Ability to Repay and Qualified Mortgage TILA 129 C

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1 Congressional Concerns Ability to Repay and Qualified Mortgage TILA 129 C February 2014 Patti Blenden Financial Solutions 2 The Dodd Frank Act (DFA) changes reflect 3 primary concerns with the mortgage industry: Concern that consumers received loans they had no reasonable ability to repay Widespread belief that consumers were steered to more expensive products that were less safe by loan originators (LO) believed to be motivated by LO compensation programs Many feel the industry lacked the capacity to address consumer loan servicing needs, particularly with delinquent borrowers and loss mitigation options Dodd Frank Act (DFA) Progress as of January 9, 2014 CFPB s Compliance Guide Updated on January 18, Financial Solutions: February

2 ATR/QM Rule Silos ATR Rule Exemptions 5 Standard Ability to Repay (ATR) 8 specific factors Nationalized underwriting and required docs Legislative provisions providing QM Creditors with special protection from liability under the ATR requirements Safe harbor Rebuttable presumption QM Rules & qualification criteria Product feature restrictions Underwriting requirements Doc standards General QM Agency/GSE QM Refinancing a non standard mortgage Small Creditor Balloon Payment QM Rural and Underserved Market Creditor Balloon Payment QM Temporary GSE or Agency QM 6 Home equity lines of credit (HELOC) Mortgage transactions secured by a timeshare Reverse mortgages Temporary or bridge loans with a term of <12 months Extensions of credit primarily for a business, commercial, or agricultural purpose Creditors and Loan Programs Exempt from ATR Requirements The ATR requirements do not apply to those loans on the previous slide. A loan eligible for one of these exemptions is not eligible for QM status, as the QM provisions are only applicable to loans subject to the ATR. A consumer who obtained an ATR exempt loan has no ability to repay claim under the ATR/QM rule. These exempt loans are subject to the prepayment penalties restrictions and may not be structured as open end credit plans to evade those restrictions. June Financial Solutions: February

3 Balloon QM Balloon QM by Small Creditor in Rural or Underserved Areas Small Creditor Portfolio QM Small Creditor regardless of R or UA Status, held in Portfolio General QM Basic Definition Qualified Mortgages Temporary Agency/GSE QM Eligible for GSE Purchase Refinance Non Standard Mortgage to a Standard Mortgage Small Creditor Balloon Payment QM Temporary Family Closed End Mortgages QM Safe Harbor Loans Modifications and Existing Loan Portfolio QM Rebuttable Presumption Loans Non QM ATR Loans Financial Solutions: February

4 Covered Transaction Key Terms Closed end consumer credit transaction secured by a dwelling, with or without real estate Includes primary residences and other personal residences (second home, vacation home, etc.) 14 Refinancing (a) A refinancing occurs when an existing obligation that was subject to this subpart is satisfied and replaced by a new obligation undertaken by the same consumer. A refinancing is a new transaction requiring new disclosures to the consumer. The new finance charge shall include any unearned portion of the old finance charge that is not credited to the existing obligation. 15 NOT a Refinancing The following will not be treated as a refinancing even if accomplished by cancellation of old obligation & substitution of a new one: A renewal of a single payment obligation with no change in original terms A reduction in APR with a corresponding change in payment schedule An agreement involving a court proceeding A change in the payment schedule or a change in collateral requirements as a result of the consumer s default or delinquency, unless when the rate is increased, or new amount financed exceeds the unpaid balance plus earned finance charge and premiums for continuation of insurance of the types described in (d). The renewal of optional insurance purchased by the consumer and added to the existing transaction, if disclosures relating to the initial purchase were provided as required by this subpart. A change from fixed rate to adjustable rate is always a transaction requiring new disclosures to the consumer! 16 Financial Solutions: February

5 Modifications Fully Indexed Rate CFPB s Small Entity Compliance Guide, January 2014 The index rate prevailing on a residential mortgage loan at the time the loan is made plus the margin that will apply after the expiration of any introductory interest rates The interest rate calculated using the index or formula at the time of consummation and the maximum margin that can apply at any time during the loan term Do you have floor rates that will prevail in an ARM? Fully Amortizing Payment Loan Amount & Term A periodic payment of principal and interest that will fully repay the loan amount over loan term Used in the general payment calculation provision in (c)(5)(i)(B), which requires the use of monthly, fully amortizing payments that are substantially equal The monthly payment must be calculated using the fully indexed rate at the time of loan closing, without considering the introductory rate Recast date: could be the trigger! 19 Loan Amount: Principal amount consumer will borrow as reflected in the promissory note or loan contract Use entire loan amount as reflected in loan contract or promissory note, even though loan amount may not be fully disbursed at consummation Loan Term: Period of time to fully repay the obligation Generally the amortization period on which periodic amortizing payments are based. 20 Financial Solutions: February

6 Maximum Loan Amount Higher Priced Covered Transaction Principal amount the consumer will borrow plus any increase in principal resulting from negative amortization based on the note s terms, and Consumer projected to make only the minimum periodic payments for the maximum possible times until the note requires fully amortizing payments Maximum interest rate is reached at earliest possible time Used for two primary purposes under new rules Standard ATR Loans Determines whether you must use the balloon payment on a loan when underwriting the consumer s monthly DTI or residual income Qualified Mortgages of any category Determines whether you are entitled to safe harbor or rebuttable presumption when challenged HPCT Thresholds HPCT OR Higher Priced QMs ATR/QM Category Standard ATR (regardless of asset size or loans originated) (e)(2) General QM (e)(4) Agency/GSE QM (e)(5) Small Creditor Portfolio QM (e)(6) Small Creditor Temporary Balloon Payment QM (f) Small RUS* Creditor Balloon Payment QM 23 1 st Lien HPCT Loans Subordinate Lien HPCT Loans >1.5% over APOR >3.5% over APOR >1.5% over APOR >3.5% over APOR >1.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR >3.5% over APOR Higher priced covered transactions are QMs with an APR > comparable APOR by the specified threshold: 1.5 percentage points for non small creditor 1 st lien QMs 3.5 percentage points for small creditor 1 st lien QMs 3.5 percentage points for all creditors subordinate lien QMs Higher priced QMs (HPCT QMs) receive rebuttable presumption of compliance with ATR Rule Non higher priced QMs (non HPCT QM) receive safe harbor of compliance with ATR Rule 24 Chart on Slide 95 Financial Solutions: February

7 Recast Loan Recast means: For an ARM, the expiration of the period during which payments based on the introductory fixed interest rate are permitted under the terms of the legal obligation; For an interest only loan, the expiration of the period during which interest only payments are permitted under the terms of the legal obligation; and For a negative amortization loan, the expiration of the period during which negatively amortizing payments are permitted under the terms of the legal obligation (c) Repayment Ability General requirement. A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. Consumer Suitability Industry Penalty Provisions Congress made ATR violations subject to: Full array of damages also triggered by HOEPA violations, including refund of all finance charges and consumer paid fees, court costs and attorney s fees Expanded 3 year statute of limitations Defense to foreclosure: Without regard to the 3 year statute of limitations, if the creditor, assignee or other holder of a mortgage loan, or anyone acting on their behalf, initiates a judicial or non judicial foreclosure or any other action to collect the debt, the consumer can assert a violation of the ability to repay provisions to offset against amount owed! 27 Severe Non Compliance Penalties Consumer may be able to recover special statutory damages equal to sum of all finance charges & fees paid by the consumer unless creditor demonstrates failure to comply is not material (in addition to actual damages, statutory damages, court costs & attorneys fees) Statute of limitations: 3 years from date of violation Defense by recoupment or set off in a foreclosure action by the creditor, any assignee of the creditor, or anyone acting as servicer on behalf of the holder of the loan No time limit on use of defense, but consumer cannot recover more than 3 years of finance charges & fees paid plus actual damages and fees (including reasonable attorney s fees) Recordkeeping will be crucial for evidencing compliance 28 Financial Solutions: February

8 29 Mandatory Underwriting Factors Income or Assets Current or reasonably expected, excluding this property Employment Status Current Monthly Payment on Covered Transaction Monthly Payment on Simultaneous Loan Current Monthly Payment for Mortgage Related Obligations Current Current Debt Obligations Including alimony and child support Monthly Debt to Income Ratio (DTI) Fully loaded, back end ratio or residual income Credit History No specificity about how to apply these factors in General ATR! Payment Calculations Refer to the Matrix and Tools Creditor must use substantially equal, monthly, fully amortizing payments at fully indexed rate The final rules establish a required payment calculation that requires calculation of the consumer s monthly payment amount based on: The total loan amount (principal per the note), Amortize loan amount in substantially equal payments over loan term Calculate equal payments using introductory rate or fully indexed rate, whichever is greater. 15 U.S.C. 1604(a) 30 Payment Calculation Rules Special rules apply to loans with a balloon payment, interest only payment or negative amortization feature For a simultaneous loan payment: For another covered transaction, follow the payment calculation requirements for the main transaction; or For a HELOC subject to , use the periodic payment required under the plan and the amount of credit to be drawn at or before consummation of the main transaction Version 4 Financial Solutions: February

9 Prepayment Penalties The new rules provide that covered transactions may not include a prepayment penalty unless: Prepayment penalty is permitted by law; Loan has an APR that cannot increase after closing; Loan is a qualified mortgage and Loan is not a higher priced mortgage loan (Reg Z Section 35 HPML). Allowable Prepayment Penalty Allowed on non HPML QMs ONLY if: The penalties satisfy certain restrictions Are permitted under law, AND Creditor has offered consumer an alternative without prepayment penalties HPML Thresholds A HPML is a closed end consumer credit transaction secured by the consumer s principal dwelling with an APR in excess of the APOR for a comparable transaction as of the date the interest rate is set by: 1.5% points or more for a 1st lien conforming mortgage loan 2.5% points or more for a 1st lien jumbo mortgage loan 3.5% points for a loan secured by a subordinate lien Creditor should use the last date the interest rate for the mortgage loan is set before closing HPML rules do not include HELOCs, second home, investment property or any commercial transactions 35 Test effective June 1, Freddie Mac 2014 Loan Limits Loans Above Limits = Jumbo Loans Property Type Maximum Base Conforming Loan Limits for properties NOT located in Alaska, Hawaii, Guam & U.S. Virgin Islands Maximum Base Conforming Loan Limits for properties located in Alaska, Hawaii, Guam & U.S. Virgin Islands 1 unit $417,000 $625,500 2 unit $533,850 $800,775 3 unit $645,300 $967,950 4 unit $801,950 $1,202,925 Financial Solutions: February

10 Prepayment Penalty Limits The final rule restricts prepayment penalties and allows them only if limited to: 2% of prepaid outstanding loan balance during Years 1 and 2 1% of prepaid outstanding loan balance during Year 3 0% of prepaid outstanding loan balance after Year 3 Alternative Loan If you wish to charge a prepayment fee, you must also offer the consumer an alternative transaction that you believe the consumer will qualify for. The alternative loan cannot have a prepayment penalty. The alternative loan must be similar to the loan with the prepayment penalty, so the consumer can choose between two products he will likely qualify for. The alternative loan: Must be a fixed rate or graduated payment loan and must match the rate type from the loan with the prepayment penalty Must have the same term as the mortgage with the prepayment penalty Cannot have deferred principal, balloon or interest only payments, or negative amortization CFPB Small Entity Compliance Guide, August 2013, p. 42 Anti Steering Safe Harbor When your organization is a broker or table funds loans and you want to use the safe harbor for compliance with anti steering rules for loan originators under (e) of Regulation Z, you must show the consumer: The loan with the lowest interest rate overall The loan with the lowest interest rate with a prepayment penalty The loan with the lowest total origination points or fee and discount points CFPB Small Entity Compliance Guide, August 2013, p Financial Solutions: February

11 HOT BUTTON: Points and Fees Points & Fees More important issue now than ever before! We expect more high cost mortgages since the CFPB eliminated the exemptions for purchase money loans and HELOCs The new calculation itself is more complex and lower thresholds are expected to increase qualifying loans Will have to begin reporting on the HMDA LAR and we feel that it will be a potential fair lending red flag Amount of points and fees will be used to calculate a fee cap for certain options to verify the borrower ATR Previous payable at or before loan closing concept is replaced with known at or before consummation standard Revised Points and Fees Test QM Points & Fees Restrictions Distinction between loan amount and total loan amount Use the loan amount (i.e., face amount of note) to determine whether loan is above or below $20,000 and appropriate trigger Apply the applicable points and fees trigger to the total loan amount For closed end credit, the amount financed ( ) minus any points and fees that are rolled into the loan amount and financed by the creditor For HELOCs, new definition of total loan amount is credit limit for the plan when opened, (same as loan amount used to determine which trigger applies) Loan Amount Points and Fees Limit $1 to $12,499 8% of loan amount $12,500 to $19,999 $1,000 $20,000 to $59,999 5% of loan amount $60,000 to $99,999 $3,000 > $100,000 3% of loan amount Financial Solutions: February

12 HOEPA (HCML Section 32) Points & Fees To calculate points and fees for HOEPA coverage of closed end credit transactions, use the same general approach that you use for calculating points and fees for qualified mortgages under the Home Ownership and Equity Protection Act (HOEPA) thresholds in the Bureau s High Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) rulemakings. However, you have a different set of thresholds to compare to the APOR! High Cost Mortgage Points and Fees Section 32 Loans, HOEPA 5% of total loan amount for loan > $20,000 8% of the total loan amount or $1,000 for a loan < $20,000 The $1,000 and $20,000 figures for the Points & Fees Test will be adjusted annually Closed End Points and Fees Test Finance Charge items under (a) and (b), excluding: Interest or time price differential Certain mortgage insurance premiums/charges Certain bona fide third party charges Certain bona fide discount points Financial Solutions: February

13 New Points and Fees Exclusions: Bona Fide Discount Points Definition: Generally 1% of the loan amount/credit limit that reduces interest rate based on calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate for the amount of discount points paid Additional points (1.5 % or 2.0% etc. of loan amount) can be charged depending on market circumstances Example: Fannie or Freddie guidance on what constitutes a sufficient reduction in rate in exchange for discount point New Points and Fees Exclusions: Bona Fide Discount Points Exclusions from points and fees: Up to 2 bona fide discount points if undiscounted interest rate does not exceed APOR by more than 1 % point If no discount points have been excluded under the above test, up to 1 bona fide discount point if undiscounted interest rate does not exceed APOR by more than 2 % points For personal property secured loans, use the average rate for a loan insured under Title I of National Housing Act as a measuring stick, rather than APOR This provision only applies for high cost purposes, not to determining qualified mortgage treatment New Points and Fees Exclusions: Mortgage Insurance Premiums (MIP) Complete exclusion for MIP premium or charge imposed under any federal or state agency program for guarantee or insurance against the consumer s default or other credit loss Private Mortgage Insurance (PMI) premium or charge payable after consummation is completely excluded New Points and Fees Exclusions: Private Mortgage Insurance (PMI) Premiums PMI premium/charge payable at or before closing is excluded up to amount that equals amount that would have been paid for an FHA loan, provided also that: Premium/charge is refundable on a pro rata basis, and Refund is automatically issued upon satisfaction of the mortgage Any portion of the PMI premium/charge that does not qualify for exclusion must be included in points and fees, regardless of whether paid in cash or financed or whether the insurance is required or optional Financial Solutions: February

14 housing/comp/premiums/sfpcalc PMI Premiums Example (b)(1)(i)(C)1iiC $3,000 PMI premium charged on a closed end mortgage loan is payable at or before closing. It is required to be refunded on a pro rata basis and automatically refunded upon notification of the satisfaction of the mortgage Maximum premium allowable under the National Housing Act is $2,000 Can exclude $2,000 from P & F, include $1,000 If premium was not required to be refunded on a pro rata basis or not automatically issued upon notification of mortgage satisfaction, include entire $3,000 in P & F Loan Originator Compensation HOEPA Language Include all mortgage broker compensation High Cost Language Include all compensation paid directly or indirectly by consumer to creditor or loan originator that can be attributed to that loan at the time the interest rate is set Financial Solutions: February

15 U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, DC ASSISTANT SECRETARY FOR HOUSING- FEDERAL HOUSING COMMISSIONER January 31, 2013 To: All Approved Mortgagees Mortgagee Letter Subject Revision of Federal Housing Administration (FHA) policies concerning cancellation of the annual Mortgage Insurance Premium (MIP) and increase to the annual MIP Purpose Consistent with FHA s ongoing efforts to strengthen the Mutual Mortgage Insurance Fund, FHA is: revising the period for assessing the annual MIP; removing the exemption from the annual MIP for loans with terms of 15 years or less and Loan to Value (LTV) ratios of less than or equal to 78 percent at origination; and increasing the annual MIP on all forward mortgages except single family forward streamline refinance transactions that refinance existing FHA loans that were endorsed on or before May 31, 2009 (see ML ). Effective Date The section of this ML that increases the annual MIP is effective for case numbers assigned on or after April 1, 2013, except as noted below. The following sections of this ML are effective for all mortgages with FHA case numbers assigned on or after June 3, 2013: revision to the period for assessing the annual MIP; removal of the exemption from the annual MIP for loans with terms of 15 years or less and LTVs of less than or equal to 78 percent at origination; increase in the annual MIP for mortgages with terms less than or equal to 15 years and LTV ratios less than or equal to 78 percent at origination. Continued on next page espanol.hud.gov 15

16 2 Mortgagee Letter , Continued Affected Topics This ML: rescinds the automatic cancellation of the annual MIP collection announced in MLs and ; rescinds ML , under which mortgages with terms of 15 years or less and LTVs of less than or equal to 78 percent at time of origination were exempt from the annual MIP; and rescinds and updates Sections 7.3.a, 7.3.c, 7.3.d, 7.3.e, 7.3.f, and 7.3.g of HUD Handbook as appropriate. This ML increases the annual MIP on all forward mortgages previously announced in ML , except single family forward streamline refinance transactions that are refinancing existing FHA loans that were endorsed on or before May 31, 2009; the rate for those streamline transactions remains at the level announced in ML Revision to the Period for Assessing Annual MIP For loans with FHA case numbers assigned on or after June 3, 2013, FHA will collect the annual MIP for the maximum duration permitted under statute. See 12 U.S.C. 1709(c)(2)(B). For all mortgages regardless of their amortization terms, any mortgage involving an original principal obligation (excluding financed Up-Front MIP (UFMIP)) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first. For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. Note: FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, FHA uses the original appraised value of the property to calculate the LTV. Continued on next page 16

17 3 Mortgagee Letter , Continued Revision to the Period for Assessing Annual MIP (continued) The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination. Term LTV (%) Previous New 15 yrs 78 No annual MIP 11 years 15 yrs > Cancelled at 78% LTV 11 years 15 yrs > Cancelled at 78% LTV Loan term > 15 yrs 78 5 years 11 years > 15 yrs > Cancelled at 78% LTV & 5 yrs 11 years > 15 yrs > Cancelled at 78% LTV & 5 yrs Loan term Increase to Annual Mortgage Insurance Premium Under Public Law (1)(b), FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps), by Mortgagee Letter. The first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after April 1, Term > 15 Years Base Loan Amt. LTV Previous MIP New MIP $625, % 120 bps 130 bps $625,500 > 95.00% 125 bps 135 bps > $625, % 145 bps 150 bps > $625,500 > 95.00% 150 bps 155 bps Term 15 Years $625, % % 35 bps 45 bps $625,500 > 90.00% 60 bps 70 bps > $625, % % 60 bps 70 bps > $625,500 > 90.00% 85 bps 95 bps The second table shows the previous and the new effective annual MIP rates for loans with an LTV of less than or equal to 78 percent and with terms of up to 15 years. The new annual MIP for these loans is effective for case numbers assigned on or after June 3, Term 15 Years Base Loan Amt. LTV Previous MIP New MIP Any Amount % 0 bps 45 bps Continued on next page 17

18 4 Mortgagee Letter , Continued Exceptions to MIP Duration Changes The changes to the duration of the annual MIP as specified in this ML are effective for all Single Family FHA programs for which FHA charges an annual MIP except: Title I Home Equity Conversion Mortgages (HECM) Exceptions to Announced MIP Increases. The increases in the annual MIP specified in this ML apply to all mortgages insured under FHA s Single Family Mortgage Insurance Programs except: Streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009 (see ML ) Title I Home Equity Conversion Mortgages (HECM) Section 247 (Hawaiian Homelands) Section 248 (Indian Reservations) Information Collection Requirements The information collection requirements contained in this document have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C ) and assigned an OMB control number of In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB Control Number. Questions Please address any questions about the topics addressed in this Mortgagee letter to the FHA Resource Center at CALLFHA. Persons with hearing or speech impairments may reach this number via TTY by calling the Federal Information Relay Service at For additional information on this Mortgagee Letter, please visit Signature Carol J. Galante Assistant Secretary for Housing - Federal Housing Commissioner 18

19 FHA Monthly (Periodic) Mortgage Insurance Premium Calculation The formula for calculating monthly mortgage insurance premium became effective May 1, 1998 (see Mortgagee Letter Attachment). Below is the monthly mortgage insurance premium (MIP) calculation with examples and pseudocode using the annual and upfront MIP rates in effect for mortgages assigned an FHA case number before October 4, See the following Mortgagee Letters for subsequent changes to the annual and upfront MIP rates: 10-28, 11-10, 11-35, 12-04, and [PDF]. Premium Calculation Monthly MIP Computation Steps Step 1: Compute annual average outstanding balance (see below) Step 2: Average Outstanding Balance * Annual MIP Rate Example Average Outstanding Balance for 1st amortization year: $106, , x.005 = (round to 2nd decimal place round to based on value in 3rd decimal place). Step 3: If MIP financed, / ( ) = divide annual MIP from Step 2 by (1 + Upfront MIP round to factor) Result rounded to 2nd decimal place based on value in 3rd decimal place. Step 4: Divide by 12 and round to nearest cent for Monthly MIP / 12 = round to Result rounded to 2nd decimal place based on value in 3rd decimal place. Step 5: Multiply by 12. This is the Annual Premium. $

20 Computation of Annual Average Outstanding Balance To start, use the original loan amount as the previous balance. Repeat the following steps for the remaining months in the year (11 iterations). The calculation of subsequent years is the same. The second year will begin with the last result of the first year. a. Multiply previous balance times annual contract interest rate. Round the result to two (2) decimal places based on value in 3rd decimal place. b. Divide result by Round the result to two (2) decimal places based on the value in 3rd decimal place. c. Add previous balance. d. Subtract P&I payment. Note: For an ARM use original Interest Rate and original P&I through all years. For GEM/GPM compute current P&I based on amortization plan. See table below. When the final year is computed, total up the 12 results for that year and divide the total by 12. AMPLAN RATE OF INCREASE MONTHS OF INCREASE A B C D E F L M N O P The new monthly P&I for GEM/GPM is not calculated if the twelfth month of the case has not been reached or if the payment number is greater than the maximum number of months. Premium Calculation Example Field Value Original Mortgage Amount $106,605 Interest Rate 7.5 Monthly P&I Annual MIP Rate Upfront Factor Beginning Amortization Date 04/2008 Today's Date 12/

21 Compute the annual average outstanding balance: Month/Year Computation Result Year 1 / Month 1 (Use Original Mortgage Amount) $106, Year 1 / Month 2 a. 106, * 7.5 = 799, (round to 799,537.50) b. 799, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 3 a. 106, * 7.5 = 798, (round to 798,944.10) b. 798, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 4 a. 106, * 7.5 = 798, (round to 798,347.03) b. 798, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 5 a. 106, * 7.5 = 797, (round to 797,746.20) b. 797, / 1200 = (round to ) c , = 107, d. 107, = 106, Year 1 / Month 6 a. 106, * 7.5 = 797, (round to 797,141.63) b. 797, / 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 7 a. 106, * 7.5 = 796, (round to 796,533.23) b. 796, / 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 8 a. 106, * 7.5 = 795, (round to 795,921.08) b. 795,921.08/ 1200 = (round to ) c , = 106, d. 106, = 106, Year 1 / Month 9 a. 106, * 7.5 = 795, (round to 795,305.10) b. 795, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 10 a. 105, * 7.5 = 794, (round to 794,685.23) b. 794, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 11 a. 105, * 7.5 = 794, (round to 794,061.53) b. 794, / 1200 = (round to ) c , = 106, d. 106, = 105, Year 1 / Month 12 a. 105, * 7.5 = 793, (round to 793,433.93) b. 793, / 1200 = (round to ) c , = 106, d. 106, = 105, $106, $106, $106, $106, $106, $106, $106, $105, $105, $105, $105, Total of the Year 1 results $1,273, Divided by 12 $106, This is the Annual Average Outstanding Balance See Premium Calculation table at beginning of page for remaining steps to calculate Year 1 premium 21

22 Year 2 / Month 1 a. 105, * 7.5 = 792, b. 792, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 2 a. 105, * 7.5 = 792, b. 792, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 3 a. 105, * 7.5 = 791, b. 791, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 4 a. 105, * 7.5 = 790, b. 790, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 5 a. 105, * 7.5 = 790, b. 790, / 1200 = c , = 106, d. 106, = 105, $105, Year 2 / Month 6 a. 105, * 7.5 = 789, b. 789, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 7 a. 105, * 7.5 = 788, b. 788, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 8 a. 105, * 7.5 = 788, b. 788, / 1200 = c , = 105, d. 105, = 105, $105, Year 2 / Month 9 a. 105, * 7.5 = 787, b. 787, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 10 a. 104, * 7.5 = 786, b. 786, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 11 a. 104, * 7.5 = 786, b. 786, / 1200 = c , = 105, d. 105, = 104, $104, Year 2 / Month 12 a. 104, * 7.5 = 785, b. 785, / 1200 = c , = 105, $104,

