The Impact of the CFPB s New Mortgage Rules on the Closing Process

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1 The Impact of the CFPB s New Mortgage Rules on the Closing Process March 11, 2014 Banking & Finance Practice

2 Escrow Account Rule 4 Escrow Account Rule Effective June 1, Extends current rule from one year to five years for higher-priced mortgage loans. New rural and underserved exemption. 5 ABILITY-TO-REPAY / QUALIFIED MORTGAGE RULE 6

3 ATR/QM Rule Effective January 10, 2014 Ability-to-Repay (ATR) Lenders must consider a borrower s ability to repay mortgage. Applies to all closed-end loans secured by a dwelling. Qualified Mortgages (QM) Creates a safe harbor for non-hpmls For HPMLs, creates a rebuttable presumption that lender complied with ATR Rule. 7 Ability-to-Repay Rule Loans Covered All closed-end consumer credit transactions secured by a dwelling Includes subordinate liens (e.g. second mortgages) Loans Not Covered Open-end credit plans Time-share plans Reverse mortgages Temporary or bridge loans Construction loans (12 months or less) Loans involving vacant land ATR/QM Rule ATR Underwriting Factors Current or expected income Employment status Monthly mortgage payment Monthly payment on simultaneous loan(s) Monthly payment for mortgage-related obligations Debt obligations, alimony, and child support Debt-to-income ratio or residual income Credit history 9

4 Ability-to-Repay Rule Income Salary Wages Self-employment income Bonuses Tips Commissions Interest Payments Dividends Public Assistance Child Support Future Income** Assets Checking & Savings Accounts Vested Amounts in Retirement Accounts Stocks Bonds Certificates of Deposit Trust Funds (if available to the Debtor) Ability-to-Repay Rule Lender must verify the information using reasonably reliable third-party records. QUALIFIED MORTGAGES 12

5 Qualified Mortgages What is a Qualified Mortgage? Protects consumers from risky mortgages. Provides protection for lenders from potential liability (i.e. avoids lawyers). ATR/QM Rule Safe Harbor vs. Rebuttable Presumption QMs that are not higher-priced have a safe harbor (i.e. a lender conclusively complied with ATR Rule). QMs that are higher-priced have a rebuttable presumption (i.e. presumed to have complied with ATR Rule, but consumer is allowed to rebut that presumption). 14 Types of QMs General QM Small Creditor QM Temporary QM Balloon-Payment QM ATR/QM Rule 15

6 ATR/QM Rule General QM No negative amortization, interest-only, or balloon payment. Cannot exceed 30 years. Points and fees are limited. Underwritten based on fully-amortizing schedule using the maximum rate permitted during first five years. Consider borrower s income, assets, and debt obligations. DTI is less than 43 percent. 16 ATR/QM Rule Debt-to-Income Ratio (DTI) DTI needs to be 43 percent or less Income: Earned income; unearned income; and other regular payments to the consumer. Debt: The mortgage; any simultaneous loans secured by the same property; mortgage- related obligations; and current debt obligations, alimony, and child support. 17 ATR/QM Rule QM Points-and-Fees Caps 3 % of the total loan amount for a loan greater than $100k $3k for a loan greater than or equal to $60k but less than $100k 5% of the total loan amount for a loan greater than or equal to $20k but less than $60k $1k for a loan greater than or equal to $12,500 but less than $20k. 8% of the total loan amount for a loan less than $12,500 18

7 ATR/QM Rule Small Creditor QM During the prior year, lender had $2 billion or less in assets. Together with its affiliates, originated 500 or fewer covered transactions. In order to receive QM status, loan must meet all other QM requirements. 19 ATR/QM Rule Temporary QM Temporary QM status for certain loans eligible for purchase or guarantee by GSEs or for insurance or guarantee by federal agencies. Do not have to meet DTI threshold. Balloon Payment QM Lenders meeting the rural and underserved standard. Loan cannot have negative-amortization or interest-only features, and must meet points-and-fees limitations. Must be held by the lender for at least 3 years unless sold to another small creditor. 20 ECOA Valuations & TILA HPML Appraisals 21 7

8 ECOA Valuations ECOA Valuations Effective January 18, 2014 Applies to first-lien loans secured by a dwelling Notify borrower within 3 days of application of right to receive copy of appraisal and/or written valuations Provide a copy of the appraisal/valuation promptly after performed or 3 days before closing (whichever is earlier). 22 TILA HPML Appraisals TILA HPML Appraisals Effective January 18, 2014 Lenders must obtain appraisals for higher-priced mortgage loans (HPMLs). Provide free copies of appraisal(s) to borrower. New disclosures. 23 NEW DISCLOSURES 24

9 OVERVIEW Effective August 1, Applies to all closed-end consumer mortgages The forms help consumers decide if they can afford mortgage. Use clear language for consumers to locate key information. Interest rate Monthly payments Costs to close loan 25

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12 Questions? Simmons Perrine Moyer Bergman PLC 115 3rd Street SE, Suite 1200 Cedar Rapids, IA (319) City Center Square th Street Coralville, IA (319)

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Section 1026.43. Ability-to-Repay (ATR) 1026.43(c)(1) and Qualified Mortgage (QM) 1026.43(e), (f)

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