1 F9 Office of the President TO MEMBERS OF THE COMMITTEE ON FINANCE: For Meeting of November 14, 2013 ACTION ITEM REVISIONS AND MODIFICATIONS TO UNIVERSITY OF CALIFORNIA LOAN PROGRAM POLICIES AND PROCEDURES EXECUTIVE SUMMARY This item requests that the Regents approve amendments to the Mortgage Origination Program (MOP) and Supplemental Home Loan Program (SHLP) to establish a new loan product, the 5/1 Adjustable Rate Mortgage (5/1 MOP), and impose an interest rate cap of ten percent over the starting rate for all loans made after January 1, In addition, the item requests that the President be authorized to develop and implement loan underwriting standards that are consistent with the Regents policies and applicable federal lending regulations for the 5/1 MOP, and to implement new federal Truth in Lending regulations, effective January 10, 2014, at the President s discretion and in the best interests of the MOP and SHLP programs. The proposed policy modifications will maintain an overall uniform framework for housing loan assistance, while providing the President with discretion on the management of the University s Housing Programs. Consultations have been completed with the Academic Council, the Office of the Chief Investment Officer, and the Office of the General Counsel. RECOMMENDATION The President recommends that the Committee on Finance recommend that the Regents: A. Amend the Mortgage Origination Program (MOP) Policies, as shown in Attachment 1, to: (1) Implement an interest rate cap of ten percent over the starting interest rate for MOP, Graduated Payment MOP (GP-MOP), Interest-Only MOP (IO-MOP), and 5/1 MOP loans made after January 1, (2) Establish a new 5/1 Adjustable Rate Mortgage loan product (5/1 MOP).
2 COMMITTEE ON FINANCE -2- F9 November 14, 2013 B. Authorize the President to develop and implement 5/1 MOP loan underwriting standards that are consistent with the Regents policies and applicable federal lending regulations. C. Authorize the President to implement new federal Truth in Lending regulations, effective January 10, 2014, according to Presidential discretion and in the best interests of the MOP and Supplemental Home Loan Program. BACKGROUND Program History. In July 1984, the Regents approved the establishment of the Mortgage Origination Program (MOP). MOP was approved to provide primary mortgage financing to support the University s recruitment and retention needs for faculty and Senior Managers. The University also administers the Supplemental Home Loan Program (SHLP), which was approved by the Regents in March SHLP provides flexibility to utilize campus funding sources to offer primary and secondary financing with a range of loan products. MOP and SHLP are valuable resources in the recruitment and retention of faculty and Senior Managers. Historically, the median sales price in California has been significantly higher than the national median sale price. This is particularly true in the areas surrounding the University campuses. Housing affordability close to the work location continues to be a key factor in recruiting a new faculty member or Senior Manager. The underwriting guidelines for MOP and SHLP were designed to provide easier qualifying than products available in the conventional mortgage market, and to provide flexibility given the unique nature of University employment. Consumer Finance Protection Bureau Regulations. In response to the financial crisis of the late 2000s, the Dodd-Frank Wall Street Reform and Protection Act (Dodd-Frank Act) was passed to increase accountability of financial institutions. The Dodd-Frank Act includes regulations that affect the mortgage lending industry. In January 2013, the Consumer Finance Protection Bureau (CFPB) issued new lending regulations that implement certain provisions of the Dodd-Frank Act. The new CFPB regulations are effective January 10, These new regulations include strict underwriting standards, and provide a definition of a Qualified Mortgage (QM) that must meet certain requirements, including prohibitions or limitations on loan product features. Although the University is exempt from some features of the Dodd-Frank Act, the CFPB regulations apply to any lender that must comply with federal Truth in Lending disclosure requirements, commonly referred to as Regulation Z. Consultation with General Counsel and outside Counsel has confirmed that the University is subject to these new regulations. Lenders may continue to make loans that are deemed non-qualified Mortgages, but will not receive the same protections in the event of future litigation. Under Dodd-Frank, lenders must make a reasonable, good-faith determination that the consumer has a reasonable ability to repay the loan. The University has documented procedures for each of the factors that generally must
