Ability to Repay/Qualified Mortgage Rule

Transcription

1 Ability to Repay/Qualified Mortgage Rule Note: This document was used in support of a live discussion. As such, it does not necessarily express the entirety of that discussion nor the relative emphasis of topics therein.

2 Disclaimer The Bureau issued the Title XIV mortgage rules in January of 2013 to implement provisions under the Dodd Frank Wall Street Reform and Consumer Protection Act. The rules have been further clarified and updated by final rules issued in May, July and September, Most of the rules will take effect in January This presentation is current as of November 7, This presentation does not represent legal interpretation, guidance or advice of the Bureau. While efforts have been made to ensure accuracy, this presentation is not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding requirements. This document does not bind the Bureau and does not create any rights, benefits, or defenses, substantive or procedural, that are enforceable by any party in any manner. 1

3 Background Bureau finalized amendments to Regulations B, X, and Z that relate to mortgage origination; most amendments take effect in January Ability-to-Repay and Qualified Mortgages ( and.43) High-cost Mortgages (HOEPA) ( and.34) New Counseling-Related Requirements ( and ) Escrows for Higher-priced Mortgage Loans ( ) New Appraisal Requirements ( and ) Loan Originators ( ) A summary of each rule and the rules themselves are available on the Bureau s website at: 2

4 ABILITY-TO-REPAY/ QUALIFIED MORTGAGES FINAL RULE 3

5 Ability-to-Repay/Qualified Mortgages General ability-to-repay requirement Applies broadly to closed-end transactions secured by a dwelling Requires creditor to make a reasonable, good faith determination that consumer can repay the loan Qualified mortgages Restricts certain loan features, caps points and fees, and imposes certain underwriting requirements Safe harbor for loans below the higher-priced mortgage threshold; rebuttable presumption for higher-priced loans 4

6 Ability-to-Repay Requirement Creditor must make a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms Consider and verify certain consumer-specific information Requirements for calculating mortgage payment No specific requirements for loan features or points and fees 5

7 ATR Eight Underwriting Factors The 8 ATR factors cover normal underwriting considerations: Income, assets and employment status 1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan 2. Current employment status (if you rely on employment income when assessing the consumer s ability to repay) Debts monthly payments on the new loan, and simultaneous loans, property costs, alimony, child-support obligations, and other debts 3. Monthly mortgage payment for this loan. You calculate this using the introductory or fullyindexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal 4.Monthly payment on any simultaneous loans secured by the same property 5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent 6. Debts, alimony, and child-support obligations Risk - monthly debt -to-income ratio or residual income, and credit history 7. Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income 8.Credit history They do not include loan to value ratios 6

8 Verifying information using 3 rd party records An organization must verify the information it relies on using reasonably reliable third-party records. For example, if a consumer tells the lender about his or her income, the lender must verify a consumer s income using documents such as W-2s or payroll statements. There are a variety of sources and documents that may help to verify the information relied on for determining ATR and for verifying each of the eight factors. 7

9 ATR factor (1) Income or assets 1. Current or reasonably expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on to repay the loan. Only required to consider income or assets necessary to repay the loan. Income or assets include: Wages, self-employment income, bonuses, tips, commissions, dividends, rental income, benefits payments, bank accounts, investments or trust funds. Verification can be by W-2 or payroll statement, tax returns, bank statements, receipts from check cashing or funds-transfer services, benefits program documentation, or employer records. The consumer can provide tax return transcripts or payroll statements. 8

10 ATR factor (2) Employment status 2. Current employment status (if the lender relies on employment income when assessing the consumer s ability to repay) This can be full-time, part-time, seasonal, irregular, military, or self-employment. Verification can be by Documenting a consumer s employment status by calling the employer and receiving an oral verification, as long as the lender maintains a record of the information received on the call. 9

11 ATR factor (3) Mortgage Payment 3. Monthly mortgage payment for this loan. Calculate this using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal Other special rules: Balloon loans If they are higher-priced, the monthly payment is based on the maximum payment in the payment schedule, including the balloon payment. If they are not higher priced, the monthly payment is based on the maximum payment in the first 5 years. Interest-only and negative amortization loans also have special rules for calculating monthly payments. 10

