Early Returns: What is Working with Mortgage Reform (and What is Not)

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1 Early Returns: What is Working with Mortgage Reform (and What is Not) Presented by: BEQUEAITH, A Division of TIB Service Company David Bequeaith, President/Managing Director [email protected] Lindsay LaNore, Director of Compliance & Training Services [email protected] 1

2 Setting the Stage: Our Perspective Trainers Examiner Attorney Bankers Consultants Therapists 2

3 Current State of Mortgage Reform Reform Segment Effective Date Current Community Bank Implementation Status Ability to Repay & Qualified Mortgages January 10, 2014 Haphazard Mess for Some Banks; Others Doing OK Loan Originator Rule January 1, 2014 Many Banks Still in Denial Appraisal Requirements (ECOA & Reg Z) January 18, 2014 Some Feet Dragging HOEPA January 10, 2014 Generally Working; Less Impact than Anticipated Loan Servicing January 10, 2014 So Far So Good, But Watch Out ARM Originators TILA & RESPA Integration August 1, 2015 Not Even Thinking About Until 8/1/2014 3

4 Our Global Observations Misconceptions, misinterpretations, and misunderstandings are running wild You are kind of on your own to build your network of support experts as regulators are too busy to rely on (and it s all new to them too!) Risk tolerances and mortgage lending strategies should be a constant consideration for community bank management What is tolerant today might not be the case tomorrow. 4

5 Mortgage Reform: What is Working vs. Not Working Working Ignorance is bliss Enormous carve outs for small creditors, small servicers, CDFIs, etc. (Thank you ICBA!) No Appendix Q No 43% DTI Greater safe harbor for HPML loans Not Working Staying too rigid and not being willing to adapt Avoiding mortgage alternatives just because you don t understand Don t trust Small Creditor exemptions 5

6 ATR & QM: Brief Summary of New Loan Buckets Exemption Credit ( (a)) General ATR Credit ( (c)) Qualified Mortgage Credit ( (e) & (f)) Bad to Good Credit ( (d)) HELOCs, Reverse Mortgages, Temporary or Bridge Loans (with 12 mo. terms or less), Construction only (with 12 mo. term or less), Business Purpose Loans, Vacant Land Loans, Time Share Plans, and Certain Creditors Exempt (CDFI s, 501(c)(3), etc.) No loan feature restrictions; Must consider and verify 8 general underwriting factors; Payment underwriting nuances particularly with balloons and HPML balloons QM General Internal underwriting at 43% DTI (.43(e)(2)) QM GSE/Federal Agency Temporary (.43(e)(4)) QM Basic Small Creditor (No Balloon) (.43(e)(5)) QM Small Creditor Balloon (Temporary 2 Years) (.43(e)(6)) QM Small Creditor Balloon (Permanent) (.43(f)) Refinancing a non standard mortgage into a standard mortgage 6

7 ATR & QM: 3 Disciplines of Banks Off Roading at Excess Speed Middle of the Road Staying Put in the Garage 7

8 Why Middle of the Road is Something to Strive For Plans are worthless, but planning is everything. (Quote by Dwight Eisenhower) Your bank is seeing through the tangled web of compliance and winning the battle. Your bank is looking at its competitive market and balancing with compliance burdens to find a common ground that is permissible and profitable. Off-roading without planning is likely to result in loan originations outside of any bucket. Staying in the garage not likely to produce greater profits. 8

9 The Concept of Small Creditor Folks are still understanding this incorrectly. Leary of embracing it and its small creditor options To be a Small Creditor, your bank must satisfy the following: You had assets below $2 billion (to be adjusted annually) at the end of the last calendar year, AND You (and your affiliates) together originated no more than 500 first-lien closed-end residential mortgages subject to ATR requirements in preceding calendar year. *Asset size is only based on individual bank charter 9

10 Small Creditor Balloon Loans Permanent Exemption (f) Geographic restriction Requires more than 50% of first lien covered transactions in rural or underserved areas Must use CFPB rural and underserved designations to determine Dwelling location (not lender) determines applicability. Afraid of balloon stigma Temporary Exemption (e)(6) No geographic restriction Expires January 10, 2016 A win for metro community banks Plan to use throughout the entire exemption period Afraid to take advantage just for two years 10

