
Ability-to-Repay and QualifiedAbility-to-Repay and Q...
E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@...
CFPBCFPB
• Past
• Present
• Future
The GoodThe Good
andand
The BadThe Bad
CFPBCFPB
• Past – OCC; FRB; NCUA; FTC; FDIC; HUD
– Consumer Protection Act of 2010 established CFPB as an
independent agen...
PresentPresent
• CFPB will enforce the following rules:
– NCUA Rules
• Equal Credit Opportunity Act (Regulation B)
• Home ...
PresentPresent
– Federal Trade Commission Rules
• Telemarketing Sales Rule
• Mortgage Assistance Relief Services
• Fair Cr...
PresentPresent
– Department of Housing and Urban Development
Rules
• Civil Money Penalties (under RESPA) and the
Interstat...
Director CordrayDirector Cordray
FutureFuture
Background/MortgageBackground/Mortgage
RegulationsRegulations
• CFPB will implement requirements of
Dodd-Frank relating to...
Will the Ability to Repay Rule beWill the Ability to Repay Rule be
Workable for Credit Unions?Workable for Credit Unions?
Record
Year for Credit Unions
Record
Year for Credit Unions
Mortgages originated by credit unions are
Mortgages originated...
# of 1# of 1stst
Mortgages Originated Through 3QMortgages Originated Through 3Q
Source: Callahan & Associates
330,023
463,...
$ of 1$ of 1stst
Mortgages Originated Through 3QMortgages Originated Through 3Q
Source: Callahan & Associates
$56,462,353,...
The New Mortgage RulesThe New Mortgage Rules
Workable?Workable?
Proposed Regulation: 474 pagesProposed Regulation: 474 pages
Comments Received: 1800Comments Received: 1800
Final Regulati...
OverviewOverview
• Applies to all credit unions offering mortgage loans
• Must determine a consumer’s ability to repay a m...
Ability to Repay and QualifiedAbility to Repay and Qualified
Mortgage RuleMortgage Rule
• January 2013, the CFPB amended
R...
Ability to Repay and QualifiedAbility to Repay and Qualified
Mortgage RuleMortgage Rule
• Regulation Z currently prohibits...
Ability to Repay and QualifiedAbility to Repay and Qualified
Mortgage RuleMortgage Rule
• New Ability-to-Repay Rule applie...
Ability to repay determinationsAbility to repay determinations
(at a minimum credit unions must consider 8(at a minimum cr...
Minimum Underwriting FactorsMinimum Underwriting Factors
1. Current or reasonably expected income or assets
2. Current Emp...
Current or Reasonably ExpectedCurrent or Reasonably Expected
Income or Assets DeterminationIncome or Assets Determination
...
Current or Reasonably ExpectedCurrent or Reasonably Expected
Income or Assets DeterminationIncome or Assets Determination
...
Minimum Underwriting FactorsMinimum Underwriting Factors
1. Current or reasonably expected income or assets
2. Current Emp...
Minimum Underwriting FactorsMinimum Underwriting Factors
1. Current or reasonably expected income or assets
2. Current Emp...
Minimum Underwriting FactorsMinimum Underwriting Factors
1. Current or reasonably expected income or assets
2. Current Emp...
Minimum Underwriting FactorsMinimum Underwriting Factors
1. Current or reasonably expected income or assets
2. Current Emp...
Qualified MortgagesQualified Mortgages
a/k/a Safe Harbora/k/a Safe Harbor
Qualified Mortgages - GeneralQualified Mortgages - General
Qualified mortgage: a residential mortgage that
provides for re...
Qualified Mortgages –Qualified Mortgages –
Safe HarborSafe Harbor
• Presumption of Compliance for Qualified
Mortgages
• Hi...
Qualified MortgagesQualified Mortgages
“Financial Institutions are not required to issue only
Qualified Mortgages.” CFPB D...
Qualified Mortgages –Qualified Mortgages –
Special RulesSpecial Rules
Qualified Mortgage PresumptionQualified Mortgage Presumption
• Rule provides a presumption that “qualified
mortgages” sati...