3 COMMITTEE ON FINANCE -3- F9 November 14, 2013 be considered for the ability-to-repay (ATR) 1 requirements as defined by Dodd-Frank. In order to reduce the risk of litigation, the University will continue to follow the established procedures for complying with the ATR requirements. Lenders who comply with the strict requirements of the CFPB s guidelines for a QM are provided a conclusive presumption that they have complied with the ATR requirements. A lender who fails to make a reasonable, good faith determination of a borrower s qualifications could be liable for penalties, damages and costs of any action brought against the lender. QM Guidelines MOP/SHLP Guidelines 30 year maximum loan term 40 year maximum loan term No Interest-Only or Balloon payment loans Interest-Only MOP (up to maximum 10 year I-O period) Interest-Only and Balloon SHLP products available 43% maximum debt-to-income ratio 48% maximum debt-to-income ratio ARM Loans must be underwritten based on highest possible rate in first five years Underwriting based on initial interest rate The table above compares the underwriting standards for a Qualified Mortgage to the current MOP/SHLP guidelines. MOP Qualification Analysis under CFPB Standards. An analysis of the 152 MOP loans that were funded between July 1, 2010 and September 30, 2013 was completed to determine how many of the funded loans met the requirements of the new CFPB regulations. Specifically, at the time they were funded, 14 percent of the loans had an overall debt-to-income ratio of greater than 43 percent, which does not meet the definition of a QM. Of the remaining loans, the debt-toincome ratio was re-calculated using the highest possible rate and payment in the first five years of the loan, and a maximum loan term of 30 years. An additional 42.7 percent of the loans did not qualify as QM s. Overall, 57 percent of the MOP loans funded during this time period would not have qualified as QM s. Based on the results of this analysis, adhering to the strict QM guidelines will have a significant negative impact on the University s ability to offer housing assistance in the recruitment and 1 There are eight factors that generally must be considered for the Ability-To-Repay Requirements: 1) Current or reasonably expected income or assets; (2) Current employment status; (3) The monthly payment on the covered transaction; (4) The monthly payment on any simultaneous loan; (5) The monthly payment for mortgage-related obligations; (6) Current debt obligations, alimony, and child support; (7) The monthly debt-to-income ratio or residual income; and (8) Credit history.
4 COMMITTEE ON FINANCE -4- F9 November 14, 2013 retention of faculty and Senior Managers. Although MOP and SHLP loans do not meet the QM guidelines, all University loans are fully documented and are underwritten according to the standards approved by the Regents. The loan portfolio has had a very low delinquency and default rate throughout the program s history. Alternatives. The University is evaluating the risks associated with making Non-Qualified Mortgages as compared to the need for providing easier loan qualifying criteria to assist in recruiting and retaining faculty. Part of this analysis includes completing research on whether the University will be able to sell loans that are not QM s. Given that the regulations have not yet been implemented, it is unclear whether investors will be willing to purchase non-qm s. Another option is to pursue a Small Creditor Exemption to the CFPB regulations. o Small Creditor Exemption This exemption applies to creditors who originate less than 500 loans per year and have less than $2 billion in assets. The exemption extends Qualified Mortgage status to certain loans that are held in the creditor s own portfolio for at least 3 years. To qualify in terms of asset size, the Office of Loan Programs within the Office of the President would be set up as a separate 501(c)(3) organization. The recommendations that follow are designed to provide remedies to assist the University in adhering to the new lending standards. Approval of the 5/1 MOP option will allow the University to use the initial interest rate of the loan to calculate qualifying ratios, since the rate will be fixed for the first five years of the loan. In the MOP qualifying analysis referenced above, 70 percent of the 152 loans would have qualified as QM s using the parameters for the 5/1 MOP. DETAILED RECOMMENDATIONS 1. Modify MOP Policies to Provide an Alternative Loan Product Offering a Fixed Interest Rate and Payment for the First Five Years of the Loan Term. This new product is similar to 5/1 ARM products available through conventional lenders. The loan product offers a fixed interest rate and payment for five years, after which the loan converts to a Standard MOP. For consistency with other MOP products, this product will be known as the 5/1 MOP. The President, in consultation with the Office of the Chief Investment Officer, will establish the initial interest rate (Initial Rate) using a published index to be determined. The index for the Initial Rate will be selected to create a product that is an alternative investment vehicle as compared to other short-term investments of STIP. Unlike the MOP, GP-MOP and IO-MOP products, the 5/1 MOP rate of interest will not track the STIP rate of return during the Fixed-Rate Term. The minimum Initial Rate will be 3.5 percent.
