by: Stephen King, JD, AMLP

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1 Community Bank Audit Group Dodd-Frank Lending Issues June 2, 2014 by: Stephen King, JD, AMLP MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS 2013 Wolf & Company, P.C.

2 Today s Agenda Ability to Repay Qualified Mortgages Appraisal Rules Resources 2

3 Ability to Repay 3

4 Definitions Ability-to-Repay = a legal obligation to analyze and document a borrower s ability-to-repay a loan. Qualified Mortgage = a status which, if obtained, provides either an absolute or a conditional defense against borrower initiated Ability-to-Repay legal actions. Higher Priced Covered Transaction = APR exceeds APOR 1.5% for 1 st liens 3.5% for 1 st liens if Small Creditor, Rural/Underserved or Temp Balloon QM Exception 3.5% for subordinate liens 4

5 Definitions Lenders who gain absolute QM protection safe harbor cannot be challenged by borrowers regarding compliance with ATR. Conversely, QM loans that constitute higher-priced covered transaction under TILA only get the lesser protection of rebuttable presumption, meaning lenders may have to defend their ATR compliance if their conditional QM defense is overcome by a borrower. 5

6 Ability to Repay HIGHLIGHTS Effective January 10, 2014 All consumer purpose closed-end loans secured by a 1 4 unit dwelling (including HELs) Reasonable good faith determination of ATR For non-qm loan, lender must consider and verify at least eight underwriting criteria to determine ATR Information on which a lender relies must be verified Record Retention 3 years after consummation 6

7 Ability to Repay Outside Scope HELOC (open-end credit plans) Changes to existing loan (e.g., modification) Bridge loan Initial construction loan Construction phase of construction-to-permanent loan if construction is less than 12 months Reverse mortgages Time-share plans 7

8 Ability to Repay Remember; demonstrate compliance with Ability to Repay rules by: Originate a Qualified Mortgage (Safe Harbor) 8 Underwriting Factors (General ATR Requirements) Refinance a risky non-standard loan into a standard loan 8

9 Ability to Repay Minimum Underwriting Criteria 1. Income or assets 2. Employment 3. Monthly payment 4. Simultaneous loan payment obligations 5. Mortgage-related payments 6. Debt obligations 7. Debt-to-income (DTI) ratio 8. Credit history 9

10 Ability to Repay 1. Income or assets Creditor may use actual income and reasonably expected verified by 3 rd party records 2. Employment Creditor may verify employment orally, if it prepares a record documenting all information 10

11 Ability to Repay 3. Monthly payment of covered transaction Greater of fully-indexed interest amortized monthly payment or introductory interest rate amortized monthly payment that may apply during first (5) years Example #1: 3/1 ARM Intro Rate = 5%; Index = 4.5%, Margin = 3% Cap = 1% Calculate 7.5% (b/c Index + Margin > Intro Rate + caps) Example #2: 5/1 ARM Intro Rate = 6%; Index = 4.5%, Margin = 3% Calculate 7.5% (b/c Index + Margin > Intro Rate) 11

12 Ability to Repay 3. Monthly payment of covered transaction If HPCT balloon payment, use max monthly loan payment in schedule including the balloon payment. If not HPCT balloon payment, use max monthly loan in first 60 pymts after 1 st regular payment due Example #1 $200k 10-yr $1000/mos with $190k balloon pymt - If HPCT, then must use max payment $190K - If not HPCT, then use $

13 Ability to Repay Example #2 5 yr Non HPCT Balloon Loan closes June 2, $1,000 1 st monthly payment due on August 1, 2014 $200,000 balloon payment due 5 yrs from note (6/1/19) Calculation is 5 Yrs from 1 st regular pymt due (8/1/19) SO, ATR must consider $200,000 balloon payment 13

14 Ability to Repay 3. Monthly payment of covered transaction If interest-only loan for 1 or more monthly payments; use the greater of the fully-indexed interest rate or introductory rate to calculate equal amortized loan payments to repay the loan over remaining term after expiration of Interest-only period Example $200,000 loan 7% with 5 yrs I-O $1000 pymts (no Prin) Remaining Term = 25 $200,000 use $1400 amortized monthly pymts 14