Some Qualified MortgageSome Qualified Mortgage
PresumptionsPresumptions
• Rule establishes underwriting criteria for
quali...
Qualified Mortgage & Fannie/FreddieQualified Mortgage & Fannie/Freddie
Underwriting StandardsUnderwriting Standards
• Comp...
Qualified Mortgage & Fannie/FreddieQualified Mortgage & Fannie/Freddie
Underwriting StandardsUnderwriting Standards
• A lo...
Higher PricedHigher Priced CoveredCovered
Transaction/Qualified MortgageTransaction/Qualified Mortgage
Defined as a covere...
Balloon – Payment QualifiedBalloon – Payment Qualified
MortgagesMortgages
A qualified mortgage may provide for a balloon-
...
Balloon – PaymentBalloon – Payment
Qualified MortgagesQualified Mortgages
• Credit union should first consider:
– Borrower...
Balloon – PaymentBalloon – Payment
Qualified MortgagesQualified Mortgages
• Credit union determines borrower can make all ...
Balloon PaymentBalloon Payment
Qualified MortgageQualified Mortgage
• For loans that are not higher-priced covered
transac...
Points and FeesPoints and Fees
Points and FeesPoints and Fees
Points and fees include the following that are
known at or before consummation:
•All financ...
Points and FeesPoints and Fees
Points and fees include the following that are known
at or before consummation (cont.):
•Co...
Qualified Mortgages –Qualified Mortgages –
Limits on Points and FeesLimits on Points and Fees
Points and fees on qualified...
A Glossary of PaymentA Glossary of Payment
CalculationsCalculations
• Balloon Payment Loans
• Interest Only Loans
• Negati...
A Glossary of Other KeyA Glossary of Other Key
Terms or DefinitionsTerms or Definitions
• Total Loan Amount
• Fully Indexe...
MonthlyMonthly
Debt-to-Income RatioDebt-to-Income Ratio
Determination of Debt-to-IncomeDetermination of Debt-to-Income
RatioRatio
– Credit union is required to consider the borro...
Some of The NumbersSome of The Numbers
1. 43%
2. 8
3. 30
4. 3%
5. 182
Best PracticesBest Practices
Remember
1.Form an in-house credit union team that meets regularly
2.Involve credit union man...
E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@...
E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.
Consumer FinancialConsumer Financial
Protection BureauProtection Bureau
The...
The Ability to Repay/Qualified Mortgages
The Ability to Repay/Qualified Mortgages
The Ability to Repay/Qualified Mortgages
The Ability to Repay/Qualified Mortgages
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The Ability to Repay/Qualified Mortgages

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Andy Keeney made this presentation before NAFCU on July 12, 2013

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The Ability to Repay/Qualified Mortgages

  1. 1. Consumer FinancialConsumer Financial Protection BureauProtection Bureau The Good and the Bad AboutThe Good and the Bad About The Ability-to-Repay andThe Ability-to-Repay and Qualified Mortgage RulesQualified Mortgage Rules July 12, 2013July 12, 2013 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.