23 d. 105, = 104, Total of the Year 2 results $1,261, Divided by 12 $105, This is the Annual Average Outstanding Balance Multiplied by the Annual MIP Rate (.005) $ Rounded to two (2) decimal places $ Divided by 1 + Upfront MIP Factor ( ) $ Rounded to two (2) decimal places $ Divided by 12 $ Rounded to two (2) decimal places $42.85 This is the Monthly MIP Multiply Monthly MIP by 12 $ This is the Annual MIP Pseudocode Input Values interest = Interest Rate mip = Annual MIP Rate months = Years Since Amortization Date * 12 orig_mtg = Original Mortgage Amount p_i = Monthly Principal & Interest upfront = Upfront MIP Factor hold_val = A variable to store intermittent results total_amt = A variable to sum the last 12 months BEGIN last_val = orig_mtg total_amt = last_val FOR (I = 2 TO months) hold_val = last_val * interest [ROUND hold_val to 2 places after the decimal] hold_val = hold_val / 1200 [ROUND hold_val to 2 places after the decimal] hold_val = hold_val + last_val hold_val = hold_val - p_i last_val = hold_val total_amt = total_amt + last_val IF (REMAINDER(I / 12) = 0) AND (I <> months) THEN total_amt = 0 END IF NEXT I total_amt = total_amt / 12 total_amt = total_amt * mip [ROUND total_amt to 2 places after the decimal] total_amt = total_amt / (1 + upfront) [ROUND total_amt to 2 places after the decimal] total_amt = total_amt / 12 [ROUND total_amt to 2 places after the decimal] PRINT: Monthly Premium = total_amt END 23

24 Points and Fees New Inclusion Loan Originator Compensation All paid directly or indirectly by consumer or creditor to a loan originator that can be attributed to that loan at time interest rate is set Excluded: Comp based on long term performance, on overall quality of files, base salary Note: The exact details of loan officer compensation included (hourly wages, offsetting) is subject to additional rulemaking! Concurrent Ability to Repay Rulemaking Loan Originator Compensation Example Commentary (b)(1)(ii) 4 ii Payments by a mortgage broker to its individual loan originator employee Compensation paid by a mortgage broker to its individual loan originator employee is not included in points and fees under (b)(1)(ii). For example, assume a consumer pays a $3,000 fee to a mortgage broker, and the mortgage broker pays a $1,500 commission to its individual loan originator employee for that transaction. The $3,000 mortgage broker fee is included in points and fees, but the $1,500 commission is not included in points and fees because it has already been included in points and fees as part of the $3,000 mortgage broker fee Loan Originator Compensation Example Commentary (b)(1)(ii) 4 iii Creditor's origination fees loan originator not employed by creditor Compensation paid by a creditor to a loan originator who is not employed by the creditor is included in the calculation of points and fees. Such compensation is included in points and fees in addition to any origination fees or charges paid by the consumer to the creditor that are included in points and fees under (b)(1)(i). For example, assume that a consumer pays to the creditor a $3,000 origination fee and that the creditor pays a mortgage broker $1,500 in compensation attributed to the transaction. Assume the consumer pays no other charges to the creditor that are included in points and fees and that the mortgage broker receives no other compensation included in points and fees. For purposes of calculating points and fees, the $3,000 origination fee is included in points and fees and the $1,500 in loan originator compensation is included, equaling $4,500 in total points and fees, provided that no other points and fees are paid or compensation received. 59 Proposed Final (b)(ii) (b)(1) In connection with a closed end credit transaction, points and fees means the following fees or charges that are known at or before consummation: (ii) All compensation paid directly or indirectly by a consumer or creditor to a loan originator, as defined in (a)(1), that can be attributed to that transaction at the time the interest rate is set unless: (A) That compensation is paid by a consumer to a mortgage broker, as defined in (a)(2), and already has been included in points and fees under paragraph (b)(1)(i) of this section; (B) That compensation is paid by a mortgage broker, as defined in (a)(2), to a loan originator that is an employee of the mortgage broker; (C) That compensation is paid by a creditor to a loan originator that is an employee of the creditor; or (D) That compensation is paid by a retailer of manufactured homes to its 60 employee. Financial Solutions: February

25 Closed End Points and Fees Test All items listed in (c)(7) finance charge (except amounts held for future payment of taxes), unless: The charge is reasonable; The creditor receives no direct or indirect compensation in connection with the charge; and The charge is not paid to an affiliate of the creditor New Points and Fees Exclusions: Bona Fide Third Party Charges Bona fide third party charges that are not retained by creditor, loan originator or affiliate of either are excluded from points and fees Example: Bona fide fee charged by third party closing agent to conduct closing is excluded from points and fees, even if it is a finance charge, so long as creditor, loan originator, or affiliate of either do notretain the charge New Points and Fees Exclusions: Bona Fide Third Party Charges Exception: Exclusion for bona fide third party charges does not trump the specific provisions relating to mortgage insurance, real estate related fees, and credit insurance Example: Even if PMI premium is paid to a third party that is unaffiliated with creditor or loan originator, PMI is included in points and fees unless it meets PMI requirements for exclusion Financial Solutions: February

26 Include in Points and Fees NEW Credit Property Insurance Includes insurance against loss or damage to personal property such as a houseboat or manufactured home Include hazard insurance unless solely for the benefit of the consumer, even if they are not part of the finance charge Include Prepayment Fees The maximum prepayment penalty that may be charged or collected under the terms of the mortgage loan; and The total prepayment penalty, incurred by the consumer if the consumer refinances the existing mortgage loan with the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either. Include in Points and Fees NEW Prepayment Fee Closed End For a closed end credit transaction, a charge imposed for paying all or part of the transaction s principal before the date on which the principal is due, other than a waived, bona fide third party charge that the creditor imposes if the consumer prepays all of the transaction s principal sooner than 36 months after consummation, provided, however, that interest charged consistent with the monthly interest accrual amortization method is not a prepayment penalty for extensions of credit insured by the FHA consummated before January 21, Include in Points and Fees NEW HELOC Points and Fees Prepayment Fee Open End A charge imposed by the creditor if the consumer terminates the open end loan prior to the end of the term, other than a waived bona fide third party charge that the creditor imposes if the consumer terminates the open end plan sooner than 36 months after account opening Excluded: Fees imposed for preparing documents when an open end plan is terminated, if imposed irrespective of when terminated Loan guarantee fees Certain termination fees permitted under Section (f) Definition of points and fees for a HELOC is substantially the same as for closed end loan, except the following are also included: Any fees for participation in the plan as described in (c)(4), if payable at or before account opening, Any transaction fee, including minimum or per transaction fee, that will be charged for a draw on the line; creditor must assume that consumer will make at least one draw equal to total credit line during the term Financial Solutions: February

27 Exemptions and Exceptions QM Small Creditor Tests Rural County (b)(2)(iv)(a) 71 CT = Covered Transaction (A) (B) (C) RUS = Rural or Underserved A county is rural during a calendar year if it is neither in an MSA nor in a micropolitan statistical area that is adjacent to an MSA, as those terms are defined by the U.S. Office of Management and Budget and as they are applied under currently applicable Urban Influence Codes (UICs), established by the United States Department of Agriculture's Economic Research Service (USDA ERS). This is not the same definition of rural used for Home Mortgage Disclosure Act (HMDA) reporting or used by other agencies. 72 Financial Solutions: February

28 Underserved County list ofrural and underserved counties for use in 2014/ Underserved areas (counties where no more than 2 creditors extend 5 or more first lien covered transactions in a calendar year) Originated < st lien CTs To determine if you meet the number of originations requirement, count all first lien, closed end mortgages made by you and made by your affiliates that are subject to the ATR requirements. Do not count subordinate lien mortgages. Also do not count mortgages that are not subject to the ATR/QM rule, such as HELOCs, time share plans, reverse mortgages, or temporary or bridge loans with terms of 12 months or less. CFPB Small Entity Compliance Guide, August 2013, p. 34 Prior Year Assets To determine if you meet the asset size requirement, count only your assets. Do not count your affiliate s assets. CFPB Small Entity Compliance Guide, August 2013, p Financial Solutions: February

29 Small Creditor QM Potential Loss of Small Creditor QM Status NO toxic features: negative amortization, interestonly payments, or balloon payments Loan term limited to 30 years or less Subject to the QM points and fees limitations Subject to modified version of ATR rules for all of the 8 underwriting criteria except employment status and credit history The loan must not be subject to a forward commitment an agreement made at or prior to consummation of a loan to sell the loan after consummation, other than : Must be held in portfolio at least for 3 years If sold within 3 years, it must be sold to another creditor eligible for small creditor status Can be sold pursuant to a supervisory action or agreement at any time Refinance Non Standard Meeting to Standard Meeting (d) ATR Special Circumstance Payment Shock! To encourage refinancing of non standard mortgages into standard mortgages, the CFPB authorized special circumstances that would allow consumers with adjustable rate, interest only or negative amortization loans that may be unaffordable when the loan recasts (changes payments based on loan contract terms). Applicable only to mortgages held in portfolio. Subservicers and third parties cannot use the refinance provision. 80 Financial Solutions: February

30 Standard Mortgage A mortgage loan that, among other things, has these characteristics No negative amortization No interest only payments No balloon payments Limited points and fees (like the QM limits) Limited use of loan proceeds (no cash out!) Interest rate is fixed for first 5 years Mortgage underwriting based on maximum interest rate in the first 5 years Term limited to 40 years 81 Non Standard Mortgage An adjustable rate mortgage with an introductory fixed interest rate for a period of 1 year or longer, An interest only loan, or A negative amortization loan 82 Note: The final rule does not include ARMs with long fixed periods, nor balloon payment loans. Refinance Non Standard Mortgages Special rules encourage creditors to refinance nonstandard mortgages into standard mortgages with fixed rates for at least 5 years that reduce consumers monthly payments without having to meet the ATR requirements Non standard mortgage: the products include various types of mortgages which can lead to payment shock that are believed to result in default 83 Option Available ONLY When: Refi will not cause principal balance to increase Proceeds used to payoff principal and for HUD 1 closing or settlement charges (no cash out!) Monthly payment materially decreases (>10%) Only 1 30 day late payment in last 12 months and no late payments in last 6 months Written application received <2 months after the nonstandard mortgage has recast Consideration given to whether recast mortgage will prevent consumer from defaulting on non standard mortgage If non standard mortgage consummated on or after 1/10/14, the non standard mortgage complied with ATR or QM provisions 84 Financial Solutions: February

31 Material Decrease in Payment Calculate new non standard loan payment after it reaches a recast point. Recast occurs when: The introductory fixed rate period ends for an ARM The interest only period ends for an interest only loan The negatively amortizing payment period ends for a negatively amortizing loan Compare the projected new standard mortgage payment using fully indexed rate and fully amortizing equal payments to the after recast payment to determine if meet materially lower standard Payment reduction of 10% or more! Resulting Refinanced Standard Mortgage MUST: Not have deferred principal, negative amortization or balloon payments Limit points and fees to the QM thresholds Limit loan term to 40 years Interest rate must be fixed for at least 5 years of the loan term Full Exemption Refinance Loan Modifications If creditors meet all qualifications, a full exemption from all ATR UW standards and may: Evaluate qualifying applications without verifying the consumer s income and assets, as otherwise required by the general ATR standards. Calculate the monthly payment used for determining the consumer s ATR the new loan based on assumptions that would typically result in a lower monthly payment than those required to be used under the general ATR standards. Avoid other calculations restricted by ATR standards. 87 ATR/QM rule does not apply when you alter an existing loan without refinancing it. You can provide a loan modification to a defaulted (or non defaulted) consumer without complying with ATR. Refer to the changes to a loan that will be treated as a modification rather than a refinancing in Regulation Z at (a) 88 CFPB Small Entity Compliance Guide, April 2013, p. 44 Financial Solutions: February

32 QM Liability Safe Harbor or a Rebuttable Presumption of Compliance? Safe Harbor QM If a court upholds that a mortgage truly is a QM, that finding conclusively establishes that you complied with the ATR requirements when you originated the mortgage Case over! Provides safe harbor from a claim by a consumer that you did not comply with ATR requirements QM ATR Which is easier to defend? 90 Rebuttable Presumption Rebuttable Presumption, cont. HPCT QMs have a rebuttable presumption of compliance with ATR, but it can be argued that it does not meet QM criteria. If you lose on that argument, then you have to prove your loan complied with ATR. If a court finds that you originated a HPCT QM, a consumer can argue that you violated the ATR requirements. The consumer could try to argue that you violated the ATR. They could try to show that based on the information available to you before and at the time the mortgage was made, the consumer did not have enough residual income left to meet living expenses after paying their mortgage and other debts. The RP provides more legal protection and certainty to you than the general ATR requirements, but less protection and certainty than the safe harbor Financial Solutions: February

33 Qualified Mortgages (QM) Only difference is the APR (Pricing)! Higher Priced Covered Transaction Safe Harbor QM Prime QM Non HPCT QM: Loans that meet the QM conditions and are not higher priced covered transactions (HPCTs) Compliance is deemed conclusive: If the prime QM truly satisfies the QM criteria, the loan will not be subject to rebuttal based on residual income or otherwise. Appendix Q defines the strict standards for defining income, to provide QM certainty to creditors Expected to be easier to defend Rebuttable Presumption QM Subprime QM HPCT QM: Loans that meet the QM conditions, but do qualify as higher priced covered transactions (HPCTs) Compliance can be challenged in court focusing on issue of insufficient residual income or assets: At loan origination, the consumer s income and debt obligations left insufficient residual income or assets to meet living expenses Expected to be more expensive to defend HPCT HPML New APOR threshold test used to determine which ATR compliance protection a Qualified Mortgage (QM) will receive: HPCT QM receives Rebuttable Presumption of Compliance Non HPCT receives Safe Harbor HPCT Tests for QMs HPCT = Rebuttable Presumption Remedies for TILA 129C Violations A consumer who brings an action against a creditor within 3 years of consummation for a violation of the ATR requirements may be able to recover special statutory damages equal to sum of all finance charges and fees paid unless creditor proves that failure to comply is not material. This is in addition to: (1) actual damages; (2) statutory damages in an individual action or class action, up to a prescribed threshold; and (3) court costs and attorney fees that would be available for other TILA violations. 95 CT = Covered Transaction RUS = Rural or Underserved 96 Financial Solutions: February

34 HPCT QM Violations The final rule provides that consumers may show a violation with regard to a subprime QM by showing that, at the time of loan origination, the consumer s income and debt obligations left insufficient residual income or assets to meet living expenses. The analysis would consider the consumer s: Monthly payments on the loan, Loan related obligations, and Any simultaneous loans of which the creditor was aware, as well as Any recurring, material living expenses of which creditor was aware. 97 Customer Challenge Options If a borrower under the safe harbor challenges whether a loan is a QM or not then wins, then everything is up for grabs. If the borrower loses, then they cannot challenge it any further. Rebuttable position means borrower has a "two for one deal" They can challenge whether it is a QM or not and Can also challenge whether the ATR requirement was met. No matter where you are in the process, borrowers can stop the foreclosure by alleging facts that will prevent their challenge from upfront dismissal. Servicing rules also give the borrower a private right of action so be very careful to be compliant! 98 Foreclosure Remedies Financial Solutions During a foreclosure action, consumer may assert a 129C(a) violation as a matter of defense by recoupment or setoff with no time limit for action to be taken by the consumer Recoupment or setoff is special statutory damages are limited to no more than 3 years of finance charges and fees Patti Blenden [email protected] Drop us a line sometime! 99 Financial Solutions: February

35 Basic guide for lenders What is a Qualified Mortgage? Starting January 10, 2014, you must assess the borrower s ability to repay for virtually all closed-end residential mortgage loans. All Qualified Mortgages (QM) are presumed to comply with this requirement. As described below, a loan that meets the product feature requirements can be a QM under any of three main categories: (1) the general definition; (2) the GSE-eligible provision; or (3) the small creditor provision. Mandatory product feature requirements for all QMs Points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed); No risky features like negative amortization, interest-only, or balloon loans (BUT NOTE: balloon loans originated until January 10, 2016 that meet the other product features are QMs if originated and held in portfolio by small creditors); Maximum loan term is less than or equal to 30 years. Three main categories 1. General definition category of QMs Any loan that meets the product feature requirements with a debt-to-income ratio of 43% or less is a QM. 2. GSE-eligible category of QMs Any loan that meets the product feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA, or USDA is QM regardless of the debt-to-income ratio (this QM category applies for GSE loans as long as the GSEs are in FHFA conservatorship and for federal agency loans until an agency issues its own QM rules, or January 10, 2021, whichever occurs first). 3. Small creditor category of QMs If you have less than $2B in assets and originate 500 or fewer first mortgages per year, loans you make and hold in portfolio are QMs as long as you have considered and verified a borrower s debt-to-income ratio (though no specific DTI limit applies). EXTRA NOTE: Even if a loan is not a qualified mortgage, it can still be an appropriate loan. You can originate any mortgage (whether or not it is a QM) as long as you make a reasonable, good-faith determination that the consumer is able to repay the loan based on common underwriting factors. You can continue to rely on your sound, tested underwriting guidelines that you have used in the past to make loans that have generally performed well, as long as you document the information you consider. Learn more about the Ability to Repay Rule: consumerfinance.gov/regulations 35

36 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide The Consumer Financial Protection Bureau (CFPB) is publishing the 2013 CFPB Dodd- Frank Mortgage Rules Readiness Guide (the Guide) to help financial institutions come into and maintain compliance with the new mortgage rules outlined in Part I of this guide. The CFPB has designed this guide for use by institutions of all sizes. The Guide summarizes the mortgage rules finalized by the CFPB in 2013, but it is not a substitute for the rules. Only the rules and their official interpretations can provide complete and definitive information regarding their requirements. These rules can be found at Each rule description below also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. You will also find links to videos outlining the main elements of the rule. The Guide consists of: Part I, Summary of the Rules Part II, Readiness Questionnaire Part III, Frequently Asked Questions Part IV, Tools The questionnaire in Part II is not intended to encompass all details of a comprehensive compliance program. It is not a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. This document is available online only and is updated periodically. We invite your feedback on this guide. How useful is it in preparing for compliance with the rules? Do you have suggestions for improving it? Please send feedback to [email protected]. For more information on the rule content, please contact the Bureau s Office of Regulations at , or questions to [email protected]. For more information about CFPB supervision policies and procedures, please contact [email protected]. If your company is supervised by an agency other than the CFPB, please contact that agency with questions about supervision policies and procedures. 36

37 Part I Summary of the Rules In 2013, the Bureau issued several final rules concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law , 124 Stat (2010). The rules amend several existing regulations, including Regulation Z, X, and B. Below are summaries related to these rules. The headings are hyperlinks that will direct you to rule-specific CFPB website pages. An overview of rule content is also available in the Small Entity Compliance Guides. (See the last pagefor links to these guides). The CFPB will continue to provide updates to the rules where necessary. Updates will be posted, along with a summary of the changes, on the regulatory-implementation CFPB page. Ability-to-Repay and Qualified Mortgage Standards (Regulation Z) The CFPB amended Regulation Z, which implements the Truth in Lending Act (TILA). Before the amendment, Regulation Z prohibited a creditor from making a higher-priced mortgage loan without regard to the consumer s ability to repay the loan. The amendments implement Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establish certain protections from liability under this requirement for Qualified Mortgages. The amendments also implement Section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the amendments require creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule is effective for transactions for which the creditor received an application on or after January 10, Escrow Requirements under Truth in Lending Act (Regulation Z) The CFPB issued a final rule that amends Regulation Z (Truth in Lending Act) to implement certain amendments to the Truth in Lending Act made by the Dodd-Frank Act. Regulation Z currently requires creditors to establish escrow accounts for higherpriced mortgage loans secured by a first lien on a principal dwelling. The rule implements statutory changes made by the Dodd-Frank Act that lengthen the time to 5 years from one year to maintain a mandatory escrow account established for a higherpriced mortgage loan. The rule also exempts certain transactions from the statute s escrow requirement. The primary exemption applies to mortgage transactions extended by creditors that operate predominantly in rural or underserved areas, together with their affiliates originate a limited number of first-lien covered transactions, have assets below a certain threshold, and together with their affiliates do not maintain escrow accounts on 37

38 extensions of consumer credit secured by real property or a dwelling that are currently serviced by the creditors or their affiliates (subject to certain exceptions). This rule was effective June 1, High-Cost Mortgage and Homeownership Counseling (Regulation Z) (Regulation X) The CFPB issued this final rule to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act s amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rule amends Regulation Z (Truth in Lending Act) by expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA), revising and expanding the tests for coverage under HOEPA, and imposing additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement. The final rule also amends Regulation Z and Regulation X (Real Estate Settlement Procedures Act) by imposing certain other requirements related to homeownership counseling, including a requirement that consumers receive information about homeownership counseling providers. This rule is effective for transactions for which the creditor received an application on or after January 10, Mortgage Servicing Rules (RESPA) (Regulation X) (TILA) (Regulation Z) The CFPB amended Regulation X, which implements the Real Estate Settlement Procedures Act of 1974, and implemented a commentary that sets forth an official interpretation to the regulation. The CFPB also amended Regulation Z, which implements the Truth in Lending Act and the official interpretation to the regulation, which interprets the requirements of Regulation Z. These final rules implement provisions of the Dodd-Frank Act regarding mortgage loan servicing. Specifically, the Regulation X final rule implements Dodd-Frank Act sections addressing servicers obligations to correct errors asserted by mortgage loan borrowers; to provide certain information requested by such borrowers; and to provide protections to such borrowers in connection with force-placed insurance. Additionally, this final rule requires servicers to establish reasonable policies and procedures to achieve certain delineated objectives; to provide information about mortgage loss mitigation options to delinquent borrowers; and to establish policies and procedures for providing delinquent borrowers with continuity of contact with servicer personnel capable of performing certain functions. The rule establishes procedures for the review of borrowers applications for available loss mitigation options. Further, this final rule modifies and streamlines certain existing servicing-related provisions of Regulation X. 38

39 The Regulation Z final rule implements Dodd-Frank Act sections addressing initial rate adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responses to requests for payoff amounts. This final rule also amends current rules governing the scope, timing, content, and format of disclosures to consumers regarding the interest rate adjustments of their variable-rate transactions. These rules are effective January 10, ECOA Valuations for Loans Secured by a First Lien on a Dwelling (Regulation B) The CFPB amended Regulation B, which implements the Equal Credit Opportunity Act (ECOA), and the Bureau s official interpretations of the regulation, which interpret and clarify the requirements of Regulation B. The final rule revises Regulation B to implement an ECOA amendment concerning appraisals and other valuations that was enacted as part of the Dodd-Frank Act. In general, the revisions to Regulation B require creditors to provide to applicants free copies of all appraisals and other written valuations developed in connection with an application for a loan to be secured by a first lien on a dwelling, and require creditors to notify applicants in writing that copies of appraisals will be provided to them promptly. This rule is effective for loans to be secured by first liens on dwellings for which an application is received by the creditor on or after January 18, TILA Appraisals for Higher-Priced Mortgage Loans (Regulation Z) The CFPB issued a final rule to amend Regulation Z jointly with the Federal Reserve Board, FDIC, FHFA, NCUA, and OCC. This rule implements new appraisal provsions in the Truth in Lending Act (TILA) that were added by the Dodd-Frank Act. The rule requires creditors to obtain a full interior appraisal by a certified or licensed appraiser for non-exempt higher-risk mortgage loans (HPMLs). HPMLs are mortgages with an annual percentage rates that exceed the average prime offer rate by a specified percentage. The rule also requires a second such appraisal at the creditor s expense for certain properties held for less than 180 days. Exemptions include qualified mortages, reverse mortages, bridge loans, construction loans and certain manufactured homes. In addition, the rule requires creditors to provide the consumer a copy of all written appraisals performed in connection with the HPML at least 3 days prior to closing. This rule is effective January 18, Loan Originator Compensation Requirements (Regulation Z) The CFPB amended Regulation Z to implement amendments to the Truth in Lending Act made by the Dodd-Frank Act. The final rule implements requirements and 39

40 restrictions imposed by the Dodd-Frank Act concerning loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of credit insurance. The rule revises or provides additional commentary on Regulation Z s definition of a loan originator, restrictions on loan originator compensation, including prohibitions on dual compensation and compensation based on a term of a transaction or a proxy for a term of a transaction, and to recordkeeping requirements. The rule also establishes tests for when loan originators can be compensated through certain profits-based compensation arrangements. The rule did not prohibit payments to and receipt of payments by loan originators when a consumer pays upfront points or fees in the mortgage transaction. Instead the Bureau will first study how points and fees function in the market and the impact of this and other mortgage-related rulemakings on consumers understanding of and choices with respect to points and fees. The amendments to are effective on three separate dates: the prohibition on mandatory arbitration was effective June 1, 2013; the provisions on financing credit insurance and including the loan originator s name and NMLSR ID on loan documents are effective January 10, 2014; and the loan originator compensation provisions are effective January 1,