12 ATR factor (4) Simultaneous loans 4. Monthly payment on any simultaneous loans secured by the same property If a lender knows (or has reason to know) that there will be a simultaneous transaction around the time the loan closes, the lender must consider the monthly payment on that transaction: For HELOCs the ATR assessment should include a monthly payment on the simultaneous loan that is calculated based on the amount of credit to be drawn down at or before consummation of the main loan. For non-helocs - the ATR assessment should include a monthly payment on the simultaneous loan calculated as appropriate for adjustable-rate mortgages, interest-only loans, or other categories discussed above, depending on what type of simultaneous loan is made. 11

13 ATR factor (5) Monthly property costs 5. Monthly payments for property taxes and insurance that the creditor requires the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent Records for mortgage-related obligations can include: Property taxes: government entities or the amount listed on the title report Cooperative, condominium, or homeowners associations: a billing statement from the association Levies and assessments: statement from the assessing entity (for example, a water district bill) Ground rent: the current ground rent agreement Lease payments: the existing lease agreement Other records: can be reasonably reliable if they come from a third party 12

14 ATR factor (6) Debts 6. Debts, alimony, and child-support obligations Typical recurrent monthly debts include: Student loans Auto loans Revolving debt Existing mortgages not being paid off at or before closing Verification can be by Using a credit report to verify a consumer s debt obligations or on other items reported on the consumer s application; The lender does not need to obtain individual statements for every debt. 13

15 ATR factor (7) DTI 7. Monthly debt-to-income ratio or residual income, calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income. To calculate the DTI ratio or residual income the lender uses the verified information about the consumers income, along with the consumers debt information. The general ATR standard requires creditors to consider DTI or residual income, but does not contain specific DTI or residual income thresholds. 14

16 ATR factor (8) Credit history 8.Credit history The rule does not specify how credit history should be weighed against other factors or how the various aspects of a consumer s credit history should be weighted to reach a reasonable, good faith determination of ability to repay. Verification: If a consumer does not have a credit history from a credit bureau, the lender can verify credit history using documents that show nontraditional credit references, such as rental payment history or utility payments. 15

17 Record Retention The rule requires that lenders retain evidence that they complied with the ATR/QM rule, including the prepayment penalty limitations, for three years after closing. 16

18 Looking at ATR determinations To determine whether the lender generally made a reasonable and good faith ATR determination, examiners can look at: Underwriting standards: Does the lender use standards that have historically produced comparatively low rates of delinquency and default during adverse economic conditions? Payment history: Has the consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage? 17

19 Looking for unreasonable ATR determinations Factors showing the ATR determination was not reasonable and in good faith: Underwriting standards: Evidence was ignored that the underwriting standards are not effective at determining consumers repayment ability. Inconsistency: Underwriting standards are inconsistent or different standards were used for similar loans without having a reasonable justification. Payment history: The consumer defaults early in the loan, or shortly after the loan resets, without having experienced a significant financial challenge or life-altering event. 18

20 Consequences for failing to determine ATR A lender that fails to consider the borrower s ability to repay a loan faces the risk that the borrower, or a class action on behalf of similarly situated borrowers, or an enforcement action by a state or Federal regulator may recover 3 years of finance charges and attorneys fees Statutory damages not less than $400 or greater than $4,000 are also permitted 3 year statute of limitations for affirmative claims. 19

21 Qualified Mortgage: Presumption of Compliance Safe Harbor Loan satisfies QM criteria and APR is less than: First liens: APOR + 1.5% Second Liens: APOR + 3.5% OR Loan satisfies small creditor QM or balloon QM and APR is less than APOR + 3.5% Rebuttable Presumption Loan satisfies QM criteria and APR equals or exceeds: First liens: APOR + 1.5% Second Liens: APOR + 3.5% Rebuttal limited to insufficient residual income 20

22 Qualified Mortgage: Features Limits on loan features No negative amortization or interest-only periods No balloon payments (except for certain portfolio loans by small creditors) Loan term may not exceed 30 years Points and fees cap Generally 3% of total loan amount Higher caps for loans <$100,000 Up to two additional bona fide discount points allowed depending on rate Relevant underwriting requirements Use maximum rate in first five years after first payment, full amortization Consider and verify income or assets Consider and verify current debt obligations, alimony, and child support Monthly debt-to-income ratio cannot exceed 43% 21

