Ability to Repay and Qualified Mortgage TILA 129 C

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1 Congressional Concerns Ability to Repay and Qualified Mortgage TILA 129 C February 2014 Patti Blenden Financial Solutions 2 The Dodd Frank Act (DFA) changes reflect 3 primary concerns with the mortgage industry: Concern that consumers received loans they had no reasonable ability to repay Widespread belief that consumers were steered to more expensive products that were less safe by loan originators (LO) believed to be motivated by LO compensation programs Many feel the industry lacked the capacity to address consumer loan servicing needs, particularly with delinquent borrowers and loss mitigation options Dodd Frank Act (DFA) Progress as of January 9, 2014 CFPB s Compliance Guide Updated on January 18, Financial Solutions: February

2 ATR/QM Rule Silos ATR Rule Exemptions 5 Standard Ability to Repay (ATR) 8 specific factors Nationalized underwriting and required docs Legislative provisions providing QM Creditors with special protection from liability under the ATR requirements Safe harbor Rebuttable presumption QM Rules & qualification criteria Product feature restrictions Underwriting requirements Doc standards General QM Agency/GSE QM Refinancing a non standard mortgage Small Creditor Balloon Payment QM Rural and Underserved Market Creditor Balloon Payment QM Temporary GSE or Agency QM 6 Home equity lines of credit (HELOC) Mortgage transactions secured by a timeshare Reverse mortgages Temporary or bridge loans with a term of <12 months Extensions of credit primarily for a business, commercial, or agricultural purpose Creditors and Loan Programs Exempt from ATR Requirements The ATR requirements do not apply to those loans on the previous slide. A loan eligible for one of these exemptions is not eligible for QM status, as the QM provisions are only applicable to loans subject to the ATR. A consumer who obtained an ATR exempt loan has no ability to repay claim under the ATR/QM rule. These exempt loans are subject to the prepayment penalties restrictions and may not be structured as open end credit plans to evade those restrictions. June Financial Solutions: February

3 Balloon QM Balloon QM by Small Creditor in Rural or Underserved Areas Small Creditor Portfolio QM Small Creditor regardless of R or UA Status, held in Portfolio General QM Basic Definition Qualified Mortgages Temporary Agency/GSE QM Eligible for GSE Purchase Refinance Non Standard Mortgage to a Standard Mortgage Small Creditor Balloon Payment QM Temporary Family Closed End Mortgages QM Safe Harbor Loans Modifications and Existing Loan Portfolio QM Rebuttable Presumption Loans Non QM ATR Loans Financial Solutions: February

4 Covered Transaction Key Terms Closed end consumer credit transaction secured by a dwelling, with or without real estate Includes primary residences and other personal residences (second home, vacation home, etc.) 14 Refinancing (a) A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. 15 NOT a Refinancing The following will not be treated as a refinancing even if accomplished by cancellation of old obligation & substitution of a new one: A renewal of a single payment obligation with no change in original terms A reduction in APR with a corresponding change in payment schedule An agreement involving a court proceeding A change in the payment schedule or a change in collateral requirements as a result of the consumer s default or delinquency, unless when the rate is increased, or new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in (d). The renewal of optional insurance purchased by the consumer and added to the existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart. A change from fixed rate to adjustable rate is always a transaction requiring new disclosures to the consumer! 16 Financial Solutions: February

5 Modifications Fully Indexed Rate CFPB s Small Entity Compliance Guide, January 2014 The index rate prevailing on a residential mortgage loan at the time the loan is made plus the margin that will apply after the expiration of any introductory interest rates The interest rate calculated using the index or formula at the time of consummation and the maximum margin that can apply at any time during the loan term Do you have floor rates that will prevail in an ARM? Fully Amortizing Payment Loan Amount & Term A periodic payment of principal and interest that will fully repay the loan amount over loan term Used in the general payment calculation provision in (c)(5)(i)(B), which requires the use of monthly, fully amortizing payments that are substantially equal The monthly payment must be calculated using the fully indexed rate at the time of loan closing, without considering the introductory rate Recast date: could be the trigger! 19 Loan Amount: Principal amount consumer will borrow as reflected in the promissory note or loan contract Use entire loan amount as reflected in loan contract or promissory note, even though loan amount may not be fully disbursed at consummation Loan Term: Period of time to fully repay the obligation Generally the amortization period on which periodic amortizing payments are based. 20 Financial Solutions: February

