Minnesota Credit Union Network

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1 Minnesota Credit Union Network MnCUN CoMpliaNCe RefeReNCe GUide CFPB Mortgage Rules Summary Ability-to-Repay Rule Qualified Mortgage Rule Loan Originator Rule Home Ownership & Equity Protection Act Appraisals & Valuations (ECOA & HPML) TILA Escrow Rule TILA & RESPA Mortgage Servicing Rules Regulatory Summary 2013 Credit Union Reporting Deadlines 2014 december 2013

2 TABLE OF CONTENTS CFPB Mortgage Rules Summary Ability-to-Repay Rule Overview Application of Ability-to-Repay Rule Underwriting Standards.. 9 Current or reasonably expected income or assets 10 Current employment status.. 10 Monthly payment on the covered transaction 11 Monthly payment on any simultaneous loan 11 Monthly payment for mortgage-related obligations 11 Current debt obligations, alimony and child support 12 Monthly debt-to-income ratios or residual income 12 Credit history..13 Verifying a Borrower's Credit Information Liability Under the ATR Rule Record Retention Additional Educational Resources Attachment A: Comparison Ability-to-Repay with Qualified Mortgages 16 Qualified Mortgage Rule Overview Definitions General Qualified Mortgage.. 17 Temporary Qualified Mortgage Small Creditor Qualified Mortgage Balloon-Payment Qualified Mortgage Points and Fees Limitation Prepayment Penalties Refinancing a Non-Standard Loan into a Standard Loan Rebuttable Presumption Safe Harbor Protection Additional Educational Resources Attachment A: Small Creditor Qualified Mortgages Flowchart. 24 Loan Originator Rule Overview Loans Covered by the Loan Originator Rule Definition of loan originator.. 25 Compensation Definition of compensation.. 27 Third-party charges.. 27

3 Charges for non-loan origination activities 28 Pooled compensation.. 28 Payments Based on a Term of Transaction Overview.. 28 Term of a transaction.. 29 Proxy for a term of a transaction.. 30 Payments by Persons Other Than Consumer Dual compensation.. 30 Prohibition on Steering Contributions to a Defined Contribution Plan or Defined Benefit Plan Contributions to a Non-Deferred Profits-Based Contribution Plan Other Permissible Forms of Compensation Loan Originator Qualification Requirements Individual loan originator Loan origination organizations Training Record Retention Requirements Loan Documents Miscellaneous Restrictions on Lending Practices Prohibition on mandatory arbitration clauses and waivers No waivers of federal statutory causes of actions Prohibition on financing single-premium credit insurances Policies and Procedures Additional Educational Resources Home Ownership and Equity Protection Act Rule Overview Expansion of HOEPA Testing for a High-Cost Mortgage Annual Percentage Rate (APR) Test Points and Fees Test.. 40 Prepayment Penalties Coverage Test.. 40 Special Disclosures Prohibited Acts for High-Cost Mortgages Balloon payments.. 42 Prepayment penalties.. 42 Due-on-demand clauses.. 42 Encouraging or recommending default.. 42 Previous HOEPA Restrictions Still in Effect Home Ownership Counseling High-cost mortgages.. 44 Negative amortization loans for first-time borrowers 45 All other mortgages.. 45 Additional Educational Resources Attachment A: Summary: Homeownership Counseling Organizations List

4 Attachment B: CFPB Bulletin on Homeownership List Requirements Appraisals & Valuations Part I-ECOA Overview of Equal Credit Opportunity Act Loans Covered by the ECOA Valuations Rule Valuation Defined Delivery of Disclosure Sample Disclosure Delivery of the Appraisal and/or Written Valuation Promptly Upon Completion defined More than one applicant Waiver by the applicant Reimbursement Compliance Checklist Additional Educational Resources Exhibit A: Code of Federal Regulations Part 1026, Appendix N Appraisals & Valuations Part II-Higher-Priced Mortgage Loans Key Differences Between ECOA Valuations & Appraisals for HPMLs Loans Covered by HPML Appraisal Rule Exemptions Disclosure required Appraisal Required for HPMLs Additional appraisal may be required Exemptions from second appraisal requirement Applicant to Receive Copy of Appraisal Frequently Asked Questions Additional Educational Resources TILA Escrow Rule Overview Loans Covered by the Escrow Rule Cancellation of an Escrow Account Credit Unions That Serve Rural & Underserved Counties Frequently Asked Questions Additional Educational Resources Atttachment A: Mortgage Rules with "Rural and Underserved" Designation RESPA & TILA Mortgage Servicing Final Rules Overview RESPA (Regulation X) TILA (Regulation Z) Small Servicer Exemption Provisions exempting small servicers Small servicer determination Affiliate defined Master servicer/subservicers If a credit union exceeds the 5,000 mortgage threshold