  2. 2. CFPBCFPB The Good and The Bad About TheThe Good and The Bad About The Ability-to-Repay and QualifiedAbility-to-Repay and Qualified Mortgage RulesMortgage Rules
  3. 3. E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA 23510 (757) 624-3153 eakeeney@kaufcan.com
  4. 4. CFPBCFPB • Past • Present • Future The GoodThe Good andand The BadThe Bad
  5. 5. CFPBCFPB • Past – OCC; FRB; NCUA; FTC; FDIC; HUD – Consumer Protection Act of 2010 established CFPB as an independent agency within Board of Governors of the Federal Reserve The GoodThe Good andand The BadThe Bad
  6. 6. PresentPresent • CFPB will enforce the following rules: – NCUA Rules • Equal Credit Opportunity Act (Regulation B) • Home Mortgage Disclosure (Regulation C) • Electronic Fund Transfers (Regulation E) • Registration of Residential Mortgage Loan Originators • Consumer Leasing (Regulation M) • Privacy of Consumer Financial Information • Fair Credit Reporting (with certain exceptions) • Truth in Lending (Regulation Z) • Truth in Savings (Regulation DD)
  7. 7. PresentPresent – Federal Trade Commission Rules • Telemarketing Sales Rule • Mortgage Assistance Relief Services • Fair Credit Reporting Act • Holder In Due Course
  8. 8. PresentPresent – Department of Housing and Urban Development Rules • Civil Money Penalties (under RESPA) and the Interstate Land Sales Full Disclosure Act • Purchasers’ Revocation Rights, Sales Practices, and Standards
  9. 9. Director CordrayDirector Cordray FutureFuture
  10. 10. Background/MortgageBackground/Mortgage RegulationsRegulations • CFPB will implement requirements of Dodd-Frank relating to mortgages to include: – Mortgage loan servicing – Escrow accounts – HOEPA (Home Ownership and Equity Protection Act) – Loan origination compensation – Appraisals – Ability-to-repay – Qualified mortgages
  11. 11. Will the Ability to Repay Rule beWill the Ability to Repay Rule be Workable for Credit Unions?Workable for Credit Unions?
  12. 12. Record Year for Credit Unions Record Year for Credit Unions Mortgages originated by credit unions are Mortgages originated by credit unions are expected to top $100 billion in 2012… expected to top $100 billion in 2012… M ore Borrow ers Turn to M ore Borrow ers Turn to Credit Unions for M ortgages Credit Unions for M ortgages … expected to surpass a record-breaking $100 billion … expected to surpass a record-breaking $100 billion in m ortgage loan originations this year… in m ortgage loan originations this year… Credit Unions Hit AnotherCredit Unions Hit Another Mortgage Record: CallahanMortgage Record: Callahan …credit unions originated $84.5 billion in housing finance…credit unions originated $84.5 billion in housing finance loans…activity through the first six months totaled $157loans…activity through the first six months totaled $157 billion.billion. Credit Unions Experience RecordCredit Unions Experience Record Breaking Loan QuarterBreaking Loan Quarter Since 2007, credit unions have originated more than 105Since 2007, credit unions have originated more than 105 million loans, amounting to $1.5 trillion.million loans, amounting to $1.5 trillion.
  13. 13. # of 1# of 1stst Mortgages Originated Through 3QMortgages Originated Through 3Q Source: Callahan & Associates 330,023 463,584 341,113 536,729 345,002
  14. 14. $ of 1$ of 1stst Mortgages Originated Through 3QMortgages Originated Through 3Q Source: Callahan & Associates $56,462,353,519 $77,066,186,748 $55,997,564,511 $54,315,197,762 $89,251,359,972
  15. 15. The New Mortgage RulesThe New Mortgage Rules Workable?Workable?
  16. 16. Proposed Regulation: 474 pagesProposed Regulation: 474 pages Comments Received: 1800Comments Received: 1800 Final Regulation: 804 pagesFinal Regulation: 804 pages Effective Date: January 10, 2014Effective Date: January 10, 2014 Number of Days Remaining: 182Number of Days Remaining: 182 Are YouAre You Ready?!Ready?! HistoryHistory
  17. 17. OverviewOverview • 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 • Ability-to-Repay determination and underwriting considerations • Underwriting considerations • Qualified mortgages and a “Safe Harbor” • Exemptions
  18. 18. Ability to Repay and QualifiedAbility to Repay and Qualified Mortgage RuleMortgage Rule • January 2013, the CFPB amended Regulation Z (Truth in Lending) by issuing new regulations governing mortgage lending requirements, known as the “Ability-to-Repay and Qualified Mortgage Rule” • Effective date: January 10, 2014
  19. 19. Ability to Repay and QualifiedAbility to Repay and Qualified Mortgage RuleMortgage 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 making a residential mortgage loan • New Rule offers Safe Harbors from liability
