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The New Ability to Repay and Qualified Mortgage Rule
 

The New Ability to Repay and Qualified Mortgage Rule

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The webinar reviewed the Dodd-Frank Act's Ability to Repay requirements for residential mortgage loans, the Bureau's proposed definition of a qualified mortgage and how lenders making such loans can comply with the Ability to Repay requirements. We also reviewed the rule’s anticipated effective date, as well as its expected impacts on mortgage operations and product offerings going forward. Attendees will receive the most recent information on this soon to be issued Bureau rule, how to plan for the operational challenges to comply with the new Ability to Repay and qualified mortgage requirements.

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    The New Ability to Repay and Qualified Mortgage Rule The New Ability to Repay and Qualified Mortgage Rule Presentation Transcript

    • Overview and Insight:The CFPB’s New Ability toRepay and Qualified MortgageRuleBy Jim Milano 1
    • An Overview and Understanding of the CFPB’s NewAbility to Repay and Qualified Mortgage Rule Todays’ Agenda• A Brief History of Suitability in Mortgage Lending• An Overview of the Rule• A Deeper Dive into Qualified Mortgages• An Overview of the Concurrent Proposal• An Overview of the Inter-play of Other CFPB and Agencies’ ruleswith ATR-QM• Some Comments on What the ATR-QM Rule will mean for theMortgage Industry Going Forward• Questions We Are Receiving and Questions from the Audience 2
    • History of Suitability in Mortgage Lending An Important Chapter is Finalized• The first reported case of “suitability” in consumer financial services was a1942 lawsuit brought against a “boiler-room” securities brokerage for selling“penny” stocks to a little old lady• The mortgage industry, particularly mortgage lenders and banks, haveresisted a suitability standard in mortgage lending• The concept or “seed” of “suitability” in mortgage lending was planted in1994 when Congress amended TILA through the enactment of the firstversion of the Home Ownership and Equity Protection Act (and the FederalReserve Board implemented finalized regulations under HOEPA, as part ofRegulation Z, in 1995)• In 1999, New York enacted state high cost home loan regulations, and inthat same year North Carolina enacted an anti-predatory lending law; Bothstates’ initiatives were based on federal HOEPA, but generally had a lower“points and fees” thresholds, and other requirements that go beyond federallaw 3
    • History of Suitability in Mortgage Lending An Important Chapter is Finalized• In 2001, the Federal Reserve Board added, eff. Oct. 2002, an Ability toRepay Requirement to HOEPA Regulations under Regulation Z• Leading up to and after the “Financial Crisis” in 2007 and 2008, manystates added subprime mortgage laws or regulations that had lowerthresholds or triggers, and if tripped, required an ability to repayassessment• During this time, states also began to enact or institute Tangible NetBenefit Requirements• In 2008, the Federal Reserve Board proposed the Higher PricedMortgage Loan Rules (these rules became effective in Oct. 2009)• In 2010, the Dodd-Frank Act was enacted, enacting the MortgageReform and Anti-Predatory Lending Act (Title XIV of the DFA) 4
    • History of Suitability in Mortgage Lending An Important Chapter is Finalized• Title XIV of the Dodd-Frank Act (DFA) enacted the Mortgage Reformand Anti-Predatory Lending Act• Sections 1411, 1412 and 1413 of the Dodd-Frank Act address abilityto repay issues  “…no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.” (Section 1411(a)(2), adding section 129C(a)(1) to TILA).• Section 1411 of the DFA also added to the TILA requirements for thebasis of determination of the borrower’s ability to repay a mortgageloan, and income verification• Section 1412 sets out the parameters of a “Qualified Mortgage” 5
    • History of Suitability in Mortgage Lending An Important Chapter is Finalized• Section 1413 of the DFA amends the liability provisions under TILA toprovide consumers with a defense to foreclosure by way of set-off orrecoupment for the life of the loan if there is a violation of the Ability toRepay provisions• Such set-off or recoupment can include TILA damages which includestatutory damages, actual damages, three years of finance charges andattorney fees and court costs• These extended liability provisions apply to assignees of the mortgage• Other amendments to TILA made by the DFA extended the Statute ofLimitations from one year to three (3) years• Section 1414 of the DFA adds restrictions to PPPs on residentialmortgage loans 6