5 Periodic Statements Exemption for consumer in bankruptcy Timing Form Content and layout of periodic statement Coupon books Interest Rate Adjustment Notices Loans covered by this provision Exemptions Changes to current interest rate adjustment notice rules Prompt Payment Crediting and Payoff Statements Prompt payment crediting Partial payments Non-conforming payments Pyramiding of late fees Payoff statements Force-Placed Insurance Loans covered Definition Notice Requirements Exemption Error Resolution & Information Requests Loans covered Notice of error Specific location for notices of error Acknowledging receipt Response to notice of error Credit union finds additional errors Requesting information from the borrower Timing Copies of documents Alternative compliance Reasons under which a response is not required Prohibitions Requests for Information Specific location for information requests Acknowledging receipt Response to information request Timing & extensions of time Reasons not requiring a response Notice requirement when not responding Prohibitions General Servicing Policies, Procedures & Requirements Application

6 General policies, scope and objectives Servicing transfers Record retention Servicing file requirements Early Intervention Requirements Application Exemptions Continuity of Contact Application Loss Mitigation Requirements Application Complete loss mitigation application definition Review of loss mitigation application Evaluation of complete loss mitigation application Prohibition on foreclosure referral Prohibition on foreclosure sale Appeals process Timing The appeal Small servicer requirements Successors in Interest Additional Educational Resources Attachment A: Federal Regulations Part Attachment B: Mortgage Origination: Transaction Coverage & Exemptions Attachment C: Mortgage Servicing Rules: Coverage Regulatory Summary 2013 Deposit Accounts New ATM Signage Law Signed Regulation D Reserve Requirements/Reporting Adjustments Reserve requirements Compliance dates Internal Revenue Service Treasury/IRS Regulations to Combat Off-Shore Tax Evasion Percentage Method Tables for Income Tax Withholding Lending HUD rule Formalizing Discriminatory Effects on Housing Federal Housing Finance Agency Streamlined modification initiative Community Financial Institution cap increase No lender-placed insurance reimbursements HARP received two-year extensions HMDA Reporting Guide

7 Fannie Mae & Freddie Mac to purchase only QMs NCUA Operational Changes NCUA Amends Troubled Condition Procedures Small Credit Union Threshold Increased Application Deadline for Low-Income Designation Extended Technical Changes to Share Insurance Coverage Approved Higher-Priced Mortgage Appraisal Rules Approved Final Rule Amending Definition of Rural District Final Rule Adding TIPS to List of Permissible Investments Guidance on Biggert-Waters Flood Insurance Reform Act Final Loan Participation Rule Final Emergency Liquidity Rule Qualified Mortgage Fair Lending Risks Guidance Guidance for Troubled Debt Restructurings Final Rule on Credit Union Service Organizations Consumer Financial Protection Bureau Ability-to-Repay Rule CFPB issues rule CFPB small entity compliance guide CFPB amendment to Ability-to-Repay Rule Home Ownership & Equity Protection Act Final rule expanding HOEPA coverage Additional amendments to the 2013 Mortgage Rules Escrow Account Rule CFPB issues final rule for escrow accounts Compliance guide for TILA Escrow Rule CFPB clarifies Escrow Rule Mortgage Originator Rule CFPB issues rule on mortgage origination Mortgage Servicing Rule CFPB issues mortgage servicing rules Mortgage Servicing Rule amended Equal Credit Opportunity Act Valuations Rule Final rule on appraisals and valuations Home Mortgage Disclosure Act CFPB increases HMDA threshold CFPB HMDA Re-submission Guidelines Mortgage Rules Ability-to-Repay, Mortgage Servicing and Loan Originator rules Three Small Entity Compliance Guides released Effective date for Single Credit Premium Insurance Rule delayed Final listing of rural and underserved counties CFPB exam procedures for new mortgage rules Small entity guides for loan originator and mortgage servicing

8 Ability-to-Repay and mortgage servicing rules published Remittance Transfer Rule Rule to goes into effect on Oct CFPB Remittance Transfer Rule Exam Procedures Final TILA/RESPA Mortgage Disclosure Rules Credit card accounts for stay-at-home spouses & partners CFPB bulletin on indirect lending Credit CARD Act Rule finalized Reg E amended for ATM disclosure requirements White paper on payday loans and deposit advance products CFPB Civil Penalty Rule CFPB framework to better coordinate with state regulators Changes Effective in Reporting Interest Paid to Nonresident Aliens in Regulation Z Renumbering New CTR and SAR CFPB Begins Supervising Debt Collectors Credit Union Reporting Deadlines 2014 Internal Revenue Service NCUA Minnesota Department of Commerce Miscellaneous