41 Part II Readiness Questionnaire This questionnaire should be used as a self-assessment in determining your progress towards compliance with the new mortgage rules. This document is not an examination tool and will not be added to the Examination Manual; it is intended to be a voluntary guide for preparation. It can also serve as a guide for discussions with examiners. The extent of those discussions may be determined by your institution s size, products offered, risk mitigation, and overall strength of your compliance management system. Developing an Implementation Plan 1. Evaluate the current products or services you offer to consumers to determine applicability: Do you offer mortgage loans to consumers? Do you offer any of the following mortgage products: - Home equity lines of credit secured by a dwelling (i.e., HELOCs)? - Mortgages that qualify as higher-priced mortgages under section of Regulation Z? - Mortgages that qualify as high-cost mortgages under section of Regulation Z? - Loans that are intended to meet the criteria for Qualified Mortgages under section of Regulation Z? - Second mortgages that meet the requirements of or of Regulation Z? Do you service mortgage loans or own servicing rights? Do you own mortgage notes that you have sold servicing rights to? 2. Based on the products you offer to consumers, determine which regulatory amendments impact your current products. What are the requirements that apply for each of your products? Have you obtained, reviewed, and considered the various bulletins, updates to rulemakings, and other requirements or guidance related to the January 2013 final rules? 41

42 Do you qualify for any exemptions? (Refer to the Small Entity Compliance Guides listed at the end of this document or the rules themselves for additional information on exemptions) Have you discussed which rules apply and any potential exemptions with your compliance counsel, as applicable, or regulator? 3. Have you developed an implementation plan? Have you performed a gap analysis to determine what business, operational, and automated transaction processes need to change as a result of the new rules? Has the plan been approved by senior management and the board (or similar oversight functions), as appropriate? Has the plan been developed in consultation with or reviewed by key stakeholders, such as legal, compliance, and information technology? Does it contain key milestones, dates for completion of required steps for compliance, and progress reports? - How are you tracking progress? - Who reviews progress reports? Does the plan include an audit review? - Have testing procedures been defined? - How are results and progress tracked? Does the plan identify the responsible parties for developing the plan, ensuring adherence to the plan, and future compliance? - Is progress reported to senior management or the board (or similar oversight functions), as applicable? Is your plan on schedule? - If not, has the deviation from schedule been approved by the board, or similar oversight function, or senior management, as appropriate, and discussed with regulators? 42

43 - Are all aspects of your plan scheduled to be completed prior to the rules effective dates (NOTE: Some rules have already taken effect.)? Have you discussed your implementation plan with your regulators and compliance counsel, as applicable? - Have discussions with regulators resulted in any changes to your implementation plan? Do you have contracts with any third parties related to mortgage activities? Policies and Procedures - If so, have you discussed and evaluated their implementation plan? - Do you have a back-up plan should the vendor not fully implement the necessary changes prior to the effective dates? - Additional questions regarding this topic can be found in the section below titled, Third Party and Vendor Management. 1. Do your policies and procedures reflect the appropriate provisions in the following rules? (Note: The list below does not encompass all possible provisions that may apply to your institutions. For a more detailed list of all provisions, requirements, and exemptions please visit Ability-to-Repay and Qualified Mortgage Standards (Reg Z ) Ability-to-Repay If you will make loans that are not Qualified Mortgages, do your policies and procedures address the key components of the ability-to-repay provisions, including: - Obtaining and verifying certain financial information related to the consumer(s)? - Ensuring that borrowers have sufficient assets or income to pay back the mortgage? 43

44 - For adjustable-rate mortgages, that the monthly payment is calculated using either a fully indexed rate or an introductory rate, whichever is higher? - Any exemptions that apply and a full description of when the exemptions apply and conditions for exemptions (e.g., for a customer trying to refinance certain risky loans only after specific conditions are met)? Qualified Mortgages Do your policies and procedures address the key components of the qualified mortgage provisions, including: - Documenting, where applicable, that loans were eligible for purchase or guarantee by Fannie Mae or Freddie Mac or insurance or guarantee by FHA or other federal agencies? - Restrictions on charging points and fees and prohibition of certain risky loan features (as applicable)? - Limits on debt to income ratios (as applicable)? - Full descriptions of qualifications for any qualified mortgage provisions (e.g., if the loan is made by a smaller creditor)? Escrow Requirements under TILA (Reg Z ) Do your policies and procedures address the key components of the higher-priced mortgage loan escrow provisions, including but not limited to: - Requirements to establish and maintain escrow accounts for at least five years after consummating a higher-priced mortgage loan? - If you qualify for any exemptions and a full description why, e.g., if you are a smaller creditor operating predominantly in rural or underserved areas and meet the other elements of that exemption? - Limited exemptions for common interest communities? High-Cost Mortgage and Homeownership Counseling (Reg Z ) and (Reg X ) 44

45 Do your policies and procedures address the key components of the High- Cost Mortgage provisions, including: - Identifying High-Cost mortgages under the revised HOEPA coverage tests? o Determining the applicable average prime offer rate. o Determining points and fees thresholds. o Determining prepayment penalty triggers. - Imposing limitations and restrictions on certain loan terms for HOEPA loans? Do your policies and procedures address the key components of the Homeownership Counseling provisions including: - Identifying when Homeownership Counseling is required? - Providing a list of homeownership counseling agencies to applicants within three business days after they apply for a federally-related mortgage loan? - Receiving confirmation that required borrowers have received the appropriate counseling before making a high-cost loan or a loan that provides for or permits negative amortization to the borrower? Mortgage Servicing Rules (Reg Z 1026) and (Reg X 1024) Do your policies and procedures address the key components of the Mortgage Servicing provisions, including: - Periodic billing statements - Interest-rate adjustment notices for ARMs - Prompt payment crediting and payoff statements - Force-placed insurance - Error resolution and information requests - General servicing policies, procedures, and requirements 45

46 o Assessing and providing timely and accurate information o Properly evaluating loss mitigation applications o Facilitating oversight of, and compliance by, service providers o Facilitating transfer of information during servicing transfers o Informing borrowers of the written error resolution and information request procedures - Early intervention with delinquent borrowers - Continuity of contact with delinquent borrowers - Loss mitigation procedures Valuations for First Lien Loans Secured by a Dwelling (Reg B 1002) Do your policies and procedures address the key components of the ECOA Valuations provisions, including: - Notifying applicants of their right to receive copies of all valuations and appraisals developed in connection with the application, along with other information required in the notice? - Providing applicants a copy of each appraisal and other written valuation promptly upon their completion or three business days prior to consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier? - That fees cannot be charged in connection with providing a copy of the appraisal or valuation? Appraisals for Higher-Priced Mortgage Loans (Reg Z ) Do your policies and procedures address the key components of the higher-priced mortgage loan appraisal provisions, including: - For all higher-priced mortgage loans that are not eligible for at least one of the several exemptions from the rule: o notifying applicants of their right to receive copies of any written appraisal developed, along with other information required in the notice? 46

47 o obtaining a written appraisal (including a physical visit of the interior of the property) performed by a certified or licensed appraiser? o obtaining an additional written appraisal (including a physical visit of the interior of the property), at no cost to the borrower, in connection with certain flipped properties? o consumer receiving a free copy of all written appraisals for the transaction at least three business days before consummation? Loan Originator Compensation Requirements (Reg Z ) Do your policies and procedures address the key components of the Loan Originator Compensation provisions, including: - Requirements that a loan originator s compensation cannot be based on any of the transaction s terms? - Requirements that your individual loan originators are licensed or registered as applicable under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and other applicable laws? - Requirements that your loan originators provide their name and unique identifier under the Nationwide Mortgage Licensing System and Registry on loan documents? - Requirements for maintaining records concerning loan originator compensation for at least three years? - Assuring that a loan originator that receives compensation directly from a consumer cannot receive compensation from another person in connection with the same transaction? Note: The Bureau has issued a complete exemption to the prohibition on loan originators receiving origination fees or charges from someone other than the consumer where the consumer pays upfront points and fees pursuant to its exemption authority while it scrutinizes several crucial issues relating to the design, operation, 47

48 and possible effects in a mortgage market undergoing regulatory overhaul of such a restriction. Mandatory Arbitration and Financed Credit Insurance Do your policies and procedures address provisions that: - Prohibit contracts or agreements from requiring consumers to submit disputes concerning a residential mortgage loan or home equity line of credit to arbitration and prohibit applying or interpreting such contracts or agreements to waive federal statutory causes of action? - Prohibit financing of any premiums or fees for credit insurance or debt cancellation or suspension in connection with a consumer credit transaction secured by a dwelling? (Note: Credit insurance can be paid on a monthly basis and some unemployment insurance is excluded.) 2. Do your policies contain all the relevant disclosures required by the new rules? Do you use model disclosure forms and language contained in the regulatory guidance? - If not, are your disclosures clearly written in a way that consumers are likely to understand? - Are the disclosures presented in a way that is likely to call the consumer s attention to the nature and significance of the information in the notice? Have disclosures been reviewed by compliance and audit? 3. Have the policies been reviewed by the board (or similar oversight functions) and senior management as appropriate, the compliance officer, or legal counsel? Were any concerns identified at this level? If yes, have they been resolved? 4. Do the policies reflect your actual practices? Do you have testing planned to confirm this? 48

49 5. What processes do you have in place to ensure that policies are kept current and account for all changes in the regulatory environment? Who is responsible for maintaining content? 6. Describe the steps you will take to ensure that new product development considers new regulatory rules and associated risks. Is the compliance function represented in the new product development process? 7. Do your policies and procedures vary materially regionally, by delivery method, or by legal entity? If practices vary: - Is testing done for each segment? - Are all policies individually approved? - What controls are in place to ensure that regulatory updates are accounted for in all policies? 8. Have automated tools been updated to reflect your new policies and procedures? Have they been tested to confirm accuracy? 9. Have you updated your risk assessment to reflect the regulatory changes? Training Do your policies and procedures define a process for ongoing updates to the risk assessment to account for regulatory changes? 1. Have you determined what training needs to be developed? 2. Have you determined who needs training? 3. Has training been conducted? If so, do you anticipate offering refresher training? 4. Have you considered the following questions in developing training: What information will be covered in the new training? 49

50 What will the format be for training? (Instructor-led, online, etc.) How will training vary based on job duties? How do you document completed training? What are the consequences for employees not completing training by the assigned deadline? Have the changes to the training program been fully integrated into your full training program and ongoing schedule? 5. How will you roll out the changes to your training program? When will training be completed? Do training timelines allow for enough time for staff to fully understand rule requirements prior to the effective dates? Have you done any testing of training program changes? 6. Who is responsible for developing course content? Did you purchase content from an outside vendor? How is senior management involved in developing and approving course content? How did you determine that course content is adequate? What is the process for identifying the need for additional changes? 7. Have you determined what training will be needed to address operational changes? What areas are impacted by the changes? Audit, Compliance Review, Internal Control 1. Did audit and compliance review play a role in developing and implementing your new procedures for complying with the new mortgage rules? If so, did they make any suggestions for process improvement? 50

51 Are any action items outstanding? - How are they being tracked? - Will enhancements be made prior to the rule effective dates? 2. Have audit/compliance review/internal control procedures been updated to reflect the regulatory changes? Have the updated procedures been tested? Has the updated audit/compliance/internal control program been approved by the board (or similar oversight function) and senior management, as appropriate? Have you conducted a pre-exam review to determine level of compliance? 3. Have you conducted any pre-implementation reviews? If so, have you adjusted appropriate elements of your compliance management program where you ve identified weaknesses? Complaints 1. What training will the associates that process consumer complaints receive regarding the changes to the mortgage rules? Will applicable training be completed prior to the effective dates of the new rules? 2. Are complaints processed centrally or by individual business lines? If by line of business, how will complaints training vary? 3. Is complaint data analyzed to identify training needs and process breakdowns? 4. How are complaints handled when regulatory violations are noted? Are violations tracked? Is root cause analysis done when violations are noted? Third Party and Vendor Management 1. What arrangements, agreements, or contracts exist with vendors and third parties related to mortgage products or servicing? 51

52 Do you have changes planned for third party practices as a result of the new rules? Will your third party service providers deliver compliant application technology releases and/or fully tested process updates in time for the effective dates? If your third party service provider is or was not compliant by the effective dates, do you have an alternate plan in place to ensure compliance? If no such plan exists, when will such a plan be established? 2. What changes have been made or need to be made to the above arrangements, agreements, or contracts to ensure that service providers comply with new regulations and all legal obligations? 3. Do you review complaints regarding vendor activity for compliance and process concerns? How frequently do you receive this complaint data? 4. Do you receive and review training procedures for third parties related to regulatory requirements? 5. Will you provide training for any third party service providers? 52

53 Part III Frequently Asked Questions How do I contact the CFPB about the new mortgage rules? For more information on the rule content, please contact the Bureau s Office of Regulations at , or questions to [email protected]. For more information regarding using this readiness guide, you may contact the CFPB Office of Supervision by at [email protected]. Who must comply with the rules? Specific requirements vary for each rule. Please review the details of the new requirements to determine coverage. Additional information about coverage and exemptions can also be found in small entity compliance guides. What does the CFPB expect of institutions on the effective dates of the regulations? The CFPB expects institutions to comply with all relevant provisions by the effective date of each rule. Policies and procedures should be updated to ensure that employees fully understand the changes prior to the effective dates. When will the CFPB start examining for compliance with the rule changes? The CFPB will assess policies and procedures in a timely fashion. Transaction testing will not take place until after the effective date of the applicable rule and enough time has passed to allow for an adequate sample of transactions. You should be prepared to discuss your implementation plan and policy changes prior to the effective date of the applicable rule. Will the CFPB coordinate and communicate supervisory activities with other regulatory agencies? In accordance with the Dodd-Frank Act and its routine practice, the CFPB will coordinate with other regulators. Regulators will communicate examination plans and findings with each other. When appropriate, the regulators will coordinate examination efforts in order to reduce regulatory burden. Where can I find CFPB examination procedures and other information? The exam procedures can be found on the CFPB website. 53

54 Where can I find examination procedures for other regulators? For examination procedures outside the CFPB, you should consult the regulatory agencies websites Where do I find additional resources to assist in implementation? For additional information, you may use the CFPB developed tools and compliance guides. Many of the tools developed by the CFPB can be accessed on our website, or in Part V of this document. 54

55 Part V Tools Below you will find links to further information and CFPB-prepared tools to assist you in complying with the new mortgage rules. CFPB Regulatory Implementation Website - Title XIV Small Entity Compliance Guides o Ability-to-Repay/Qualified Mortgage o 2013 HOEPA Rule o Loan Originator Rule o ECOA Valuations o TILA HPML Appraisals o TILA Escrow Rule o TILA and RESPA Servicing Quick Reference Charts o Ability-to-Repay Requirements with Qualified Mortgages Comparison Chart o Small Creditor Qualified Mortgages Flowchart o Mortgage Origination Rules: Transaction Coverage and Exemption Chart o TILA and RESPA Servicing Coverage Chart 55

56 AuditTraining Sorting Out the Coverage of New Mortgage Rules I t isn t enough that the new rules for consumer mortgages are so complicated and lengthy. It is made even more complicated by the fact that each rule has its own rules and conditions for coverage. The CFPB did what they could to straighten things out, but the bottom line is that Congress made this very complicated and quite messy. Some rules apply to primary residence while others include all dwellings. Which is which? How can you and your lenders avoid getting them mixed up? The chart below presents the terms or requirements together with the important and distinguishing elements of their definition. Hopefully, this will help you. Term or Practice Residential Mortgage Transaction (a)(24) Federally Related Mortgage Loan 12 USC Early TILA Disclosures (a) Adjustable Rate Mortgage (ARM) (b) High-Cost Mortgage Loans (HCML) and (HOEPA) (a) Higher-Priced Mortgage Loan (HPML) (a) HPML Escrow Account (b) (HPML Appraisal Requirements (c)(2) and (c)(4)2) Prohibited Practices for Mortgage Loans (b) (2) Periodic Statements (a) Qualified Mortgage (QM) and Ability to Repay (ATR) (a) Valuation Independence (a) Servicing (c)(1) Key Elements of Definition A loan secured by consumer s principal dwelling to finance the acquisition or initial construction of that dwelling Any loan (other than temporary financing, such as a construction loan) that is secured by a first or subordinate lien on residential real property, including a refinancing of any secured loan on residential real property. A mortgage transaction subject to RESPA that is secured by the consumer s dwelling Exemptions: HELOCs and loans secured by timeshares Annual percentage rate may increase after consummation; secured by the consumer s principal dwelling; for a term of more than one year. Open-end or closed-end consumer credit transaction secured by the consumer s principal dwelling and the final APR exceeds APOR by 6.5 percentage points for first liens; 8.5 percentage points for subordinate liens and loans of < $50,000 secured by personal property; points and fees exceed specified thresholds; or the loan has a prepayment penalty longer than 36 months. Exemptions: Reverse mortgages, initial construction only loans, HFA loans and HFA is creditor, and USDA Rural Development 502 Loans. Closed-end transaction secured by the consumer s principal dwelling with a final APR that exceeds the APOR, as of the date the interest rate is set, by 1.5 or more percentage points for first liens, 2.5 percentage points for first lien jumbos, or 3.5 percentage points for subordinate liens. Exemptions: Qualified mortgage loan (QM); loans secured by a new manufactured home, mobile home, boat or trailer; loan for initial construction only, bridge loans with a maturity of 12 months or less; or reverse mortgage Closed-end HPML secured by a first lien on the consumer s principal dwelling cannot be extended unless an escrow account is established before closing for payment of property taxes and premiums for mortgage-related insurance required by the creditor. Exemptions: Loans secured by shares in a cooperative, initial construction loans, bridge loans if 12 months or less, reverse mortgages, small/rural creditors Creditor must obtain a written appraisal performed by a certified or licensed appraiser for HPML transactions. Two appraisals are required if the HPML property is being sold within 90 to 180 days of seller s acquisition and sales price is more than 10% (90 days) or 20% ( days) of seller s acquisition price (excluding financing costs). Exemptions: Qualified mortgage loan (QM), loans secured by new manufactured homes, mobile homes, boats or trailers, loans for initial construction of a home, bridge loans of 12 months or less, and reverse mortgages. Mortgage loan means any closed-end consumer credit transaction that is secured by a consumer s principal dwelling. Closed-end consumer loan secured by a dwelling and is referred to as a mortgage loan for this section. Exemptions: Reverse mortgages, Timeshare plans, Coupon books for fixed-rate mortgages, Small Servicers Any consumer credit transaction that is secured by a dwelling Exemptions: HELOC, loan secured by a timeshare, loan for initial construction only, bridge loans with a maturity of 12 months or less; or reverse mortgage and loans made by certain specified exempt creditors. Any open-end or closed-end consumer credit transaction secured by the consumer s principal dwelling. Includes real property attached to a dwelling Requires prompt crediting of payments and payoff statements, prohibits pyramiding of late fees for loans secured by consumer s principal dwelling. Mandatory arbitration and financing of credit insurance is prohibited for loans secured by a dwelling COMPLIANCE ACTION PAGE 4 VOLUME 18, NUMBER 13 56

57 ActionTraining To-Do List for Mortgage Regulations T he first area to have up, running and tested is servicing. Since most statements and account issues occur on a monthly basis, these provisions should be in place and under control before January 1, Listed below are regulatory requirements related to mortgage loan servicing that must be in place. Before taking steps to implement the new rules, it is necessary to know your starting point. For example, if you do not offer escrow accounts, you may be starting from scratch whereas if you currently maintain escrow accounts on some loans, you need to identify what changes need to be made. Rules Affecting Servicing and Servicing Support Requirement Tasks Staff Policies and Procedures Escrow Accounts Periodic Statement Prompt Crediting ARM Disclosures Payoff Statement Error Resolution and Information Requests Force-placed Insurance Servicing Transfers Early Intervention and Continuity of Contact Loss Mitigation Procedures (.41) Revise existing policies and procedures to address regulatory changes. Determine what mortgage loan products, features and services the institution will and will not offer. Compliance, Determine coverage of institution and loans. Develop procedures to establish and manage escrow accounts. Prepare to establish escrow accounts for flood insurance required by Biggert-Waters. Review current statement or coupon booklet process. Update procedures and systems to provide for periodic statements. Include all required information and calculations on periodic statements or in payment coupon books. Review entire process for receiving and crediting payments. Establish documentation of date payments are received. Establish regular monitoring of payment crediting accuracy. Review content on existing disclosures and update content. Review and reset schedules for disclosures. Establish process for receiving and referring requests. Assign responsibility for identifying payoff amounts and providing that information to the borrower. Designate point for receiving notices of error and information requests. All staff trained to recognize and refer. Maintain system for tracking insurance policies, whether or not in an escrow account. Establish procedure for force-placement including selection of insurer and notices to borrower. Review servicing transfer notices for compliance. Update as necessary. Establish procedure to identify loans that trigger the early intervention requirement. Refer loans triggering early intervention to the designated customer service area. Assign contact team for loan. Establish communication and documentation procedures. Determine whether to offer loss mitigation procedures. Lending Compliance, Lending, Loan Ops Compliance, Loan Ops Customer Service, Loan Ops Loan Ops Customer Service, Loan Ops Customer Service, Loan Ops Loan servicing, loan Ops Loan Ops Customer Service, Loan Ops Senior Mgt COMPLIANCE ACTION PAGE 4 VOLUME 18, NUMBER 14 57

58 ActionTraining Exemptions and the Conditions Attached O ne of the messiest aspects of the new Regulation Z is that each section or set of rules is slightly different. Even the exemptions vary from rule to rule. Some exemptions relate to the entire section of the regulation while others provide an exemption that is limited to a subpart. In short, it s a mess and figuring out what is covered and what isn t is not easy. To help just a little the specific exemptions are laid out below by each section of Regulation Z. Regulatory Provision Post-consummation requirements ARM Loan Disclosure -Timing and Content ARM Initial Rate Adjustment High Cost Mortgages Definition of loan cost based on points and fees calculation Prohibited Practices for High Cost Mortgages Repayment ability HPMLs Escrow Accounts - General HPML Escrow Accounts Exemption for Small Servicers Appraisals Required for HPMLs Full appraisal including interior inspection Specific Exemptions for Provision - Loan term of one year or less - ARM with first interest rate adjustment within 210 days of settlement and new rate disclosed at consummation - Borrower has asserted rights under FDC PA - ARM with term of one year or less - Reverse Mortgage - Loans to finance initial construction of a dwelling - HFA loans if HFA is the creditor - USDA Section 502 Direct Loan Program - Temporary or bridge loans of 12 months or less - Loan secured by shares in a cooperative - Loan to finance initial construction of dwelling - Temporary or bridge loan of 12 months or less - Reverse mortgage During any three preceeding years, more than 50% of first liens in rural or underserved counties, and During preceding calendar year creditor and affiliates originated 500 or fewer covered transactions secured by first lien, and As of end of preceding calendar year, creditor had total assets of less than $2 billion, and Neither creditor nor affiliate maintains escrow accounts other than for HPMLs or for distressed consumers. - Qualified mortgages - Transactions secured by new manufactured home - Transaction secured by mobile home, boat or trailer - Loan for initial construction - Bridge loan of 12 months or less - Reverse mortgage Additional appraisals for HPML flipped properties Periodic Statements Small Servicer Exemption - Credit to finance acquisition from state, local or federal government agency - To person who acquired title through foreclosure - From non-profit entity participating in government program - From employer or relocation agency in connection with relocation - From a service member who received deployment or duty station change after purchasing property - Located in a federal disaster area - Located in rural county as defined in (b)(2)(iv)(A). - Reverse Mortgages - Timeshare Plans - Coupon books (limited to fixed rate loans) - Together with affiliates services 5,000 or fewer mortgages loans not counting reverse mortgages, timeshare plans or voluntary and non-compensated servicing for creditor that is not an affiliate. - Housing Finance Agency (24 CFR 266.5) ATR/QM - Reverse mortgage - Temporary or bridge loan of 12 months or less - Construction phase of 12 months or less of a construction-to-permanent loan - Credit extended in program administered by a Housing Finance Agency (24 CFR 266.5), or other specially designated housing programs, - Credit extended by a CDFI. COMPLIANCE ACTION PAGE 4 VOLUME 18, NUMBER 16 58