  20. 20. Ability to Repay and QualifiedAbility to Repay and Qualified Mortgage RuleMortgage 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 (12 months or less) • New Rule goes into effect on January 10, 2014 • But, some rule changes may be in the works
  21. 21. Ability to repay determinationsAbility to repay determinations (at a minimum credit unions must consider 8(at a minimum credit unions must consider 8 underwriting factors in determining a borrower’sunderwriting factors in determining a borrower’s ability to repay)ability to repay)
  22. 22. Minimum Underwriting FactorsMinimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status
  23. 23. Current or Reasonably ExpectedCurrent or Reasonably Expected Income or Assets DeterminationIncome or Assets Determination • Regulation prescribes the manner in which the credit union should verify the borrower’s assets and income • May review specified records to satisfy this requirement – Tax returns – IRS Form W-2 (or similar forms) – Employer records – Government agency records (Social Security Administration “proof of income” letter)
  24. 24. Current or Reasonably ExpectedCurrent or Reasonably Expected Income or Assets DeterminationIncome or Assets Determination • May review specified records to satisfy this requirement – Financial institution records – Check cashing receipts • Credit union needs to verify only the income/assets actually relied upon in making its determination of whether to extend credit
  25. 25. Minimum Underwriting FactorsMinimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans
  26. 26. Minimum Underwriting FactorsMinimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support
  27. 27. Minimum Underwriting FactorsMinimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support 7. The monthly debt-to-income ratio or residual income 8. Credit history
  28. 28. Minimum Underwriting FactorsMinimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support 7. The monthly debt-to-income ratio or residual income 8. Credit history
  29. 29. Qualified MortgagesQualified Mortgages a/k/a Safe Harbora/k/a Safe Harbor
  30. 30. Qualified Mortgages - GeneralQualified Mortgages - General Qualified mortgage: a residential mortgage that provides for regular, substantially equal payments and does 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 – Points and fees in excess of or exceeding 3% of total loan amount (for loans over $100,000)
  31. 31. Qualified Mortgages –Qualified Mortgages – Safe HarborSafe Harbor • Presumption of Compliance for Qualified Mortgages • Higher-Priced Covered Transaction (Rebuttable Presumption) • “Avoid the lawyers”
  32. 32. Qualified MortgagesQualified Mortgages “Financial Institutions are not required to issue only Qualified Mortgages.” CFPB Director Richard Cordray has indicated that it would be a mistake for prudential regulators (NCUA?) to examine institutions in a way that steers them toward providing only mortgages defined as “qualified” under the Ability-to-Repay rule. “I think there has been more hubbub around these requirements than is perhaps justified” BUT…
  33. 33. Qualified Mortgages –Qualified Mortgages – Special RulesSpecial Rules
  34. 34. Qualified Mortgage PresumptionQualified Mortgage Presumption • Rule provides a presumption that “qualified mortgages” satisfy the Ability-to-Repay requirements: – Conclusive presumption (a safe harbor) for qualified mortgages that are not higher-priced or subprime – Rebuttable presumption for qualified mortgages that are higher-priced or subprime • Benefits?
  35. 35. Some Qualified MortgageSome Qualified Mortgage PresumptionsPresumptions • Rule establishes underwriting criteria for qualified mortgages: – Monthly payments must be calculated based on the highest payment that will apply in the first 5 years of the loan – Consumer has a total debt-to-income ratio that is less than or equal to 43% • Possible changes pending – stay tuned
  36. 36. Qualified Mortgage & Fannie/FreddieQualified Mortgage & Fannie/Freddie Underwriting StandardsUnderwriting Standards • Compliance with Fannie Mae / Freddie Mac underwriting guidelines alone does not necessarily mean a loan is a Qualified Mortgage • A temporary special rule (sunset date no later than 1/10/2021) if a loan that meets Fannie/Freddie underwriting standards PLUS additional criteria will be considered a Qualified Mortgage • BUT!?
  37. 37. Qualified Mortgage & Fannie/FreddieQualified Mortgage & Fannie/Freddie Underwriting StandardsUnderwriting 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 3% • BUT!?