6 Maximum Loan Amount Higher Priced Covered Transaction Principal amount the consumer will borrow plus any increase in principal resulting from negative amortization based on the note s terms, and Consumer projected to make only the minimum periodic payments for the maximum possible times until the note requires fully amortizing payments Maximum interest rate is reached at earliest possible time Used for two primary purposes under new rules Standard ATR Loans Determines whether you must use the balloon payment on a loan when underwriting the consumer s monthly DTI or residual income Qualified Mortgages of any category Determines whether you are entitled to safe harbor or rebuttable presumption when challenged HPCT Thresholds HPCT OR Higher Priced QMs ATR/QM Category Standard ATR (regardless of asset size or loans originated) (e)(2) General QM (e)(4) Agency/GSE QM (e)(5) Small Creditor Portfolio QM (e)(6) Small Creditor Temporary Balloon Payment QM (f) Small RUS* Creditor Balloon Payment QM 23 1 st Lien HPCT Loans Subordinate Lien HPCT Loans >1.5% over APOR >3.5% over APOR >1.5% over APOR >3.5% over APOR >1.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR Higher priced covered transactions are QMs with an APR > comparable APOR by the specified threshold: 1.5 percentage points for non small creditor 1 st lien QMs 3.5 percentage points for small creditor 1 st lien QMs 3.5 percentage points for all creditors subordinate lien QMs Higher priced QMs (HPCT QMs) receive rebuttable presumption of compliance with ATR Rule Non higher priced QMs (non HPCT QM) receive safe harbor of compliance with ATR Rule 24 Chart on Slide 95 Financial Solutions: February

7 Recast Loan Recast means: For an ARM, the expiration of the period during which payments based on the introductory fixed interest rate are permitted under the terms of the legal obligation; For an interest only loan, the expiration of the period during which interest only payments are permitted under the terms of the legal obligation; and For a negative amortization loan, the expiration of the period during which negatively amortizing payments are permitted under the terms of the legal obligation (c) Repayment Ability General requirement. 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. Consumer Suitability Industry Penalty Provisions Congress made ATR violations subject to: Full array of damages also triggered by HOEPA violations, including refund of all finance charges and consumer paid fees, court costs and attorney s fees Expanded 3 year statute of limitations Defense to foreclosure: Without regard to the 3 year statute of limitations, if the creditor, assignee or other holder of a mortgage loan, or anyone acting on their behalf, initiates a judicial or non judicial foreclosure or any other action to collect the debt, the consumer can assert a violation of the ability to repay provisions to offset against amount owed! 27 Severe Non Compliance Penalties Consumer may be able to recover special statutory damages equal to sum of all finance charges & fees paid by the consumer unless creditor demonstrates failure to comply is not material (in addition to actual damages, statutory damages, court costs & attorneys fees) Statute of limitations: 3 years from date of violation Defense by recoupment or set off in a foreclosure action by the creditor, any assignee of the creditor, or anyone acting as servicer on behalf of the holder of the loan No time limit on use of defense, but consumer cannot recover more than 3 years of finance charges & fees paid plus actual damages and fees (including reasonable attorney s fees) Recordkeeping will be crucial for evidencing compliance 28 Financial Solutions: February

8 29 Mandatory Underwriting Factors Income or Assets Current or reasonably expected, excluding this property Employment Status Current Monthly Payment on Covered Transaction Monthly Payment on Simultaneous Loan Current Monthly Payment for Mortgage Related Obligations Current Current Debt Obligations Including alimony and child support Monthly Debt to Income Ratio (DTI) Fully loaded, back end ratio or residual income Credit History No specificity about how to apply these factors in General ATR! Payment Calculations Refer to the Matrix and Tools Creditor must use substantially equal, monthly, fully amortizing payments at fully indexed rate The final rules establish a required payment calculation that requires calculation of the consumer s monthly payment amount based on: The total loan amount (principal per the note), Amortize loan amount in substantially equal payments over loan term Calculate equal payments using introductory rate or fully indexed rate, whichever is greater. 15 U.S.C. 1604(a) 30 Payment Calculation Rules Special rules apply to loans with a balloon payment, interest only payment or negative amortization feature For a simultaneous loan payment: For another covered transaction, follow the payment calculation requirements for the main transaction; or For a HELOC subject to , use the periodic payment required under the plan and the amount of credit to be drawn at or before consummation of the main transaction Version 4 Financial Solutions: February

9 Prepayment Penalties The new rules provide that covered transactions may not include a prepayment penalty unless: Prepayment penalty is permitted by law; Loan has an APR that cannot increase after closing; Loan is a qualified mortgage and Loan is not a higher priced mortgage loan (Reg Z Section 35 HPML). Allowable Prepayment Penalty Allowed on non HPML QMs ONLY if: The penalties satisfy certain restrictions Are permitted under law, AND Creditor has offered consumer an alternative without prepayment penalties HPML Thresholds A HPML is a closed end consumer credit transaction secured by the consumer s principal dwelling with an APR in excess of the APOR for a comparable transaction as of the date the interest rate is set by: 1.5% points or more for a 1st lien conforming mortgage loan 2.5% points or more for a 1st lien jumbo mortgage loan 3.5% points for a loan secured by a subordinate lien Creditor should use the last date the interest rate for the mortgage loan is set before closing HPML rules do not include HELOCs, second home, investment property or any commercial transactions 35 Test effective June 1, Freddie Mac 2014 Loan Limits Loans Above Limits = Jumbo Loans Property Type Maximum Base Conforming Loan Limits for properties NOT located in Alaska, Hawaii, Guam & U.S. Virgin Islands Maximum Base Conforming Loan Limits for properties located in Alaska, Hawaii, Guam & U.S. Virgin Islands 1 unit $417,000 $625,500 2 unit $533,850 $800,775 3 unit $645,300 $967,950 4 unit $801,950 $1,202,925 Financial Solutions: February

