MBA Compliance Essentials ATR/QM Resource Guide

MBA Compliance Essentials℠

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

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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

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Alexandra M. Karram
Associate, Weiner Brodsky Kider PC

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mbaeducation.org/compliance
13376

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

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General Ability to Repay ............................................................................................ 13
The Eight Factors ..................................................................................................... 13
Developing Underwriting Standards ......................................................................... 14

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Penalties ...................................................................................................................... 15

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Qualified Mortgages ................................................................................................... 16
Safe Harbor vs. Rebuttable Presumption ................................................................. 16

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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

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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

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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

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©2013 Weiner Brodsky Kider PC

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

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VIII. Quality Control ............................................................................................... 43

IX.

Vendor Management ...................................................................................... 44

X.

General Ability to Repay Procedure ............................................................. 45

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A. Overview...................................................................................................... 45

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B. Verification Using Reasonably Reliable Third-Party Records ..................... 45
C. Assessment of Eight Factors ....................................................................... 46
General QM Procedure .................................................................................. 55

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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

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D. Safe Harbor or Rebuttable Presumption ..................................................... 63

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XIII. Small Creditor Portfolio QM Procedure ....................................................... 66
D. Portfolio Requirement .................................................................................. 69
E. Safe Harbor or Rebuttable Presumption ..................................................... 70
XIV. Small Creditor Balloon QM Procedure ......................................................... 72

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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

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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

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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

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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

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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

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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

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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.

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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.

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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.

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

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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
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section 501(c)(3) of the Internal Revenue Code of 1986. However, the exemption only applies if
the following conditions are met:




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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.
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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.

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THE EIGHT FACTORS

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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:

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(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;

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(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);

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(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
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(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.
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12 C.F.R. § 1026.43(c).
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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.

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B. Compliance Department125

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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.



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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.

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

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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.
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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”).

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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.

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

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.

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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).

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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.

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

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.

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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:

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

A Community Development Financial Institution, as defined under 12 C.F.R. §
1805.104(h);

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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

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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.

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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:

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

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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-

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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
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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

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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.

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“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

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“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.

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“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.

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“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
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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.
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

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.

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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.

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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.

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

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.

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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

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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
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Note: The Company may require use of only one method: either DTI or residual income.
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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;

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o

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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.

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The consumer’s total monthly income means the sum of:
o

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

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The consumer’s monthly payment for mortgage-related obligations calculated
Procedure; and

The consumer’s current or reasonably expected income or assets calculated
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.

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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.

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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

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

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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

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o

The premiums or other charges payable at or before consummation included in
points and fees under Category 4 of the definition.

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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) =

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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).

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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).

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

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.

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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.

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w



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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.

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The Company is an “affiliate” of the following businesses:

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Business Name

Finance Charge

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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

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?

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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?

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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.

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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.

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7.

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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.

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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:

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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.

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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

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View more MBA Compliance Essentials resource guides at mbaeducation.org/compliance

MBA Compliance Essentials ATR/QM Resource Guide

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