15 Ability to Repay 4. Simultaneous loan payment obligations (other liens) Any other covered transaction or HELOC that will be secured by the same dwelling and made to the same consumer either at or before the consummation of the covered loan; or Post consummation to cover closing costs of the 1 st covered transaction Simultaneous loan can be by same creditor or 3 rd party 15

16 Ability to Repay 5. Mortgage-related payments property taxes flood insurance hazard insurance credit / life insurance condo / homeowners association fees 16

17 Ability to Repay 6. Current debt obligations, alimony, and child support If joint applicants; must include the debt obligations of all joint applicants. NOT Required to include the debt obligations of a guarantor or surety (Bank option) 17

18 Ability to Repay 7. Monthly debt-to-income ratio or residual income Total monthly obligations (##3-6) vs Total income (#1) = residual income 18

19 Ability to Repay 8. Credit history (Factors) Number and age of credit lines payment history judgment, collections or bankruptcies NO requirement to obtain or consider a credit score or to establish a minimum credit score threshold 19

20 Ability to Repay Must document Ability to Repay using reasonably reliable third party records Records transmitted electronically Form that the creditor provides to the 3 rd party for providing requested information Document prepared by consumer, creditor, broker if reviewed by an appropriate 3 rd party Bank Records maintained for borrower deposit account(s) held by Bank and Bank accounts related to current outstanding obligations 20

21 Ability to Repay Examples of reasonably reliable third party records IRS tax returns and transcripts, W-2 Bank statements Payroll statements Gov t records stating benefit/entitlement income Credit reports (do not need to verify each debt) For property taxes; may use information in a 3 rd party report if such contained tax information was provided by a governmental organization Billing statements for debt imposed by other 3 rd parties 21

22 Ability to Repay Factors that may show that the ATR determination was reasonable and in good faith: Underwriting standards: Creditor used underwriting standards that have historically resulted comparatively low rates of delinquency and default during adverse economic conditions (i.e. LP/DU) Payment history: The consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage. 22

23 Ability to Repay Factors that may show that the ATR determination was not reasonable and in good faith: Underwriting standards: Creditor ignored evidence that underwriting standards are ineffective at determining consumer s repayment ability Payment history: consumer defaults early or shortly after the loan resets without having experienced a significant financial challenge or life-altering event Inconsistency: Creditor applied underwriting standards inconsistently or used different standards from those used for similar loans without reasonable justification 23

24 Qualified Mortgages 24

25 Qualified Mortgage Terms not greater than 30 years Documentation of ATR ( no doc loan prohibited) Confirm income, assets, other mortgage and nonmortgage debts Points & Fees limitation Underwriting Standards 43% DTI limit (worst case scenario for maximum rate) 25

26 Qualified Mortgage No negative amortization No interest only payments No balloon payments Limited prepayment penalties Record retention three years 26

27 Qualified Mortgage Points & Fees Limitations Loan Amount Ln < $12,500 Points & Fees Limit 8% total loan amount $12,500 <= Ln < $20,000 $1,000 $20,000 <= Ln < $60,000 5% total loan amount $60,000 <= Ln < $100,000 $3,000 Ln = $100,000 or more 3% total loan amount 27

28 Qualified Mortgage Points & Fees Interest Mortgage Insurance Bona fide FC 3 rd party fees not retained by Bank Fees paid to and retained by affiliates 2 Discount points if Interest Rate <= APOR + 1% 1 Discount point if Interest Rate <= APOR + 2% Loan Compensation paid directly or indirectly by applicant/creditor to 3 rd party LO Max prepayment penalty under loan terms Total prepayment penalty if refinance with same Ldr 28

29 Ability to Repay Prepayment Penalties May only be imposed on fixed rate and step rate QM that are not HPCT May not exceed 2% of the prepaid amount for the first 2 years. May not exceed 1% of the prepaid amount for the 3 rd year. Before originating loan with prepayment penalty, must offer comparable alternative loan without penalty 29

30 Qualified Mortgage Exceptions QM Safe Harbor (Prime Loans) QM Rebuttable Presumption (Subprime loan - HPML) Temporary QM Status (GSE / Agency Loans) Small Creditor Portfolio Exception Rural / Underserved Portfolio QM Loan w/balloon Temporary Balloon Payment QM Limited Refinancing of Non-Standard Loans to Standard 30