9 These summaries are provided by the Minnesota Credit Union Network for informational purposes only, and are intended to provide credit unions with the general regulatory requirements and effective dates for the new CFPB Mortgage Rules. It is not a substitute for a credit union s own review of the underlying regulation. These summaries are distributed with the understanding that the Minnesota Credit Union Network is not engaged in rendering legal, accounting, investment or other professional advice, and this guide should not be relied upon or substituted for the same. Such advice should be sought from your attorney, certified public accountant or other appropriate professional. Further, this information has been provided in advance of the effective date of the rules below, and such rules are subject to change and amendment; please consult the CFPB and/or an attorney for any changes that may occur. ABILITY-TO-REPAY RULE OVERVIEW Many experts believe loose underwriting standards and a failure to take into consideration a borrower s ability to repay a mortgage contributed to the mortgage crisis of In response, the Federal Reserve Board in October of 2009 implemented an amendment to the Truth-in-Lending-Act (TILA) requiring lenders to take into consideration a borrower s ability-to-repay prior to making a higher-priced mortgage loan. 1 Under the Board s rule, a lender is presumed to have complied with the ability-torepay requirement if the creditor followed certain underwriting procedures, including verifying the borrower s income, assets and current obligations. 2 In 2010, Congress passed the Dodd-Frank Act which adopted similar ability-to-repay requirements for nearly all closed-end residential mortgage loans. In addition, Congress created a presumption of compliance with the ability-to-repay requirements for certain mortgages called Qualified Mortgages. In January of 2013, the CFPB adopted a final rule implementing the Ability-to-Repay and Qualified Mortgage provisions of Dodd-Frank. Under the CFPB s Ability-to-Repay/Qualified Mortgage rule, mortgage lenders must make a good faith determination that the borrower has a reasonable ability to repay the loan by taking into consideration eight underwriting factors set forth by the CFPB. The Ability-to-Repay/Qualified Mortgage rule is scheduled to become effective on January 10, 2014, and applies to applications (generally for closed-end consumer credit transactions secured by a dwelling) received on or after that date. 3 1 A higher-priced mortgage loan is defined as a mortgage that is secured by a consumer s dwelling with an annual percentage rate (APR) that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or 3.5 percentage points for loans secured by a subordinate lien on a dwelling. 12 C.F.R C.F.R (a)(4). 3 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p. 6. 8

10 APPLICATION OF THE ABILITY-TO-REPAY RULE Under the Ability-to-Repay rule (ATR rule), a credit union must make a reasonable and good faith determination at or before consummation of a mortgage that the borrower will have a reasonable ability to repay the loan according to its terms. 4 The ATR rule applies to all closed-end consumer credit transactions secured by a dwelling, which includes residential structures with one to four units, including condominiums and co-ops. 5 As the rule applies to all closed-end transactions, the ATR rule also covers subordinate lien loans. 6 However, the ATR rule does not apply to: Open-end credit plans (i.e., home equity lines of credit (HELOCs)); Time-share plans; Reverse mortgages; Temporary or bridge loans with terms of twelve (12) months or less (with possible renewal); Construction phase of twelve (12) months or less of a construction-to-permanent loan (with possible renewal); and Consumer credit transactions secured by vacant land. 7 Additionally, if a loan qualifies as a refinancing, as defined by the Truth-in-Lending-Act (12 C.F.R (a)), it will fall under the ATR rule. On the other hand, if the loan is a modification, and not subject to Truth-in-Lending, it is not subject to the ATR rule. 8 UNDERWRITING STANDARDS In order to comply with the ATR rule, a credit union s ATR evaluation must include eight (8) underwriting factors: Current or reasonably expected income or assets; Current employment status; Monthly mortgage payment on the covered transaction; Monthly payment on any simultaneous loan secured by the same property; Monthly payment for mortgage-related obligations, such as taxes, insurance, and homeowner s association fees; Current debt obligations, including alimony and child support; Monthly debt-to-income ratio or residual income; and Credit history. 9 4 Comment 12 C.F.R (c)(1) 5 12 C.F.R (a). 6 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), pp Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p at p C.F.R (c)(2)(i)-(viii). 9