    • History of Suitability in Mortgage Lending An Important Chapter is Finalized• In May 2011, the Federal Reserve Board proposed the Ability toRepay – Qualified Mortgage Rule (ATR-QM)• On July 21, 2011, authority over TILA and 17 other enumeratedconsumer laws (i.e., federal consumer financial services laws)transferred to the Consumer Financial Protection Bureau (the CFPB, orBureau) and the Bureau “inherited” pending proposed rules of otheragencies, including the Fed’s ATR-QM Proposed Rule• On June 9, 2011, the Bureau re-opened the comment period of theATR-QM Proposed Rule on several distinct issues, including the use ofDTI ratios and residual income in underwriting a Qualified Mortgage,and Litigation Risk from the use of a Rebuttable Presumption vs. aSafe Harbor• On January 10, 2013, the Bureau published the final ATR-QM Ruleon its website indicating the Rule will become effective one year lateron January 10, 2014 7
    • The CFPB ATR-QM Rule Highlights• The CFPB’s ATR-QM Rule Implements the statutory changes made bythe DFA to TILA, adopts many of the original proposals of the rule asset forth by the Federal Reverse Board, but makes some very importantchanges  The General ATR Requirements  5 or 6 new Classes of Qualified Mortgages  Qualified Mortgage (Safe Harbor)  Higher Priced Qualified Mortgage (Rebuttable Presumption of Compliance)  Agency Qualified Mortgage  Further Proposed exemptions for Nonprofit creditors, certain Homeownership Stabilization Programs, and Qualified Mortgage made and held in portfolio by Small Creditors  Refinances of Non-Standard Mortgages into Standard Mortgages  Balloon Payment Qualified Mortgages made by Community Lenders serving Rural Areas 8
    • The CFPB ATR-QM Rule “Covered Transaction”• The ATR Rule applies to Consumer Credit Transactions Securedby a Dwelling  Does not apply to business purpose loans  Applies to a loan secured by a dwelling, not merely consumer’s principal dwelling• The ATR Rule Does Not Apply to:  HELOCs  Reverse mortgages  Timeshares  Temporary bridge loans with a term of 12 months or less  Construction phase of 12 months or less of construction-to- perm loans 9
    • The CFPB ATR-QM Rule The General Rule - ATR• A creditor shall not make a loan that is a covered transactionunless the creditor makes a reasonable and good faithdetermination at or before consummation that the consumer willhave a reasonable ability to repay the loan according to its terms.• Unless a Covered Transaction is a Qualified Mortgage, Refinanceof a Non-Standard Mortgage into a Standard Mortgage, or a BalloonPayment Qualified Mortgage, in determining the consumer’srepayment ability, a creditor must consider eight (8) criteria 10
    • The CFPB ATR-QM Rule The General Rule - ATR• The eight (8) criteria are: 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; 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; 4. The consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made, calculated; 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 ratio or residual income; and 8. The consumer’s credit history 11
    • The CFPB ATR-QM Rule The General Rule - ATR• There are specific rules with regard to verifying the consumer’s:  Income or assets (criteria 1),  Employment (criteria 2),  Mortgage payment on the covered transaction (criteria 3), and  Monthly debt-to-income ratio or residual income (criteria 7)• A creditor must verify the information that the creditor relies uponin making the consumer’s repayment ability, except:  In verifying the consumer’s income or assets (criteria 1), the creditor must follow specific rules (addressed on the next slide)  A creditor may make an oral verification of employment (criteria 2) if it prepares a record of the information obtained orally, and  In verifying debt information on the consumer (criteria 6), if a creditor relies on a consumer’s credit report to verify a consumer’s current debt obligations and a consumer’s application states a current debt obligation not shown in the consumer’s credit report, the creditor need not independently verify such an obligation 12
    • The CFPB ATR-QM Rule The General Rule - ATR• Verifying the consumer’s income or assets(Criteria 1):  A creditor must verify the amounts of income or assets that the creditor relies on under “criteria 1” to determine a consumer’s ability to repay a covered transaction using third-party records that provide reasonably reliable evidence of the consumer’s income or assets  A creditor may verify the consumer’s income using a tax-return transcript issued by the Internal Revenue Service (IRS) 13
    • The CFPB ATR-QM Rule The General Rule - ATR• Verifying the consumer’s income or assets (Criteria 1):  Examples of other records the creditor may use to verify the consumer’s income or assets include: (i) Copies of tax returns the consumer filed with the IRS or a State taxing authority; (ii) IRS Form W-2s or similar IRS forms used for reporting wages or tax withholding; (iii) Payroll statements, including military Leave and Earnings Statements; (iv) Financial institution records; (v) Records from the consumer’s employer or a third party that obtained information from the employer; (vi) Records from a Federal, State, or local government agency stating the consumer’s income from benefits or entitlements; (vii) Receipts from the consumer’s use of check cashing services; and (viii) Receipts from the consumer’s use of a funds transfer service 14