10 Prepayment Penalty Limits The final rule restricts prepayment penalties and allows them only if limited to: 2% of prepaid outstanding loan balance during Years 1 and 2 1% of prepaid outstanding loan balance during Year 3 0% of prepaid outstanding loan balance after Year 3 Alternative Loan If you wish to charge a prepayment fee, you must also offer the consumer an alternative transaction that you believe the consumer will qualify for. The alternative loan cannot have a prepayment penalty. The alternative loan must be similar to the loan with the prepayment penalty, so the consumer can choose between two products he will likely qualify for. The alternative loan: Must be a fixed rate or graduated payment loan and must match the rate type from the loan with the prepayment penalty Must have the same term as the mortgage with the prepayment penalty Cannot have deferred principal, balloon or interest only payments, or negative amortization CFPB Small Entity Compliance Guide, August 2013, p. 42 Anti Steering Safe Harbor When your organization is a broker or table funds loans and you want to use the safe harbor for compliance with anti steering rules for loan originators under (e) of Regulation Z, you must show the consumer: The loan with the lowest interest rate overall The loan with the lowest interest rate with a prepayment penalty The loan with the lowest total origination points or fee and discount points CFPB Small Entity Compliance Guide, August 2013, p Financial Solutions: February

11 HOT BUTTON: Points and Fees Points & Fees More important issue now than ever before! We expect more high cost mortgages since the CFPB eliminated the exemptions for purchase money loans and HELOCs The new calculation itself is more complex and lower thresholds are expected to increase qualifying loans Will have to begin reporting on the HMDA LAR and we feel that it will be a potential fair lending red flag Amount of points and fees will be used to calculate a fee cap for certain options to verify the borrower ATR Previous payable at or before loan closing concept is replaced with known at or before consummation standard Revised Points and Fees Test QM Points & Fees Restrictions Distinction between loan amount and total loan amount Use the loan amount (i.e., face amount of note) to determine whether loan is above or below $20,000 and appropriate trigger Apply the applicable points and fees trigger to the total loan amount For closed end credit, the amount financed ( ) minus any points and fees that are rolled into the loan amount and financed by the creditor For HELOCs, new definition of total loan amount is credit limit for the plan when opened, (same as loan amount used to determine which trigger applies) Loan Amount Points and Fees Limit $1 to $12,499 8% of loan amount $12,500 to $19,999 $1,000 $20,000 to $59,999 5% of loan amount $60,000 to $99,999 $3,000 > $100,000 3% of loan amount Financial Solutions: February

12 HOEPA (HCML Section 32) Points & Fees To calculate points and fees for HOEPA coverage of closed end credit transactions, use the same general approach that you use for calculating points and fees for qualified mortgages under the Home Ownership and Equity Protection Act (HOEPA) thresholds in the Bureau s High Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) rulemakings. However, you have a different set of thresholds to compare to the APOR! High Cost Mortgage Points and Fees Section 32 Loans, HOEPA 5% of total loan amount for loan > $20,000 8% of the total loan amount or $1,000 for a loan < $20,000 The $1,000 and $20,000 figures for the Points & Fees Test will be adjusted annually Closed End Points and Fees Test Finance Charge items under (a) and (b), excluding: Interest or time price differential Certain mortgage insurance premiums/charges Certain bona fide third party charges Certain bona fide discount points Financial Solutions: February