11 The CFPB notes that these eight (8) factors are only the minimum factors a credit union must consider in order to comply with the ATR rule. Credit unions are not precluded from considering other factors in addition to the eight listed above. 10 Current or reasonably expected income or assets A credit union may consider any type of current or reasonably expected income, including salary, wages, self-employment income, dividends, rental income, military or reserve pay, bonus pay, interest payments, retirement benefits, and child support and/or alimony. 11 If a credit union relies on expected income in excess of the borrower s income, such as an annual bonus, the credit union must verify that expectation through third-party records that provide reasonably reliable evidence. 12 Seasonal or irregular income is acceptable, provided the credit union reasonably determines that the borrower s annual income divided equally across 12 months is sufficient to make the monthly loan payments. 13 A credit union may consider any of the borrower s assets, including savings and checking accounts, amounts vested in a retirement account, stocks, bonds, and certificates of deposit. 14 However, the credit union cannot consider the dwelling that secures the covered transaction to be an asset of the borrower. 15 For two or more applicants, a credit union only needs to consider income and/or assets sufficient to support the credit union s repayment ability determination. If the income and/or assets of one applicant are sufficient, the credit union does not need to consider the income and/or assets of the other applicant(s). 16 Current employment status In considering a borrower s employment status, the employment does not need to be full-time, and employment does not need to occur at regular intervals. 17 If a credit union relies upon the borrower s employment as part of its determination, the employment may be full-time, part-time, seasonal, irregular, military, or self-employment. 18 Further, a credit union only has to verify a borrower s employment if the credit union is relying upon that employment income in determining the borrower s repayment ability Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), pp Comment 12 C.F.R (c)(2)(i) Comment 12 C.F.R (c)(2)(ii)

12 In verifying a borrower s employment, a credit union may call the employer and obtain oral verification. However, a credit union must make a written record of the verification and the information received. 20 Also, while you do not have to retain paper copies of documents relied upon, you must be able to reproduce the documentation itself. For example, if the credit union received a W-2 electronically from the member the credit union should retain or otherwise be able to reproduce the record during the three year required retention period. Monthly payment on the covered transaction In order to properly make its repayment ability determination, a credit union must calculate the borrower s monthly payment as set forth in 12 C.F.R (c)(5). Monthly payment on any simultaneous loan In determining a borrower s ability to repay, credit unions must take into consideration any simultaneous loan that the credit union knows or has reason to know will be made, such as home equity lines of credit (HELOC), in addition to the mortgage. 21 Knows or has reason to know is included in the rule to require lenders to take into consideration any piggyback second-lien loan that the lender knows or has reason to know will be used to finance part of the borrower s down payment. In order to comply with this requirement, credit unions must follow policies and procedures that are designed to determine whether the borrower has applied for another credit transaction that is secured by the same dwelling. 22 The CFPB cites as an example instances in which the borrower seeks to borrow less than the full amount of the purchase price. In this instance, credit unions must require the borrower to identify the source of the down payment and provide verification. 23 If the source of the down payment, in full or in part, comes from another loan, the credit union must take into consideration that loan s periodic payment. 24 On the other hand, credit unions do not have to take into consideration credit transactions that occur after consummation of the loan. 25 Monthly payment for mortgage-related obligations Credit unions must take into consideration the borrower s monthly payments for mortgage-related obligations, such as: property taxes; insurance premiums required by lenders; fees or special assessments required by a cooperative, condominium, or homeowners association; ground rent; and leasehold payments. 26 However, credit unions only have to take into consideration payments that occur 20 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p C.F.R. 1026(c)(2)(iv). 22 Comment 12 C.F.R (c)(2)(iv) Comment 12 C.F.R (c)(2)(v); see also 12 C.F.R (b)(8) and 12 C.F.R (b)(5), (7), (8), or (10). 11

13 on a regular basis. Payments that are satisfied at the loan s consummation (or closing), or are one-time charges, are excluded from this calculation. 27 Current debt obligations, alimony, and child support Credit unions must consider the borrower s current debt obligations and any alimony or child support the borrower is required to pay. 28 These debts include: student loans; car loans; revolving debt; and existing mortgages. 29 The rule does grant credit unions some latitude when taking into consideration a borrower s debt obligations, particularly if the debt will be paid off soon. 30 On the other hand, credit unions should take into consideration debts that are in forbearance or deferred if they are likely to affect the borrower s ability to repay. 31 Monthly debt-to-income ratio or residual income Credit unions must take into consideration the borrower s debt-to-income (DTI) ratio or residual income. 32 In order to calculate a borrower s DTI ratio, a credit union must consider the ratio of the borrower s monthly debt obligations to the borrower s total monthly income. 33 Credit unions may include all of the borrower s earned income, unearned income, and other regular payments (such as alimony, child support, or government benefits) when determining the borrower s income. 34 When determining the borrower s debt obligations, a credit union should take into consideration the loan being applied for, any simultaneous loans secured by the same property, mortgage-related obligations, and current debt obligations, alimony, or child support. 35 The credit union does not have to consider any debts that have been previously paid off, or will be paid off at consummation of the loan. 36 Residual income, on the other hand, is calculated by taking the borrower s monthly income after subtracting the borrower s total monthly debt obligations from total income. 37 NOTE while the Qualified Mortgage standard has a specific DTI threshold of 43 percent (discussed below), credit unions are only required to consider the borrower s DTI under the ATR rule. The borrower s DTI does not have to meet a specific threshold under the ATR rule Comment 12 C.F.R (c)(2)(v) C.F.R (c)(2)(vi). 29 Comment 12 C.F.R (c)(2)(vi) C.F.R (c)(2)(vii) C.F.R (c)(7)(ii). 34 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p at C.F.R (c)(7)(ii)(B). 38 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p