    • The CFPB ATR-QM Rule The General Rule - ATR• Calculating the Consumer’s Monthly Payment(Criteria 3):  Except for certain loans with a balloon payment, interest-only loans, and negative amortization loans (which we will not cover today), a creditor must calculate the Consumer’s Monthly Payment using: (A)The fully indexed rate or any introductory interest rate, whichever is greater; and (B) Monthly, fully amortizing payments that are substantially equal 15
    • The CFPB ATR-QM Rule The General Rule - ATR• Calculating Monthly DTI or Residual IncomePayment (Criteria 7):  If a creditor considers the consumer’s monthly debt-to- income ratio under Criteria 7, the creditor must consider the ratio of the consumer’s total monthly debt obligations to the consumer’s total monthly income, or  If a creditor considers the consumer’s monthly residual income under Criteria 7, the creditor must consider the consumer’s remaining income after subtracting the consumer’s total monthly debt obligations from the consumer’s total monthly income 16
    • The CFPB ATR-QM Rule Re-Cap• General Rule: A creditor shall not make a loan that is a coveredtransaction unless the creditor makes a reasonable and good faithdetermination at or before consummation that the consumer willhave a reasonable ability to repay the loan according to its terms• 4 Ways to meet the above ATR requirements: The General ATR Requirement  5 or 6 new Classes of Qualified Mortgages  Refinances of Non-Standard Mortgages into Standard Mortgages  Balloon Payment Qualified Mortgages made by Community Lenders serving Rural Areas 17
    • The CFPB ATR-QM Rule Qualified Mortgages• 5 or 6 new Classes of Qualified Mortgages  Qualified Mortgage (Safe Harbor)  Higher Priced Qualified Mortgage (Rebuttable Presumption of Compliance)  Agency Qualified Mortgages  Further Proposed Exemptions (in the “Concurrent Proposal”) for:  Nonprofit Creditors  Certain Homeownership Stabilization Programs, and  Qualified Mortgage made and held in portfolio by Small Creditors 18
    • The CFPB ATR-QM Rule Qualified Mortgage (Safe Harbor)• A Creditor that Makes a “Qualified Mortgage” complies with theATR requirements• Generally, a “Qualified Mortgage” is one that meets the followingsix (6) criteria: 1. (Fully amortizing) - That provides for regular periodic payments that are substantially equal, except for the effect that any interest rate change after consummation has on the payment in the case of an adjustable-rate or step-rate mortgage, that do not: (A) Result in an increase of the principal balance; (B) Allow the consumer to defer repayment of principal, or (C) Result in a balloon payment 2. The loan term does not exceed 30 years 3. The total points and fees payable in connection with the loan do not exceed 3% of the total loan amount (for loans of $100,000 or more, and lesser amounts for lower loan balances) 19
    • The CFPB ATR-QM Rule Qualified Mortgage (Safe Harbor, cont’d) 4. For which the creditor underwrites the loan, taking into account the monthly payment for mortgage-related obligations, using: (A) 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; and (B) Periodic payments of principal and interest that will repay either: (1) The outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate, assuming the consumer will have made all required payments as due prior to that date; or (2) The loan amount over the loan term 20
    • The CFPB ATR-QM Rule Qualified Mortgage (Safe Harbor, cont’d) 5. For which the creditor considers and verifies at or before consummation the following: (A) 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, in accordance with Appendix Q, and Criteria 1 and 4 under the General Ability to Repay requirement; and (B) The consumer’s current Debt Obligations, alimony, and child support in accordance with appendix Q and Criteria 4 and third party document requirements of the General Ability to Repay requirements 21
    • The CFPB ATR-QM Rule Qualified Mortgage (Safe Harbor, cont’d) 6. For which the Ratio of the consumer’s total monthly debt to total monthly income at the time of consummation does not exceed 43 percent • The ratio of the consumer’s total monthly debt to total monthly income is determined: (A) Except as provided in (B) below, in accordance with the standards in appendix Q; (B) Using the consumer’s monthly payment on: (1) The covered transaction, including the monthly payment for mortgage-related obligations; and (2) Any simultaneous loan that the creditor knows or has reason to know will be made 22