  38. 38. Higher PricedHigher Priced CoveredCovered Transaction/Qualified MortgageTransaction/Qualified Mortgage Defined as a covered transaction with an APR that exceeds the average prime offer rate for a comparable transaction by 1.5% or more for a first-lien covered transaction, or by 3.5% or more for a subordinate-lien transaction REBUTTABLE PRESUMPTION
  39. 39. Balloon – Payment QualifiedBalloon – Payment Qualified MortgagesMortgages A qualified mortgage may provide for a balloon- payment, provided: •No increase in principal balance (negative amortization) •Term does not exceed 30 years •Total points and fees do not exceed 3% (for loans greater than $100,000)
  40. 40. Balloon – PaymentBalloon – Payment Qualified MortgagesQualified Mortgages • 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 – 43%
  41. 41. Balloon – PaymentBalloon – Payment Qualified MortgagesQualified Mortgages • Credit union determines borrower can make all of the scheduled payments together with the monthly payments for mortgage-related obligations but excluding the balloon payment • Credit union considers debt-to-income ratio and verifies debt obligations and income (43%) • Regular, scheduled payments are substantially equal • Term must be at least 5 years
  42. 42. Balloon PaymentBalloon Payment Qualified MortgageQualified Mortgage • For loans that are not higher-priced covered transaction for a balloon payment, must use the maximum payment scheduled the first 5 years of the loan • For higher-priced covered transactions must consider the consumer’s ability to repay the loan based on the payment schedule, including any required balloon payment
  43. 43. Points and FeesPoints and Fees
  44. 44. Points and FeesPoints and Fees Points and fees include the following that are known 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
  45. 45. Points and FeesPoints and Fees Points and fees include the following that are known at or before consummation (cont.): •Compensation paid by consumer or creditor to loan originator •Real-estate related fees unless: – Reasonable charge – Not paid to lender – Not paid to an affiliate of lender •Possible double counting
  46. 46. Qualified Mortgages –Qualified Mortgages – Limits on Points and FeesLimits on Points and Fees Points and fees on qualified mortgages cannot exceed 3% on loans of $100,000 or more Possible changes pending – stay tuned
  47. 47. A Glossary of PaymentA Glossary of Payment CalculationsCalculations • Balloon Payment Loans • Interest Only Loans • Negative Amortization Loans • Simultaneous Loans
  48. 48. A Glossary of Other KeyA Glossary of Other Key Terms or DefinitionsTerms or Definitions • Total Loan Amount • Fully Indexed Rate • Higher Priced Covered Transaction • Maximum Loan Amount • Mortgage Related Obligations • Simultaneous Loan • Third Party Record • Repayment Ability
  49. 49. MonthlyMonthly Debt-to-Income RatioDebt-to-Income Ratio
  50. 50. Determination of Debt-to-IncomeDetermination of Debt-to-Income RatioRatio – Credit union is required to consider the borrower’s monthly debt-to-income ratio prior to extending a mortgage loan – Credit union must consider the borrower’s total monthly debt obligations, including mortgage 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. Credit union 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 – 43%!!!!
  51. 51. Some of The NumbersSome of The Numbers 1. 43% 2. 8 3. 30 4. 3% 5. 182
  52. 52. Best PracticesBest Practices Remember 1.Form an in-house credit union team that meets regularly 2.Involve credit union management 3.Hold the third party vendors accountable 4.Involve NAFCU Compliance Team 5.Review all policies and procedures - Now 6.Develop a new set of documentation for Ability-to-Repay 7.Establish a timetable with achievable deadlines – stick to it 8.Evaluate the benefits of Qualified Mortgages 9.Establish goals for % of Non-Qualified Mortgages 10.Prepare but anticipate last minute changes
  53. 53. E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA 23510 (757) 624-3153 eakeeney@kaufcan.com
  54. 54. E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. Consumer FinancialConsumer Financial Protection BureauProtection Bureau The Good and the Bad AboutThe Good and the Bad About The Ability-to-Repay andThe Ability-to-Repay and Qualified Mortgage RulesQualified Mortgage Rules July 12, 2013July 12, 2013

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