14 Credit history While credit unions are required to take into consideration a borrower s credit history, they are not required to obtain or consider a consolidated credit score. 39 Credit history is defined to include factors such as the number and age of credit lines, payment history, and any judgments, collections, or bankruptcies. 40 When two or more borrowers apply for a loan as joint obligors, credit unions must take into consideration the credit history of all applicants. 41 On the other hand, when an applicant is merely a surety or guarantor, a credit union does not have to consider that applicant s credit history. 42 If a credit union obtains a credit report and knows, or has reason to know, information on the credit report is inaccurate, the credit union may ignore the information. 43 VERIFYING A BORROWER S CREDIT INFORMATION For the information obtained and relied upon in making its ATR determination, the credit union must verify that information using reasonably reliable third-party records. 44 Credit unions may rely upon records such as: Records from government organizations such as a tax authority or local government; Federal, state, or local government agency letters detailing the consumer s income, benefits, or entitlements; Statements provided by a cooperative, condominium, or homeowners association; A ground rent or lease agreement; Credit reports; Statements for student loans, auto loans, credit cards, or existing mortgages; Court orders for alimony or child support; Copies of the consumer s federal or state tax returns; W-2 forms or other IRS forms for reporting wages or tax withholding; Payroll statements; Military leave and earnings statements; Financial institution records, such as bank account statements or investment account statements reflecting the value of particular assets; Records from the consumer s employer or a third party that obtained consumer-specific income information from the employer; Check-cashing receipts; and Remittance-transfer receipts Comment 12 C.F.R (c)(2)(viii). 40 Comment 12 C.F.R (c)(2)(viii). 41 Comment 12 C.F.R (c)(2)(viii) Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p C.F.R (c)(3). 45 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), pp

15 Again, credit unions are only required to verify the information used in making its ATR determination, and are not required to verify superfluous information provided by the borrower. Credit unions should review its processes, underwriting guidelines, software, contracts, and/or other aspects of its mortgage lending operation to ensure compliance with the ATR rule. While many credit unions are already using the eight ATR factors discussed above in the underwriting process, credit unions should review its policies and procedures to ensure that they state the eight factors are being considered during the underwriting process, and also describe the process by which they are considered. 46 LIABILITY UNDER THE ATR RULE If a borrower has difficulty repaying a loan originated by a credit union based upon the credit union s failure to comply with the ATR rule the borrower could bring a lawsuit under the ATR rule against the credit union. 47 Borrowers will have to prove the credit union failed to make a reasonable, good-faith determination of their ATR prior to the loan s consummation. 48 If the borrower prevails, a credit union may be liable for, among other things, up to three years of finance charges and fees the borrower paid, as well as the borrower s legal fees. 49 Borrowers will have three years to bring an ATR claim against a credit union. Upon expiration of the claims period, the borrower may only bring an ATR claim as setoff/recoupment claims in a defense to foreclosure. 50 However, a credit union should not be held in violation of ATR requirements if consumers cannot repay their mortgage loans solely because they experienced an unexpected job loss after origination. 51 RECORD RETENTION Credit unions must retain records showing compliance with the ATR/QM rule, including the prepayment penalty limitations, for at least three years from the loan s consummation. 52 The CFPB suggests credit unions may want to retain records for longer than three years for business purposes. In addition, while credit unions are not required to keep the actual documentation used during the underwriting process, it must be able to reproduce the records. 53 For example, if a credit union uses a W-2 to verify income, it must be able to produce an electronic copy of the form itself. Being able to produce the information only that was listed on the W-2 would be insufficient at at C.F.R (c)(3). 53 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p

16 ADDITIONAL EDUCATIONAL RESOURCES The following are helpful resources available that may assist you in compliance with the new Mortgage Rules. The CFPB s Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide The CFPB s Comparison Chart which compares the Ability-to-Repay requirements with the requirements for originating Qualified Mortgage loans (here appended) 15