59 REAL ESTATE LOAN MATRIX (For Loans After 1/10/14) Phone: Revised 12/20/13 Version APPLICABLE REGULATIONS Website: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) Ability To CHARACTERISTICS OF LOAN REQUEST Written ECOA / Early R of R / Flood RESPA Repay / TILA HPML HMDA Application Fair Housing TILA HCM Insurance Type of Security Use of Security Use of Loan Proceeds Disclosure Purchase X X X X* X ** X* X X X Refinance (Purchase Money) X X X X* X X X* X X X Primary Residence Home Improvement X X* X X X* X X X Home Equity (Closed End) X X* X X X* * X X 1-4 Family Residential Home Equity Line of Credit (Open End) ** ** X X X Dwelling or Mobile Home Business or Agricultural Purpose * X X (Less Than 25 Acres) Purchase, Refinance or Home Improvement X X X Rental House Home Equity - Business Purpose * X X Home Equity - Consumer Purpose X X X * X X Secondary or Purchase, Refinance or Home Improvement X X X X X X Other Residence Home Equity X X X * X X Purchase X X * X ** X* X X X 1-4 Family Residential Refinance (Purchase Money) X X * X X X* X X X Dwelling or Mobile Home Primary Residence Home Improvement * X X X* X X X (25 Acres or More) Home Equity * X X X* * X X Business or Agricultural Purpose * X X Construct Home or Mobile Home + Land X X* X 1,2 X 1* X* X* X* ** X X Buy Mobile Home or Construct Home on Primary Residence Land Already Owned X X* X 1 X 1* X* X* X* ** X X Bare Land (Less Than 25 Acres) Bare Land (25 Acres or More) Business or Farm (No House) Mobile Home (No Land Taken As Collateral) * = See Back AT APPLICATION Rental Home Primary Residence Rental Home Primary Residence, Residence OVER 4 Units Secondary or Rental Business or Farm (With Building) Primary Residence Secondary Residence Rental Home Buy Land Only - Will Not Build With Same Proceeds Construct Home or Mobile Home ** X Construct Home or Mobile Home X X* X * X* X* ** X Buy Mobile Home or Construct Home on Land Already Owned X X* X * X* X* ** X Buy Land Only - Will Not Build With Same Proceeds Construct Home or Mobile Home ** X X Purchase, Refinance or Home Improvement X X Home Equity * X Personal Use X* X Business or Agricultural Purpose X Purchase X X * X ** X* X X X Refinance (Purchase Money) X X * X X X* X X X Home Improvement * X X X* X X X Home Equity * X X X* * X X Business or Agricultural Purpose * X X Purchase, Refinance or Home Improvement X X X X Home Equity X * X X Purchase, Refinance or Home Improvement X X X Home Equity - Business Purpose * X X 1 = Provide if you anticipate providing permanent financings at the time the construction application is taken. 2 = If land transfer, RESPA applies. 3 BUSINESS DAYS AFTER RECEIVING APPLICATION TIMETABLE BEFORE CLOSING AT LOAN CLOSING Written Application (1) RESPA Homeownership Counseling List (3) Abilty To Repay (5) Settlement Statement - HUD-1/1A (3) X* X* ECOA Appraisal (1st Lien Only) X X X 4th BUSINESS DAY AFTER LOAN IS CLOSED Request Government Monitoring Information (2) (8) Servicing Disclosure Statement - 1st Lien Only (3) HCM Test (6) Final Truth in Lending Disclosure (5) CHARM Booklet & ARM Program Disclosure (4*) Settlement Cost Booklet - Purchases Only (3) HCM Notice - 3 Business Days Prior to Closing (6) Right of Rescission Notice (6) HELOC Booklet & HELOC Program Disclosure (4**) Good Faith Estimate (3) HCM Counseling Certification (6) HPML Escrow Account (7) Early TILA Disclosure (4) HPML Test (7) Flood Insurance In Place (9) Advance Loan Proceeds (6) HPML (7) & ECOA (10) Appraisal Notice HPML (7) & ECOA (10) Appraisals - No Later Than 3 Business Days Prior to Closing Flood Determination (9) Flood Notice - Zones A & V Only - Approximately 10 Days Prior to Closing (9) 59

60 REAL ESTATE MATRIX 1. A written application is required on loans secured by and made for the purpose of purchasing or refinancing (the purchase money) a 1-4 family principal residence. 2. Request and retain Government Monitoring Information (ethnicity, race, sex, age, marital status) on loans that are secured by and made for the purpose of purchasing, constructing (if converted to permanent financing), or refinancing (purchase money) the borrower s 1-4 family principal residence (including a mobile home). National banks must request and retain 20 monitoring items (all of which are contained in the standard FHLMC/FNMA residential loan application form). *Do not collect Government Monitoring Information for construction only loans. 3. RESPA applies to any consumer purpose loan secured by a lien on residential real estate upon which a 1-4 family residence or mobile home is or will be constructed. RESPA does not apply to loans secured by residential real estate if: (1) the residence is located on 25 acres or more; (2) the loan is for a business purpose (RESPA does not apply to business purpose, such as rental properties); or (3) a specific property is not identified in the application (pre-qualifications). Provide a Servicing Disclosure Statement (1 st liens only), RESPA Homeownership Counseling List, Good Faith Estimate, and a Settlement Booklet (purchase only) within 3 business days after receiving an application. These disclosures do not need to be signed. The HUD-1 (or HUD-1A) Settlement Statement must be available one business day prior to closing if requested by borrower; otherwise provide it at closing. A HUD-1A may only be used if there is no seller. *Temporary financing, such as a construction or bridge loan, is exempt from RESPA. However, RESPA does apply to construction loans if the loan may be converted to permanent financing by the same lender. **The RESPA Homeownership Counseling List must be provided in connection with HELOC applications. 4. Provide a preliminary TILA (PTIL) disclosure within 3 business days after receiving an application and wait 7 business days to close the loan. If the APR becomes inaccurate, refer to (a)(2)(ii) for re-disclosure requirements. *If the loan has a variable interest rate (and term greater than one year), provide a CHARM booklet and variable rate program disclosure with application.. **If a Home Equity Line of Credit, provide a HELOC program disclosure and brochure with application. 5. Provide a final TILA disclosure (if 50% of the loan proceeds are for business purposes, TIL does not apply) and document the borrower s ability to repay the mortgage loan. Lenders must make a good faith, reasonable determination, consider specific underwriting factors and use reasonably reliable third-party records to verify the information they use to evaluate the factors *The ATR requirements only apply to closed-end loans secured by a dwelling. Construction/bridge loans (or other temporary financing) of 12 months or less; HELOCs, and reverse mortgages are exempt. 6. The right to rescind applies only when the applicant has an ownership interest in the dwelling being pledged as collateral. Purchase and construction loans are exempt unless secured by the borrower s current dwelling (bridge loans). Renewals, refinances, and future advances are subject to rescission but only for the amount of the new money extended (closed-end loans). The renewal of a land sales contract is subject to the right of rescission. Advances cannot be extended until the 4 th business days after the later of: (1) the right to rescission notice is provided, (2) the note is signed, and (3) all disclosures are provided. High Cost Mortgage rules apply if the APR exceeds the applicable Average Prime Offer Rate spread, exceeds the applicable points and fees test or includes a prepayment penalty. *Bridge loans require the right to rescind. Construction loans are exempt from the HCM requirements **Purchase loans are also subject to the HCM testing and requirements (restrictions, notice and certified counseling). 7. Higher Priced Mortgage Loan rules apply if the APR the Average Prime Offer Rate by 1.5% (first lien) or 3.5% (subordinate lien). An appraisal disclosure is required within three business days of application and a copy of the appraisal must be provided three business days prior to consummation (cannot be waived). A certified written appraisal is required. Non-exempt banks must escrow for HPMLs (5 year minimum). *HPML rules do not apply to construction loans, bridge loans or other temporary financing with a term of 12 months or less, HELOCs, or Reverse Mortgages. HPML appraisal requirements do not apply to Qualified Mortgages, streamlined 1st lien refinancings meeting certain conditions; smaller dollar loans; or to loans secured by manufactured homes (until ); mobile homes, boats, or trailers. 8. HMDA information must be compiled by banks who are (1) located in a Metropolitan Statistical Area (or have a branch in a MSA) and (2) have assets exceeding the minimum threshold. Banks shall collect data on home purchase, home improvement and refinancings. The regulation defines home purchase loans as a loan secured by and made for the purpose of purchasing a dwelling. A home improvement loan is unsecured or secured in which the proceeds are used to repair, rehabilitate or remodel the property. *If this loan is a Refinancing, it is reportable. A Refinancing is any new obligation that satisfies and replaces an existing obligation by the same borrower where both the existing obligation and the new obligation are secured by liens on a dwelling regardless of the purpose of the existing obligation. **Banks shall not report: (1) loans on unimproved land; (2) temporary financing (bridge or construction loans); (3) the purchase of an interest in a pool of loans; or (4) the purchase solely of the right to service loans. 9. The Flood Disaster Protection Act applies to any improved real estate loan or mobile home loan (regardless of where the mobile home will be located). Complete a Standard Flood Hazard Determination Form for each property before the loan is closed. If the improved real estate or mobile home securing the loan is located or to be located in an area identified as having special flood hazards, a Flood Hazard Notice must be delivered to the customer within a reasonable period of time before closing (not less than 10 days) & must be signed. The requirements of this Act apply to increases, extensions, and renewals as well as commercial and agricultural loans secured by improved real estate. 10. For any first lien loan (consumer or commercial) secured by a 1-4 family dwelling, the bank must: (1) provide a Notice of Free Appraisal Copy Disclosure to the primary applicant within 3 business days of receiving a covered application; and (2) provide a copy of the appraisal to the primary applicant (whether credit is granted or denied or the application is withdrawn) promptly, at least 3 business days prior to consummation. A waiver may be obtained, but a copy must still be provided at closing. If a loan is not made a copy must be provided within 30 days after the determination. RE Matrix 9.2 [email protected] Revised 12/20/13 60

61 Repayment Ability Risk & Requirements Matrix Version 3.1 1/3/14 Qualified Mortgages (QM) Non- Qualified Mortgage Standard QM Special QM HUD (FHA) QM "Conclusive" Safe Harbor (Non- HPML Loans) X X X X HUD (FHA) "Conclusive Safe Harbor X (APOR/APR Spread Annual MIP %) "Conclusive" Safe Harbor X X (1st Lien HPML Rate Spread < 3.5%) Civil Liability Risk "Rebuttable" Presumption of Compliance X X X X Safe Harbor (HPML Loans) HUD (FHA) "Rebuttable" Presumption of Compliance X (APOR/APR Spread > Annual MIP %) No Safe Harbor X Small Creditor Balloon Payment QM Small Creditor Portfolio QM *Points & Fees Threshold: Loans $100,000 = 3% Loans $60,000 but < $100,000 = $3,000 Loans $20,000 but < $60,000 = 5% Loans $12,500 but < $20,000 = $1,000 Loans < $12,500 = 8% Loan Product Requirements Loan Product Prohibitions Minimum Underwriting Factors Underwriting Verification Loan Points & Fees Do Not Exceed Threshold* X X X Equal Monthly Payments X X X1 30 Year Maximum Loan Term X X X 5 Year Minimum Loan Term X Balloon Payment ** X X Interest Rate Increase X Negative Amortization X X X Deferred Principal Payment X X Post Consummation Transfer X2 X2 Appendix Q Standards X Income and/or Assets X X X X3 Employment Status X Monthly Loan Payment X X X X Monthly Simultaneous Loan Payment X X X X Monthly Mortgage Related Obligations/Payments X X X X Current Debt Obligations X X X X Debt To Income Ratio and/or Residual Income X X4 X X Credit History X Government Program Eligible X5 X 3rd Party Documentation X X X X X1 - Other than the balloon payment. **Any non- QM balloon payment due within 60 months aler the first payment due date must be considered to determine repayment ability. Higher Priced Mortgage Loans must consider any balloon payment. X4 - Total "back end" debt to income rano cannot exceed 43%. X5 - Loan conforms to Fannie Mae/Freddie Mac standards or is confirmed "eligible" by either Desktop Underwriter or Loan Prospector. Small Creditors: You had assets of less than $2.028 billion and you and your affiliates made no more than 500 first lien covered loans in the preceding calendar year. X2 - These loans generally cannot be transferred within the first three years other than to another creditor whom also meets the applicable QM creditor qualificanons. X3 - Determine that the consumer can make all scheduled payments other than the balloon payment from current or reasonably expected income and/or assets. Non Standard Mortgage Non- Standard Mortgage Loan to Standard Mortgage Loan Refinance (To prevent current or future default upon recast^) Standard Mortgage Criteria ^Applicanons must be received no later than two months aler the last payment due date applicable to any introductory, interest only or neganve amornzanon payment period. Interest Only, Adjustable Rate or Negative Amortization Mortgage Same Creditor/Servicer Materially Lower Payment*** Loan Points & Fees Do Not Exceed Threshold* Materially Lower Payment*** Prior Late Payment History**** 40 Year Maximum Loan Term 5 Year Fixed Rate Minimum No Cash Out No Balloon Payment (i.e. fully amortizing) No Negative Amortization No Deferred Principal Payment Repayment Ability Analysis Not Required***** ***A 10% payment reducnon is deemed to be "materially" lower in all cases. ****No more than one late payment more than 30 days late in prior 12 months and none in prior 6 months. *****Any non- standard mortgage loan made on or aler 1/10/14 must have met the minimum repayment ability requirements (non- QM) to be eligible for the non- standard mortgage refinance exempnon. Important Note: This matrix is not inclusive of every detailed requirement. Consult 12 CFR for further details. 61

62 EMPLOYMENT CONFIRMATION (TIME SAVER / ALTERNATE DOCUMENT PROGRAM) BORROWER: A LOAN NUMBER# R STARTING DATE OF EMPLOYMENT: G THE FOLLOWING INFORMATION WAS OBTAINED VIA THE UNDERSIGNED TELEPHONE CONVERSATION WITH: NAME: B TITLE: C COMPANY: D PHONE NUMBER: E CURRENTLY EMPLOYED YES NO F POSITION: H PROBABILITY OF CONTINUED EMPLOYMENT: I INCOME: $ J /MONTHLY /WEEKLY /HOURLY K /NUMBER OF HOURS WORKED PER WEEK YEAR TO DATE EARNINGS:$ L 199 EARNINGS: $ M OVERTIME EARNED? N _YES NO LIKELY TO CONTINUE YES NO COMMISSION: EARNED? YES NO LIKELY TO CONTINUE YES NO BONUS: EARNED? YES NO LIKELY TO CONTINUE YES NO PREVIOUS EMPLOYMENT: DATE HIRED: AA DATE TERMINATED: AB POSITION HELD: AC SALARY/WAGE AT TERMINATION: AD PER REASON FOR LEAVING: AF /YEAR /MONTH /WEEK AE EMPLOYER'S TELEPHONE NUMBER WAS VERIFIED VIA: TELEPHONE BOOK O DIRECTORY ASSISTANCE OTHER: I CERTIFY THAT THE ABOVE INFORMATION WAS PROPERLY OBTAINED AND RECORDED PER MY TELEPHONE CONVERSATION AS STATED ABOVE. P SIGNATURE Q DATE NOTE: BOXES AREAS MUST BE COMPLETED/CONFIRMED WITH EMPLOYER TO MEET MINIMUM INVESTOR STANDARDS. OTHER AREAS WE NEED TO ATTEMPT TO CONFIRM OR COMPLETE FROM CHECK STUBS AND W-2'S. Underwriting C25-b (01/14/02) 62

63 EMPLOYMENT CONFIRMATION (TELEPHONE) INSTRUCTIONS This form should be utilized when: calling the employer to further verify the validity of a Verification of Employment; using the method to verify employment by calling on the telephone for the alternate documentation programs; or shortening the waiting time on panic situations that require immediate action. A. Full name of the borrower. B. Name of the party to whom you spoke. C. Title of the person with which you spoke. D. Name of the company alleged to be employing the borrower. E. Telephone number dialed for this information. Information from current employer. F. Check either Yes or No - confirmation currently employed. G. Borrower's starting date of employment with this company. H. Position of the borrower with this employer. I. Probability of continued employment. J. Amount of income per pay period. K. Payment period (note if hourly, number of hours per week.) L. Year to date income received. M. Income received the previous year. N. Answer Yes or No to the following questions about overtime, commissions and/or bonuses. O. Verifying source for the employer's telephone number. P. Signature of the person marking the telephone call. Q. Date of completing this form. R. U.S. Bank Home Mortgage Loan Number. Information from a previous employer. AA. AB. AC. AD. AE. AF. Starting date of employment with this former employer. Last date of employment with that employer. Position of borrower when employed by this employer. Salary/wage when leaving this employer. Payment period. Reason given for termination with this employer. Underwriting C25-a (01/14/02) 63

64 Job Aid Cash Flow Analysis Borrower Name: The following self-employed income analysis worksheet and accompanying guidelines generally apply to individuals: Who have 25% or greater interest in a business Who are employed by family members Who are paid commissions Who own rental property Who receive variable income, have earnings reported on IRS Form 1099, or income that cannot otherwise be verified by an independent and knowable source Form Individual Income Tax Return Yr. Yr. 1. Total Income 2. Wages, salaries considered elsewhere 3. Tax-Exempt Interest Income 4. State and Local Tax Refunds 5. Nonrecurring Alimony Received 6. Negate Schedule D (Income) Loss 7. Pension and/or IRA Distributions 8. Negate Schedule E (Income) Loss 9. Nonrecurring Unemployment Compensation 10. Social Security Benefit 11. Nonrecurring Other (Income) Loss 12. Other Form Employee Business Expenses 13. Total Expenses 14. Depreciation Schedule B - Interest and Dividend Income 15. Nonrecurring Interest Income 16. Nonrecurring Dividend Income Schedule C - Profit or Loss from Business: Sole Proprietorship 17. Nonrecurring Other (Income) Loss/Expenses 18. Depletion 19. Depreciation 20. Meals and Entertainment Exclusion 21. Business Use of Home 22. Amortization/Casualty Loss (-) (+) (-) (-) (+/-) (+) (+/-) (-) (+) (+/-) (-) (+) (-) (-) (+/-) (+) (+) (-) (+) (+) (-) (+) (-) (-) (+/-) (+) (+/-) (-) (+) (+/-) (-) (+) (-) (-) (+/-) (+) (+) (-) (+) (+) Schedule D - Capital Gains and Losses 23. Recurring Capital Gains/(Loss) (+/-) (+/-) Form Sales of Business Property 24. Recurring Capital Gains/(Loss) (+/-) (+/-) Form Installment Sale Income 25. Principal Payments Received (+) (+) Schedule E - Supplemental Income and Loss 26. Gross Rents and Royalties Received 27. Total Expenses Before Depreciation 28. Amortization/Casualty Loss/Non-recurring Expenses 29. Insurance, Mortgage Interest, and Taxes included in PITI payment (Only if using the property's full PITI payment in qualifying ratios) Schedule F - Profit or Loss from Farming 30. Non-Tax Portion Ongoing Coop and CCC Payment 31. Nonrecurring Other (Income) Loss 32. Depreciation 33. Amortization/Casualty Loss/Depletion 34. Business Use of Home (+) (-) (+) (+) (+) (+/-) (+) (+) (+) (Consider K-1 income only if the borrower can document ownership and access to income, the business has adequate liquidity to support withdrawal, and the business has positive sales and earnings trends.) Partnership Schedule K-1 (Form 1065) 35. Ordinary Income (Loss) 36. Net Income (Loss) 37. Guaranteed Payments to Partner S Corporation Schedule K-1 (Form 1120s) 38. Ordinary Income (Loss) 39. Net Income (Loss) 1040 TOTAL (+/-) (+/-) (+) (+/-) (+/-) (+) (-) (+) (+) (+) (+/-) (+) (+) (+) (+/-) (+/-) (+) (+/-) (+/-) 64

65 Partnerships, S Corporations, and Corporations Whether or not additional income from a Partnership, S Corporation, or regular corporation is used to qualify an applicant, lenders must still conduct an analysis of the business tax returns to ensure a consistent pattern of profitability. Any loss resulting from this analysis must be deducted from cash flow as it represents a drain on the borrower's income. The following sources of income may be considered for qualification provided: The borrower can document ownership and access to income; The business has adequate liquidity to support withdrawal of earnings; and Partnership - Form Passthrough (Income) Loss from Other Partnerships 41. Nonrecurring Other (Income) Loss 42. Depreciation 43. Depletion 44. Amortization/Casualty Loss 45. Mortgage or Notes Payable in Less than 1 Year 46. Meals and Entertainment Exclusion 47. Subtotal 48. Partnership Total (subtotal multiplied by % ownership) S Corporation - Form 1120S 49. Nonrecurring Other (Income) Loss 50. Depreciation 51. Depletion 52. Amortization/Casualty Loss 53. Mortgage or Notes Payable in Less than 1 Year 54. Meals and Entertainment Exclusion 55. Subtotal 56. S Corporation Total (subtotal multiplied by % ownership) Regular Corporation - Form Taxable Income 58. Total Tax 59. Nonrecurring (Gains) Losses 60. Nonrecurring Other (Income) Loss 61. Depreciation 62. Depletion 63. Amortization/Casualty Loss 64. Net Operating Loss and Special Deductions 65. Mortgage or Notes Payable in Less than 1 Year 66. Meals and Entertainment Exclusion 67. Subtotal 68. Subtotal Multiplied by Ownership Percentage 69. Less: Dividends Paid to Borrower 70. Corporation Total Totals 1040 total Partnership, S Corporation, and Corporation totals The business has positive sales and earning trends. Yr. (+/-) (+/-) (+) (+) (+) (-) (-) (+/-) (+) (+) (+) (-) (-) (-) (+/-) (+/-) (+) (+) (+) (+) (-) (-) (-) Yr. (+/-) (+/-) (+) (+) (+) (-) (-) (+/-) (+) (+) (+) (-) (-) (-) (+/-) (+/-) (+) (+) (+) (+) (-) (-) (-) GRAND TOTAL Year-to-Date income from profit and loss statements may only be considered if it is consistent with the previous years' earnings. Allowable addbacks include depreciation, depletion, and other non-cash expenses as identified above. Year-to-Date Profit and Loss Statement Salary/Draw to Individual Net Profit x % Ownership = Total Allowable Addbacks x % Ownership = Year-to-Date Total 65

66 CASH FLOW ANALYSIS (FORM 1084) Form 1040 Individual Income Tax Return Line 1 - Total Income: Begin with Total Income, which represents the borrower's gross income before adjustments. Line 2 Wages, Salaries, Tips: Subtract any income reported on Form 1040 that has been verified and underwritten based on current information or that does not belong to the borrower. This type of income would include salary and hourly compensation, income from a spouse or ex-spouse that is not applying for mortgage credit, other income more appropriately underwritten based on current earnings rather than historical. Cross-reference the amount reported on Form 1040 against the amount indicated on the borrower's Form W-2. Line 3 Tax-exempt Interest Income: Add any tax-exempt interest income included on Form 1040 to the Total Income if it is likely to continue and is verified as recurring income. Taxable interest income and dividend income reported on Form 1040 will be addressed by analyzing Schedule B (Form 1040). This analysis should focus on the continuance of any interest or dividend income. (See analyzing Schedule B.) Line 4 State and Local Tax Refunds: Subtract from Total Income all taxable refunds, credits, or offsets of state and local income taxes reported on Form A tax refund cannot be included as qualifying income since it has been accounted for in the previous year's gross income. Line 5 Nonrecurring Alimony Received: Subtract from Total Income any alimony income that does not meet the following criteria: The receipt of alimony income has been documented as stable for at least 12 months, The payments will be on-going and consistent with the level reported on Form 1040 for a minimum of three years, and The alimony payments are made as a result of a divorce decree or written and signed agreement that is a legal obligation. Line 6 Negate Schedule D (Income) Loss: Examine Schedule D (Form 1040) to determine whether capital gains should be added to or whether capital losses should be subtracted from Total Income. (See analyzing Schedule D.) Line 7 Pension and/or IRA Distributions: The non-taxable portion of IRA distributions, pension, or annuity income is not included in Total Income reported on Form However, total distributions should be used as qualifying income provided the distributions are likely to continue for a minimum of three years and at their reported levels. Pension agreements or account verifications must be obtained to confirm the continuance of this income. On Form 1040, total distributions are reported, however, only the taxable portion of total distributions is included in the borrower's Total Income. To determine the tax exempt portion of this income, calculate the difference between total distributions and the taxable portion and add the difference to Total Income by recording the calculated amount on Line 7 of our form. The tax-exempt portion of this income can be grossed up according to the guidelines that address tax-exempt income. 66

67 Line 8 Negate Schedule E (Income) Loss: Negate all income (subtract) or loss (add) from rental real estate, royalties, partnerships, S corporations, and trusts. Each component of Schedule E (Form 1040) income (loss) reported on the first page of Form 1040 will be analyzed separately. This approach will help avoid complications that may arise if nondeductible losses occur. Line 9 Nonrecurring Unemployment Compensation: Nonrecurring unemployment compensation payments must be subtracted from Total Income. However, if it is typical for the borrower to be laid off seasonally (for example, a construction worker or landscaping laborer) do not subtract the reported amount from Total Income. Unemployment compensation must appear in two consecutive years of tax returns and must be relatively consistent. In addition, the borrower's current job must be subject to the same seasonally affected layoff. If these conditions do not exist, subtract the amount reported from Total Income. Line 10 Social Security Benefits: Determine the difference between the total and the taxable social security benefits paid to the borrower and add the calculated amount to Total Income. In addition, deduct any nonrecurring taxable benefits. Supporting documentation must be obtained (statement of benefits) to confirm the continuance of this income. Scheduled benefit payments must continue for a minimum of three years to be considered as qualifying income. The tax-exempt portion of this income can be grossed up according to the guidelines that address tax-exempt income. Line 11 Nonrecurring Other (Income) Loss: Subtract other income from the borrower's Total Income unless documentation can be obtained to verify that the receipt of the income will be consistent and on going (minimum of three years). Add back other losses to Total Income if documented to be nonrecurring. Adjustments to Income: Form 1040 allows for the reduction in Total Income for items such as IRA contributions, moving expenses, various expenses associated with self employment, and others. This worksheet begins with Total Income (Form 1040); therefore, an adjustment is not necessary for these items. Note however, that if the borrower is claiming an adjustment on Form 1040 for alimony paid, this obligation must be factored into the borrower's monthly debt payments to calculate the total debt-toincome ratio. Schedule A (Form 1040) Itemized Deductions A review of Schedule A will give the lender an indication of whether the borrower has owned real estate in the past and if there was a lien against a property (institutional or private). Interest paid on owneroccupied real estate and real estate taxes are itemized on Schedule A. Interest and real estate taxes paid on investment properties are reported on Schedule E (Supplemental Income and Loss). Unreimbursed employee expenses appear on Schedule A and indicate the borrower is subject to certain business expenses that must be factored in the analysis. The lender must obtain and examine Form 2106 if Schedule A indicates the presence of unreimbursed expenses. Form Employee Business Expenses Line 13 Total Expense: The borrower s unreimbursed expenses are reported on Form Subtract the reported amount from Total Income. Note that when the borrower recognizes "actual expenses" rather than using the "standard mileage rate," the lender must analyze the "actual expenses" section of the form checking for lease payments. Add back actual lease payments to ensure that the expense is recognized only once. 67