13 New Points and Fees Exclusions: Bona Fide Discount Points Definition: Generally 1% of the loan amount/credit limit that reduces interest rate based on calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate for the amount of discount points paid Additional points (1.5 % or 2.0% etc. of loan amount) can be charged depending on market circumstances Example: Fannie or Freddie guidance on what constitutes a sufficient reduction in rate in exchange for discount point New Points and Fees Exclusions: Bona Fide Discount Points Exclusions from points and fees: Up to 2 bona fide discount points if undiscounted interest rate does not exceed APOR by more than 1 % point If no discount points have been excluded under the above test, up to 1 bona fide discount point if undiscounted interest rate does not exceed APOR by more than 2 % points For personal property secured loans, use the average rate for a loan insured under Title I of National Housing Act as a measuring stick, rather than APOR This provision only applies for high cost purposes, not to determining qualified mortgage treatment New Points and Fees Exclusions: Mortgage Insurance Premiums (MIP) Complete exclusion for MIP premium or charge imposed under any federal or state agency program for guarantee or insurance against the consumer s default or other credit loss Private Mortgage Insurance (PMI) premium or charge payable after consummation is completely excluded New Points and Fees Exclusions: Private Mortgage Insurance (PMI) Premiums PMI premium/charge payable at or before closing is excluded up to amount that equals amount that would have been paid for an FHA loan, provided also that: Premium/charge is refundable on a pro rata basis, and Refund is automatically issued upon satisfaction of the mortgage Any portion of the PMI premium/charge that does not qualify for exclusion must be included in points and fees, regardless of whether paid in cash or financed or whether the insurance is required or optional Financial Solutions: February

14 housing/comp/premiums/sfpcalc PMI Premiums Example (b)(1)(i)(C)1iiC $3,000 PMI premium charged on a closed end mortgage loan is payable at or before closing. It is required to be refunded on a pro rata basis and automatically refunded upon notification of the satisfaction of the mortgage Maximum premium allowable under the National Housing Act is $2,000 Can exclude $2,000 from P & F, include $1,000 If premium was not required to be refunded on a pro rata basis or not automatically issued upon notification of mortgage satisfaction, include entire $3,000 in P & F Loan Originator Compensation HOEPA Language Include all mortgage broker compensation High Cost Language Include all compensation paid directly or indirectly by consumer to creditor or loan originator that can be attributed to that loan at the time the interest rate is set Financial Solutions: February

15 U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, DC ASSISTANT SECRETARY FOR HOUSING- FEDERAL HOUSING COMMISSIONER January 31, 2013 To: All Approved Mortgagees Mortgagee Letter Subject Revision of Federal Housing Administration (FHA) policies concerning cancellation of the annual Mortgage Insurance Premium (MIP) and increase to the annual MIP Purpose Consistent with FHA s ongoing efforts to strengthen the Mutual Mortgage Insurance Fund, FHA is: revising the period for assessing the annual MIP; removing the exemption from the annual MIP for loans with terms of 15 years or less and Loan to Value (LTV) ratios of less than or equal to 78 percent at origination; and increasing the annual MIP on all forward mortgages except single family forward streamline refinance transactions that refinance existing FHA loans that were endorsed on or before May 31, 2009 (see ML ). Effective Date The section of this ML that increases the annual MIP is effective for case numbers assigned on or after April 1, 2013, except as noted below. The following sections of this ML are effective for all mortgages with FHA case numbers assigned on or after June 3, 2013: revision to the period for assessing the annual MIP; removal of the exemption from the annual MIP for loans with terms of 15 years or less and LTVs of less than or equal to 78 percent at origination; increase in the annual MIP for mortgages with terms less than or equal to 15 years and LTV ratios less than or equal to 78 percent at origination. Continued on next page espanol.hud.gov 15

16 2 Mortgagee Letter , Continued Affected Topics This ML: rescinds the automatic cancellation of the annual MIP collection announced in MLs and ; rescinds ML , under which mortgages with terms of 15 years or less and LTVs of less than or equal to 78 percent at time of origination were exempt from the annual MIP; and rescinds and updates Sections 7.3.a, 7.3.c, 7.3.d, 7.3.e, 7.3.f, and 7.3.g of HUD Handbook as appropriate. This ML increases the annual MIP on all forward mortgages previously announced in ML , except single family forward streamline refinance transactions that are refinancing existing FHA loans that were endorsed on or before May 31, 2009; the rate for those streamline transactions remains at the level announced in ML Revision to the Period for Assessing Annual MIP For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP for the maximum duration permitted under statute. See 12 U.S.C. 1709(c)(2)(B). For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first. For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. Note: FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, FHA uses the original appraised value of the property to calculate the LTV. Continued on next page 16

17 3 Mortgagee Letter , Continued Revision to the Period for Assessing Annual MIP (continued) The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination. Term LTV (%) Previous New 15 yrs 78 No annual MIP 11 years 15 yrs > Cancelled at 78% LTV 11 years 15 yrs > Cancelled at 78% LTV Loan term > 15 yrs 78 5 years 11 years > 15 yrs > Cancelled at 78% LTV & 5 yrs 11 years > 15 yrs > Cancelled at 78% LTV & 5 yrs Loan term Increase to Annual Mortgage Insurance Premium Under Public Law (1)(b), FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps), by Mortgagee Letter. The first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after April 1, Term > 15 Years Base Loan Amt. LTV Previous MIP New MIP $625, % 120 bps 130 bps $625,500 > 95.00% 125 bps 135 bps > $625, % 145 bps 150 bps > $625,500 > 95.00% 150 bps 155 bps Term 15 Years $625, % % 35 bps 45 bps $625,500 > 90.00% 60 bps 70 bps > $625, % % 60 bps 70 bps > $625,500 > 90.00% 85 bps 95 bps The second table shows the previous and the new effective annual MIP rates for loans with an LTV of less than or equal to 78 percent and with terms of up to 15 years. The new annual MIP for these loans is effective for case numbers assigned on or after June 3, Term 15 Years Base Loan Amt. LTV Previous MIP New MIP Any Amount % 0 bps 45 bps Continued on next page 17