    • The CFPB ATR-QM Rule Appendix Q• What is Appendix Q?• An Attachment to the QM Rule with Very Detailed Standards forDetermining a Borrower’s Monthly Debt and Income, including: I. Consumer Eligibility A. Stability of Income B. Salary, Wage and Other forms of Income C. Family Owned Businesses D. Self employed Individuals E. Tax Return AnalysisII. Non-Employment Related Income A. Alimony, Child Support B. Investment, Trust Income, Rental Property, Military and Non-taxable IncomeIII. Consumer Liabilities: RecurringIV. Consumer Liabilities: Non-recurring 23
    • The CFPB ATR-QM Rule 3% Points and Fees• Defined based off of Section 32 definition of“Points and Fees”• Includes payments to Loan Originators (but theConcurrent Proposal asks for Comments on thisitem)• Includes non-Finance Charge Closing Costs paidto the Creditor or Loan Originator, or an Affiliate ofthe Creditor or Loan Originator 24
    • The CFPB ATR-QM Rule Points and Fees• A covered transaction is not a qualified mortgage unless thetransaction’s total points and fees, as defined in §1026.32(b)(1), donot exceed: (A)For a loan amount greater than or equal to $100,000 (indexed for inflation): 3 percent of the total loan amount; (B) For a loan amount greater than or equal to $60,000 (indexed for inflation) but less than $100,000 (indexed for inflation): $3,000 (indexed for inflation); (C) For a loan amount greater than or equal to $20,000 (indexed for inflation) but less than $60,000 (indexed for inflation): 5 percent of the total loan amount; (D) For a loan amount greater than or equal to $12,500 (indexed for inflation) but less 25
    • The CFPB ATR-QM Rule Points and Fees• Points and fees, as defined in §1026.32(b)(1), means the followingfees or charges that are known at or before consummation:  Finance charges, other than the interest rate,  All compensation paid directly or indirectly by a consumer or creditor to a loan originator that can be attributed to that transaction at the time the interest rate is set  The maximum PPP that may be charged (excluding recoupment of bona fide 3rd party closing costs if the borrower prepays before 36 months, or post-prepayment per diem interest on FHA-insured loans made before Jan. 21, 2015)  The total PPP if the PPP is paid to the current holder of the loan, the servicer acting on behalf of the holder, or an affiliate of either• Bona Fide Third Party Charges that are Not Retained by theCreditor, LO or an Affiliate of either are Excluded from Points andFees 26
    • The CFPB ATR-QM Rule Points and Fees• Points and fees also do not include :  FHA MIP (or any premium or charge imposed in any federal or state agency program for guaranty or insurance that protects the creditor against the consumers default or other credit loss)  On-going BPMI, or up-front BPMI if the premium is not in excess of the amount payable under policies in effect at the time of origination the FHA insurance program for 203(b) loans, provided that the premium or charge is required to be refundable on a pro rata basis and the refund is automatically issued upon notification of the satisfaction of the underlying mortgage loan;  Bona fide discount points (one or two points, if the APR does not exceed the APOR by one or two points, respectively)• Non-finance charge closing costs are excluded from points and fees aslong as:  they are reasonable;  the creditor receives no direct or indirect compensation in connection with the charge; and  the charge is not paid to an affiliate of the creditor 27
    • The CFPB ATR-QM Rule Agency Qualified Mortgage• If a covered transaction meets the full amortization, 30 year termand 3% points and fees tests, then it is a qualified mortgage if it iseligible to be:1. Purchased or guaranteed by one the GSEs (Fannie Mae or Freddie Mac) while they are in conservatorship, or receivership under FHFA, or any limited-life regulatory entity succeeding the charter of either GSE2. Insured by HUD3. Guaranteed by the VA4. Guaranteed by the USDA, or5. Insured by the RHSA. If HUD, the VA, the USDA or the RHS publish rules for qualified mortgages under their respective programs, as allowed by the Dodd- Frank Act and section 129C(b)(3)(ii) of the TILA, then the above rule for Agency Qualified Mortgages for such Agencies shall expire• The above rule for “Agency Qualified Mortgages” will expire on Jan. 10,2021, unless the conditions in A. above occur before that date 28
    • The CFPB ATR-QM Rule Qualified Mortgage (Higher Priced Covered Transactions)• If a qualified mortgage is a higher priced covered transaction,then the creditor, and an assignee of such loan only has arebuttable presumption of compliance with the ATR Rule• To rebut the presumption of compliance of the ATR, it must be proventhat, despite meeting the requirements of a QM, the creditor did notmake a reasonable and good faith determination of the consumer’srepayment ability at the time of consummation, by showing that theconsumer’s income, debt obligations, alimony, child support, and theconsumer’s monthly payment (including mortgage-related obligations)on the covered transaction and on any simultaneous loans of whichthe creditor was aware at consummation would leave the consumerwith insufficient residual income or assets other than the value of thedwelling (including any real property attached to the dwelling) thatsecures the loan with which to meet living expenses, including anyrecurring and material non-debt obligations of which the creditor wasaware at the time of consummation 29