31 Qualified Mortgage QM Safe Harbor (Prime Loans) Exception If covered transaction meets QM non-higher Priced Covered Transaction definition (slide #4), Bank is presumed to satisfy Ability to Repay requirements and does not need to demonstrate technical compliance Within tolerances for Points & Fees and DTI 31

32 Qualified Mortgage QM Rebuttable Presumption (Subprime loan - HPCT) Borrower may rebut the presumption that Bank made a reasonable and good faith determination of consumer s ability to repay by demonstrating income, debt obligation, monthly loan pymt, debt-related obligations and simultaneous loan pymt would leave borrower with sufficient residual income or assets other than property value to meet living expenses. (can not challenge employment and credit history) If HPCT non-qm, must show all ATR aspects 32

33 Qualified Mortgage QM Rebuttable Presumption Temporary QM Status (GSE / Agency Loans) Term not longer than 30 years No negative amortization; no principal deferral, no balloon payment Points & Fees limitations Eligible to be purchased by GSE 43% DTI does NOT apply Exception ends January 10, 2021 or earlier if agencies adopt own QM rules 33

34 Qualified Mortgage Small Creditor Portfolio Exception Less than $2 billion in assets (with affiliates); Originate <=500 1 st -lien covered loans in prior year No negative amortization, interest-only payments or balloon payments Only another Small Creditor can commit to Acquisition of loan at Consummation Portfolio for 3 years to maintain QM status NOT subject to 43% DTI; employment or credit history but other ATR factors must be considered and verified 34

35 Qualified Mortgage Rural / Underserved Portfolio QM Loan w/balloon Less than $2 billion in assets (with affiliates); Originate <=500 first-lien mortgages per year Originates at least 50% of their first-lien loans in rural/underserved counties No negative amortization; no principal deferral, no balloon payment Points & Fees limitations Maturity at least 5 years but Amortization Term not exceeding 30 years and interest rate does not increase Basic ATR underwriting standards (ATR) 35

36 Qualified Mortgage Temporary Balloon Payment QM Loan must be consummated on or before January 10, Less than $2 billion in assets (with affiliates); Originate <=500 first-lien mortgages per year Maturity at least 5 years but Amortization Term not exceeding 30 years Basic ATR underwriting standards (ATR) Interest Rate does not increase 36

37 Qualified Mortgage Refinancing of Risky Loans to Standard Loan risky loans = Adjustable rate loans Interest-only loan payments negative-amortization features New standard monthly loan payment must be substantially lower than former risky loan payment Other requirements (timing, delinquencies) 37

38 Non QM Loans Loan term exceed 30 years Interest-only or Negative Amortization Feature Loan with graduated payments Loans with balloon payment (Rural / Underserved exception) Loan where the customer can elect to make payments that are lower than the substantially equal payments necessary to re-pay the loan amount over loan term 38

39 ATR / QM Regulatory Expectations Board strategic goal based on risk appetite Policies and written procedures ATR compliance / documentation Circumstances for non-qm loans Staff training Self monitoring Tracking and reporting QM vs. non-qm for Fair Lending analysis 39

40 Bank Analysis QM vs. Non-QM What is the Bank portfolio s current ratio between QM products and non-qm products? How would the Bank structure a non-qm product to meet borrower needs? What are the risks of offering non-qm products? Can differentiate QM vs Non-QM between loan products Consider regulatory impact of decision CRA, Fair Lending & UDAAP 40

41 41

42 Appraisals The HPML Appraisal Rule applies to higher-priced, firstlien or subordinate-lien closed-end loans secured by a consumer s principal dwelling. higher-priced mortgage loan thresholds: 1 st -lien APR exceeds APOR by 1.50% or more. 1 st -lien jumbo loan APR exceeds APOR by 2.50% or more Subordinate-lien APR exceeds APOR by 3.50% or more 42

43 Appraisals Loans not subject to TILA HPML Appraisal Rules QMs Loans secured by new manufactured homes, mobile homes, trailers, and boats Reverse mortgages Bridge loans (12 months or less and intended to be used to acquire a new principal dwelling) Loans for initial construction of a dwelling (not limited to loans of 12 months or less) Reverse Mortgages Home Equity Line of Credit Special refinancings 43