18 4 Mortgagee Letter , Continued Exceptions to MIP Duration Changes The changes to the duration of the annual MIP as specified in this ML are effective for all Single Family FHA programs for which FHA charges an annual MIP except: Title I Home Equity Conversion Mortgages (HECM) Exceptions to Announced MIP Increases. The increases in the annual MIP specified in this ML apply to all mortgages insured under FHA s Single Family Mortgage Insurance Programs except: Streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009 (see ML ) Title I Home Equity Conversion Mortgages (HECM) Section 247 (Hawaiian Homelands) Section 248 (Indian Reservations) Information Collection Requirements The information collection requirements contained in this document have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C ) and assigned an OMB control number of In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB Control Number. Questions Please address any questions about the topics addressed in this Mortgagee letter to the FHA Resource Center at CALLFHA. Persons with hearing or speech impairments may reach this number via TTY by calling the Federal Information Relay Service at For additional information on this Mortgagee Letter, please visit Signature Carol J. Galante Assistant Secretary for Housing - Federal Housing Commissioner 18

19 FHA Monthly (Periodic) Mortgage Insurance Premium Calculation The formula for calculating monthly mortgage insurance premium became effective May 1, 1998 (see Mortgagee Letter Attachment). Below is the monthly mortgage insurance premium (MIP) calculation with examples and pseudocode using the annual and upfront MIP rates in effect for mortgages assigned an FHA case number before October 4, See the following Mortgagee Letters for subsequent changes to the annual and upfront MIP rates: 10-28, 11-10, 11-35, 12-04, and [PDF]. Premium Calculation Monthly MIP Computation Steps Step 1: Compute annual average outstanding balance (see below) Step 2: Average Outstanding Balance * Annual MIP Rate Example Average Outstanding Balance for 1st amortization year: $106, , x.005 = (round to 2nd decimal place round to based on value in 3rd decimal place). Step 3: If MIP financed, / ( ) = divide annual MIP from Step 2 by (1 + Upfront MIP round to factor) Result rounded to 2nd decimal place based on value in 3rd decimal place. Step 4: Divide by 12 and round to nearest cent for Monthly MIP / 12 = round to Result rounded to 2nd decimal place based on value in 3rd decimal place. Step 5: Multiply by 12. This is the Annual Premium. $

20 Computation of Annual Average Outstanding Balance To start, use the original loan amount as the previous balance. Repeat the following steps for the remaining months in the year (11 iterations). The calculation of subsequent years is the same. The second year will begin with the last result of the first year. a. Multiply previous balance times annual contract interest rate. Round the result to two (2) decimal places based on value in 3rd decimal place. b. Divide result by Round the result to two (2) decimal places based on the value in 3rd decimal place. c. Add previous balance. d. Subtract P&I payment. Note: For an ARM use original Interest Rate and original P&I through all years. For GEM/GPM compute current P&I based on amortization plan. See table below. When the final year is computed, total up the 12 results for that year and divide the total by 12. AMPLAN RATE OF INCREASE MONTHS OF INCREASE A B C D E F L M N O P The new monthly P&I for GEM/GPM is not calculated if the twelfth month of the case has not been reached or if the payment number is greater than the maximum number of months. Premium Calculation Example Field Value Original Mortgage Amount $106,605 Interest Rate 7.5 Monthly P&I Annual MIP Rate Upfront Factor Beginning Amortization Date 04/2008 Today's Date 12/

21 Compute the annual average outstanding balance: Month/Year Computation Result Year 1 / Month 1 (Use Original Mortgage Amount) $106, Year 1 / Month 2 a. 106, * 7.5 = 799, (round to 799,537.50) b. 799, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 3 a. 106, * 7.5 = 798, (round to 798,944.10) b. 798, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 4 a. 106, * 7.5 = 798, (round to 798,347.03) b. 798, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 5 a. 106, * 7.5 = 797, (round to 797,746.20) b. 797, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 6 a. 106, * 7.5 = 797, (round to 797,141.63) b. 797, / 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 7 a. 106, * 7.5 = 796, (round to 796,533.23) b. 796, / 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 8 a. 106, * 7.5 = 795, (round to 795,921.08) b. 795,921.08/ 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 9 a. 106, * 7.5 = 795, (round to 795,305.10) b. 795, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 10 a. 105, * 7.5 = 794, (round to 794,685.23) b. 794, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 11 a. 105, * 7.5 = 794, (round to 794,061.53) b. 794, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 12 a. 105, * 7.5 = 793, (round to 793,433.93) b. 793, / 1200 = (round to ) c , = 106, d. 106, = 105, $106, $106, $106, $106, $106, $106, $106, $105, $105, $105, $105, Total of the Year 1 results $1,273, Divided by 12 $106, This is the Annual Average Outstanding Balance See Premium Calculation table at beginning of page for remaining steps to calculate Year 1 premium 21