68 Line 14 Depreciation: If the borrower has claimed automobile depreciation on Form 2106, this expense should be added to the borrower's income. Vehicle depreciation can be calculated one of two ways by using the standard mileage deduction or actual depreciation expense. The method used by the borrower will be disclosed on the second page of Form If the borrower used the standard mileage deduction, multiply the business miles driven by the depreciation factor for the appropriate year and add the calculated amount to Total Income. If the borrower claimed the actual depreciation expense, add this amount to Total Income. Schedule B (Form 1040) Interest and Dividend Income Line 15 Nonrecurring Interest Income: Subtract nonrecurring interest income from Total Income. This includes interest income from assets used to complete the subject transaction. Document the existence of the accounts on which the interest is earned and confirm that the balances have not significantly decreased. Subtract any interest income from seller financed mortgages that have less than three years remaining in the contract or that is unstable because of delinquent repayment. (Note that the principal portion of installment payments received is reported in Schedule D and Form 6252 [Installment Sale Income]) Line 16 Nonrecurring Dividend Income: Document that the assets producing dividend income exist and are owned by the borrower. Deduct nonrecurring dividend income from Total Income. Schedule C (Form 1040) Profit or Loss from Business: Sole Proprietorship Line 17 Nonrecurring Other (Income) Loss/Expense: Other income reported on Schedule C represents income received that was not obtained from the profits of the business. Unless this income is documented and determined to be stable, consistent, and recurring, subtract all Other Income. Line 18 Depletion: Add back to Total Income any depletion reported on Schedule C. Line 19 Depreciation: Add back to Total Income any depreciation reported on Schedule C. Vehicle depreciation can be calculated one of two ways by using the standard mileage deduction or actual depreciation expense. If the borrower used the standard mileage deduction, multiply the business miles driven by the depreciation factor for the appropriate year and add the calculated amount to the borrower's cash flow. Line 20 Travel, Meals, and Entertainment: These expenses relate to the cost of business-related travel, meals, and entertainment and therefore the full amount of these expenses should be taken into account when determining the borrower's actual cash flow. A portion of these expenses is excluded for meals and entertainment, subtract this exclusion from Total Income. Line 21 Business Use of Home: Add to Total Income any expenses for business use of home. Line 22 Amortization/Casualty Loss: Amortization expenses are usually onetime costs that are distributed over a period of time and can therefore be added to Total Income. Casualty losses are typically nonrecurring, add them to Total Income. 68

69 Schedule D (Form 1040) Capital Gains and Losses Note that we negated Schedule D gains or losses earlier. Evaluate the consistency and likelihood of continuance of any gains or losses reported on Schedule D. Compare at least two consecutive years of Schedule D to determine whether or not the income or losses are recurring. Confirm the likelihood of continuance by obtaining documentation that supports the borrower's ownership of assets that will produce future gains or losses. Also, ensure that pass through income from Schedule K-1 is not included. Line 23 Recurring Capital Gains/Losses: Add recurring gains to Total Income and deduct recurring losses from Total Income. Form 4797 Sales of Business Property Line 24 Recurring Capital Gains/Losses: Add recurring gains to Total Income and deduct recurring losses from Total Income. Form 6252 Installment Sale Income Line 25 Principal Payments: Only gains, losses, and principal repayments are reported on this form (interest income is reported on Schedule B) and are carried forward to Schedule D and Form Schedule D gains or losses were negated in the first part of the analysis. Add principal payments to the borrower s income only when they are determined to be stable and recurring. Obtain a copy of the note or contract to verify that payments will continue for at least three years. Schedule E (Form 1040) Rent and Royalty Income Income or losses reported on Schedule E was initially negated in the first part of the analysis. In this section of the worksheet, determine to what extent income or losses from real estate rental activities and royalties can be included in the analysis. Income or losses from partnerships and S corporations, which are also included on Schedule E, will be addressed below. Line 26 Gross Rents and Royalties Received: Before analyzing the cash flow from rental properties, confirm that the borrower continues to own and rent all properties referenced in the schedule. Crossreference the schedule of real estate owned as reported on the mortgage application with those listed in Schedule E and with mortgage obligations appearing on the credit report. Add ongoing gross rents received to Total Income. If the borrower has listed royalty income, it should be verified as ongoing and consistent before including it as usable income. Add royalties received to the borrower's income when they are ongoing for three or more years. Line 27 Total Expenses before Depreciation: Subtract from gross rental income the total amount of expenses paid for property maintenance and upkeep. This includes all expenses reported on Schedule E except depreciation. The resulting calculation is the actual income from rental real estate activities. Line 28 Amortization/Casualty Loss/Nonrecurring Expenses: A borrower may occasionally claim amortization, casualty losses, or a one-time extraordinary expense, such as a new roof. When an amount is reported in Schedule E for these type expenses, add it back to Total Income. 69

70 Line 29 Insurance, Mortgage Interest, and Taxes: Add back the insurance, mortgage interest, and tax expenses reported on Schedule E when using the full PITI payment for all rental property to calculate the borrower's qualifying ratios. Confirm that PITI payments include all elements insurance, mortgage interest, and taxes. The initial step to negate Schedule E income or loss cancelled out the effect of depreciation, depletion, and passive loss limitations on cash flow, therefore no adjustment is required for either of these items. When using other cash flow worksheets that do not calculate actual losses, add depreciation and depletion expenses to the borrower's income. In addition, determine whether or not any properties were subject to passive loss limitations or used prior year unallowed losses. Prior year unallowed losses should be added back to cash flow and passive loss limitations should be subtracted. This step is not necessary, however, when using this worksheet. Schedule F (Form 1040) Profit or Loss from Farming Line 30 Non-taxable Portion Ongoing Coop and CCC Payments: Certain federal agriculture program payments, coop distributions, and insurance/loan proceeds are not fully taxable. Add the nontaxable portion of these income types to Total Income. However, caution should be exercised when including them. These sources of income may or may not be stable or continuous. Do not include any income that represents a one-time occurrence or is not stable. Line 31 Nonrecurring Other (Income) Loss: Other income reported on Schedule F represents income received by a farmer that was not obtained through farm operations. If this income cannot be documented to be stable, consistent, and recurring, subtract Other Income and add Other Losses from income. Line 32 Depreciation: Add any depreciation reported on Schedule F to Total Income. Line 33 Amortization/Casualty Loss/Depletion: Add amortization, casualty loss, and depletion expenses reported on Schedule F to Total Income. Line 34 Business Use of Home: Add expenses for business use of home, as reported on Schedule F, to Total Income. Partnership Schedule K-1 (Form 1065) Line 35 Ordinary Income (Loss): Subtract ordinary losses from the borrower s income. Add ordinary income from the Schedule K-1 to borrower s income only if: The business has positive sales and earnings trends; The business has adequate liquidity to support the withdrawal of earnings (Review the history of withdrawals shown in the analysis of partner's capital account on the first page of the Schedule K-1 to determine a history or pattern of prior withdrawals. Review the partnership's financial position and liquidity to determine the overall ability of the business to support the borrower's withdrawal of earnings.); and, The borrower can document ownership and access to the income through a partnership resolution. (A majority ownership position, as disclosed on the first page of Schedule K-1 and indicating a majority ownership of capital, will provide sufficient evidence.) 70

71 Line 36 Net Income (Loss): Add continuous and on-going income to the borrower's income if the three conditions listed above are met and the income is not reported elsewhere in the borrower's tax returns. (Note that portfolio income, such as interest, dividends, and royalties, listed on Schedule K-1 is reported elsewhere on the 1040, therefore no adjustment is required.) Subtract on-going losses from the borrower s income. Line 37 Guaranteed Payments to Partner: Add guaranteed payments to partner to the borrower's income when the borrower has at least a two-year history of having received them. S Corporation Schedule K-1 (Form 1120S) Line 38 Ordinary Income (Loss): Subtract any ordinary losses shown on Schedule K-1 from the borrower s income. Add ordinary income to the borrower's income only if The business has positive sales and earnings trends; The business has adequate liquidity to support the withdrawal of earnings (Review the history of distributions and the S corporation's financial position and liquidity to determine the ability of the business to support the borrower's withdrawal of earnings.); and, The borrower can document ownership and access to the income through a corporate resolution. (A majority ownership position, as disclosed on the first page of Schedule K-1 and indicating a majority ownership of capital, will provide sufficient evidence.) Line 39 Net Income (Loss): Add continuous and on-going income to the borrower's income if the three conditions listed above are met and the income is not reported elsewhere in the borrower's tax returns. (Note that portfolio income, such as interest, dividends, and royalties, listed on Schedule K-1, is reported elsewhere on the 1040, therefore no adjustment is required.) Subtract on-going losses from the borrower s income. Business Cash Flow: Partnerships, S Corporations, and Regular Corporations The lender must analyze business tax returns to determine whether income from a Partnership, S Corporation, or Regular Corporation can be used to qualify the borrower. The business must show a consistent pattern of profitability for the income to be used. Losses identified by the lender's analysis must be deducted from the borrower's income since they represent a drain on cash flow. Partnership Form 1065 A partnership's distributive earnings and losses are reported on Form 1065 for informational purposes only. The partnership does not pay taxes. Any income or loss is passed through to the partners, with their distributive shares being reported on Schedule K-1 (Form 1065). The borrower's share of ordinary (net) income or loss from a partnership has already been addressed in the evaluation of Schedule K-1 (Form 1065). The analysis of Form 1065 will enable the lender to consider certain adjustments to the ordinary income or losses reported on Schedule K-1. When analyzing Form 1065, only the partner's share of income or loss adjustments should be used to calculate income. The partner's share is based on his or her percentage of capital ownership as reported on the Schedule K-1. The worksheet provides for this calculation. 71

72 Line 40 - Passthrough (Income) Loss from Other Partnerships: Income and losses from these sources should generally not be recognized. In this case, the partnership is a partner in another partnership. Before any of this income can be used to qualify the borrower, additional documentation is needed to support distributions are being made to the borrower's partnership. In addition, the three conditions governing the use of K-1 income must be met relative to the partnership. In general, subtract ordinary income from other partnerships and add any ordinary losses from other partnerships. Line 41 - Nonrecurring Other (Income) Loss: Subtract other income or add other losses that are not consistent and recurring. Line 42 - Depreciation: Add depreciation to income. Line 43 - Depletion: Add depletion to income. Line 44 - Amortization/Casualty Loss: Add amortization or casualty loss to income. Line 45 - Mortgage or Notes Payable in Less than 1 Year: These obligations may significantly affect the financial operations of the business. Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1065, end of year column. If there is evidence that these liabilities regularly rollover and/or there are sufficient liquid business assets to cover them, no deduction is necessary. Line 46 - Meals and Entertainment Exclusion: Subtract the meals and entertainment exclusion reported on Schedule M-1 of Form 1065 from the business income. Line 47 Subtotal: Add/Subtract all amounts on lines 40 to 46 to determine the amount to be recorded on this line. Line 48 - Partnership Total: Multiply the subtotal (line 47) by the borrower's ownership share of the partnership. The borrower's share of ownership is based on his or her percentage ownership of capital (at end of year) as reported on the Schedule K-1. S Corporation Form 1120S Form 1120S represents an S corporation's distributive earnings and losses. This income or loss is reported for taxation purposes to the individual shareholders on Schedule K-1 (Form 1120S). The borrower's share of ordinary (net) income or losses from the business has already been addressed in the evaluation of Schedule K-1 (Form 1120S). The analysis of Form 1120S will enable a lender to consider certain adjustments to the ordinary income or losses reported on Schedule K-1. When analyzing Form 1120S, only the borrower's share of income or loss adjustments should be used to calculate income. The borrower's share is based on his or her percentage of stock ownership as reported on the Schedule K-1. The worksheet provides for this calculation. Line 49 - Nonrecurring Other (Income) Loss: Subtract other income or add other losses that are not consistent and recurring. Line 50 - Depreciation: Add depreciation to income. Line 51 - Depletion: Add depletion to income. Line 52 - Amortization/Casualty Loss: Add amortization or casualty loss to income. 72

73 Line 53 - Mortgage or Notes Payable in Less than 1 Year: These obligations may significantly affect the financial operations of the business. Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1120S, end of year column. If there is evidence that these liabilities regularly rollover and/or there are sufficient liquid business assets to cover them, no deduction is necessary. Line 54 - Meals and Entertainment Exclusion: Subtract the meals and entertainment exclusion reported on Schedule M-1 of Form 1120S from the business income. Line 55 Subtotal: Add/Subtract all amounts on lines 49 to 54 to determine the amount to be recorded on this line. Line 56 - S Corporation Total: Multiply the subtotal (line 55) by the borrower's percentage of stock ownership, as reported on the Schedule K-1. Corporation Form 1120 Line 57 - Taxable Income: The analysis of corporate income begins with Taxable Income as reported on the first page of Form (Note: Corporate earnings may be used to qualify a borrower only when the borrower can document 100% ownership of the business.) Line 58 - Total Tax: Corporations are required to pay taxes on earnings (unlike partnerships and S corporations). To determine the available cash flow from the business, subtract the corporation's tax liability from taxable income. Line 59 - Nonrecurring (Gains) Losses: Determine the likelihood of continuance and stability of capital gains and net gains or losses reported on the first page of Form Subtract nonrecurring gains from the corporation's income and add nonrecurring losses. Line 60 - Nonrecurring Other (Income) Loss: Subtract nonrecurring other income and add other nonrecurring losses. Line 61 - Depreciation: Add corporate depreciation to income. Line 62 - Depletion: Add corporate depletion to income. Line 63 - Amortization/Casualty Loss: Add corporate amortization or casualty loss to income. Line 64 - Net Operating Loss and Special Deductions: These deductions do not represent actual current expenses or losses. Therefore, add net operating loss and special deductions to the corporation s income. Line 65 - Mortgage or Notes Payable in Less than 1 Year: These obligations may significantly affect the financial operations of the business. Subtract the amount of mortgage or note obligations payable in less than one year, as reported in Schedule L of Form 1120, end of year column. If there is evidence that these liabilities regularly rollover and/or there are sufficient liquid business assets to cover them, no deduction is necessary. 73

74 Line 66 - Meals and Entertainment Exclusion: Subtract the meals and entertainment exclusion reported on Schedule M-1 of Form 1120 from the business income. Line 67 Subtotal: Add/Subtract all amounts on lines 57 to 66 to determine the amount to be recorded on this line. Line 68 - Subtotal Multiplied by Ownership Percentage: Multiply the subtotal (line 67) by the borrower's percentage of stock ownership, as reported on the Schedule E (Form 1120) or other independent source. Line 69 - Less: Dividends Paid to Borrower: Distributions (dividends) paid to stockholders are reported on Schedule M-2 of Form The borrower's share of these distributions will be reported on Schedule B (Form 1040). These funds are also included in the corporation's taxable income and are therefore being double counted. Therefore, subtract distributions paid by the corporation and reported on the borrower's Schedule B (Form 1040). Line 70 - Corporation Total: Line 68 less line 69 equals total corporation income. Year-to-date Income Analysis Year-to-date income from profit and loss statements may only be considered if the income and expenses are consistent with the previous year's performance. Any salaries or draws received by the borrower, as well as any adjustments used when analyzing tax returns, such as nonrecurring income and expenses, depreciation, and depletion, may be added to the business cash flow. Note, however, that these adjustments are limited to the borrower's proportionate share of ownership of the business. 74

75 OMB Control No Respondent Burden: 30 minutes LOAN ANALYSIS LOAN NUMBER PRIVACY ACT INFORMATION: The VA will not disclose information collected on this form to any source other than what has been authorized under the Privacy Act of 1974 or Title 5, Code of Federal Regulations for routine uses as (i.e., the record of an individual who is covered by this system may be disclosed to a member of Congress or staff person acting for the member when the request is made on behalf of the individual) identified in the VA system of records, 55VA26, Loan Guaranty Home, Condominium and Manufactured Home Loan Applicant Records, Specially Adapted Housing Applicant Records, and Vendee Loan Applicant Records - VA, published in the Federal Register. Your obligation to respond is required in order to determine the veteran's qualifications for the loan. RESPONDENT BURDEN: This information is needed to help determine a veteran's qualifications for a VA guaranteed loan. Title 38, USC, section 3710 authorizes collection of this information. We estimate that you will need an average of 30 minutes to review the instructions, find the information, and complete this form. VA cannot conduct or sponsor a collection of information unless a valid OMB control number is displayed. You are not required to respond to a collection of information if this number is not displayed. Valid OMB control numbers can be located on the OMB Internet Page at: If desired, you can call to get information on where to send comments or suggestions about this form. SECTION A - LOAN DATA 1. NAME OF BORROWER 2. AMOUNT OF LOAN 4. APPLICANT'S AGE $ SECTION B - BORROWER'S PERSONAL AND FINANCIAL STATUS 5. OCCUPATION OF APPLICANT 6. NUMBER OF YEARS AT 7. LIQUID ASSETS (Cash, PRESENT EMPLOYMENT savings, bonds, etc.) 3. CASH DOWN PAYMENT ON PURCHASE PRICE $ 8. CURRENT MONTHLY HOUSING EXPENSE $ $ 9. UTILITIES INCLUDED 10. SPOUSE'S AGE 11. OCCUPATION OF SPOUSE 12. NUMBER OF YEARS AT 13. AGE OF DEPENDENTS PRESENT EMPLOYMENT YES NO NOTE: ROUND ALL DOLLAR AMOUNTS BELOW TO NEAREST WHOLE DOLLAR SECTION C- ESTIMATED MONTHLY SHELTER EXPENSES (This Property) SECTION D - DEBTS AND OBLIGATIONS (Itemize and indicate by ( ) which debts considered in Section E, Line 40) (If additional space is needed please use reverse or attach a separate sheet) ITEMS ( ) ITEMS AMOUNT MO. PAYMENT UNPAID BAL. 14. TERM OF LOAN: YRS. 22. $ $ 15. MORTGAGE PAYMENT (Principal and % $ REALTY TAXES HAZARD INSURANCE SPECIAL ASSESSMENTS MAINTENANCE & UTILITIES OTHER (HOA, Condo fees, etc.) TOTAL 29. JOB RELATED EXPENSE (e.g., child care) $ 30. TOTAL SECTION E - MONTHLY INCOME AND DEDUCTIONS ITEMS SPOUSE $ $ BORROWER TOTAL 31. GROSS SALARY OR EARNINGS FROM EMPLOYMENT $ 32. FEDERAL INCOME TAX $ $ 33. STATE INCOME TAX 34. DEDUCTIONS RETIREMENT OR SOCIAL SECURITY 35. OTHER (Specify) TOTAL DEDUCTIONS $ $ NET TAKE-HOME PAY PENSION, COMPENSATION OR OTHER NET INCOME (Specify) $ 39. TOTAL (Sum of lines 37 and 38) $ $ $ 40. LESS THOSE OBLIGATIONS LISTED IN SECTION D WHICH SHOULD BE DEDUCTED FROM INCOME TOTAL NET EFFECTIVE INCOME LESS ESTIMATED MONTHLY SHELTER EXPENSE (Line 21) GUIDELINE 43. BALANCE AVAILABLE FOR FAMILY SUPPORT $ $ 44. RATIO (Sum of Items 15, 16, 17, 18, 20 and 40.. sum of Items 31 and 38) 45. PAST CREDIT RECORD 46. DOES LOAN MEET VA CREDIT STANDARDS? (Give reasons for decision under "Remarks," if necessary, e.g., borderline case) SATISFACTORY UNSATISFACTORY YES NO 47. REMARKS (Use reverse or attach a separate sheet, if necessary) $ % CRV DATA (VA USE) 48A. VALUE 48B. EXPIRATION DATE 48C. ECONOMIC LIFE YRS. SECTION F - DISPOSITION OF APPLICATION AND UNDERWRITER CERTIFICATION Recommend that the application be approved since it meets all requirements of Chapter 37, Title 38, U.S. Code and applicable VA Regulations and directives. Recommend that the application be disapproved for the reasons stated under "Remarks" above. The undersigned underwriter certifies that he/she personally reviewed and approved this loan. (Loan was closed on the automatic basis.) 49. DATE 50. SIGNATURE OF EXAMINER/UNDERWRITER 51. FINAL ACTION 52. DATE 53. SIGNATURE AND TITLE OF APPROVING OFFICIAL APPROVE APPLICATION VA FORM NOV REJECT APPLICATION EXISTING STOCKS OF VA FORM , SEP 2006, WILL BE USED. 75

76 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 9. How to Complete VA Form , Loan Analysis Change Date April 10, 2009, Change 10 This section has been updated to make minor grammatical edits. a. General In order to properly enter information on VA Form , Loan Analysis, the underwriter must understand and apply the guidelines provided in the preceding sections of this chapter. Self-explanatory items are not discussed in this section. b. Estimated Monthly Shelter Expenses Special instructions are listed in the following table. Item Special Instructions 16 If taxes are expected to increase, use the increased amount. 17 Include the flood insurance premium for properties located in special flood hazard areas. 18 If special assessments are anticipated, use the anticipated amount. 19 Calculate maintenance and utility costs using 14 per square foot. Example: A 1500 square foot home would have a combined maintenance and utility cost of $210 (1500sq X.14). 20 For condominiums or houses in a Planned Unit Development (PUD), include the monthly amount of maintenance assessment payable to the homeowner s association. If the assessment is less than the maximum provided in the covenants or master deed and it appears likely that the assessment will be insufficient for operation of the condominium or PUD, include the maximum amount the veteran could be charged. Continued on next page

77 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 9. How to Complete VA Form , Loan Analysis, Continued c. Debts and Obligations List all known debts and obligations of the applicant and spouse including any alimony and/or child support payments. Place a check mark in the ( ) column next to any significant debt or obligation. See the topic Analysis of Debts and Obligations in section 5 of this chapter, for an explanation of significant. Job Related Expense Include any costs for child care, significant commuting costs, and any other direct or incidental costs associated with the applicant s (or spouse s) employment. Check this item if total job-related expenses are significant. d. Item 33, Federal Income Tax Enter the applicant s estimated monthly Federal income tax. If the applicant has a MCC, reduce the Federal income tax by the estimated tax credit. Reference: See the topic Income Tax Credits from Mortgage Credit Certificates in section 3 of this chapter. e. Item 44, Balance Available for Family Support Enter the appropriate residual income amount from the following tables in the guideline box. Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly shelter expenses) to cover family living expenses such as food, health care, clothing, and gasoline. The numbers are based on data supplied in the Consumer Expenditures Survey (CES) published by the Department of Labor s Bureau of Labor Statistics. They vary according to loan size, family size, and region of the country. Special Instructions for Using Tables Count all members of the household (without regard to the nature of the relationship) when determining family size, including: an applicant s spouse who is not joining in title or on the note, and any other individuals who depend on the applicant for support. For example, children from a spouse s prior marriage who are not the applicant s legal dependents. Continued on next page

78 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 9. How to Complete VA Form , Loan Analysis, Continued e. Item 44, Balance Available for Family Support (continued) Special Instructions for Using Tables (continued) Exception: The lender may omit any individuals from family size who are fully supported from a source of verified income which, for whatever reason, is not included in effective income in the loan analysis. For example: a spouse not obligated on the note who has stable and reliable income sufficient to support his or her living expenses, or a child for whom sufficient foster care payments or child support is received regularly. Reduce the residual income figure (from the following tables) by a minimum of five percent if: the applicant or spouse is an active-duty or retired serviceperson, and there is a clear indication that he or she will continue to receive the benefits resulting from use of military-based facilities located near the property. Use five percent unless the VA office of jurisdiction has established a higher percentage, in which case, apply the specified percentage for that jurisdiction. A key to the geographic regions is listed in the following tables. Family Size Table of Residual Incomes by Region For loan amounts of $79,999 and below Northeast Midwest South West 1 $390 $382 $382 $425 2 $654 $641 $641 $713 3 $788 $772 $772 $859 4 $888 $868 $868 $967 5 $921 $902 $902 $1,004 over 5 Add $75 for each additional member up to a family of seven. Continued on next page

79 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 9. How to Complete VA Form , Loan Analysis, Continued e. Item 44, Balance Available for Family Support (continued) Family Size Table of Residual Incomes by Region For loan amounts of $80,000 and above Northeast Midwest South West 1 $450 $441 $441 $491 2 $755 $738 $738 $823 3 $909 $889 $889 $990 4 $1,025 $1,003 $1,003 $1,117 5 $1062 $1,039 $1,039 $1,158 over 5 Add $80 for each additional member up to a family of seven Key to Geographic Regions Used in the Preceding Tables Northeast Connecticut Maine Massachusetts New Hampshire New Jersey New York Pennsylvania Rhode Island Vermont Midwest South West Illinois Indiana Iowa Kansas Alabama Arkansas Delaware District of Columbia Florida Georgia Alaska Arizona California Colorado Michigan Minnesota Missouri Nebraska Kentucky Louisiana Maryland Mississippi North Carolina Oklahoma Hawaii Idaho Montana Nevada North Dakota Ohio South Dakota Wisconsin Puerto Rico South Carolina Tennessee Texas Virginia West Virginia New Mexico Oregon Utah Washington Wyoming Continued on next page