5 COMMITTEE ON FINANCE -5- F9 November 14, 2013 After the Fixed Rate Term, the interest rate will adjust to the MOP rate in effect at that time, subject to a five percent initial rate adjustment cap, a three percent minimum interest rate, and a ten percent overall maximum rate adjustment cap. After the Fixed Rate Term and the initial interest rate adjustment at the end of the Fixed Rate Term, the maximum annual adjustment is 1 percent. The 5/1 MOP will meet the January 10, 2014 requirements for a QM as defined by the CFPB. If the CFPB s definition of a QM is altered, the parameters of the 5/1 MOP may be revised to be in compliance with the new definition. The 5/1 MOP loans will provide a stable monthly payment to borrowers in the early years of the loan and will allow loan qualification at the Initial Rate, while meeting the requirements for a QM. 2. Implement an interest rate cap of ten percent over the starting interest rate for MOP loan applications received after January 1, Rate caps on adjustable rate mortgages are standard in the mortgage industry. Truth in Lending regulations include a requirement to disclose the maximum payment possible. Having a rate cap will allow the University to provide a realistic estimate of the maximum payment amount.
6 Attachment 1 Additions shown by underscoring; deletions shown by strikethrough UNIVERSITY OF CALIFORNIA MORTGAGE ORIGINATION PROGRAM POLICIES A. ELIGIBILITY AND PARTICIPATION POLICIES In all eligibility and participation policies described herein, it is understood that any appointee in a position specifically designated by The Regents as requiring Regents approval for compensation-related matters, must be approved for Mortgage Origination Program participation by The Regents. All references to MOP loan eligibility, participation policies, and loan policies also apply to GP- MOP, IO-MOP and 5/1-MOP loans unless otherwise described herein. 1. The eligible population for the Mortgage Origination Program (MOP) consists of fulltime University appointees who: are members of the Academic Senate or hold academic titles equivalent to titles held by such members; hold the title of Acting Assistant Professor; are members of the Senior Management Group; or will be appointed to any of these eligible positions effective no more than 180 days after loan closing. 2. From the eligible population, the Chancellor or Lawrence Berkeley National Laboratory (LBNL) Director shall designate eligible individuals for participation in MOP based on each location s determination of its requirements for recruitment and retention. Additionally, the Chancellor or LBNL Director may recommend, and the President is authorized to approve, individuals not in the eligible population defined in Section A.1 for participation in MOP, based upon the essential recruitment and retention needs and goals of the institution. 3. Effective with the MOP allocation and for all subsequent allocations, a minimum of 60% of funds allocated for MOP is designated for participants who are purchasing their first principal place of residence within a reasonable distance of their campus or laboratory. These loans are further designated for participants who have not owned a principal place of residence within a reasonable distance of their campus or laboratory within the 12-month period preceding the closing date of their MOP loan. 4. If, in the judgment of the Chancellor or LBNL Director, individual circumstances warrant the making of a loan that does not meet the intent of Section A.3, up to 40% of the allocation is available to address essential recruitment or retention needs of the campus or laboratory for otherwise eligible appointees for one or more of the following purposes (Limited Purpose loans):
7 to refinance existing qualifying housing-related debt secured on a participant s principal residence, including related loan transaction expenses included in the prior loan balance or related to the MOP loan, with the understanding that the MOP loan cannot be used to pay off loans, secured or not secured, used for nonhousing-related expenses or for any mortgages on other properties. For any debt secured on a participant s principal residence that was incurred during the five years prior to loan closing, the participant must document the purpose and use of funds as qualifying housing-related indebtedness associated with the subject property; to provide a new MOP loan to a current or prior MOP participant at the same campus or laboratory; or to provide a MOP loan to a participant who has owned a home within a reasonable distance of the campus or laboratory within a 12 month period prior to the funding of a MOP loan. 5. MOP participation may continue for the term of employment by the University of California, as long as the property securing the loan