22 Year 2 / Month 1 a. 105, * 7.5 = 792, b. 792, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 2 a. 105, * 7.5 = 792, b. 792, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 3 a. 105, * 7.5 = 791, b. 791, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 4 a. 105, * 7.5 = 790, b. 790, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 5 a. 105, * 7.5 = 790, b. 790, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 6 a. 105, * 7.5 = 789, b. 789, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 7 a. 105, * 7.5 = 788, b. 788, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 8 a. 105, * 7.5 = 788, b. 788, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 9 a. 105, * 7.5 = 787, b. 787, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 10 a. 104, * 7.5 = 786, b. 786, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 11 a. 104, * 7.5 = 786, b. 786, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 12 a. 104, * 7.5 = 785, b. 785, / 1200 = c , = 105, $104,

23 d. 105, = 104, Total of the Year 2 results $1,261, Divided by 12 $105, This is the Annual Average Outstanding Balance Multiplied by the Annual MIP Rate (.005) $ Rounded to two (2) decimal places $ Divided by 1 + Upfront MIP Factor ( ) $ Rounded to two (2) decimal places $ Divided by 12 $ Rounded to two (2) decimal places $42.85 This is the Monthly MIP Multiply Monthly MIP by 12 $ This is the Annual MIP Pseudocode Input Values interest = Interest Rate mip = Annual MIP Rate months = Years Since Amortization Date * 12 orig_mtg = Original Mortgage Amount p_i = Monthly Principal & Interest upfront = Upfront MIP Factor hold_val = A variable to store intermittent results total_amt = A variable to sum the last 12 months BEGIN last_val = orig_mtg total_amt = last_val FOR (I = 2 TO months) hold_val = last_val * interest [ROUND hold_val to 2 places after the decimal] hold_val = hold_val / 1200 [ROUND hold_val to 2 places after the decimal] hold_val = hold_val + last_val hold_val = hold_val - p_i last_val = hold_val total_amt = total_amt + last_val IF (REMAINDER(I / 12) = 0) AND (I <> months) THEN total_amt = 0 END IF NEXT I total_amt = total_amt / 12 total_amt = total_amt * mip [ROUND total_amt to 2 places after the decimal] total_amt = total_amt / (1 + upfront) [ROUND total_amt to 2 places after the decimal] total_amt = total_amt / 12 [ROUND total_amt to 2 places after the decimal] PRINT: Monthly Premium = total_amt END 23

24 Points and Fees New Inclusion Loan Originator Compensation All paid directly or indirectly by consumer or creditor to a loan originator that can be attributed to that loan at time interest rate is set Excluded: Comp based on long term performance, on overall quality of files, base salary Note: The exact details of loan officer compensation included (hourly wages, offsetting) is subject to additional rulemaking! Concurrent Ability to Repay Rulemaking Loan Originator Compensation Example Commentary (b)(1)(ii) 4 ii Payments by a mortgage broker to its individual loan originator employee Compensation paid by a mortgage broker to its individual loan originator employee is not included in points and fees under (b)(1)(ii). For example, assume a consumer pays a $3,000 fee to a mortgage broker, and the mortgage broker pays a $1,500 commission to its individual loan originator employee for that transaction. The $3,000 mortgage broker fee is included in points and fees, but the $1,500 commission is not included in points and fees because it has already been included in points and fees as part of the $3,000 mortgage broker fee Loan Originator Compensation Example Commentary (b)(1)(ii) 4 iii Creditor's origination fees loan originator not employed by creditor Compensation paid by a creditor to a loan originator who is not employed by the creditor is included in the calculation of points and fees. Such compensation is included in points and fees in addition to any origination fees or charges paid by the consumer to the creditor that are included in points and fees under (b)(1)(i). For example, assume that a consumer pays to the creditor a $3,000 origination fee and that the creditor pays a mortgage broker $1,500 in compensation attributed to the transaction. Assume the consumer pays no other charges to the creditor that are included in points and fees and that the mortgage broker receives no other compensation included in points and fees. For purposes of calculating points and fees, the $3,000 origination fee is included in points and fees and the $1,500 in loan originator compensation is included, equaling $4,500 in total points and fees, provided that no other points and fees are paid or compensation received. 59 Proposed Final (b)(ii) (b)(1) In connection with a closed end credit transaction, points and fees means the following fees or charges that are known at or before consummation: (ii) All compensation paid directly or indirectly by a consumer or creditor to a loan originator, as defined in (a)(1), that can be attributed to that transaction at the time the interest rate is set unless: (A) That compensation is paid by a consumer to a mortgage broker, as defined in (a)(2), and already has been included in points and fees under paragraph (b)(1)(i) of this section; (B) That compensation is paid by a mortgage broker, as defined in (a)(2), to a loan originator that is an employee of the mortgage broker; (C) That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or (D) That compensation is paid by a retailer of manufactured homes to its 60 employee. Financial Solutions: February