44 Appraisals Notifications Within 3 business days after receiving the consumers application, must disclose that applicant is entitled to a free copy of any appraisal the creditor orders and also that the applicant can hire own appraiser at own expense for own use. Deliver copies of appraisals to the primary applicant no later than 3 business days before consummation Deliver copies of appraisals to the primary applicant no later than 30 days after the creditor determines that the loan will not be consummated. 44

45 Appraisals Appraisal Requirements Performed by certified or licensed appraiser in conformity with the USPAP. The appraiser must visit the interior of the property and provide a written report 45

46 Appraisals Actual Appraisal Requirements Identifies the creditor, the property, and the interest being appraised. Statement whether analyzed the contract price. Neighborhood conditions Property condition and any improvements 46

47 Appraisals Identifies valuation approaches used and a reconciliation if the appraiser used more than one valuation approach. Property s market value and as of date Indicates that the appraiser performed a physical property visit of the interior of the property. Signed certification 47

48 Appraisals ECOA Notification vs TILA Notification The applicant can waive ECOA Valuations Rule notification and elect to receive the copies at closing, BUT the applicant cannot waive the HPML Appraisal Rule notification deadlines. If the transaction is subject to both rules, then comply with the earlier deadline. The HPML Appraisal Rule deadline will be earlier if the applicant provides a waiver under the ECOA Valuations Rule. 48

49 Appraisals TILA HPML Appraisal disclosure language We may order an appraisal to determine the property s value and charge you for this appraisal. We will [*] give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost. * For a first-lien transaction, add the word promptly to the disclosure so as to comply with the ECOA Valuation Rule 49

50 Appraisals 2 nd Additional Appraisal Required if: The seller acquired the property 90 or fewer days prior to the date of the borrower s P&S agreement and the new sales price exceeds the seller's acquisition price by more than 10%; or The seller acquired the property 91 to 180 days prior to the date of the borrower s P&S agreement and the new sales price exceeds the seller's acquisition price by more than 20%; 50

51 Appraisals For flipped properties, Creditor must exercise reasonable diligence to determine prior sale date and price. MUST perform 2 nd appraisal UNLESS can demonstrate requirement does not apply. Mandatory Analysis: Difference between seller s acquired price and consumers buying price Changes in Market between 2 transactions Any improvements to Property 51

52 Appraisals Restrictions Creditor may not charge applicant for any appraisal required to be provided under TILA Creditor may provide copy of appraisal electronically if comply with ESIGN Act consumer consent and verification requirements. 52

53 Appraisals Flipped Homes 2 nd Appraisal Exemptions Loans of $25,000 or less; A person who acquired title from the holder of a defaulted mortgage on the property via foreclosure, deed-in-lieu of foreclosure, or other similar judicial or no judicial procedure through exercise of the holder s rights in the defaulted loan A person who inherited the property or acquired it through a court-ordered dissolution of marriage, civil union, or domestic partnership, or through the partition of the seller s joint or marital assets 53

54 Appraisals Flipped Homes 2 nd Appraisal Exemptions A service member who received a deployment or permanent change of station order after purchasing the property Located in a presidentially-declared disaster area during any time period during which the federal financial institutions regulatory agencies waive requirements An employer or relocation agency in connection with an employee relocation 54

55 Appraisals Flipped Homes 2 nd Appraisal Exemptions A nonprofit entity as part of a local, state, or federal government program that lets nonprofits acquire title to single-family properties for resale from a seller who itself acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or no judicial procedure A local, state, or federal government agency 55

56 Resources CFPB eregulations Truth in Lending Act Regulation Z 12 CFR CFPB Small Creditor Qualified Mortgages Flowchart l.pdf CFPB Small Entity Guide Ability to Repay and Qualified Mortgages CFPB Small Entity Guide HPML Appraisal Rules 56

57 Resources OCC Mortgage Rules Quick Reference Guide APOR Table CFPB Final List of Rural and Underserved Areas ABA Bank Compliance Magazine March/April

58 Thank You Stephen R. King, JD, AMLP Director, Regulatory Compliance Services

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