By - Nitin J. Dave 25-Year Veteran of FannieMae ATR / QM Agency Prospective Effectively Manage Repurchases, Make-Wholes & Indemnifications

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1 By - Nitin J. Dave 25-Year Veteran of FannieMae ATR / QM Agency Prospective Effectively Manage Repurchases, Make-Wholes & Indemnifications Effective with Loan Applications on or after January 10,

2 What Transactions Are Covered All Conforming Residential - Closed-End Loans Consumer Credit Transactions - Secured by a Dwelling One to four units Condominiums First and second liens Primary residence, 2 nd home and investment Does not apply to: HELOCs Reverse Mortgages Temporary or bridge loans with terms of 12 months or less A construction phase of 12 months or less of a construction to permanent loan Vacant Land 2

3 Three Types of QM 1) General QM definition as described in the next slide pertains to Jumbo financing and loans sold to Your business partners. 2) Temporary QM definition GSE s, FNMA and FHLMC are exempt until approximate Does The Majority of Your Volume fall into this category? 3) IF a Loan Fails the 3% Points & Fees Test, it is NOT QM. Be Careful NOT to Treat the AUS Approved / Eligible as QM Validation. Temporary Agency Exception ONLY Relates to the DTI. IF YOU GET AN APPROVED / ELIGIBLE RESPONSE FROM YOUR AUS, HOWEVER, LOAN DOES NOT MEET THE OTHER QM REQUIREMENTS, YOU COULD / WOULD FACE A REPURCHASE. 3

4 General Qualified Mortgage (QM) 1. Must have regular periodic payments and any interest rate changed after consummation has: No negative amortization No interest only feature Resulted in a balloon payment* (except Balloon Payment QM) 2. Loan term not to exceed 30 years 3. Points and fees are within the limitations 4. For which the creditor underwrites the loan taking into account the monthly payment for mortgagerelated obligations using The maximum interest rate that may apply during the first five years and Periodic payments of P&I that will repay either the outstanding principal balance over the remaining term or the loan amount over the loan term 5. Creditor considers and verifies before consummation: The Consumer s current or reasonably expected income or assets in accordance with appendix Q and verification of income or assets are verified through a third party; The Consumer s current debt obligation, alimony, and child support in accordance with appendix Q and debts are verified through a third party. 6. Ratio of consumers total monthly debt to income (DTI) a the time of consummation does not exceed 43% as determined by appendix Q If a loan that is NOT Higher-Priced satisfies the QM criteria, a court will conclusively presume that we complied with the ATR Rule. If a Higher-Priced loans meets the QM criteria, a court will presume it complies with the ATR requirements, but the consumer may rebut the presumption. 4

5 Ability to Repay (ATR) A reasonable, good-faith ATR evaluation must include at least these eight ATR underwriting factors through a reliable third-party: 1. Current income and assets 2. Current Employment Status Per Appendix Q 3. Monthly Payment Transaction 4. Monthly Payment Simultaneous loan 5. Monthly Payment Related Taxes, Insurance, mortgage insurance, flood, condo fee, leasehold payments, round rent, homeowners association, etc. 6. Current debt obligations to include alimony, child support 7. Monthly DTI Ratio or residual income 8. Credit History 5

6 ATR Requirements 1. Verification using third-party records, 2. Verification of income and/or assets, 3. Payment calculation using fully indexed rate or introductory interest rate, whichever is greater, 4. Payment calculation for simultaneous loans 5. Monthly debt-income ratio or residual income 6

7 Underwriting Standards Your organization is responsible for developing and applying its own underwriting standards and making changes to those standards over time in response to empirical information and changing economic and other conditions. Good faith examples of ATR was reasonable and in good faith: You used standards to underwrite the transaction that have historically resulted din comparatively low rates of delinquency and default during adverse economic conditions. The consumer paid on time for a significant time after origination or reset of an ARM ATR determination was not reasonable and in good faith: You ignored evidence that your underwriting standards are not effective at determining consumer s repayment ability. You applied underwriting standards inconsistently or used underwriting standards different from those you used for similar loans without having a reasonable justification. The consumer defaults early in the loan, or shortly after the loan resets, without having experienced a significant financial challenge or life-altering event. 7

8 Consumer has trouble repaying a loan originated under the general ATR rule? If consumers have trouble repaying a loan originated, they could claim that the creditor failed to make a reasonable, good-faith determination of the creditors ATR before the loan was made. If the consumer proves this claim in court, the credit could be liable for, among other things up to three years of finance charges and fees the consumers paid as well as the consumers legal fees. 8

9 Small Creditor Portfolio QM Intend for loans without balloon mortgages Creditor has assets less than $2 billion Originate less than 500 or fewer 1 st lien transactions to include affiliates Does not conform to 43% DTI All other QM requirements must be met. 9