4/20/2015. Dodd Frank Sections 1411 and Defines pretty specifically the terms and dimensions of each. On this one, you can't blame the CFPB

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1 Ability To Repay and Qualified Mortgages Presented by: TriComply, a Temenos Product Presenter: Blair Rugh, Compliance Director Florida Banker's Association, Annual Consumer Compliance Seminar April 29 th, 2015 Ability to Repay and Qualified Mortgages Dodd Frank Sections 1411 and 1412 Defines pretty specifically the terms and dimensions of each On this one, you can't blame the CFPB Coverage Any consumer credit transaction secured by a dwelling Except: Home Equity Lines of Credit Timeshares Reverse mortgages Temporary or bridge loans with a term of 12 months or less Construction term of 12 months or less of construction to perm loans Various government programs 1

2 Ability to Repay A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. Basis for Determination The creditor must consider: The consumer's current or reasonably expected income or assets Current employment status Monthly payment on the covered loan and any simultaneous loans Other monthly debt obligations, alimony and child support Credit history Everything must be verified using third party records The creditor may consider anything else that is relevant Special Rules for Calculating Monthly Payment for Certain Types of Loans Introductory rates Balloon payments Interest only Negative amortization 2

3 Determining Ability to Repay Calculate either debt to income ration or residual income after debt payments Use an underwriting system that in the past has resulted in a small number of delinquencies Apply the underwriting system consistently Success will depend on whether or not the consumer pays the loan Ability to Repay Lenders have never considered ability to repay in making lending decisions The new rules don't calculate a consumer's ability to repay Residual income is a better test then debt to income ratios Changes after closing don't count but what about changes between the time of your determination and closing? Damages: What If You Make a Mistake? Any creditor who fails to comply with any requirement imposed under this part... With respect to any person is liable to such person in an amount equal to the SUM of: (1) any actual damage sustained by such person as a result of the failure; (4) an amount equal to the sum of all finance charges and fees paid. 3

4 Qualified Mortgages Compliance with ATR rules if not a higher priced mortgage Rebuttable presumption of compliance if higher priced mortgage; burden of proof on consumer Standard Qualified Mortgage Requirements Substantially equal regular periodic payments except for interest rate changes under an ARM No increase in principal balance No deferral of principal payments No balloon payment Limit on points and fees; generally 3% of loan amount More Standard Qualified Mortgage Requirements For ARMS must use the maximum interest rate that is possible during the first five Years after the first regular periodic payment will be made in calculating loan payment Income, assets and debt obligations must be determined in accordance with Appendix Q Ratio of debt to income may not exceed 43% Restrictions on prepayment penalties 4

5 Temporary Exemption Until January 10, 2016 A qualified mortgage may have a balloon payment if the lender is a small creditor Small creditor: Assets less than $2 billion Originated no more than 500 covered first mortgages in prior year At least 50% of covered mortgages were in rural or underserved areas Small Creditor Balloon Mortgages Lender must be a small creditor Loan must have a fixed rate and term of five years or more Must meet same standards as regular qualified mortgage except Appendix Q is not required to be followed Loan not subject to a commitment to sell to a lender that is not a small creditor If loan is sold after consummation qualified mortgage status may be lost QUESTIONS? 5

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