continues to meet the specifications outlined in Section B.1, it being understood that: if the property securing the loan no longer meets the specifications outlined in Section B.1, the MOP loan shall be reviewed for appropriate disposition; and if University employment is terminated or, in the case of academic appointees, there is a permanent change to an appointment status not considered to be in fulltime service to the University, the MOP loan is to be repaid within 180 days of such date of separation or change in status, with the understanding that: o o o participation can continue when separation is due to disability or retirement under the provisions of the University of California Retirement Plan or other retirement plan to which the University contributes on behalf of the participant; or in the event of the death of the participant, participation can continue for a surviving spouse or surviving Domestic Partner or, in the absence of a surviving spouse or surviving Domestic Partner, for a surviving Eligible Child (as the terms Domestic Partner and Eligible Child are defined by the University of California Retirement Plan); or in hardship cases, reasonable forbearance beyond the 180 day period may be granted for repayment, provided all other terms and conditions of the loan are satisfied. B. MOP LOAN POLICIES 1. MOP loans shall be secured, using a recorded deed of trust for residences that are: owner-occupied single-family residences, including planned unit development and condominium units, which may include one secondary unit that does not comprise more than one-third of the total living area of the home; Page 2 of 6
8 the principal place of residence for the participant, other than during absences for sabbatical leave or other approved leaves of absence; used primarily for residential, non-income producing purposes; and 50% or more participant-owned. 2. MOP loans may not be used for direct construction loans; however, MOP loans may be used to refinance commercial construction loans upon completion of a new residence or the completion of the renovation of an existing residence. 3. The maximum loan-to-value ratio (LTV) of a MOP loan is to be determined as follows: for loans up to (including) $845,000 (indexed limit as of April ), the maximum LTV is 90% when the loan does not include any financing of closing costs and 92% with financing of documented closing costs; for loans greater than $845,000 up to (including) the Indexed Program Loan Amount ($1,330,000 as of April ), the maximum LTV is 90%; for loans greater than the Indexed Program Loan Amount, the maximum LTV is 80%; and MOP loan amounts greater than the Indexed Program Loan Amount shall require the approval of the President and the concurrence of the Chairman of the Board of Regents and Chairs of the Committees on Finance and Compensation. An increase to the 80% maximum LTV for loans in excess of the Indexed Program Loan Amount to no more than 85% may be approved upon recommendation by the President, with concurrence of the Chairman of the Board of Regents and the Chairs of the Committees on Finance and Compensation. The value of the residence is, in all cases, defined as the lesser of the purchase price or current appraised value. The above dollar threshold amounts for determining the maximum LTV and for the Indexed Program Loan Amount reflect applicable levels in effect as of April , which shall be adjusted annually in April, based upon any increases in the All-Campus Average Sales Price determined by the annual zip code study performed by the Office of Loan Programs. 4. The maximum term of a MOP loan shall be 40-years. 5. The standard mortgage interest rate (Standard MOP Rate) will be equal to the most recently available average rate of return earned by the Short-Term Investment Pool (STIP) for the four quarters preceding the issuance of a loan commitment letter for the mortgage loan, plus an administrative fee component: the President shall determine the level of the administrative fee component of the rate up to an amount not to exceed 0.25%; the Standard MOP Rate will be adjusted annually on the anniversary date of the loan; the maximum amount of adjustment up or down of the Standard MOP Rate will be 1% per year; Page 3 of 6