80 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 9. How to Complete VA Form , Loan Analysis, Continued f. Item 45, Debt-to-Income Ratio VA s debt-to-income ratio is a ratio of total monthly debt payments (housing expense, installment debts, and other debt) to gross monthly income. Add: Items = Debt Add: Items * = Income Divide: Debt Income = Debt-to-Income Ratio Round: To the nearest two digits The Debt-to-Income Ratio heading in section 10 of this chapter contains special procedures to apply if the ratio exceeds 41 percent. *Tax-free income may be grossed up for purposes of calculating the debtto-income ratio only (not residual income). This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan. Grossing up involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the taxexempt income. Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower s actual income. Do not add non-taxable income to taxable income before grossing up. Tax-free income includes certain military allowances, child support payments, workers compensation benefits, disability retirement payments, and certain types of public assistance payments. Verify that the income is indeed tax-free before grossing up. If grossing up is used, indicate such and provide the grossed up ratio in item 47, Remarks. g. Item 46, Past Credit Record Indicate whether the applicant (and spouse, if applicable) is a satisfactory or unsatisfactory credit risk based on a complete analysis of credit data

81 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 10. How to Analyze the Information on VA Form Change Date April 10, 2009, Change 10 This section has been updated to make minor grammatical edits. a. Residual Income VA s minimum residual incomes (balance available for family support) are a guide. They should not automatically trigger approval or rejection of a loan. Instead, consider residual income in conjunction with all other credit factors. An obviously inadequate residual income alone can be a basis for disapproving a loan. If residual income is marginal, look to other indicators such as the applicant s credit history, and in particular, whether and how the applicant has previously handled similar housing expense. Consider whether the purchase price of the property may affect family expense levels. For example, a family purchasing in a higher priced neighborhood may feel a need to incur higher-than-average expenses to support a lifestyle comparable to that in their environment, whereas a substantially lower priced home purchase may not compel such expenditures. Also consider the ages of the applicant s dependents in determining the adequacy of residual income. Continued on next page

82 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 10. How to Analyze the Information on VA Form , Continued b. Debt-to- Income Ratio VA s debt-to-income ratio is a ratio of total monthly debt payments (housing expense, installment debts, and so on) to gross monthly income. It is a guide and, as an underwriting factor, it is secondary to the residual income. It should not automatically trigger approval or rejection of a loan. Instead, consider the ratio in conjunction with all other credit factors. A ratio greater than 41 percent requires close scrutiny unless: the ratio is greater than 41 percent solely due to the existence of tax-free income (Put notation regarding the tax-free income in the loan file or calculate an adjusted, smaller ratio based on grossing up of the tax-free income.), or residual income exceeds the guideline by at least 20 percent. Loans Closed Automatically with Ratio Greater than 41 percent Include a statement justifying the reasons for approval, signed by the underwriter s supervisor, unless residual income exceeds the guideline by at least 20 percent. The statement must: not be perfunctory, or list the compensating factors justifying approval of the loan. c. Credit History A poor credit history alone is a basis for disapproving a loan. If credit history is marginal, look to other indicators such as residual income. Continued on next page

83 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 10. How to Analyze the Information on VA Form , Continued d. Compensating Factors Compensating factors may affect the loan decision. These factors are especially important when reviewing loans which are marginal with respect to residual income or debt-to-income ratio. They cannot be used to compensate for unsatisfactory credit. Valid compensating factors should represent unusual strengths rather than mere satisfaction of basic program requirements. For example, the fact that an applicant has sufficient assets for closing purposes, or meets the residual income guideline, is not a compensating factor. Valid compensating factors should logically be able to compensate (to some extent) for the identified weakness in the loan. For example, significant liquid assets may compensate for a residual income shortfall whereas longterm employment would not. Compensating factors include, but are not limited to the following: excellent credit history, conservative use of consumer credit, minimal consumer debt, long-term employment, significant liquid assets, sizable downpayment, the existence of equity in refinancing loans, little or no increase in shelter expense, military benefits, satisfactory homeownership experience, high residual income, low debt-to-income ratio, tax credits for child care, and tax benefits of home ownership. Continued on next page

84 VA Pamphlet 26-7, Revised Chapter 4: Credit Underwriting 10. How to Analyze the Information on VA Form , Continued e. Compare What Shelter Expenses will be to What Applicant Pays Now Closely scrutinize a case in which the applicant will be paying significantly higher shelter expenses than he or she currently pays. Consider the: ability of the applicant and spouse to accumulate liquid assets; such as cash and bonds, and amount of debts incurred while paying a lesser amount for shelter. If an application shows little or no capital reserves and excessive obligations, it may not be reasonable to conclude that a substantial increase in shelter expenses can be absorbed

85 Rules and Regulations Federal Register Vol. 78, No. 238 Wednesday, December 11, rmajette on DSK2TPTVN1PROD with RULES This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Parts 201, 203, 1005, and 1007 [Docket No. FR 5707 F 02] RIN 2502 AJ18 Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages AGENCY: Office of Secretary, HUD. ACTION: Final rule. SUMMARY: Through this final rule, HUD establishes a definition of qualified mortgage for the single family residential loans that HUD insures, guarantees, or administers that aligns with the statutory ability-to-repay criteria of the Truth-in-Lending Act (TILA) and the regulatory criteria of the definition of qualified mortgage promulgated by the Consumer Financial Protection Bureau (CFPB). The Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) created new section 129C in TILA, which establishes minimum standards for considering a consumer s repayment ability for creditors originating certain closed-end, dwelling-secured mortgages, and generally prohibits a creditor from making a residential mortgage loan unless the creditor makes a reasonable and good-faith determination of a consumer s ability to repay the loan according to its terms. Section 129C authorizes the agency with responsibility for compliance with TILA, which is CFPB, to issue a rule implementing these requirements, and the CFPB has issued its rule implementing these requirements. The Dodd-Frank Act also charges HUD and three other Federal agencies with prescribing regulations defining the types of loans that these Federal agencies insure, guarantee, or administer, as may be applicable, that are qualified mortgages. Through this rule, HUD complies with this statutory directive for the single family residential loans that HUD insures, guarantees, or administers. DATES: Effective Date: January 10, FOR FURTHER INFORMATION CONTACT: Michael P. Nixon, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 9278, Washington, DC 20410; telephone number , ext (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the Federal Relay Service at (this is a toll-free number). SUPPLEMENTARY INFORMATION: I. Executive Summary A. Purpose of the Regulatory Action This rule meets HUD s charge under TILA, as amended by the Dodd-Frank Act, to define, in regulation, the term qualified mortgage for the single family residential mortgages and loans that HUD insures, guarantees, or otherwise administers. While the CFPB, in accordance with statutory direction, has promulgated regulations that define qualified mortgage for the broader single family mortgage market, HUD, through this rule, promulgates regulations that define this term for HUD s single family insured or guaranteed mortgage programs. The statutory purpose of defining qualified mortgage, whether for the conventional mortgage market or for specific Federal programs, as specified in the Dodd-Frank Act, is to identify single family residential mortgages that take into consideration a borrower s ability to repay the loan and provide certain protections for the lender from liability. During the years preceding the mortgage crisis, too many mortgages in the conventional mortgage market were made to borrowers without regard to their ability to repay the loan and included risky features such as no doc loans or interest only loans. As a result, many homeowners defaulted on these loans and faced foreclosure, contributing to the collapse in the housing market in 2008 and leading to the Nation s most serious financial crisis since the Great Depression. In developing its definition of qualified mortgage, HUD reviewed its mortgage insurance and loan guarantee VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 programs and determined that all of the single family residential mortgage and loan products offered under HUD programs should be defined as qualified mortgages ; that is, they exclude risky features and are designed so that the borrower can repay the loan. For certain of its mortgage products, HUD establishes qualified mortgage standards similar to those established by the CFPB in its definition of qualified mortgage. HUD has always required lenders to determine a borrower s ability to repay a mortgage in its insured and guaranteed single family mortgage programs. With ability-to-repay and qualified mortgage standards now in place for conventional mortgage loans, HUD determined that all HUD loans should be qualified mortgages and it could adjust its existing standards to more closely align with the standards promulgated by the CFPB, lessening future differences in standards for HUD s single family residential insured mortgages and those governing conventional mortgages to be designated qualified mortgage, but maintaining standards that continue to support the mission of HUD s programs. B. Summary of the Major Provisions of the Regulatory Action In defining qualified mortgage in its rulemaking, the CFPB established both a safe harbor and a rebuttable presumption of compliance for transactions that are qualified mortgages. The label of safe harbor qualified mortgage applies to those mortgages that are not higher-priced covered transactions (that is the annual percentage rate does not exceed the average prime offer rate by 1.5 percent). These are considered to be the least risky loans and presumed to have conclusively met the ability-to-repay requirements of TILA. The label of rebuttable presumption qualified mortgage is applied to those mortgages that are higher-priced transactions. In this final rule, the definition of qualified mortgage, as provided in HUD s September 30, 2013, proposed rule, published at 78 FR 59890, is retained with certain clarifications and exceptions HUD is making in response to public comments. As proposed by HUD in the September 30, 2013, proposed rule, this final rule designates Title I (property improvement loans and manufactured home loans), Section

86 75216 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans covered by this rule as safe harbor qualified mortgages and no changes to the current underwriting requirements of these mortgage and loan products are made by this final rule. To this list, FHA adds manufactured housing insured under Title II of the National Housing Act (Title II) and clarifies that the Title I Manufactured Home Loan program is included in the Title I exemption. However, for its largest volume of mortgage products, those insured under Title II of the National Housing Act, with certain exceptions, HUD retains the two categories of qualified mortgages similar to the two categories created in the CFPB final rule a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage. HUD continues to exempt reverse mortgages insured under section 255 of Title II from the qualified mortgage definition. HUD has also added to the list of exempted transactions Title II insured mortgages made by housing finance agencies and certain other governmental or nonprofit organizations providing home financing under programs designed for low- and moderate-income individuals and families, and discussed in more detail later in this preamble. For the remaining Title II insured mortgages, this final rule, consistent with the proposed rule, defines safe harbor qualified mortgage as a mortgage insured under Title II of the National Housing Act that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR (e)(3), and that has an annual percentage rate for a first-lien mortgage relative to the average prime offer rate that is no more than the sum of the annual mortgage insurance premium and 1.15 percentage points. This final rule defines a rebuttable presumption qualified mortgage as a single family mortgage insured under Title II of the National Housing Act that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR (e)(3), but has an annual percentage rate that exceeds the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the sum of the annual mortgage insurance premium and 1.15 percentage points for a first-lien mortgage. HUD requires that all loans, subject to the exceptions noted, be insured under Title II of the National Housing Act and meet the CFPB s points and fees limit at 12 CFR (e)(3) in order to be either a rebuttable presumption or safe harbor qualified mortgage. The CFPB set a three percent points and fees limit for its definition of qualified mortgage and allowed for adjustments of this limit to facilitate the presumption of compliance for smaller loans. As more fully discussed in HUD s September 30, 2013, proposed rule, HUD establishes two categories of qualified mortgages for the majority of National Housing Act mortgages to maintain consistency with the TILA statutory criteria defining qualified mortgage, as well as the CFPB s definition, to the extent consistent with the National Housing Act. While the final rule makes no significant changes to HUD s proposed core definition of qualified mortgage, as noted above, HUD is making certain clarifications and exceptions. For example, commenters stated that compliance with HUD regulations would necessitate further and immediate system changes and that the lending industry lacked sufficient time to make such changes by January HUD clarifies that HUD s definition of safe harbor qualified mortgage incorporates CFPB s requirements for a safe harbor qualified mortgage under the special provision for loans insured under the National Housing Act while allowing for a higher APR threshold, so compliance with HUD regulations does not necessitate immediate industry changes for lenders to identify safe harbor qualified mortgages under HUD s definition by January In other words, compared to the CFPB s regulations, this rule allows more FHA mortgages to qualify as safe harbor qualified mortgages; every FHA loan that would have qualified as a safe harbor qualified mortgage under the CFPB regulations for loans insured under the National Housing Act would qualify as a safe harbor qualified mortgage under this HUD rule. Since the lending industry must comply with CFPB s regulations by January 2014, and were given a full year to prepare for compliance with the CFPB regulations, this clarification should ease concerns about additional immediate compliance costs and the need for additional time to comply with HUD s qualified mortgage regulations. C. Costs and Benefits HUD s final rule, in effect, reclassifies a sizeable group (about 19 percent) of Title II loans insured under the National Housing Act from rebuttable presumption qualified mortgages under the CFPB regulations to safe harbor qualified mortgages under HUD s regulation, less than one percent would remain a rebuttable presumption qualified mortgage. A small number (about 7 percent) of Title II loans would continue to not qualify as qualified mortgage based on their exceeding the points and fees limit, while the remaining FHA loans (about 74 percent) would qualify for qualified mortgage status with a safe harbor presumption of compliance with the ability to repay requirements under both the CFPB s rule and HUD s rule. The Title II loans that would be non-qualified mortgages under the CFPB s rule would remain non-qualified mortgage under the proposed rule. The difference is that HUD, through this rule, will no longer insure loans with points and fees above the CFPB level for qualified mortgage, but expects that most of these loans will adapt to meet the points and fees to be insured. In addition, HUD classifies all Title I, Title II manufactured housing and Section 184 and Section 184A insured mortgages and guaranteed loans as safe harbor qualified mortgages that would have most likely been non-qualified mortgages under the CFPB s rule. Classifying these programs as safe harbor recognizes the unique nature of these loans. For these programs, HUD believes that providing safe harbor status to these programs will not increase market share but instead maintain availability of these products to the underserved borrowers targeted, and allow HUD additional time to further examine these programs and whether they should be covered by a definition of qualified mortgage similar to the definition provided in this rule for Title II mortgages. As a result of these reclassifications, HUD expects the following economic impacts: rmajette on DSK2TPTVN1PROD with RULES VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 86

87 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations TABLE 1 SUMMARY OF ECONOMIC EFFECTS: CHANGING THE REBUTTABLE PRESUMPTION STANDARD FOR TITLE I, TITLE II, SECTION 184, AND SECTION 184A LOANS Effect Distribution Effect size Benefits: Lower legal costs through an increase in the number of safe harbor loans. Costs: Foregone benefits from ability-to-pay lawsuits through incremental decrease in rebuttable presumption loans. Operational costs through the programming of a new HUD standard. Transfers: Lower interest rates for FHA mortgages due to the increased legal benefits for lenders with the HUD rule vs. CFPB patch. Potential increase in the volume of loans due to greater legal benefits to lenders for HUD rule relative to CFPB patch. Potential increase in the net present value of premium revenues minus mortgage insurance claims. Lenders (transfers to borrowers via lower interest rates). Borrowers... Lenders (potential transfers to borrowers through increased loan costs for borrowers). Lenders to Borrowers... Borrowers to FHA... Borrowers to FHA... $12.2 to $40.7 million. Unquantified (the likelihood of such lawsuits has been reduced greatly by changes in lending practices stemming from the Dodd-Frank Act and the lawsuits initiated by Federal and State governments). De minimus. Unquantified but will be capped by legal benefits to lenders. Unquantified as this theoretical increase in volume is expected to be minimal. (The observable impact of both the CFPB patch and the HUD rule will be a decrease in volume relative to HUD volume of loans today). De minimus. TABLE 2 SUMMARY OF ECONOMIC EFFECTS: ELIMINATING THE POINTS AND FEE LIMIT FOR TITLE I, SECTION 184, SECTION 184A, AND TITLE II MANUFACTURED HOUSING LOANS [All designated as safe harbor qualified mortgages] Effect Distribution Size Benefits: Maintained Homeownership benefits for underserved populations as loans continue to be made. Borrowers (Indian and Native Hawaiian borrowers, home improvement and manufactured housing borrowers). Positive but unquantified. Under the CFPB patch, there could be a slight decrease in loans to these populations as lenders would be making non-qm loans that are nevertheless guaranteed/insured by HUD. Lower legal costs... Lenders... Positive but unquantified. Costs: Foregone benefits from ability-to-pay lawsuits... Borrowers... Unquantified but expected to be minimal (the likelihood of such lawsuits has been reduced greatly by changes in lending practices stemming from the Dodd-Frank Act and the lawsuits initiated by Federal and State governments). Transfers: Potential increase in the volume of loans through greater legal protection for HUD rule relative to CFPB patch. Potential increase in the net present value of premium revenues minus mortgage insurance claims. Borrowers to FHA... Borrowers to FHA... Unquantified but expected to be minimal. De minimus. rmajette on DSK2TPTVN1PROD with RULES II. Background As noted in the Summary of this preamble, it is the Dodd-Frank Act that charges HUD and other Federal agencies to define qualified mortgage for the single family residential loans that meet statutory ability-to-repay requirements. New section 129C(a) of TILA, added by section 1411 of subtitle B of Title XIV of the Dodd-Frank Act (Pub. L , 124 Stat. 1736, approved July 21, 2010), provides minimum standards for considering a consumer s ability to repay a residential mortgage. New section 129C(b), added by section 1412 of the Dodd-Frank Act, establishes the presumption that the ability-to-repay requirements of section 129C(a) are satisfied if a mortgage is a qualified mortgage, and authorizes, initially, the Federal Reserve Board and, ultimately, the CFPB, 1 to prescribe regulations that revise, add to, or subtract from the criteria in TILA that define a qualified mortgage. 1 On July 21, 2011, rulemaking authority under TILA transferred from the Federal Reserve Board to the CFPB. VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 Section 129C(b)(2)(A) defines qualified mortgage as a mortgage that meets the following requirements: (i) The transaction must have regular periodic payments; (ii) the terms of the mortgage must not result in a balloon payment; (iii) the income and financial resources of the mortgagor are verified and documented; (iv) for a fixed rate loan, the underwriting process fully amortizes the loan over the loan term; (v) for an adjustable rate loan, the underwriting is based on the maximum rate permitted under the loan during the 87

88 75218 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES first 5 years and includes a payment schedule that fully amortizes the loan over the loan term; (vi) the transaction must comply with any regulations established by the CFPB relating to ratios of total monthly debt to total monthly income; (vii) the total points and fees payable in connection with the loan must not exceed 3 percent of the total loan amount; and (viii) the mortgage must not exceed 30 years, except in specific areas. 2 New section 129C(b)(3)(B)(ii) of TILA, also added by section 1412 of the Dodd- Frank Act, requires that HUD, the Department of Veterans Affairs (VA), and the Department of Agriculture (USDA) prescribe rules in consultation with the Federal Reserve Board 3 to define the types of loans they insure, guarantee, or administer, as the case may be, that are qualified mortgages, and revise, add to, or subtract from the statutory criteria used to define a qualified mortgage. The CFPB published a final rule on January 30, 2013, at 78 FR 6408, entitled, Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z), which is referred to in this preamble as the CFPB final rule. The CFPB final rule implemented section 129C(b) by defining qualified mortgage with two degrees of protections for creditors and assignees of a qualified mortgage. The CFPB s regulations implementing section 129C(b) are codified at 12 CFR part The CFPB regulations establish both a safe harbor and a rebuttable presumption of compliance for transactions that are qualified mortgages. Under the CFPB s regulation, a qualified mortgage falls into the safe harbor category and is conclusively presumed to have met the ability-to- 2 Section 129C also provides for a reverse mortgage to be a qualified mortgage if the mortgage meets the CFPB s standards for a qualified mortgage except to the extent that reverse mortgages are statutorily exempted altogether from the ability-torepay requirements. The CFPB s regulations provide that the ability-to-repay requirements of section 129C(a) do not apply to reverse mortgages. In the preamble to its final rule published on January 30, 2013, the CPFB states: The Bureau notes that the final rule does not define a qualified reverse mortgage. As described above, TILA section 129C(a)(8) excludes reverse mortgages from the repayment ability requirements. See section-bysection analysis of (a)(3)(i). However, TILA section 129C(b)(2)(ix) provides that the term qualified mortgage may include a residential mortgage loan that is a reverse mortgage which meets the standards for a qualified mortgage, as set by the Bureau in rules that are consistent with the purposes of this subsection. The Board s proposal did not include reverse mortgages in the definition of a qualified mortgage. See 78 FR Rulemaking authority under TILA was transferred to the CFPB. repay requirements if it is not a higherpriced covered transaction. 4 A qualified mortgage that is a higherpriced covered transaction has only a rebuttable presumption of compliance with the ability-to-repay requirement, even though each element of the qualified mortgage definition is met. See 12 CFR (e)(1)(ii)(B). The CFPB s rule is intended to provide greater protection for borrowers by providing only a rebuttable presumption of compliance for higher-priced covered transactions. The preamble to HUD s September 30, 2013, proposed rule discussed the CFPB s qualified mortgage regulations in more detail. Members of the public interested in more detail about the CFPB s regulations may refer to the preamble of HUD s September 30, 2013, proposed rule (see 78 FR ) but more importantly should refer to the preamble to the CFPB s final rule published in the Federal Register on January 30, 2013, at 78 FR III. HUD s September 30, 2013, Proposed Rule In its September 30, 2013, proposed rule, HUD submitted for public comment regulations defining qualified mortgage for its insured and guaranteed single family loan programs. The covered programs consist of single family loans insured under the National Housing Act (12 U.S.C et seq.), and section 184 loans for Indian housing under the Housing and Community Development Act of 1992 (12 U.S.C. 1715z 13a) (Section 184 guaranteed loans) and section 184A loans for Native Hawaiian housing under the Housing and Community Development Act of 1992 (1715z 13b) (Section 184A guaranteed loans). Of these programs, the single family loans insured under Title II of the National Housing Act (12 U.S.C et seq.) (Title II) present the largest volume of mortgages insured by HUD, through FHA. In the September 30, 2013, proposed rule, HUD proposed to define all FHAinsured single family mortgages to be qualified mortgages, except for reverse 4 A higher-priced covered transaction is a transaction that has an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, or by 3.5 or more percentage points for a subordinate-lien covered transaction. 5 Various provisions of CFPB s January 2013, final rule were amended by rules published in the Federal Register on June 13, 2013, at 78 FR 35430, July 24, 2013, at 78 FR 44686, July 30, 2013, at 78 FR 45842, October 1, 2013, at 78 FR 60382, and October 23, 2013, at 78 FR VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 mortgages insured under HUD s Home Equity Conversion Mortgage (HECM) program (section 255 of the National Housing Act (12 U.S.C. 1715z 20)), which are exempt from the ability-torepay requirements. Mortgages insured under the Title I Property Improvement Loan Insurance program and Manufactured Home Loan program (Title I), authorized by section 2 of the National Housing Act (12 U.S.C. 1703), and Section 184 guaranteed loans and Section 184A guaranteed loans, would be designated safe harbor qualified mortgages, with no specific points and fees limits and with no annual percentage rate (APR) limits. See 78 FR and Similar to the CFPB s regulations, HUD proposed to provide for two types of qualified mortgages for FHA Title II mortgages: (1) A safe harbor qualified mortgage and (2) a rebuttable presumption qualified mortgage. For the Title II mortgages, HUD proposed to modify the APR limit used in the higher-priced covered transaction element as defined by the CFPB to distinguish between HUD s safe harbor qualified mortgages and rebuttable presumption qualified mortgages. For Title II mortgages, HUD proposed to add a new to its regulations in 24 CFR part that would require, through the proposed definition of qualified mortgage, all FHA-insured single family mortgages, except for HECMs, to be qualified mortgages. HUD proposed to incorporate the safe harbor and rebuttable presumption standards within the definition of a qualified mortgage rather than create subsets based on defining whether a mortgage is a higher-priced covered transaction, as provided in the CFPB s regulations. HUD also proposed to adopt the CFPB s points and fees limitations at 12 CFR (e)(3). HUD advised, in the proposed rule, that it considered the adoption of the points and fees limit as established by statute and adopted by the CFPB in its final rule to be appropriate. 7 HUD s proposed rule defined safe harbor qualified mortgage for Title II mortgages as one that meets the requirements for insurance under the National Housing Act, meets the CFPB s points and fees limit, and has an APR for a first-lien mortgage relative to the average prime offer rate (APOR) that 6 All single family mortgages insured by FHA under the National Housing Act are governed by regulations in 24 CFR part 203 except for property improvement and manufactured home loans under Title I and the HECM program. 7 As noted in the proposed rule, HUD s upfront mortgage insurance premium (UFMIP) is not included in the points and fees. 88