17 ATTACHMENT A 16

18 Qualified Mortgage Rule OVERVIEW While issued with the Ability-to-Repay (ATR) rule, the Qualified Mortgage (QM) rule is a separate rule that incorporates many of the ATR standards. The rule provides a presumption that credit unions that originate qualified mortgages have complied with the ability-to-repay rule. In terms of liability, if a consumer files a complaint alleging that they could not afford the mortgage under the ATR standards, the credit union will be presumed to have complied with the ATR requirements if they issue QMs. Compliance with QM standards will also depend on whether or not it is considered higher-priced. If a loan that is not higher-priced satisfies the QM criteria, a court will presume a credit union has complied with the ATR rule. 55 The QM standards are intended to protect consumers from unduly risky mortgages, and to also provide a credit union with more certainty concerning its potential liability. For all types of QMs, points and fees generally may not exceed three (3) percent of the total loan amount, but higher thresholds are provided for loans under $100, In light of these anticipated rule changes, Fannie Mae and Freddie Mac announced in May 2013 that they would no longer be purchasing mortgages that did not meet the QM standard after the effective date of the rules, as reported in the Credit Union Times. 57 DEFINITIONS General Qualified Mortgage A General Qualified Mortgage may not have negative amortization, interest only, or balloon payment features; terms that exceed thirty (30) years; or points and fees that exceed certain limits. In addition, the credit union must: Underwrite the loan based on a fully amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment; Consider and verify the income and assets, current debt obligations, alimony and child support obligations of the borrower; Determine that the borrower s total monthly debt-to-income (DTI) ratio is no more than forty-three (43) percent. The requirements for determining the DTI are provided in Appendix Q to the rule Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p Credit Union Times, Fannie and Freddie to Reject Non-QM Mortgages Starting January 2014, May 6, C.F.R (e)(2). 17

19 If the methods contained in Appendix Q do not resolve how a specific type of debt or income should be treated, a credit union may rely on guidelines of Fannie Mae or Freddie Mac, or FHA, VA, USDA, or Rural Housing Service, to resolve the issue. 59 A General Qualified Mortgage is considered higher-priced if, at the time the interest rate is set: It is a first-lien mortgage that has an APR 1.5 percentage points over the Average Prime Offer Rate (APOR); It is a subordinate-lien mortgage with an APR that exceeds the APOR by 3.5 percentage points or more. Temporary Qualified Mortgage A Temporary Qualified Mortgage may not have negative amortization, interest only, or balloon features; terms that exceed thirty (30) years; or points and fees that exceed certain limits. This QM status is extended to loans originated during a transitional period, if they are eligible for purchase by a government-sponsored enterprise (GSE) or for insurance or guarantee by certain federal agencies. 60 These loans must also be underwritten according to the guidelines of the entities below, but do not have to meet the DTI forty-three (43) percent ratio requirement. The loan must also meet at least one of the following requirements: Eligible for purchase or guarantee by Fannie Mae or Freddie Mac (operating under federal conservatorship or receivership); Eligible for FHA insurance; Eligible to be guaranteed by the U.S. Department of Veteran Affairs; Eligible to be guaranteed by the U.S. Department of Agriculture; or Eligible to be insured by the Rural Housing Service. 61 The loan will retain its QM temporary status as a GSE, until the federal conservatorship expires January 10, If the loan is insured or guaranteed by one of the above listed federal agencies, it will retain its QM temporary status until the agency comes up with its own QM rules, or on January 10, 2021, whichever occurs first. 62 A Temporary Qualified Mortgage is considered higher-priced if, at the time the interest rate is set: It is a first-lien mortgage that has an APR 1.5 percentage points over the Average Prime Offer Rate (APOR); 59 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p C.F. R (e)(4). 61 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p at

20 It is a subordinate-lien mortgage with an APR that exceeds the APOR by 3.5 percentage points or more. 63 Small Creditor Qualified Mortgage A Small Creditor Qualified Mortgage (SCQM) may not have negative amortization, interest only, or balloon features; terms that exceed 30 years; or points and fees that exceed certain limits. As the definition implies, only those credit unions meeting the definition of small creditor may originate this type of mortgage transaction. In addition, SCQMs will cease meeting the qualification if the loan is sold or transferred less than three (3) years after consummation, unless it is sold to another creditor that meets the small creditor criteria, is required to be sold due to supervisory action, or transferred due to a merger or acquisition. 64 A SCQM must also meet the following conditions: The credit union must underwrite the loan based upon a fully amortizing schedule using the maximum rate permitted during the first five (5) years after the date of the first periodic payment; The loan must not be subject to a forward commitment to sell the loan, other than to a creditor that is itself eligible to make SCQMs; The credit union must consider and verify the member s income or assets, debts, alimony and child support; and The credit union must consider the member s DTI or residual income (but does not have to follow the 43% rule). 65 Small Creditor A credit union qualifies as a small creditor if: It (excluding affiliates 66 ) had assets below $2 billion at the end of the last calendar year (to be adjusted annually); and It (along with its affiliates) originated no more than 500 first-lien, closed-end residential mortgages that are subject to the ATR requirements in the preceding calendar year. 67 An affiliate is considered any company that controls, is controlled by, or is under common control with, the credit union. A small creditor may originate any of the four (4) qualified mortgages described; however, only a small creditor may originate a Small Creditor Qualified Mortgage and a Balloon Payment Qualified Mortgage at C.F.R (e)(5). 65 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p at Id at

