EXPLOSION OF NEW MORTGAGE REGULATION

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1 EXPLOSION OF NEW MORTGAGE REGULATION ABILITY TO REPAY/QUALIFIED MORTGAGE RULE Mortgage Regulation Teleseminar Series January 24, 2013 FINANCIAL SERVICES REGULATORY GROUP Leonard A. Bernstein Robert M. Jaworski Travis P. Nelson

2 DODD-FRANK Establishes new TILA 129C EFFECTIVE DATE Applications taken on or after January 10, 2014 BROAD COVERAGE Expands existing high cost ability-to-repay rule to almost all residential mortgage loans CHOICE Determine and verify consumer s ability to repay, or make qualified mortgage CONCURRENT CFPB PROPOSAL Small creditor exemption; mortgage originator compensation PENALTIES Substantial; more than usual TILA penalties 2

3 Heavy Penalties SPECIAL STATUTORY DAMAGES All finance charges and fees paid by consumer (unless failure not material ) ACTUAL DAMAGES; STATUTORY DAMAGES (including class actions) ATTORNEYS FEES and COURT COSTS THREE-YEAR STATUTE OF LIMITATIONS; ASSIGNEE LIABILITY RECOUPMENT ANY TIME As part of defense; no time limit; but special statutory damages limited to three years of finance charges and fees REPURCHASE ISSUES 3

4 The New Vocabulary Points & Fees measures QM coverage; discussed below Bona Fide Discount Point part of points & fees analysis; paid in manner that reduces the rate Total Loan Amount part of points & fees and QM analysis; amount financed minus certain financed costs included in points/fees Loan Amount principal amount found in note Covered Transaction scope of Rule, consumer credit dwelling secured Fully Amortizing Payment fully repays loan over loan term Fully Indexed Rate rate calculated using index (determined at consummation) and maximum margin that applies after recast Higher-Priced Covered Transaction important for QM; 1st lien APR exceeds average prime offer rate by 1.5 or more; 2nd lien APR exceeds by 3.5 or more 4

5 Even More New Vocabulary Loan Originator person who arranges to obtain credit; includes employee of creditor (12 CFR (a)(1)) Simultaneous Loan home equity loan or HELOC secured by same dwelling; made at or before consummation, or used to pay closing costs of first mortgage Third-Party Record document prepared or reviewed by person other than creditor, mortgage broker, or consumer, i.e., tax return, bank record Recast earliest date when teaser-rate/interest-only/negatively amortizing payments on ARM/interest-only/negative am loans stops Mortgage-Related Obligations property taxes, MI, property insurance, credit insurance, condo assessments and similar charges 5

6 Overview: Key Elements of the Rule Ability to Repay no loan unless reasonable and good faith determination of reasonable ability to repay Eight-Factor Test to determine repayment ability Points & Fees elaborate definition; impacts QM Test (also HOEPA/Higher-Priced Tests) Qualified Mortgage safe harbor for prime ; rebuttable presumption for nonprime Prepayment Penalties limits and prohibitions 6

7 Scope of Coverage Covered Transactions Consumer-purpose closed-end loan secured by a dwelling Exempt loans: Open-end credit plans Timeshare plans Reverse mortgages Temporary loans (term 12 months or less) Construction phase of construction/permanent loans Concurrent proposal: Further exemptions Proposes exemptions for: Community Housing Development Organizations; Homeownership Stabilization and Foreclosure Prevention Program; Federal Agency Refinancing Program; GSE Refinancing Program 7

8 Methods to Comply General ability-to-repay standard - meet eight-point test Originate Qualified Mortgage Originate Balloon-Payment Qualified Mortgage; only available to certain creditors Refinance non-standard mortgage loan into standard loan Small creditor QM proposal Strategic approach compliance with both ability-to-repay and QM 8

9 General Ability-to-Repay Standard Eight Factors Ability to Repay no loan unless reasonable and good faith determination of reasonable ability to repay No limits on loan s terms or conditions, points, fees, etc. Eight Points: Creditor must consider and verify: Current or reasonably expected income or assets Employment status Monthly payment on this loan Monthly payment on simultaneous loans Monthly payment for mortgage-related obligations Current debt obligations Monthly DTI ratio, or residual income Credit history 9

10 Verification Third-Party Records must verify information creditor relies on to determine repayment ability using reasonably reliable third-party records Verifying Income or Assets third-party records, including IRS tax return transcript, tax returns, W-2, bank records Verifying Employment Standard can be done orally 10

11 Monthly Payment Factor Mortgage payment to be considered for regular loans using: Fully indexed rate (or introductory rate, if greater) Substantially equal, fully amortizing monthly payment Different monthly payment rules apply to loans with negative am, interest-only, or balloon payment 11