25 Closed End Points and Fees Test All items listed in (c)(7) finance charge (except amounts held for future payment of taxes), unless: The charge is reasonable; The creditor receives no direct or indirect compensation in connection with the charge; and The charge is not paid to an affiliate of the creditor New Points and Fees Exclusions: Bona Fide Third Party Charges Bona fide third party charges that are not retained by creditor, loan originator or affiliate of either are excluded from points and fees Example: Bona fide fee charged by third party closing agent to conduct closing is excluded from points and fees, even if it is a finance charge, so long as creditor, loan originator, or affiliate of either do notretain the charge New Points and Fees Exclusions: Bona Fide Third Party Charges Exception: Exclusion for bona fide third party charges does not trump the specific provisions relating to mortgage insurance, real estate related fees, and credit insurance Example: Even if PMI premium is paid to a third party that is unaffiliated with creditor or loan originator, PMI is included in points and fees unless it meets PMI requirements for exclusion Financial Solutions: February

26 Include in Points and Fees NEW Credit Property Insurance Includes insurance against loss or damage to personal property such as a houseboat or manufactured home Include hazard insurance unless solely for the benefit of the consumer, even if they are not part of the finance charge Include Prepayment Fees The maximum prepayment penalty that may be charged or collected under the terms of the mortgage loan; and The total prepayment penalty, incurred by the consumer if the consumer refinances the existing mortgage loan with the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either. Include in Points and Fees NEW Prepayment Fee Closed End For a closed end credit transaction, a charge imposed for paying all or part of the transaction s principal before the date on which the principal is due, other than a waived, bona fide third party charge that the creditor imposes if the consumer prepays all of the transaction s principal sooner than 36 months after consummation, provided, however, that interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty for extensions of credit insured by the FHA consummated before January 21, Include in Points and Fees NEW HELOC Points and Fees Prepayment Fee Open End A charge imposed by the creditor if the consumer terminates the open end loan prior to the end of the term, other than a waived bona fide third party charge that the creditor imposes if the consumer terminates the open end plan sooner than 36 months after account opening Excluded: Fees imposed for preparing documents when an open end plan is terminated, if imposed irrespective of when terminated Loan guarantee fees Certain termination fees permitted under Section (f) Definition of points and fees for a HELOC is substantially the same as for closed end loan, except the following are also included: Any fees for participation in the plan as described in (c)(4), if payable at or before account opening, Any transaction fee, including minimum or per transaction fee, that will be charged for a draw on the line; creditor must assume that consumer will make at least one draw equal to total credit line during the term Financial Solutions: February

27 Exemptions and Exceptions QM Small Creditor Tests Rural County (b)(2)(iv)(a) 71 CT = Covered Transaction (A) (B) (C) RUS = Rural or Underserved A county is rural during a calendar year if it is neither in an MSA nor in a micropolitan statistical area that is adjacent to an MSA, as those terms are defined by the U.S. Office of Management and Budget and as they are applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture's Economic Research Service (USDA ERS). This is not the same definition of rural used for Home Mortgage Disclosure Act (HMDA) reporting or used by other agencies. 72 Financial Solutions: February

28 Underserved County list ofrural and underserved counties for use in 2014/ Underserved areas (counties where no more than 2 creditors extend 5 or more first lien covered transactions in a calendar year) Originated < st lien CTs To determine if you meet the number of originations requirement, count all first lien, closed end mortgages made by you and made by your affiliates that are subject to the ATR requirements. Do not count subordinate lien mortgages. Also do not count mortgages that are not subject to the ATR/QM rule, such as HELOCs, time share plans, reverse mortgages, or temporary or bridge loans with terms of 12 months or less. CFPB Small Entity Compliance Guide, August 2013, p. 34 Prior Year Assets To determine if you meet the asset size requirement, count only your assets. Do not count your affiliate s assets. CFPB Small Entity Compliance Guide, August 2013, p Financial Solutions: February

