ABILITY TO REPAY/QUALIFIED MORTGAGE RULE

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1 ABILITY TO REPAY/QUALIFIED MORTGAGE RULE Overview Information contained in this document is proprietary to Quicken Loans Inc. and may not be reproduced or disclosed without written authorization. This information is provided solely for educational purposes and provides general information. It is not legal advice and should not be relied upon. Please consult your attorney.

2 ATR AND QM RULE Final Rule issued by CFPB Jan. 10, 2013 Ability -to-repay (ATR) Rule: Lenders are required to make a reasonable, good -faith determination that the client has a reasonable ability to repay the loan according to its terms A creditor can satisfy this ability to repay requirement by: Considering repayment ability as defined by 8 underwriting factors with verification of each of the factors Qualified Mor tgage (QM): The loan is a QM loan based on loan features, points and fees and under writing requirements. A QM loan will give the creditor a safe harbor (non -higher priced loans) or a rebuttable presumption (higher-priced loans) against a claim that the consumer does have the ability to repay the loan. To preserve access to mortgages in rural and underserved areas, there are special provisions for certain small creditors, including some types of balloon-payment mortgages Bans most prepayment penalties Rule goes into ef fect for Applications received on and af ter Jan. 10,

3 WHAT IS COVERED AND EXCLUDED Covered All closed-end consumer credit transactions secured by a residential dwelling First or subordinate liens All occupancy types Excluded - NOT covered HELOCS Time-share plans Reverse mortgages Temporary or bridge loans w/terms of <12 mo. Construction/Perm loans with build out of <12 mo. Business purpose loans Loan Modifications 3

4 QM LOAN REQUIREMENTS General QM Requirements Restricted Features: No Neg./AM, No I/O Payments No Balloons* Terms <30 yrs. Underwriting Underwrite based on full AM schedule at max rate. Verify income, assets, debts, etc. Max DTI 43% Pass Points and Fees Test Temporary QM Exemptions Must meet General QM requirements except Max 43% DTI requirement Eligible for purchase by FNMA, FHLMC, FHA, VA, USDA, Rural Housing Sunset date 1/10/2021 If loan does not meet above criteria, does not meet QM *Small creditor QM loans will not be purchased by Quicken Loans 4

5 POINTS & FEES Loans must pass the points & fees and tests to be considered QM loans. The points and fees test is also used to determine if a loan is a federal high cost loan. 3% Cap on total loan amounts > $100k $60k-$99,999: $3k Cap $20k-$59,999: 5% of total loan amount $12.5k-$19,999: $1k Cap $12,499 & below: 8% of total loan amount (e)(3) 5

6 WHAT IS THE TOTAL LOAN AMOUNT? Total Loan Amount is defined as: The Amount financed (as defined in (b), less Any costs listed in (b)(1)(iii), (iv) or (vi) that are also in the points and fees test under (b)(1) and financed by the creditor. HERE IS HOW IT WORKS Closed End Total Loan Amount: Start with the Amount Financed as disclosed on the Truth in Lending disclosure which will be the loan amount from the Note and subtract all the PPFC. Minus prior prepayment penalty that is financed, if any. Minus optional insurance that is financed, if any; Minus affiliate real estate fees that are financed. These fees are also known as 4(c)(7) charges. 6

7 POINTS AND FEES INCLUDED Most prepaid finance charges. If a finance charge under (a) and (b), unless specifically excluded. All direct and indirect compensation paid by the consumer or creditor to a loan originator at the time the interest rate is set. Non bona-fide discount points Fees listed in (c)(7) with the exception of taxes (and probably insurance) unless: (can be exclude if) Fee is reasonable Creditor receives no direct or indirect compensation, and Fee is not paid to the creditor or an affiliate Affiliate Fees (title examination, title insurance, survey, appraisals, etc.) Credit Life, unemployment or other types of insurances Prepayment fee on new loan, or any prepayment penalty on existing loan if refinanced by current loan holder or servicer 7

8 POINTS AND FEES EXCLUDED Interest (including per diem) Government Mortgage Insurance FHA, VA, USDA etc. Borrower paid PMI paid after closing - Upfront PMI payable at or before closing may be excluded if amount does not exceed comparable FHA transaction and refundable on pro -rata basis upon early payof f Bona-Fide third party fees - Fees retained by the creditor, loan originator or af filiate are not bona -fide 3 rd par ty fees. Bona-Fide discount points - Up to 2 points if non-discounted rate no more than 1 point over average prime of fer rate (APOR). - Up to 1 point if non-discounted rate no more than 2 points over average prime of fer (APOR). Escrow accounts taxes and insurance if no fees paid to creditor or affiliate 8

9 SAFE HARBOR In addition to the points and fees test, lenders of Qualified Mortgages are eligible for additional protections depending on whether the loan is a higher-priced covered transaction. If it is not higher-priced, then the loan is eligible for a safe harbor. Safe Harbor Loan Satisfies QM criteria, points & fees test and: First Liens = APR is < to APOR plus 1.5% Second Liens = APR is < to APOR plus 3.5% If a QM loan meets the safe harbor test, then the lender is deemed to have complied with the ability to repay rule. Loans that are higher-priced are presumed to comply but the presumption of compliance can be rebutted. Note: the QM safe harbor test is not the same as the HPML test 9

10 IMPACT OF QM 3% POINTS AND FEE TEST Lender Paid loans Brokers with higher cost structures that require higher compensation may require alternative loan structure Smaller loans that result in a higher percentage of closing costs based on fixed costs. Clients wanting to have fees included in rate to reduce closing costs Borrower Paid loans Allows LO compensation to be received from client and rate premium to be applied to fees to minimize remaining pre-paids and other fees eligible for exclusion. (By definition of LO comp rule rate premium cannot be applied to LO compensation) Optimally offered when client wants lowest available rate or when a rate with higher premium is not available to cover closing costs May be only solution on lower loan amounts transactions based on total fees Minimal to zero impact on clients funds to close when client is set to only receive a small rate premium credit that is less than third party fees 10

11 QM SCENARIOS - LENDER PAID 11

12 QM SCENARIOS - LENDER PAID 12

13 LENDER PAID VS. BORROWER PAID 13

14 PROCESS Feedback provided available once an UW has reviewed Visibility through tracking items on Portal Communication 14