89 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES does not exceed the combined annual mortgage insurance premium (MIP) and 1.15 percentage points. HUD s proposed definition of safe harbor qualified mortgage for Title II mortgages provides a different APR relative to APOR threshold than under the CFPB s regulation. The APR relative to APOR threshold is higher than CFPB s and fluctuates according to the product s MIP. The CFPB s construct for determining a higher-priced covered transaction captured a number of FHA loans as a result of the MIP which HUD believes needs to be addressed. As provided in the preamble to HUD s proposed rule, because all FHA-insured mortgages include a MIP that may vary from time to time to address HUD s financial soundness responsibilities, including the MIP as an element of the threshold that distinguishes safe harbor from rebuttable presumption allows the threshold to float in a manner that allows HUD to fulfill its responsibilities that would not be feasible if HUD adopted a threshold based only on the amount that APR exceeds APOR. As noted in the proposed rule, if a straight APR over APOR threshold were adopted by HUD, every time HUD would change the MIP to ensure the financial soundness of its insurance fund and reduce risk to the fund or to reflect a more positive market, HUD would also have to consider changing the threshold APR limit. HUD also provides for a higher overall APR relative to APOR to remove the impact of the MIP on the designation of safe harbor qualified mortgage and rebuttable presumption qualified mortgage definitions. In the September 30, 2013, proposed rule, HUD proposed to define a rebuttable presumption qualified mortgage for Title II mortgages as a single family mortgage that is insured under the National Housing Act, does not exceed the CFPB s limits on points and fees, and has an APR that exceeds the APOR for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual MIP and 1.15 percentage points for a firstlien mortgage. HUD s proposed rule provided that a mortgage that meets the requirements for a rebuttable presumption qualified mortgage would be presumed to comply with the ability to repay requirements in 15 U.S.C. 1639c(a). The proposed rule further provided that any rebuttal of such presumption of compliance must show that despite meeting the rebuttable presumption qualified mortgage requirements, the mortgagee did not make a reasonable and good-faith determination of the mortgagor s repayment ability at the time of consummation when underwriting the mortgage in accordance with HUD requirements. In the September 30, 2013, proposed rule, HUD proposed to require FHA streamlined refinances to comply with HUD s qualified mortgage rule; that is, to require streamlined refinances to meet the points and fees requirements. Section 129C(a)(5) of TILA grants HUD the authority to exempt streamlined refinancing from the income verification requirements of section 129C(a)(4), subject to certain conditions. In the proposed rule, HUD advised that it did not consider it necessary to exercise this authority because HUD s qualified mortgage definition results in an exemption similar to the one contemplated under section 129C(a)(5). HUD requirements only exempt lenders from verifying income if the loan is originated consistent with the FHAstreamlined refinancing requirements, which means that the mortgage must be current, the loan is designed to lower the monthly principal and interest payment, and the loan involves no cash back to the borrower except for minor adjustments. 8 HUD s proposed rule provided a detailed description of the policy and factors that HUD considered in developing a definition of qualified mortgage for the mortgages that it insures, guarantees, or otherwise administers. HUD is not repeating such description in the preamble to this final rule, and refers interested parties to the preamble of the September 30, 2013, proposed rule, for more detailed information about the proposed rule choices. IV. This Final Rule As noted earlier in this preamble, HUD retains its core definition of qualified mortgage, as provided in the September 30, 2013, proposed rule. However, in response to public comments, HUD makes certain clarifications and provides certain exemptions to compliance with HUD s qualified mortgage regulations in this final rule. Changes to the regulatory text made by this final rule and certain clarifications are as follows: Compliance timeframe. As HUD notes in greater detail in the responses to public comments below, this rule should allow lenders to make the same number of insured safe harbor qualified mortgages, using systems they have 8 Handbook , Ch. 6, Sec. C (Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit Mortgage Loans Streamline Refinances) program_offices/administration/hudclips/ handbooks/hsgh/ VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 already been putting in place, than if HUD had taken no action. By taking the action of issuing this rule, HUD also provides an opportunity for lenders to modify their systems further on their own timetable to take full advantage of the potential increase in the number of insured safe harbor qualified mortgages allowed by this rule. HUD expects in accordance with a lender s own timetable and allocation of resources a lender will update its systems to increase the number of HUD-insured safe harbor qualified mortgages so to track any future revisions to HUD s MIP. Designation of manufactured home mortgages as FHA safe harbor qualified mortgages. HUD designates mortgages on manufactured homes insured under Title I and Title II to be safe harbor qualified mortgages with no changes, at this time, to the underwriting requirements for this category of housing. HUD s proposed rule was silent on the treatment of Title II manufactured housing, but HUD s intention was to exempt Title II manufactured housing mortgages from meeting the points and fees requirements of HUD s definition of qualified mortgage. HUD s designation of Title I loans as safe harbor qualified mortgages was also meant to encompass not only the Title I property improvement loans but also the Title I Manufactured Home Loan program. Similar to HUD s approach to Title I, HUD insurance of manufactured housing under Title II is a specialized product that necessitates further study. Transactions exempted from compliance with HUD s qualified mortgage definition. HUD is exempting certain mortgage transactions from compliance with HUD s qualified mortgage definition, which means that unlike all other FHA-insured mortgages, these mortgages are not subject to the requirements in (b). These exemptions are the same exemptions provided by the CFPB in its regulations (see 12 CFR (a)(3)). In exempting some of these transactions, the CFPB stated that the institutions involved in these transactions employ a traditional model of relationship lending that did not succumb to the general deterioration in lending standards that contributed to the financial crisis, they have particularly strong incentives to maintain positive reputations in their communities, and they often keep the loans they make in their own portfolios in order to pay appropriate attention to the borrower s ability to repay the loan. Therefore, consistent with the CFPB, HUD exempts from compliance with its definition of qualified mortgage the following insured mortgages: 89

90 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations (1) A reverse mortgage subject to 12 CFR ; (2) a temporary or bridge loan with a term of 12 months or less; (3) a construction phase of 12 months or less of a construction-to-permanent loan; (4) a mortgage made by: (a) A housing finance agency (HFA), as defined in HUD s regulations at 24 CFR 266.5; (b) a creditor designated as a Community Development Financial Institution, as defined in the regulations of the Department of Treasury s Community Development Financial Institutions program at 12 CFR (h); (c) a creditor designated as a Downpayment Assistance through Secondary Financing Provider, pursuant to HUD s regulations in 24 CFR (a), operating in accordance with HUD regulations as applicable to such creditors; (d) a creditor designated as a Community Housing Development Organization provided that the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME Investment Partnerships (HOME) program, pursuant to HUD s regulations at 24 CFR (a); (e) a creditor with a tax exemption ruling or determination letter from the Internal Revenue Service under section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3); 26 CFR 1.501(c)(3) 1), provided that: (i) During the calendar year preceding receipt of the consumer s application, the creditor extended credit secured by a dwelling no more than 200 times; (ii) during the calendar year preceding receipt of the consumer s application, the creditor extended credit secured by a dwelling only to consumers with income that did not exceed the low- and moderate-income household limit as established pursuant to section 102 of the Housing and Community Development Act of 1974 (42 U.S.C. 5302(a)(20)) and amended from time to time by HUD pursuant to HUD s regulations at 24 CFR 570.3; (iii) the extension of credit is to a consumer with income that does not exceed the household limit specified in the applicable FHA program; and (iv) the creditor determines, in accordance with written procedures, that the consumer has a reasonable ability to repay the extension of credit; and (5) an extension of credit made pursuant to a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5211; 5219). All of these mortgages were exempt by the CFPB from compliance with its ability to repay regulations and HUD agrees that the single family mortgages with which these governmental and nonprofit organizations are involved, many under HUD programs as noted above, should be exempt from compliance with HUD s qualified mortgage regulations while otherwise meeting HUD requirements. Adoption of the CFPB s guidance definitions for APR, APOR, and points and fees. For purposes of clarity, this final rule adopts, through crossreference, the CFPB s definitions of APOR, APR, and points and fees. The CFPB defines APOR at 12 CFR , APR at , and points and fees at 12 CFR (b)(1). In addition to these definitions, the CFPB provides guidance for APR calculations in Appendix J to 12 CFR part 1026; guidance for points and fees is provided in Paragraph 32(b) of CFPB s Official Interpretation, which is Supplement I to 12 CFR part 1026; and guidance for APOR is provided in Paragraph 35 of Supplement I to 12 CFR part HUD adopts this guidance for consistency with the CFPB. Adoption of CFPB s definition of points and fees and clarification on non-affiliated fees. HUD clarifies the points and fees calculation that applies in this final rule by incorporating the CFPB s points and fees definition at 12 CFR (b). In adopting the CFPB s points and fees definition, HUD clarifies for commenters that housing counseling fees and rehabilitation consultant fees under HUD s 203(k) program may be excluded from points and fees if made by a third-party and is not retained by the creditor, loan originator, or an affiliate of either. HUD-approved housing counseling for borrowers seeking FHA-insured mortgages, whether such counseling is voluntary or required, is not part of the points and fees calculation. HUD-approved housing counseling agencies are not permitted to be affiliated with either a creditor or loan originator and, therefore, fees that were paid for counseling would be exempt from the points and fees calculation for the transaction. Additionally, exempt from the points and fees calculation are consultant fees for ensuring program compliance and for drafting the required architectural exhibits for the 203(k) program by nonaffiliated entities. HUD requires the use of a HUD consultant to ensure 203(k) program compliance and strongly encourages the use of an independent VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 consultant to prepare the required architectural exhibits. Both types of consultation fees, if obtained by nonaffiliated entities on the 203(k) consultant list, are not included in the points and fees calculation, and therefore adoption of the CFPB points and fees definition should not reduce access to the 203(k) program Clarification of the rebuttable presumption standard. HUD amends the rebuttable presumption standard to clarify the elements of such standard are consistent with HUD s existing underwriting requirements for rebutting the presumption. The proposed rule stated that to rebut the presumption a borrower must prove that the mortgage exceeded the points and fees limit in paragraph (b)(1) of this section or that, despite the mortgage being insured under the National Housing Act, the mortgagee did not make a reasonable and good-faith determination of the mortgagor s repayment ability at the time of consummation, by failing to consider the mortgagor s income, debt obligations, alimony, child support, monthly payment on any simultaneous loans, and monthly payment (including mortgage-related obligations) on the mortgage, as applicable to the type of mortgage, when underwriting the mortgage in accordance with HUD requirements. HUD adopted the list of the CFPB s factors (mortgagor s income, debt obligations, alimony, child support, monthly payment on any simultaneous loans, and monthly payment) to remain consistent with the CFPB s rebuttable presumption standard, but intended those factors to harmonize with HUD s existing underwriting requirements. In response to commenters, HUD believes listing HUD s specific underwriting categories is more helpful than solely citing to the list provided by the CFPB. HUD replaces the CFPB s list with FHA s income, credit and assets underwriting categories, found in FHA s Underwriting Handbook. Additionally, HUD clarifies that the entity is required to do more than consider the list of ability to repay indicators for the borrower, but evaluate the mortgagor s income, credit, and assets in accordance with HUD underwriting requirements. Clarification of relationship between indemnification and qualified mortgage status. HUD adds at this final rule stage a section clarifying that a demand for indemnification or the occurrence of indemnification does not per se remove qualified mortgage status. The final rule includes an indemnification clause for both Title I and Title II loans, which clarifies that an indemnification demand or resolution 90

91 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES of a demand that relates to whether the loan satisfied relevant eligibility and underwriting requirements at time of consummation may result from facts that could allow a change in qualified mortgage status, but the existence of an indemnification does not per se remove qualified mortgage status. Flexibility to respond to lender or borrower needs consistent with the FHA mission. HUD also adds language to its qualified mortgage regulations to give FHA flexibility to make adjustments, including to the points and fees definition and the list of exempted transactions, that may be necessary to address situations where the FHA Commissioner determines such adjustments are necessary, including in times of significant decrease of available credit, increase in foreclosures, or disaster situations that adversely affect the availability of housing finance. The changes would provide for notice and the opportunity for comment prior to implementing any changes, and HUD contemplates that changes made through this notice process would be temporary not permanent changes. For example, the housing mortgage crisis that emerged late in 2008 resulted in mortgage products designed to keep homeowners from losing their homes. These mortgage products were largely temporary without a permanent regulatory structure. In a situation such as this, the notice process provided in this rule would allow the Commissioner to determine whether such products would be subject to FHA s qualified mortgage definition or be exempt. The notice process would not, however, apply to the rebuttable presumption/ safe harbor thresholds in (b)(2) and (3). In the preamble to the September 30, 2013, proposed rule, HUD committed to further study the parameters for distinguishing between a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage for the Title I, Section 184 and Section 184A loans, and makes this same commitment for Title II loans that are subject to HUD s qualified mortgage regulations in this final rule. HUD will monitor how the two subsets of qualified mortgages work for FHA Title II loans subject to these regulations, primarily in relationship to the two subset approach provided for the conventional mortgage market. Given current and expected MIPs, HUD also reiterates that a mortgage that is a safe harbor qualified mortgage under the CFPB s special rules for HUD loans as a safe harbor qualified mortgage would satisfy HUD s regulations. V. HUD s Responses to Key Issues Raised by Public Commenters This section of the preamble discusses the key issues raised by the comments submitted in response to the September 30, 2013, proposed rule. All public comments can be viewed at the following Web site, under docket number HUD Comment: Delay implementation of HUD s rule: The majority of commenters expressed support for HUD s proposed rule but the majority also stated that an implementation date of January 2014 was too soon and would not allow sufficient time for lenders to modify their systems to include the specific features of HUD requirements for qualified mortgages. Commenters stated that industry would find it extremely challenging to be ready to originate loans without a robust compliance infrastructure in place. Commenters suggested that if HUD is intent in implementing qualified mortgage regulations by January 2014, HUD should do so through a staged approach. Commenters suggested that HUD begin with all HUD insured and guaranteed single family mortgages being designated as safe harbor qualified mortgages and provide for implementation of HUD rebuttable presumption qualified mortgages at a later date. Another commenter requested that HUD withdraw its rule until HUD had taken more time to assess the impacts of its proposed rule. Response: HUD understands that the lending industry may need more time to adjust systems to fully implement HUD s qualified mortgage regulations. However, HUD considers that all lenders will be in a position to substantially implement HUD s regulations immediately because of system modifications that were already required under CFPB s regulations and which lenders have been given a full year to implement. If HUD had taken no action at all, lenders making FHAinsured loans that are qualified mortgages would have to have systems in place to account for loans that (1) have regular periodic payments and do not have certain risky features, (2) do not exceed a term of 30 years, and (3) do not exceed certain specified limits on points and fees. HUD s rule is not changing any of these requirements and, therefore, no system changes to address any of these requirements because of HUD s rule should be necessary. Further, systems that lenders have put in place to identify safe harbor qualified mortgages under the CFPB s 1.5 percent APR threshold should also identify the VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 substantial majority of safe harbor qualified mortgages under HUD s APR threshold. A loan that meets the 1.5 percent threshold will also be in compliance with the HUD threshold. Only HUD safe harbor loans that exceed the 1.5 percent threshold would not be picked up by such systems. Thus, lenders are no worse off under HUD s rule in terms of making safe harbor qualified mortgages, using systems already required to be in place, than they would be if HUD had taken no action. To the extent that lenders take steps to conform their systems to identify the higher APR safe harbor threshold allowed under the HUD rule, they will be better off in terms of making safe harbor qualified mortgages than they would have been if HUD had taken no action. The HUD rule provides an immediate opportunity for lenders to increase the number of HUD-insured safe harbor qualified mortgages they make in accordance with a timetable and allocation of resources of their choosing, but HUD does not consider it necessary for any lender to change systems immediately to adapt to HUD s requirements in order to make the same number of insured safe harbor qualified mortgages as a lender would otherwise make. Comment: Unnecessary to establish two types of qualified mortgages for FHA loans: Designate all FHA loans as safe harbor qualified mortgages to reduce burden and costs: Commenters stated that bifurcation between qualified mortgage safe harbor loans and qualified mortgage rebuttable presumption loans under CFPB s rule is intended to provide greater protection for borrowers with higher-priced mortgage loans. The commenters stated that unlike the CFPB s rule, which governs the wider market of private prime and higherpriced lending, HUD s rule covers only FHA loans. The commenters stated that this protection is unnecessary in the context of FHA loans, which are subject to strict oversight, control, and regulation. Commenters stated that FHA s sound underwriting process ensures consumer access to safe mortgage loans and the recent steps FHA has undertaken to strengthen its underwriting standards have reduced risks. A commenter similarly stated that its view is that there are safeguards and practices in place, unique to FHA lending and its mission, to lessen the need to copy the CFPB s two-tiered qualified mortgage approach and HUD should instead classify all FHA loans as safe harbor qualified mortgages. The commenter stated that other than a desire to mirror the CFPB s final rule, 91

92 75222 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES HUD s proposed rule provides no basis that such a distinction is needed for the FHA market. The commenter stated that HUD acknowledges (in the costs and benefits discussion of the preamble to the proposed rule) that the vast majority of FHA loans will meet the proposed safe harbor parameters; and for most of those that do not, it would be attributable to the limit on points and fees. The commenter stated that this suggests that there are no market indications that the two-tiered approach is warranted. Another commenter stated that HUD defended its proposal to adopt the same points/fees measure for FHA-insured loans as the CFPB qualified mortgage final rule on the basis that it would not give a lender an incentive to choose on the basis of a different (and perhaps higher) points/fees measure for FHAinsured loans. The commenter stated that HUD should consider the potential loss of additional price, product, and service choices for the borrower that might be reduced by the use of a different qualified mortgage standard. A few commenters stated that FHA s mission is to correct, not create, market failure. The commenter stated that HUD s proposed rule establishes a materially different qualified mortgage standard for FHA insured mortgages than the CFPB qualified mortgage standard for conventional mortgage loans. The commenters stated that HUD seems to rely upon an overly expansive mission justification for creating a different qualified mortgage rule than the one established by the CFPB. The commenters stated that to the extent the mission of FHA is to ensure credit access to under-served people, such a distinction may be appropriate, but that the great majority of FHA-insured lending in recent years has been related to a different purpose, which is to provide backstop countercyclical liquidity in a housing market decline. The commenters stated this countercyclical activity is not discussed in the proposed rule, so it is unclear how this activity relates to the mission justification cited. The commenter stated that substantially different qualified mortgage rules distort markets and delay the return of FHA to its primary mission. Commenters stated that HUD s proposed qualified mortgage structure for FHA loans adds significant regulatory burden and cost to the lender and borrower. Commenters stated that differentiating safe harbor from rebuttable presumption loans for only 3 percent of the current FHA market would require extensive system changes, staff training and monitoring and compliance systems, which will be an expense that saddles the 97 percent of FHA borrowers, whereas, treating all loans as safe harbors will present little compliance cost or regulatory burden. The industry is already burdened with extensive and significant changes that are estimated to increase origination costs. Response: HUD s position is that in addition to prospective borrowers of FHA-insured mortgages the overall mortgage market benefits from FHA loans being closely aligned with the statutory criteria applicable to a borrower s ability to repay, and the regulations promulgated by the CFPB. Section 1402 of the Dodd-Frank Act states that Congress created new section 129C of TILA upon a finding that economic stabilization would be enhanced by the protection, limitation, and regulation of the terms of residential mortgage credit and the practices related to such credit, while ensuring that responsible, affordable mortgage credit remains available to consumers. 9 Section 1402 of the Dodd- Frank Act further states that the purpose of section 129C of TILA is to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans. The CFPB, in its regulations, distinguishes between a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage based on whether the mortgages are prime loans (safe harbor) or subprime loans (rebuttable presumption). 10 Although section 129C(b)(3)(B)(ii) of TILA authorizes HUD to revise, add to, or subtract from the statutory criteria used to define a qualified mortgage in defining qualified mortgage for the mortgages that HUD insures, guarantees or otherwise administers, HUD respects the analysis that the CFPB undertook in defining qualified mortgage for the conventional mortgage market, and sees value in having a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage as established in regulation by the CFPB. HUD s regulation differs from the CFBP s regulation in distinguishing between the two types of qualified mortgages for FHA Title II mortgages based on the mortgage s APR. HUD incorporates the APR as an internal element of HUD s definition of qualified mortgages to distinguish safe harbor qualified mortgages from the rebuttable presumption qualified mortgages. The CFPB s higher-priced covered 9 See TILA section 129B(a)(1), 15 U.S.C. 1639b(a)(1). 10 See 78 FR VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 transaction is an external element that is applied to a single definition of qualified mortgage. As proposed in HUD s September 30, 2013, proposed rule, HUD s safe harbor qualified mortgage provides a different APR relative to APOR threshold than the CFPB s requirement that a first-lien covered transaction have an APR of less than 1.5 percentage points above the APOR. Under this final rule, for a Title II FHA mortgage to meet the safe harbor qualified mortgage definition, the mortgage is required to have an APR that does not exceed the APOR for a comparable mortgage by more than the combined annual mortgage insurance premium (MIP) and 1.15 percentage points. HUD adopts the higher APR to remediate the fact that some FHA loans would fall under the CFPB s higherpriced covered transaction as a result of the MIP. The MIP by itself should not be the factor that determines whether a loan is a higher-priced transaction. Because all FHA-insured mortgages include a MIP that may vary from time to time to address HUD s financial soundness responsibilities, including the MIP as an element of the threshold that distinguishes safe harbor from rebuttable presumption allows the threshold to float in a manner that allows HUD to fulfill its responsibilities that would not be feasible if HUD adopted a threshold based only on the amount that APR exceeds APOR. If a straight APR over APOR threshold were adopted by HUD, every time HUD would change the MIP to ensure the financial soundness of its insurance fund and reduce risk to the fund or to reflect a more positive market, HUD would also have to consider changing the threshold APR limit. In addition to the benefit of having a construct similar to the CFPB s construct, HUD expects that a rebuttable presumption category could place downward pressure on the APRs of FHA mortgages. This downward pressure would result in transfers from some FHA lenders to some FHA borrowers, and would also provide social benefits (more sustainable homeowners due to lower rates) in the aggregate. These transfers from lenders arise from legal protections they receive from achieving safe harbor rather than rebuttable presumption status under the HUD rule. Moreover, HUD, through proposing its own rebuttable presumption standard keeps conventional lenders from sending loans to HUD to take advantage of what would otherwise be no APR threshold and forces conventional lenders to keep APR within the limit for the CFPB s standard or HUD s standard for safe harbor. For example, a 92

93 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES consumer who applies for a higher risk conventional loan may not meet the CFPB s qualified mortgage on the basis of high points and fees, or if the points and fees are reduced to 3 percent, the APR may become too high for safe harbor under the CFPB rules. However, the consumer might instead be offered a higher interest rate FHA loan in return for lower points and fees, and the lender could achieve qualified mortgage with safe harbor status as an FHA loan with a very high APR in the absence of an FHA rebuttable presumption standard. Additionally, HUD believes that the loans that require a higher APR should be treated with more caution and borrowers should retain the right to challenge on ability-to-repay grounds. HUD s rule attempts to strike a balance between providing lenders legal protections and providing borrowers with access to redress when a loan is more risky. HUD carefully reviewed the public comments requesting that HUD adopt a single standard a safe harbor standard, but for the reasons presented in this response and in the preamble to HUD s September 30, 2013, proposed rule, HUD maintains that this is the right approach. Comment: Designate all FHA loans rebuttable presumption qualified mortgages: A few comments opposed the establishment of a safe harbor for most FHA loans. The commenters stated that the proposed rule provides less protection to consumers than the CFPB s rule. The commenters expressed concern that a consequence would be the reemergence of abusive FHA lending. The commenters stated that a rebuttable presumption means that a homeowner can hold a lender to the basic promise of the CFPB s rule, which is that lenders will reasonably assess a person s ability to afford a loan before that loan is made. A commenter stated that only a rebuttable presumption standard can provide consumers with the legal protection needed to preempt unforeseen predatory practices. Another commenter stated that those who support a safe harbor emphasize the additional cost associated with a rebuttable presumption. The commenter stated that an examination of the structure of TILA and the litigation facts associated with claims under TILA makes clear these claims are unfounded. The commenter stated that TILA s preexisting general rules on liability already carefully calibrate the interests of the industry and its customers, and are applicable even where there is a rebuttable presumption for ability-topay claims. The commenter disputed that there are substantial legal costs associated with defending rebuttable presumption loans. The commenter stated that most homeowners will not have counsel to seek redress, the remedy is circumscribed, the amount of proof is substantial and the objective amount of litigation in this area is very small. The commenter urged HUD to look behind claims of substantial compliance costs associated with a rebuttable presumption. Response: HUD disagrees that that the inclusion of a safe harbor qualified mortgage, as opposed to making all FHA-insured loans rebuttable presumption mortgages, will result in abusive FHA lending. The inclusion of a safe harbor qualified mortgage offers lenders an incentive to make qualified mortgages while maintaining the borrower protections required by the Dodd-Frank Act. HUD further notes that a safe harbor qualified mortgage is not exempt from any legal challenge. A borrower can continue to file a legal claim against a lender if the borrower finds or believes that the lender did not meet statutory or regulatory requirements applicable to a mortgage. However, for a safe harbor mortgage, the bar in challenging a lender meeting ability to repay requirements will be higher. Additionally, the borrower benefits from lower loan costs because lender s face lower legal risk with a safe harbor qualified mortgage and, as a result, the lender does not need to build in the cost of the higher legal risk associated with a rebuttable presumption loan. HUD believes, therefore, that the loans labeled safe harbor have met the ability-to-repay requirements and that HUD s structure, that is consistent with CFPB s structure, is appropriate for FHA-insured loans. Comment: HUD s adoption of the CFPB s points and fees features will adversely affect the FHA mortgage market and reduce available credit for the very populations FHA was established to serve: Commenters stated that HUD s cap on points and fees will destroy the lending options for the exact group FHA and HUD were intended to assist. Commenters stated that lenders are not likely to adapt to meet the points and fees requirements to insure the loan, but instead the points and fees threshold will result in preventing some borrowers from obtaining loans. Commenters requested that HUD increase the 3 percent limit on points and fees to ensure that low- and moderate-income borrowers can continue to access a variety of affordable loan products. A commenter expressed support for protecting borrowers from excessive and unnecessary fees, but stated that the VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 proposed cap was too low and could make ineligible for FHA-insurance many responsibly underwritten loans that are in the borrowers best interest. A few commenters stated that HUD s adoption of points and fees is contrary to other FHA actions. The commenters stated that HUD is returning to an age where discount points were controlled and limitations were placed on origination points and this is contrary to action taken by FHA a year ago when FHA decided to deactivate the 1% ceiling to what was prudent and customary in our region. Another commenter stated that HUD should exclude MIP from the points and fees calculation. Response: In developing the September 30, 2013, proposed rule, HUD gave careful consideration to the percentage limit that should be placed on points and fees. The 3 percent points and fees limit is one of the statutory criteria used to define a qualified mortgage, and the CFPB retained this criterion in its regulatory definition with adjustments to facilitate the presumption of compliance for smaller loans. HUD considers the proposed adoption of the points and fees limit, as established by statute and adopted by the CFPB in its rule, to be appropriate for FHA Title II loans that HUD has identified as subject to its qualified mortgage definition. In this final rule, HUD has clarified the points and fees are applicable to FHA-approved lenders by adopting, through cross-reference, the CFPB s definition of points and fees. Included in the definition is the exclusion of any premium or other charge imposed in connection with any Federal or State agency program for any guaranty or insurance that protects the creditor against the consumer s default or other credit loss. 12 CFR (b)(1)(i)(B). As stated in the preamble to HUD s September 30, 2013, proposed rule, HUD s practice prior to this rule was that points and fees would be individually negotiated. 11 Although HUD has not established a firm cap for points and fees for HUD-insured mortgages, they have been limited to reasonable and customary amounts not to exceed the actual costs of specific items and reasonable and customary charges as may be approved by the Federal Housing Commissioner (see 24 CFR (a)). As stated in HUD s September 30, 2013, proposed rule, as the market 11 Generally, the term points refers to points charged against interest so that a higher up-front payment results in a lower interest rate or vice versa. 93