9 there will be no overall cap on the total amount of adjustment of the Standard MOP Rate over the term of the loan; for MOP, GP-MOP and IO-MOP loans made on or after January 1, 2014, the overall cap on the adjustment of the interest rate over the term of the loan will be 10% above the initial interest rate for the loan; effective with loans approved on or after August 1, 2010 the minimum initial Standard MOP Rate shall be 3.0%, and the annual rate adjustment on these loans will have a floor rate of 3%; in the event a loan commitment letter is issued for a MOP, GP-MOP or IO-MOP loan and the Standard MOP Rate subsequently decreases prior to the loan funding, the participant will receive the more favorable rate; and the difference between the weighted average rate of return of the UC-Owned MOP, GP-MOP, and IO-MOP mortgage portfolios versus that of STIP will be calculated monthly, with any earnings shortfall in the combined MOP, GP-MOP, IO-MOP portfolios being covered by the Faculty Housing Program Reserve. The rate of return of the 5/1 MOP mortgage loans will not be included in this calculation during the Fixed Rate Term, as defined in this document. Following the Fixed Rate Term, the 5/1 MOP loans will be considered MOP loans for the purposes of the monthly calculation. Any earnings excess will be retained in the Faculty Housing Program Reserve. The Faculty Housing Program Reserve will reimburse STIP for any principal losses resulting from portfolio loan losses. 6. Participants may request an Interest-Only MOP loan (IO-MOP) that has a temporary interest-only repayment feature for up to 10 years (IO-Period) with the following parameters: the maximum overall term of the loan is 40 years and the minimum remaining term after the IO-Period is 30 years; an additional interest rate margin of 0.25% will be added to the Standard MOP Rate during the IO-Period (IO-Rate); the additional 0.25% margin amounts collected during the period of UCownership of any such loan shall be held in a separate loss protection account within the Faculty Housing Programs Reserve to offset any losses of principal attributed to this class of loans; during the IO-Period, the maximum annual adjustment to the IO-Rate, up or down, is 1%; after the IO-Period, the fully amortized payment will be calculated using the remaining loan balance and term at the underlying Standard MOP Rate in effect at the end of the IO-Period, subject to the maximum annual interest rate adjustment of the Standard MOP Rate, up or down, of 1%; and the IO-Period is not renewable beyond the maximum 10-year IO-Period term. Beginning with the MOP allocation and for all subsequent allocations, IO- MOP loans shall be limited to 15% of the cumulative allocation. Page 4 of 6
10 7. Each Chancellor and the LBNL Director is authorized to designate eligible participants for participation in the Graduated Payment Mortgage Origination Program (GP-MOP) option, which provides for a reduction in the Standard MOP Rate in the manner described below: the maximum rate reduction in the Standard MOP Rate is 3.0% and the minimum resulting mortgage interest rate for such loans shall be 3.0%; the rate reduction amount will be decreased by a predetermined annual adjustment (ranging from 0.25% to 0.50%) until the mortgage interest rate equals the Standard MOP Rate; for the time period in which the rate reduction is in effect for each GP-MOP loan, the campus shall provide for a monthly transfer of funds (from available campus funds, including discretionary funds, as well as unrestricted and appropriate restricted gift funds) to STIP or to a third-party investor, if the loan has been sold, to provide the same yield that would have been realized under the Standard MOP Rate; and the President is authorized to approve an initial rate reduction greater than 3.0% and an annual adjustment amount outside the standard range of 0.25% to 0.50% based upon the essential recruitment and retention needs and goals of the institution. 8. Participants may request a 5/1 ARM product (5/1 MOP) that has a temporary fixed-rate period (Fixed Rate Term), after which the loan converts to a standard MOP loan. The initial interest rate (Initial Rate) will remain fixed until the date that the 60 th payment is due, resulting in a fixed payment amount for the first 60 monthly payments. The minimum Initial Rate will be 3.5%. The overall cap on the adjustment of a 5/1 MOP loan s interest rate over the term of the loan will be 10% above the Initial Rate for the loan. After the Fixed Rate Term, the interest rate will adjust to the Standard MOP Rate in effect at that time, subject to a 5% interest rate adjustment cap, and a 3% minimum interest rate. After the Fixed Rate Term and the initial rate adjustment at the end of the Fixed Rate Term, the maximum annual adjustment is 1%. There is no Interest-Only option available under the 5/1 MOP. The Fixed Rate Term is not renewable beyond 5 years. 9. The sum of monthly mortgage payments (principal and interest) of the MOP loan and all other loans secured by the residence may not exceed 40% of the participant's household income. 10. When administratively feasible, MOP loan payments shall be made by payroll deduction while on salary status. 11. MOP loans are not assumable. Page 5 of 6
11 12. MOP loans carry no prepayment penalty. 13. MOP loans carry no balloon payments. Page 6 of 6