23 Qualified Mortgage: Temp. Alternative QM Government Patch Limits on loan features Same as permanent definition Points and fees cap Same as permanent definition Relevant underwriting requirements (alternative) Must be eligible for purchase, guarantee, or insurance by: Fannie Mae or Freddie Mac (sunsets when conservatorship ends or 7 years) HUD, VA, Department of Agriculture or Rural Housing Service (sunsets when agency rules take effect or 7 years) Factors wholly unrelated to ability-to-repay are excluded from eligibility criteria 22

24 Qualified Mortgage: Small Creditor Portfolio QM Limits on loan features Same as permanent definition Points and fees cap Same as permanent definition Relevant Underwriting Requirements Same as permanent definition, but no 43% DTI requirement Special Requirements Creditors must have <$2 billion in assets and (with affiliates) originate 500 covered mortgages per year; no restriction on location Must generally be held in portfolio for 3 years Threshold for safe harbor increased to 3.5% above APOR rather than 1.5% 23

25 Qualified Mortgage: Balloon QM Limits on loan features Points and fees cap Relevant Underwriting Requirements Same as permanent definition, although balloons are not restricted Same as permanent definition Same as permanent definition, but no 43% DTI requirement Special Requirements Creditors must have <$2 billion in assets and (with affiliates) originate 500 covered mortgages per year > 50% of first-lien mortgages made in rural or underserved counties in the preceding calendar year Must generally be held in portfolio for 3 years Threshold for safe harbor increased to 3.5% above APOR Two-year transition period Effective through 2015 while Bureau reconsiders rural and underserved definitions Allows small creditors to make balloon payment QMs regardless of rural or underserved status 24

26 Consequences of a failed QM What happens if a loan does not meet the standards for a QM? A: There is no requirement to make a QM; a QM demonstrates compliance with the ATR requirement. Without a QM safe harbor or rebuttable presumption, the lender will have to defend the loan as meeting the ability to repay requirements. For examiners who find that the loan fails as a QM, they must look at whether lender considered the borrower s ability to repay. 25

27 Points and Fees Worksheet High Cost Mortgage (Section ) Worksheet. The FFIEC Exam procedures for TILA have had a HCM (Section ) Worksheet, for examiners to determine whether a loan meets the points and fees limits for high cost loans. That worksheet has been revised to reflect the current rules. It is also useful to examiners for determining whether a QM is within the points and fees limits. QM Points and fees (Test 2 only) is the same for HCMs and QMs. The worksheet is useful for examiners because the points and fees test is the same for closed-end high cost mortgages and for QMs. After calculating points and fees, the examiner checks to see if they exceed the threshold that applies. For QMs the points and fees threshold is generally 3% of the loan amount (higher for loans under $100,000) 26

28 Calculating QM Points and fees with HCM Worksheet STEP 1: Total Points and Fees. All charges payable in connection with the transaction and known at or before consummation. A. Items included in the finance charge B. Loan originator compensation C. Certain non-finance charges under (c)(7) where the amount of the fee is unreasonable, or the creditor or affiliate receives compensation from the charge D. Premiums or other charges for optional or required insurance payable at or before consummation or account opening E. Maximum prepayment penalty F. For a refinance transaction, prepayment penalty paid to terminate prior transaction Total Points & Fees: Add Subtotals for A-F (Closed-End) 27

29 Calculating QM Points and fees with HCM Worksheet STEP 2: Determine the Total Loan Amount ( (b)(4)) 1. Determine the Amount Financed ( (b)) The full amount of principal repayable under the terms of the note or other loan contract Minus: Prepaid finance charges ( (a)(23)) Equals: Amount Financed 2. Deduct the points and fees from the Amount Financed to arrive at the Total Loan Amount 28

30 Calculating QM Points and fees with HCM Worksheet QM points and fees calculation - for transactions of $100,000 or more A. Calculate 3 percent of the total loan amount (from Step 2) B. Total Points & Fees from Step 1 C. If B exceeds A the loan is not a QM. 29

31 Comparison of ATR and QM requirements 30

32 Transaction Coverage and Exemptions 31

33 Questions? More information: 32