11 Small Creditor Balloons: Commentary Excerpt Not Working Incorrect example in Reg Z Staff Commentary at 12 CFR (f)(1)(ii) Confirmed inaccurate with CFPB Attorney 11

12 ARM Loan Opportunities: It Could Work for Your Bank For banks electing to stay away from the secondary market function and hoping to avoid balloon lending, ARMs are the likely alternative. Will require building a product that is desired in your market and tolerant of your bank s risk preference. Clearly, the 5/1 ARM was target but 1,3,5,7,9 are all acceptable What considerations must be made? 12

13 ARM Loan Opportunities Loan Type Issues Implications ATR HPML Could do fixed rate if short enough term here but HPML status requires underwriting consideration for any balloon, making a full term credit more likely QM General QM Basic Small Creditor QM GSE Traditional balance; longer term Same as above Investor compliant Virtually all full balance mortgage loans that are QM General credits will need to be an ARM of some sort as full amortization is required and the inherent interest rate risk likely too much to bare for most banks outside of the smaller balance, shorter term home improvement/equity types of credits. Same as above Not typical in today s relatively lower interest rate environment but could become more prevalent with a rising interest tide. Generally originated for sale and servicing by a third party, though not exclusively. 13

14 3% Points & Fee Cap: Working For Now Points & fees in connection with QM cannot exceed: Equal to or greater than $100,000 3% Higher for smaller loans Common issue: Loan Level Pricing Adjustment Include or Not Include Yes, LLPAs are included in the test. The CFPB decided to not exclude the LLPA in the Points & Fees test as it would disadvantage those smaller banks that hold real estate loans in portfolio. Fannie & Freddie use LLPAs to address loans with greater risk and end up as a fee for loans with certain characteristics. It is a risk/price evaluative fee rather than a third party charge. Essentially, it is Fannie and Freddie s way of pricing for risk. 14

15 Bank/Financial Affiliates: Working in the Meantime You jumped off the ledge in January but things change: Your bank is acquired You merge with another bank You have, add, or sell affiliate settlement services Considerations: Small Creditor achievement level 3% Fee Maximum Small Servicer level 15

16 Loan Originator Compensation: Not Working for All Banks Still a huge issue; not all banks comfortable with the final rules General rule is that as a loan originator, you may not receive compensation based on the terms of multiple transactions originated by multiple individual loan originators. Loan Originator Definition: Any person who, for compensation or other monetary gain, takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person. More broad than SAFE Act definition of Mortgage Loan Originator Can t get paid based on terms or proxy for residential mortgage loan 16

17 Loan Originator Comp Either you are in or you are out Going forward, banks will need to label those employees in and those employees out If you are in, then a set of rules needs to be internally set and distributed to all for adherence To avoid having compensation crimped, you will need to avoid walking that fine line Common Issue: Non-Producing Senior Credit Managers/Leadership (or are they really producing?) 17

18 Loan Originator Comp Possible Alternatives: Tax Advantaged Plans Safe Harbor De Minimis: Bonus does not exceed 10% of individual loan originator s total comp for time period, OR Lender was LO for 10 or fewer transactions during the 12-month period preceding payment 18

19 Appraisal Requirements: Working Part-Way Procedural issues surfacing Moving dates When does the bank have an application Internal valuations you must share a copy with applicant(s) E-SIGN consent needed 19

20 HOEPA: Generally Working Probably less applicable now than it was prior to January Wrench optional insurance products Single-premium not allowed anymore Installment premiums still acceptable Worthy of fee cap consideration 20

21 Loan Servicing: Working For Now First, must measure initial designation of Small Servicer Creditor (together with all affiliates) services less than 5,000 mortgage loans annually Multiple procedural details to work through Bank structure changes that could impact: You might purchase/acquire/merge Voluntary servicing for non-profit (fee vs. no fee) 21

22 Stay tuned Moving Forward: Succeeding in Change Refinements are likely Stay cool but confident Know the rules and your bank s limits Stay focused Mistakes can happen when not looking Stay positive Yes, it sounds cliché but this is a must as you work through these early months of change 22