12 Points & Fees Definition Vital for QM Understanding Includes following fees and charges known at or before consummation : Finance charges, but not Interest Government insurance, PMI Bona fide third-party charge NOT retained by creditor or affiliate Up to two bona fide discount points Loan Originator Compensation includes comp paid to loan originator if it can be attributed to the transaction at the time the interest rate is set Real Estate-Related Fees if charge paid to an affiliate Credit Life Premiums paid at or before consummation Prepayment Penalty maximum that can be charged Prepayment Penalty charged in a refinance with holder Concurrent Proposal loan originator compensation clarification 12

13 Concurrent Proposal Treatment of Loan Originator Compensation Double Counting? Invites comment on double counting of LO comp in points and fees definition Comments due February 25, 2013 Option 1 Mortgage Broker Fees Payments by consumer to mortgage broker need not be counted against points and fees cap Option 2 Mortgage Broker Fees Payments by a mortgage broker to its individual loan originator employee are not points and fees Option 3 Creditor Origination Fees (two alternatives) Alternative 1 (no offset): Creditor must include in points and fees both fees and charges paid by the consumer to the creditor, and all LO comp paid by the creditor to its LO Alternative 2 (offsetting): Creditor must reduce the amount of creditor-paid LO comp included in the points and fees calculation by any amount paid by the consumer to the creditor 13

14 Qualified Mortgage Safe Harbor or Rebuttable Presumption Safe Harbor for creditor or assignee if: Loan meets QM definition Not a higher priced covered transaction 14

15 Qualified Mortgage Safe Harbor or Rebuttable Presumption (cont.) Rebuttable Presumption of compliance for creditor or assignee if: Loan meets QM definition Loan is a higher-priced covered transaction Presumption rebutted if borrower proves that notwithstanding QM compliance, creditor did not make reasonable and good faith determination of ability to repay by showing consumer left with insufficient residual income or assets with which to meet living expenses 15

16 Qualified Mortgage Not One, But Three Regular QM Temporary QM Balloon Payment QM 16

17 Qualified Mortgage Regular QM Must meet ALL of the following product requirements: Be a Covered Transaction Loan term 30 years Substantially equal monthly payments (except ARM or step-rate adjustments) No negative am payments No interest-only payments No balloon payment Points & Fees 3% of total loan amount (3% for loans $100,000; tiers for smaller loans) 17

18 Qualified Mortgage Regular QM (cont.) Must also meet the following underwriting requirements: Calculate monthly payment (including monthly mortgage related obligations ) using maximum rate that can apply during first five years Determine that monthly payment will repay either Outstanding principal balance over remaining term when rate adjusts to maximum rate, or Loan amount over the loan term Income and/or assets and current debt obligations must be considered and verified in accordance with Appendix Q Maximum 43% (back end) debt-to-income (DTI) ratio (including monthly payment on any simultaneous loan) 18

19 Qualified Mortgage Temporary QM Must meet all Regular QM Product Requirements (including points and fees limit), AND Must be eligible to be purchased/insured/guaranteed by Fannie/Freddie (while in conservatorship/receivership), FHA, VA, U.S. Dept. of Agriculture, or Rural Housing Service No Regular QM underwriting requirements apply (including 43% DTI limit) Must follow GSE/government agency underwriting requirements instead No Temporary QM for jumbo loans Expires when Fannie/Freddie conservatorship/receivership ends, or other agencies adopt their own QM rule, or January 10, 2021, whichever comes first 19

20 Qualified Mortgage Balloon Payment QM Only available to Rural Creditors = creditors that: Made > 50% of their first-lien Covered Transactions during preceding calendar year in counties designated by CFPB as rural or underserved Together with affiliates, made 500 first-lien Covered Transactions during preceding calendar year Have total assets < $2 billion (adjusted for inflation) Must meet all Regular QM Product Requirements (except that final payment does not have to be substantially equal to all the others and may be a balloon payment), AND Have a fixed interest rate Provide for amortizing monthly payments 30 years Have a loan term five years 20

21 Qualified Mortgage Balloon Payment QM (cont.) Creditor must also: Underwrite using actual monthly payment (including monthly mortgage related obligations ); excluding balloon payment Analyze monthly DTI (with no set maximum) or residual income Verify income used and current debt obligations (without regard to standards in Appendix Q) Loan must not be subject at consummation to a forward purchase commitment (unless the purchaser is a Rural Creditor) 43% DTI limit does not apply 21

22 Qualified Mortgage Balloon Payment QM (cont.) Balloon Payment QM protections cease upon transfer of loan to another person, except Balloon Payment QM protections survive if the transfer: Occurs > three years after consummation, OR Is to a person who meets the balloon payment QM rural creditor requirements, OR Is made pursuant to a capital restoration plan or other supervisory action by, or agreement with, the creditor s regulator, OR Occurs as a result of a merger or acquisition of the creditor with or by another person 22