29 Small Creditor QM Potential Loss of Small Creditor QM Status NO toxic features: negative amortization, interestonly payments, or balloon payments Loan term limited to 30 years or less Subject to the QM points and fees limitations Subject to modified version of ATR rules for all of the 8 underwriting criteria except employment status and credit history The loan must not be subject to a forward commitment an agreement made at or prior to consummation of a loan to sell the loan after consummation, other than : Must be held in portfolio at least for 3 years If sold within 3 years, it must be sold to another creditor eligible for small creditor status Can be sold pursuant to a supervisory action or agreement at any time Refinance Non Standard Meeting to Standard Meeting (d) ATR Special Circumstance Payment Shock! To encourage refinancing of non standard mortgages into standard mortgages, the CFPB authorized special circumstances that would allow consumers with adjustable rate, interest only or negative amortization loans that may be unaffordable when the loan recasts (changes payments based on loan contract terms). Applicable only to mortgages held in portfolio. Subservicers and third parties cannot use the refinance provision. 80 Financial Solutions: February

30 Standard Mortgage A mortgage loan that, among other things, has these characteristics No negative amortization No interest only payments No balloon payments Limited points and fees (like the QM limits) Limited use of loan proceeds (no cash out!) Interest rate is fixed for first 5 years Mortgage underwriting based on maximum interest rate in the first 5 years Term limited to 40 years 81 Non Standard Mortgage An adjustable rate mortgage with an introductory fixed interest rate for a period of 1 year or longer, An interest only loan, or A negative amortization loan 82 Note: The final rule does not include ARMs with long fixed periods, nor balloon payment loans. Refinance Non Standard Mortgages Special rules encourage creditors to refinance nonstandard mortgages into standard mortgages with fixed rates for at least 5 years that reduce consumers monthly payments without having to meet the ATR requirements Non standard mortgage: the products include various types of mortgages which can lead to payment shock that are believed to result in default 83 Option Available ONLY When: Refi will not cause principal balance to increase Proceeds used to payoff principal and for HUD 1 closing or settlement charges (no cash out!) Monthly payment materially decreases (>10%) Only 1 30 day late payment in last 12 months and no late payments in last 6 months Written application received <2 months after the nonstandard mortgage has recast Consideration given to whether recast mortgage will prevent consumer from defaulting on non standard mortgage If non standard mortgage consummated on or after 1/10/14, the non standard mortgage complied with ATR or QM provisions 84 Financial Solutions: February

31 Material Decrease in Payment Calculate new non standard loan payment after it reaches a recast point. Recast occurs when: The introductory fixed rate period ends for an ARM The interest only period ends for an interest only loan The negatively amortizing payment period ends for a negatively amortizing loan Compare the projected new standard mortgage payment using fully indexed rate and fully amortizing equal payments to the after recast payment to determine if meet materially lower standard Payment reduction of 10% or more! Resulting Refinanced Standard Mortgage MUST: Not have deferred principal, negative amortization or balloon payments Limit points and fees to the QM thresholds Limit loan term to 40 years Interest rate must be fixed for at least 5 years of the loan term Full Exemption Refinance Loan Modifications If creditors meet all qualifications, a full exemption from all ATR UW standards and may: Evaluate qualifying applications without verifying the consumer s income and assets, as otherwise required by the general ATR standards. Calculate the monthly payment used for determining the consumer s ATR the new loan based on assumptions that would typically result in a lower monthly payment than those required to be used under the general ATR standards. Avoid other calculations restricted by ATR standards. 87 ATR/QM rule does not apply when you alter an existing loan without refinancing it. You can provide a loan modification to a defaulted (or non defaulted) consumer without complying with ATR. Refer to the changes to a loan that will be treated as a modification rather than a refinancing in Regulation Z at (a) 88 CFPB Small Entity Compliance Guide, April 2013, p. 44 Financial Solutions: February

32 QM Liability Safe Harbor or a Rebuttable Presumption of Compliance? Safe Harbor QM If a court upholds that a mortgage truly is a QM, that finding conclusively establishes that you complied with the ATR requirements when you originated the mortgage Case over! Provides safe harbor from a claim by a consumer that you did not comply with ATR requirements QM ATR Which is easier to defend? 90 Rebuttable Presumption Rebuttable Presumption, cont. HPCT QMs have a rebuttable presumption of compliance with ATR, but it can be argued that it does not meet QM criteria. If you lose on that argument, then you have to prove your loan complied with ATR. If a court finds that you originated a HPCT QM, a consumer can argue that you violated the ATR requirements. The consumer could try to argue that you violated the ATR. They could try to show that based on the information available to you before and at the time the mortgage was made, the consumer did not have enough residual income left to meet living expenses after paying their mortgage and other debts. The RP provides more legal protection and certainty to you than the general ATR requirements, but less protection and certainty than the safe harbor Financial Solutions: February

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