    • The CFPB ATR-QM Rule Qualified Mortgage (Higher Priced Covered Transactions)• A Higher Priced Covered Transactions is a firstlien transaction wherein the APR exceeds bymore than 1.5 percentage the APOR A “Higher-priced Covered Transaction” means a coveredtransaction with an Annual Percentage Rate that exceedsthe Average Prime Offer Rate (APOR) for a comparabletransaction as of the date the interest rate is set by 1.5 ormore percentage points for a first-lien covered transaction,or by 3.5 or more percentage points for a subordinate-liencovered transaction Note, unlike the general HPML rule, a Higher-pricedCovered Transaction does not have an Exclusion for“Jumbo Loans” 30
    • The CFPB ATR-QM Rule The “Concurrent Proposal”• Concurrently with the Issuance of the final ATR-QM Rule, theBureau issued a Concurrent Proposal and Proposed certainexemptions from the Ability to Repay Requirements for:  Nonprofit creditors,  Certain Homeownership Stabilization Programs, and  Qualified Mortgage made and held in portfolio by Small Creditors• The Bureau also requested comments on revisions to theinclusion in the 3% “Points and Fees” test for QMs of certain LoanOriginators fees• Comments on these items are due Feb. 25, 2013 31
    • The CFPB ATR-QM Rule Inter-Play of Other CFPB and Agencies’ Rules with ATR-QM• In Early January 2013, the Bureau also issued final rules on:1. HOEPA and Counseling Requirements2. Escrow Rules under TILA3. The Mortgage Servicing Rule4. Escrow Rules under ECOA and Regulation B (regarding delivery of Appraisals to Consumers)5. Appraisals for Higher Priced Mortgages, and6. A New LO Comp Rule• With the exception of the Escrow Rules under TILA, which is effective on June 1, 2013, these other rules generally become effective on January 10, 2014.• The Rules under ECOA and Regulation B (regarding delivery of Appraisals to Consumers) and the Appraisals for Higher Priced Mortgages rules become effective on January 18, 2014.• Risk Retention Rule and QRMs - Yet to be Finalized 32
    • The CFPB ATR-QM Rule Re-Cap• Rule - Lenders Cannot Make Mortgage Loans without verifyingthe Borrower’s Ability to Repay  Generally, there are 4 ways to do this, and 2 are very limited exceptions (Qualified Balloon Loans made by Certain Lenders in Rural Areas, and Refinances of Non-standard Loans)• One way to verify the Borrower’s Ability to Repay is the GeneralAbility to Repay Process Recall – 8 Criteria to be met to Determine a Consumer’s Ability to Repay a Mortgage Loan)  No Safe Harbor or Rebuttable Presumption• Another way to meet the to the Borrower’s Ability to Repay is tomake a Qualified Mortgage  Qualified Mortgage (3 Loan Type criteria [Full am., 30 yr., 3% P&F], and 3 Underwriting Criteria, incl. DTI ratio)  Higher Priced Qualified Mortgage (APR 1.5 % pts. over APOR) – Rebuttable Presumption “Agency Qualified Mortgage” (3 Loan Type criteria, and meets Agency Underwriting Criteria, but no CFPB DTI ratio) 33
    • The CFPB ATR-QM Rule The Meaning of the ATR-QM Rule Going Forward• Seems Unlikely Many Lenders will Make Loans based solely uponATR• Lenders will try to make QMs• The Rule Contains a species of “Assignee Liability”• Standard QM’s have a 43% DTI ratio; Agency QMs do Not –  This will perpetuate the federal Govt’s Role in the Mortgage Industry• Systems and Vendor Augmentation and Reliance will be Paramount  3% Points and Fees Test  Discrimination against Affiliates  Hyper-technical rules and underwriting requirements with Liability for failure to Comply  Failure to meet Agency requirements may Disqualify a Loan from being a QM 34
    • The CFPB ATR-QM Rule Questions We Are Receiving and Question from the Audience• Is there “assignee liability” for violating this rule?• Are fees paid to affiliates included in the 3% points and fees test?• How will this rule affect my JV’s?• Will Loan Originator Compensation be “double-counted”?• Is this Really Happening and when will it be effective?• Is there any chance that Congress could overrule this rule?• Why are they doing this? (No one make exotic loans any more)• Other Questions ??? 35
    • An Overview and Understanding of the CFPB’s New Ability to Repay and Qualified Mortgage Rule James (“Jim”) M. Milano WEINER BRODSKY KIDER PC 1300 19th Street, NW., 5th Floor Washington, DC 20036 Phone: 202-628-2000 milano@thewbkfirm.com Washington, DC Dallas, TX Newport Beach, CA www.wbsk.com 36