23 Concurrent Proposal Small Creditor QM Proposal New category of Qualified Mortgage for small creditors : With total assets of $2 billion or less at the end of the previous calendar year Which, together with all affiliates, originated 500 or fewer first-lien covered transactions during the previous calendar year Only covers loans that are held in a small creditor s portfolio If loans are sold within the first three years, generally they must be sold to another small creditor 43% DTI limit under January 10 rule would not apply Proposal would also raise the threshold for small creditor QM safe harbor from 1.5 percentage points above APOR to 3.5 percentage points above APOR Comments due February 25,

24 Refinance Non-Standard into Standard Mortgage Standard Mortgage = Covered loan that does not provide for neg am, interest-only payments or balloon payments Points & fees 3% of total loan amount (for loans $100,000) Term 40 years Interest rate fixed for at least first five years Proceeds used only to pay off non-std loan and closing costs/no cash out Non-Standard Mortgage = ARM with introductory fixed rate for one year or longer, or Interest-only loan, or Negative amortization loan 24

25 Refinance Non-Standard into Standard Mortgage (cont.) Creditor of standard mortgage must be holder or servicer of non-standard mortgage Monthly payment for standard mortgage must be materially lower than for nonstandard mortgage Creditor receives consumer s written application for standard mortgage no later than two months after non-standard mortgage recasts No more than one 30-day late payment on non-standard mortgage during preceding 12 months No 30-day late payments on non-standard mortgage during preceding six months If non-standard mortgage consummated after January 10, 2014, complies with ability to repay or QM 25

26 Prepayment Fee Prohibitions No prepayment fee in a covered transaction unless: Permitted by law Fixed rate or step rate, QM, not higher-priced Limits: Not apply after three years Not exceed 2% of the outstanding loan balance if incurred in first two years Not exceed 1% of the outstanding loan balance if incurred in third year Must offer alternative covered loan WITHOUT a prepayment fee: Alternative must have fixed rate or step rate Alternative has same loan term Substantially equal periodic payments; points-and-fees test met Good faith belief that consumer likely qualifies 26

27 Upcoming Topics in this Four-Part Teleseminar Series Servicing Standards Rule February 7, 2013, Noon (EST) Escrow Rule; HOEPA/High-Cost Mortgage Rule; ECOA Appraisal Rule; Appraisals for High-Risk Mortgage Rule February 21, 2013, Noon (EST) Loan Officer Compensation Rule March 7, 2013, Noon (EST) 27

28 Leonard A. Bernstein Founder and chair of the firm's Financial Services Regulatory Group Concentrates his practice in the representation of banks, thrifts, mortgage bankers and finance companies in providing consumer credit compliance advice on federal, Pennsylvania and New Jersey laws and regulations The FSR Group addresses credit card, auto finance, deposit, residential mortgage and other retail finance products Nationally known for expertise with federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, and similar laws, and works regularly with federal and state financial services regulators Defends class actions and individual claims filed against financial services providers Elected to the American College of Consumer Financial Services Attorneys Philadelphia, PA Princeton, NJ 28

29 Robert M. Jaworski Member of the Financial Industry Group and the Financial Services Regulatory Group Focuses on consumer credit compliance and other regulatory issues of concern to banks, thrifts, mortgage bankers, secondary mortgage lenders, finance companies and industry-related trade associations A frequent speaker on compliance issues before state and national groups, Bob has authored numerous articles on the subject Formerly Chief Editor of Pratt s Mortgage Compliance Letter; Co-Chair of the RESPA/Housing Finance Subcommittee of the ABA Consumer Financial Services Committee; Chair, New Jersey Bar Association Banking Law Section; and Member, Governing Committee of the Conference on Consumer Finance Law Developed and taught courses on federal and state laws and regulations affecting mortgage bankers, brokers, and servicers Princeton, NJ 29

30 Travis P. Nelson Member of the Financial Industry Group and the Financial Services Regulatory Group Former Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, Washington, D.C. Focuses his practice on financial services regulation, enforcement defense, internal investigations, and litigation matters Represents clients before federal law enforcement and regulatory agencies, including the OCC, the CFPB, and HUD, as well as various state authorities across the country Adjunct faculty teaching Regulation of Financial Institutions at Villanova University School of Law Co-Leader, Reed Smith Financial Institutions Enforcement & Investigations Task Force Editor-in-Chief of the Reed Smith Financial Services blog National President, Office of the Comptroller of the Currency Alumni Association Princeton, NJ New York, NY 30

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