21 A SCQM is considered higher-priced if, at the time the interest rate is set is a first-lien or subordinatelien mortgage that has an APR 3.5 percentage points over the Average Prime Offer Rate (APOR). Balloon-Payment Qualified Mortgage A Balloon-Payment Qualified Mortgage (BPQM) may not have negative amortization or interest only features, and must comply with the points and fees limitations for qualified mortgages. Only those credit unions meeting the definition of small creditor may originate this type of mortgage transaction. After January 10, 2016, however, only small creditors operating predominantly in rural or underserved areas may continue to make BPQMs. The loan must also meet the following conditions: Have a fixed interest rate and periodic payments that would fully amortize over thirty (30) years, or less; Have a term of five (5) years or longer; Is not being sold under agreement to another creditor, unless the purchaser is also able to make BPQMs; Has been determined that the consumer can make the scheduled periodic payments, other than the balloon payment (even if it is a higher-priced loan); income or assets, and debts, alimony and child support have been verified; and The consumer s debt-to-income ratio or residual income has been taken into consideration, although there is no set threshold under the rule. 69 A BPQM is considered higher-priced if, at the time the interest rate is set is a first-lien or subordinatelien mortgage that has an APR 3.5 percentage points over the Average Prime Offer Rate (APOR). Like SCQMs, a BPQM will generally lose its status if it is sold or transferred less than three (3) years after consummation. However, a BPQM keeps its BPQM status if the loan is sold or transferred less than three (3) years after consummation, unless it is sold to another creditor that meets the small creditor criteria, is required to be sold due to supervisory action, or transferred due to a merger or acquisition. 70 Rural or Underserved Areas As already mentioned, after January 10, 2016, a credit union can continue to originate BPQMs if it meets the asset size and number of originations criteria, as well as the requirement that it operates primarily in rural or underserved areas. Note that more than half of a credit union s first-lien covered transactions during any of the three (3) preceding calendar years must have been secured by properties in rural areas or underserved areas. Underserved areas are considered counties where no more than two creditors extend five or more first-lien covered transactions in a calendar year. The CFPB will publish an annual list of rural or underserved 69 at Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p

22 counties, which can be found at the CFPB website. 71 Both the 2013 and 2014 lists are now published. Carefully consider the definition of rural or underserved under the CFPB definition, as it differs from the Home Mortgage Disclosure Act definition of rural. 72 POINTS AND FEES LIMITATION For a loan to be a qualified mortgage, the points and fees may not exceed certain limitations. As is demonstrated below, the caps are higher for smaller loans. The initial limitations are as follows: 3% of the total loan amount for a loan greater than or equal to $100,000 $3,000 for a loan greater than or equal to $60,000 but less than $100,000 5% of the total loan amount for a loan greater than or equal to $20,000 but less than $60,000 $1,000 for a loan greater than or equal to $12,500 but less than $20,000 8% of the total loan amount for a loan less than $12,500 The above amounts will be adjusted annually and published each year in the commentary to Regulation Z ( (e)(3)(ii)). Calculation There are eight categories of charges that must be added together to calculate the total points and fees. Generally, these will include most items included in the finance charge, loan originator compensation, real estate related fees, premiums for credit insurance, credit property insurance, other life, accident, health or loss-of-income insurance where the creditor is beneficiary, or debt cancellation or suspension coverage payments, the maximum prepayment penalty, prepayment penalties paid in a refinance, charges paid by third parties, and creditor-paid charges. 73 Include amounts that are known at or before consummation, even if the consumer pays them by rolling them into the loan amount as part of the transaction. Unless otherwise specified, closing costs that are paid by the credit union, but recouped from the member over time through the interest rate, are not counted in points and fees. 74 For additional assistance in determining whether or not a charge should be included in points and fees, see generally the CFPB s Small Entity Compliance Guide at C.F.R (b)(1) and Comment 32(b)(1) Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p at

23 PREPAYMENT PENALTIES Credit unions permitted by law to charge a prepayment penalty may only do so for fixed-rate or steprate Qualified Mortgages that are not considered higher-priced. Notably, the definition of prepayment penalty does not include certain bona fide third-party charges that were waived at consummation in cases where the member fully prepays the loan within three (3) years and must repay the charges. 76 Prepayment penalties cannot be imposed after the first three (3) years of the loan term, and cannot be greater than: Two (2) percent of the outstanding loan balance prepaid during the first two (2) years of the loan; One (1) percent of the outstanding loan balance prepaid during the third (3 rd ) year of the loan. 77 Credit unions that wish to charge a prepayment fee must also offer the member an alternative transaction that does not include a prepayment penalty for which the credit union believes the member will qualify. The alternative loan must be a fixed-rate or graduated-payment loan, and must otherwise match the rate type from the loan with the prepayment penalty, must have the same term as the mortgage with the prepayment penalty, and cannot have deferred principal, balloon or interest-only payments, or negative amortization. 78 REFINANCING A NON-STANDARD LOAN INTO A STANDARD LOAN Credit unions can refinance a non-standard mortgage it holds or services into a standard mortgage without having to meet the ATR requirements, including the eight (8) underwriting factors. This option may only be used when: The refinance will not cause the member s principal balance to increase; The member uses the proceeds only to pay off the original mortgage and for closing or settlement charges appearing on the HUD-1, i.e., no cash is taken out; The member s monthly payment will materially decrease (i.e., by at least ten (10) percent); The member has only one 30-day late payment in the past twelve (12) months, and no late payments within the preceding six (6) months; The member s written application for the standard mortgage is received no later than two (2) months after the non-standard mortgage has recast; The credit union considered whether the standard mortgage likely will prevent the member from defaulting; and If the non-standard mortgage was consummated on or after January 10, 2014, the non-standard mortgage was made in accordance with the ATR requirements or QM provisions at C.F.R (g). 78 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p C.F.R (d)(1)(ii)(A). 22

24 The new loan must also meet certain requirements, including: The loan cannot have deferred principal, negative amortization, or balloon payments; The loan s points and fees must fall within the thresholds for QMs; The loan term cannot exceed forty (40) years; and The loan s interest rate must be fixed for at least the first five (5) years of the loan. 80 Note that the ATR and QM rules do not apply when an existing loan is modified, rather than refinanced, whether or not it is in default. 81 REBUTTABLE PRESUMPTION A credit union that originates a qualified mortgage that is higher-priced has a rebuttable presumption that the credit union complied with the ATR rule. Meaning, if a court finds that a mortgage a credit union originated met the definition of higher-priced, a borrower could argue the credit union violated the ATR rule. However, the borrower would then have to prove that at the time the mortgage was consummated, the borrower did not have available living expenses after paying for the mortgage debt (and other disclosed debts that were owed). 82 Under the rebuttable presumption, a member can argue that the credit union did not follow the ability to repay rule by showing that based upon information available to the credit union at the time of consummation, the member did not have enough residual income to meet living expenses after the costs of the mortgage and other debts. SAFE HARBOR PROTECTION A credit union that originates a qualified mortgage that is not higher-priced has a safe harbor conclusively presuming the credit union complied with the ATR rule. 83 ADDITIONAL EDUCATIONAL RESOURCES The CFPB s Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide The CFPB s Small Creditor Qualified Mortgages eligibility chart (here appended) The CFPB s Comparison Chart which compares the Ability-to-Repay requirements with the requirements for originating Qualified Mortgage loans (appended to ATR summary section) 80 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p C.F.R (a). 82 Ability-to-Repay and Qualified Mortgage Rule - Small Entity Compliance Guide, Consumer Financial Protection Bureau, (October 17, 2013), p

25 ATTACHMENT A 24

26 LOAN ORIGINATOR RULE OVERVIEW After the mortgage crisis in 2008, attention was placed on the influential role that loan originators play in assisting consumers in choosing their loans. Particularly there was concern regarding incentives for loan originators steering consumers toward more expensive loans to increase loan originator compensation. As a result, a number of new requirements have been imposed concerning loan originators licensing and registration, training, screening, and compensation. The Dodd-Frank Act added new requirements building upon these earlier changes. The CFPB issued regulations implementing this portion of the Dodd- Frank Act in January 2013, - the CFPB Loan Originator Rule. The Loan Originator Rule requires compliance with most of its provisions by January 1, 2014, however, the prohibition on financing credit insurance is effective January 10, 2014, and the prohibition on mandatory arbitration clauses was effective June 1, LOANS COVERED BY THE LOAN ORIGINATOR RULE The following portions of the Loan Originator Rule apply to all closed-end consumer credit transactions secured by a dwelling: Payments based on a term of a transaction; Prohibition on steering; Loan originator qualifications; Name and NMLSR ID loan document requirements; Prohibition on mandatory arbitration and waivers of certain consumer rights; and Prohibition on financing single premium credit insurance. 84 In addition, the portions pertaining to the prohibition of mandatory arbitration clauses, waivers of consumer rights, and the prohibition on financing single premium credit insurance also apply to home equity lines of credit on a consumer s principal dwelling. 85 Definition of Loan Originator Under the new rule, the definition of a loan originator is defined as follows: [T]he term loan originator means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a C.F.R (b)

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