94 75224 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES adopts the CFPB s 3-percent cap on points and fees for qualified mortgages, FHA lenders would be required to cap points and fees at about 3 percent, as a result of HUD s existing reasonable and customary standard. However, if HUD simply maintained its existing reasonable and customary standard for FHA lenders, FHA lenders would be forced to determine if charging an amount a little over 3-percent points and fees would mean the loan is a qualified mortgage, which could result in higher litigation costs to prove that the loan was a qualified mortgage based solely on whether the points and fees of the loan were reasonable and customary. By HUD adopting the cap of 3- percent points and fees, lenders would not be forced to determine what is reasonable and customary, thereby, providing certainty in the market and setting a clear enforcement standard. Many commenters argued for a bright line test and the points and fees cap adopted from CFPB accommodates that request. Additionally, the 3-percent points and fees cap is consistent with the conventional market s qualified mortgage definition and adopting the same will provide consistency for FHA lenders. HUD believes that if it did not adopt the same 3-percent points and fees caps for the majority of HUD s portfolio FHA could see an increase of market share. With respect to concerns about loss of access to mortgage credit by low- and moderate-income borrowers that FHA has traditionally served, HUD submits that the exemption of certain transactions from compliance with HUD s qualified mortgage definition (transactions made on behalf of entities with missions similar to HUD which assist low- and moderate-income borrowers in obtaining homeownership financing) helps ensure that low- and moderate-income borrowers can continue to access a variety of affordable loan products. HUD also takes the opportunity at the final rule stage to clarify that HUD-approved housing counseling fees and rehabilitation consultant fees that are required by HUD and provided by non-affiliated entities are third party charges, and as such, would not be included in points and fees under the CFPB s exemption of bona fide third-party charges at 24 CFR (b)(1)(i)(D). 12 HUD also adds language to its qualified mortgage regulations to give 12 Exceptions to this exemption include when the charge is for a guaranty or insurance that is not in connection with any Federal or State agency program, is a real-estate related fee, or is a premium or other charge for insurance for which the creditor is the beneficiary. 12 CFR (b)(1)(i)(D). FHA flexibility to make any adjustments to the points and fees calculation where the FHA Commissioner determines such adjustments are necessary. Comment: The inclusion of mortgage broker s and affiliate s fees in the cap on point and fees limits consumer choice and makes it difficult for small lenders and mortgage brokers to compete in the mortgage market: Several commenters stated that HUD s rule will limit the number of lenders who can offer mortgage products to borrowers. The primary objection was the inclusion of mortgage broker fees or affiliate fees in the points and fees cap in the CFPB s definition of points and fees. Commenters stated that applying the 3 percent points and fees cap to mortgage brokers creates a distinct and unfair competitive advantage to the banks and large lenders. Commenters stated that the points and fees cap limit adversely impacts lenders with affiliates without apparent reason. Commenters stated that the 3 percent cap is too low, and makes it unprofitable for lenders and brokers to engage in mortgage business. The commenters stated that, by including compensation paid by a creditor to any loan originator other than an employee (e.g., a mortgage brokerage company or a lender acting as a mortgage broker) in the points and fees calculation, nondepository direct lenders and other bank owned companies are given a distinct and arguably unfair competitive advantage over those in the wholesale channel. The commenters stated that the retail lender can build compensation into its loan, where the broker and a direct lender cannot, by effect making a double-standard. Commenters stated that inclusion of the lender-paid compensation in the 3 percent cap will all but eliminate broker participation in small loans. The adverse treatment of affiliated fees has a disproportionate effect on lower dollar transactions, and consequently, the availability of lower dollar mortgages will be somewhat limited, which goes against the mission of FHA lending. One commenter stated that it is important to remember that the largest third-party fee, often provided by an affiliated title agent, is title insurance. The commenter stated that the cost for title insurance to the consumer does not vary from title agent to title agent whether there is or is not an affiliation because agents are bound by their title insurance underwriter s filed rates for the state where the property is located. The commenter stated that the title agent charges the rate filed by the underwriter. Nonetheless, the current definition would include the title VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 insurance charge in the points and fees if the title agent is an affiliate. One commenter stated that in place of the inclusion of mortgage broker s and affiliate s fees in the cap on points and fees, HUD could limit adverse selection by including in its regulation that any lender participating in the FHA program may not pay or compensate a loan originator or broker differently for originating an FHA loan than any other loan type, through any compensation mechanism, whether such compensation is paid directly or indirectly to the originator. Response: HUD recognizes that this issue, which was raised in the CFPB s rulemaking on the definition of qualified mortgage, remains an issue among industry commenters. This issue was discussed by CFPB in the preamble to its January 2013 final rule. CFPB responded to comments submitted on the May 11, 2011, proposed rule of the Federal Reserve Board, which had initial responsibility for proposing regulations to implement section 129C of TILA, 13 As explained by the CFPB in the preamble to the final rule, TILA, as amended by the Dodd-Frank Act, contemplates that compensation paid to mortgage brokers and other loan originators after consummation of a loan transaction is to be counted toward the points and fees threshold. The CFPB noted that the Dodd-Frank Act removed the phrase payable at or before closing from the high-cost mortgage points and fees test and did not apply the payable at or before closing limitation to the points and fees cap for qualified mortgages. See 78 FR 6432 and sections 103(bb)(1)(A)(ii) and 129C(b)(2)(A)(vii), (b)(2)(c) of TILA. The CFPB stated that in light of evident concern by Congress with loan originator compensation practices, it would not be appropriate to waive the statutory requirement that loan originator compensation be included in points and fees, but that the CFPB would provide detailed guidance to clarify what compensation must be included in points and fees. See 78 FR Additionally, CFPB stated that throughout the Dodd-Frank Act amendments Congress made clear that affiliate fees should be treated the same way as fees paid to loan originators. See 78 FR Given the detailed response that CFBP provided in its rule on this issue, the submission of these same comments in response to HUD s rulemaking does not adequately rebut CFPB s justification for the differing treatment, which focuses on potential competition issues. At this final rule stage, HUD will not take a position that differs from that taken by 94

95 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES the CFPB, which was based on direction from Congress that loan origination compensation and affiliated fees are to be included in points and fees. HUD needs time to examine this issue further, and see whether HUD has discretion to take action that differs from the position taken by CFPB and whether a departure from CFPB on this issue would be in the interest of promoting HUD s mission. Comment: Failure to meet the point and fee structure disqualifies a loan from insurance and requires a more careful analysis: Commenters stated that if HUD will not insure non-qualified mortgages, HUD s regulation should provide for adjustment of the points and fees limits for lower balances. One of the commenters expressed support for a higher percentage for lower balance loans and wrote that the threshold of 3 percent for FHA becomes a problem at the $100,000 range. The commenter recommended amending the cap to allow loans between $100,000 and $150,000, up to $4,500 in points and fees. The commenter stated that the additional rate would more accurately reflect the fixed costs of originating these smaller balance loans, and avoid the denial of loans to otherwise qualified FHA borrowers. Another commenter stated that HUD s rule provides that a failure to meet the points and fees limit and for any of the qualified mortgage requirements not only disqualifies a loan from qualified mortgage status but also disqualifies a loan from qualifying for FHA insurance. The commenter stated that if FHA does go in this direction it is important for FHA to ensure that qualified mortgage requirements are appropriately adjusted in light of their role as program requirements. The commenter urged HUD to adjust the points and fees limit for lower balance FHA-insured loans. Another commenter stated that, as a result of only being able to originate qualified mortgage loans lenders will likely leave the market place and that will disproportionately hurt underserved populations. Response: As addressed above, HUD believes aligning with the CFPB s limit on points and fees is appropriate. TILA section 129C(b)(2) defined the points and fees limit for a qualified mortgage at 3 percent and tasked the CFPB to come up with adjustments to the limit for smaller loans. The CFPB analyzed the differences between loan amounts to determine that a $100,000 loan cap was the appropriate place to limit the definition for a smaller loan for the points and fees threshold. See 78 FR HUD does not currently have data on points and fees to determine whether a different threshold would be appropriate for defining smaller loans for FHA loans. HUD needs time to examine this issue further, and determine whether HUD has discretion to take action that differs from the position taken by CFPB and whether a departure from CFPB on this issue would be in the interest of promoting HUD s mission. Comment: Capping points and fees is irrelevant to a borrower s ability to repay a mortgage: A few commenters stated that capping points and fees does not have a direct connection to whether a borrower can repay a mortgage loan. A commenter stated that the APOR and APR have nothing to do with the actual ability of the borrower to repay the loan. Response: The 3 percent points and fees limit is one of the statutory criteria used to define a qualified mortgage. As the CFPB noted in the preamble to its January 2013 final rule, Congressional intent in amending TILA was not solely to require lenders to take the necessary steps to try and ensure that a borrower can repay a residential mortgage loan but that a qualified mortgage is a products with limited fees and safe features which preserves the availability of affordable credit to consumers. See the CFPB s final rule at 78 FR Comment: Replace HUD s proposed 1.15 percentage point with the CFPB s 1.5 percentage point: Several commenters recommended that HUD s safe harbor APR standard for FHA be adopted with the standard 1.5 percentage point in place of the proposed 1.15 percentage point. The commenters stated that such a change would bring consistency with the CFPB s regulation, reduce confusion in the lending community, and broaden the scope of loans that meet the safe harbor definition. Other commenters stated that this structure will more adequately address the needs of lowand moderate-income borrowers, borrowers from underserved areas, and minority borrowers. A commenter stated that adopting the 1.5 percentage point ratio would allow lenders more flexibility to offer lender credits to help first time and underserved buyers without exceeding the qualified mortgage limits. A commenter questioned HUD s basis for the APR for FHA safe harbor s to exceed the APR of the CFPB s safe harbor standard. The commenter stated that HUD s first justification seems to rest on lower lender compliance costs and lower litigation costs which will pass on savings to borrowers. The commenter stated that the second factor that HUD points to is the perceived need to allow its APR to APOR spread rate to float with the MIP rate. The VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 commenter stated that the overall purpose of Dodd-Frank ability-to-repay requirements, of which the CFPB and HUD qualified mortgage rules are subsets, is to strike a balance between providing lenders with legal protection when making relatively safe loans that the borrower reasonably can be expected to repay, and providing borrowers with appropriate legal recourse when lenders do not do so. The commenter stated that while HUD s mission to facilitate lending to traditionally underserved borrowers is relevant here, so too must be preserving the legal rights of borrowers where lenders fail to meet their obligations to ensure the borrower s reasonable ability to repay the loan. The commenter further stated that while the inclusion of the MIP may be a legitimate concern it can be included within the calculation already provided by the CFPB s safe harbor definition. Response: As stated in HUD s September 30, 2013, proposed rule, and accompanying regulatory impact analysis, HUD s qualified mortgage standard increases the number of FHAinsured mortgages that are safe harbor. As provided in the proposed rule and maintained in this final rule, FHA s MIP is explicitly included in the APR to APOR spread calculation but the limit on the spread itself, prior to the addition of the MIP, is reduced from 150 basis points (in the CFPB final rule) to 115 basis points (in HUD s rule). The inclusion of the MIP and the reduction in basis points results in a reduction of the pool of FHA-insured mortgages that would be designated rebuttable presumption under the CFPB s standard while increasing the number of FHAinsured mortgages that would be designated safe harbor. As noted in the regulatory impact analysis that accompanied HUD s September 30, 2013, proposed rule, HUD estimated that there were 129,500 (about 19 percent) FHA-insured mortgages (with relatively high APRs) insured between July 2012 and December 2012 that would have been rebuttable presumption under the CFPB s qualified mortgage standard but qualify as safe harbor qualified mortgages under HUD s regulation. If HUD adopted a basis point metric higher than 115 percent plus MIP more loans would be designated safe harbor. HUD s analysis shows that adoption of a higher initial basis point, such as 150 percent, would result in only a few additional loans being designated a safe harbor qualified mortgage, but that the loans that would are the ones that HUD believes would receive greater benefit from having 95

96 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations access to the protections afforded a rebuttable presumption loan. Therefore, HUD maintains that the 115 basis points plus MIP is the appropriate standard. HUD reiterates that the compliance mechanisms to identify a safe harbor qualified mortgage under the special rules for HUD loans will similarly identify a safe harbor qualified mortgage for FHA insured loans under HUD s final rule. Comment: Provide a clear distinction between safe harbor and rebuttable presumption: Some commenters expressed support for HUD s proposal to adopt an APR relative to the APOR that accounts for the annual MIP. Other commenters, however, requested that HUD clarify how the threshold between FHA s safe harbor qualified mortgage and rebuttable presumption would work, specifically what the MIP is and how it is to be incorporated. The commenters stated that it is not entirely clear how lenders would combine the annual MIP with 1.15% to calculate the FHA safe harbor threshold. The commenters stated that it appears that HUD intends the lender to calculate the sum of the annual MIP rate and 1.15% (e.g., = 2.50) and then determine whether the loan s APR exceeds the applicable APOR by that amount. Several commenters suggested that the distinction between an FHA safe harbor qualified mortgage and a rebuttable presumption qualified mortgage should be keyed to a bright line standard, not a rate cut-off that incorporates a floating MIP component. The commenters stated that HUD should consider moving from a floating threshold incorporating any of several MIP premiums to the CFPB standard of 150 bps with the addition of 135 bps to reflect the maximum MIP for FHA loans, or 285 bps over APOR. The commenters stated that this standard would be pegged to the CFPB threshold and FHA s maximum MIP going forward so it could be adjusted as needed for all loans but it would not float or vary depending on the individual loan. The commenter stated that this approach has the benefit of employing a widely known and widely programmed standard the CFPB threshold between safe harbor and rebuttable presumption loans. The commenter stated that taking such an approach would especially be helpful for smaller lenders, as the rule would be simpler and consequently less costly. It will also negate the necessity for the HUD to change its qualified mortgage rule every time FHA changes its maximum allowable MIP. Another commenter recommended that HUD establish a fixed threshold of 2.5 percentage points, which would include the annual MIP at approximately 135 basis points. The commenter stated that FHA loans would receive the safe harbor if the loan APR is no more than the 2.5 percentage points. The commenter stated that this would alleviate the complexities of complying with a fluctuating MIP. Commenters stated that clear standards without a floating component will simplify lender implementation as well as compliance oversight and accountability. Other commenters encouraged HUD to adopt a simpler approach that uses a single percentage point amount (while still taking the MIP into consideration), similar to the CFPB s approach. A commenter stated that it will be hard for lenders to know when to use the FHA standard and when to use the CFPB standard. A simpler approach that is also consistent with the CFPB s qualified mortgage regulations would minimize confusion and make it easier for both lenders and the FHA to oversee. Another set of commenters, however, stated that allowing the threshold for an FHA safe harbor qualified mortgage to potentially fluctuate in relation to the MIP could result in errors by lenders attempting to comply with the HUD s requirements. Some of the commenters stated that when a change in the threshold were to occur, then a certain period of time would be required to amend policies and procedures, re-program hardware and software systems, and re-train staff on the new threshold requirements and calculations. Several commenters suggested that HUD should provide at least 6 months advance notice prior to the effective date of any MIP change. Commenters also stated that industry needs more clarity and guidance from HUD about how the changes to MIP rates will be instituted going forward. Similar to comments pertaining to points and fees, a commenter recommended that the APR over APOR calculation, if retained, should increase for lower balance loans that have fixed costs. A commenter stated that, specifically, for loans between $100,000 and $150,000, an additional 50 basis points spread should be added to CFPB s points and fees basis of 150 basis points (1.5 percent) resulting in a standard of 200 basis points over the APOR, plus the MIP; and for loans below $100,000, a further additional 50 basis points spread should be added to the CFPB s points and fees basis of 150 basis points resulting in a standard of 250 basis points over the APOR, plus the MIP. The commenter stated that this tiered system would prevent many otherwise qualified FHA borrowers from VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 being denied a loan because of the inability of a lender to meet the APOR standard in the proposed rule. One commenter suggested that HUD grant safe harbor designation to FHA loans that receive approval through FHA s TOTAL Scorecard. Related to this comment, another suggested that HUD update FHA s Total Scorecard system to allow lenders to use the FHA system, rather than their own, to determine at the front end if a loan qualifies as a safe harbor or rebuttable presumption qualified mortgage. Another commenter stated that a clear distinction between an FHA safe harbor qualified mortgage and an FHA rebuttable presumption qualified mortgage can be achieved by establishing a clear definition for each term. The commenter stated that HUD should define safe harbor qualified mortgages as loans with APRs equal to or less than APOR + 115bps + on-going MIP, and define rebuttable presumption qualified mortgages as loans with an APR greater than APOR basis points (bps) + on-going MIP. Similar to this comment, another commenter stated that it is essential that HUD s qualified mortgage rule define the applicable MIP. Response: HUD s qualified mortgage standard is structured to recognize FHA s mission to serve a population that is somewhat riskier than the market in general and that the cost of providing mortgage insurance to this population is higher as well. This is accomplished by including FHA s MIP in the calculation. Without such accommodation, a high share of FHA-insured mortgages would be considered higher-priced covered transactions and, under the CFPB s standard, would be designated as rebuttable presumption qualified mortgages. As discussed in the regulatory impact analysis that accompanied HUD s proposed rule, under the CFPB s qualified mortgage regulations, a portion of FHA-insured mortgages would not qualify as qualified mortgages based on their exceeding the points and fees limit in the CFPB s regulation. As the regulatory impact analysis stated, a larger portion would be designated as qualified mortgages under the CFPB s regulation, but about 20 percent would only meet the CFPB s standard as a rebuttable presumption qualified mortgage. These FHA-insured mortgages would not qualify for safe harbor status under CFPB s regulations because of the 150 basis point limitation on the spread between APR and APOR, in large part because this spread for FHA-insured mortgages includes FHA s annual MIP 96

97 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES that is currently135 basis points for most loans. HUD recognizes concerns of some commenters that a standard which is tied to FHA s MIP, resulting in a floating threshold, may cause operational difficulties and delay the ability of lenders to comply with FHA s qualified mortgage standards. As HUD stated in the preamble to its proposed rule, if a straight APR over APOR threshold were adopted by HUD, in lieu of inclusion of the MIP, then every time FHA changes the MIP, for purposes of ensuring the financial soundness of its insurance fund and reducing risk to the fund or to reflect a more positive market, FHA would also have to consider changing the threshold APR limit. This would be a less dynamic approach than that proposed by HUD in its September 30, 2013, proposed rule. HUD believes that the qualified mortgage standard proposed in the September 30, 2013, proposed rule and adopted as final in this rule will be, when systems have been adjusted, easy to administer, and HUD is providing the time for lenders to adjust their systems. Again, a mortgage that would be designated a safe harbor qualified mortgage under the special rules for eligible loans under the National Housing Act in the CFPB s regulations receives the same designated under HUD s definition if insured by HUD. Comment: The APOR is not an appropriate metric: A few commenters stated that the APOR is not the appropriate metric for FHA to use to determine what constitutes a baseline for the safe harbor/rebuttable presumption distinction, and that an APOR, derived from the Freddie Mac Primary Mortgage Market Survey (PMMS), is not the best metric for determining the dichotomy for FHA. The commenter stated that The PMMS index contains only conventional conforming loans; no government insured loans are included. Additionally, in recent quarters the PMMS has fallen well below [the Mortgage Bankers Association] survey rates, at times by as much as 20 basis points. The commenter suggested additional study on what is the most useful index for FHA loans. Response: The Dodd-Frank Act provides for use of the APOR in calculating points and fees and has been adopted by the CFPB in its qualified mortgage regulation. As HUD stated in its September 30, 2013, proposed rule and in this rule, it is HUD s objective to establish qualified mortgage standards that align to the statutory ability-torepay criteria of TILA and the regulatory criteria of the CFPB s qualified mortgage standard to the extent feasible without departing from FHA s statutory mission. HUD recognizes that the APOR is a rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics, and that the representative sample may not include government-insured loans. However, as a result of the ability-to-repay requirements and enhanced consumer protections of the Dodd-Frank Act, the differences between conventional mortgage products and the government mortgage products are lessened. Comment: Clarify the APR and APOR calculation: A commenter stated that HUD s final rule should specify the APR being examined. The commenter asked HUD to clarify that the APR is the actual APR on the loan and not the high cost APR calculation used for purposes of Section 32 High Cost testing. The commenter also stated that the final rule should clarify the effective date of the APOR to be used for testing. The commenter asked whether or not this is the APOR in effect at the time the lock is set (which is consistent with the Section 32 High Cost and Section 35 higher-priced mortgage loans (HPML) testing), or HUD expects the test to use the APOR in effect at the time of case number assignment, or some other time frame. The commenter also asked that HUD s final rule clarify that if the APR is calculated to three or more places, HUD will require a specific rounding or truncation method for the purposes of this test. The commenter asked, for instance, if the APR is and the APOR is would the difference between them be calculated at 3.36 (the result truncated) or would the result be (the result using standard rounding)? Response: As noted earlier in this preamble, the final rule adopts the CFPB s definition of APR and APOR, and therefore the CFPB s guidance on the determination of each of these rates is applicable to FHA s qualified mortgage regulation. The CFPB provides detailed guidance on each of these calculations. Appendix J to the CFPB s regulations in 12 CFR part 1026 provides guidance on the APR computations for closed-end credit transactions. The guidance notes that the CFPB s regulation at 12 CFR (a) provides that the APR for other than open-end credit transactions shall be determined in accordance with either the actuarial method or the United States Rule method, and provides that Appendix J contains an explanation of the actuarial method as VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 well as equations, instructions and examples of how this method applies to single advance and multiple advance transactions. Supplement I (Official Interpretations) to the CFPB s part 1026 regulations, provides guidance on calculation of APOR, under the heading for Section By following the CFPB with respect to the APR and APOR calculations, HUD eliminates any inconsistency between APR/APOR calculations to be undertaken by FHAapproved lenders originating FHA qualified mortgages and lenders originating conventional qualified mortgages in accordance with the CFPB s regulations. Comment: Exclusion of debt-toincome could increase the number of riskier borrowers coming to FHA a residual income test should be included: The majority of commenters, commenting on debt-to-income (DTI) limits, stated that HUD s proposal to use its existing underwriting and income verification requirements and to not adopt the CFPB s 43 percent total monthly debt-to-income ratio requirements is the right approach. The commenters stated that HUD s underwriting standards have historically been the industry bench mark for documenting a consumer s ability to repay a mortgage debt. A commenter stated that a fixed DTI would only further limit credit availability especially to borrowers living in high-cost underserved communities. Another commenter stated that HUD s decision to not include a DTI limit in its qualified mortgage regulations could increase the number of riskier credit quality borrowers to the FHA in an origination environment where conventional loans must meet the more stringent CFPB qualified mortgage standard. The commenter stated that this result is inconsistent with HUD s stated goal to foster private market, not FHA, activity as steps are taken to reduce Fannie Mae and Freddie Mac s position in the market. Other commenters stated that adoption of a residual income test would substantially improve the sustainability of FHA lending, particularly for low-income borrowers. The commenter stated that it understands that the purposes of FHA differ from those of the CFPB and the adoption of the DTI requirement would likely restrict opportunities for credit for many of the FHA constituencies specifically mentioned in its statute. The commenter urged HUD to work with the Department of Veterans Affairs and the CFPB to develop a residual income test that would be uniform 97

98 75228 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES across these agencies. The commenter stated that such a test, clear and easily integrated into automated systems, would permit good loans to be made to FHA s constituencies at DTIs of 43 percent or higher. The commenter stated that if such a rule were also adopted by the CFPB, then all loans above DTIs or 43 percent would not flow to FHA, thereby satisfying another accepted public policy goal. Response: HUD appreciates the commenters suggestions about a residual income test that would be adopted by all agencies, and this may well be something to further examine. For this final rule, HUD retains the approach provided in the proposed rule. However, HUD will add this issue to HUD s plan for retrospective review of regulatory actions. 14 Comment: Treat certain other loans similarly to proposed treatment of Title I and Sections 184 and 184A loans: The majority of commenters expressed support for HUD s decision to designate all Title 1, Section 184 and Section 184A mortgages as safe harbor qualified mortgages, without any change in underwriting requirements for these loan products. One commenter, however, stated that loans without points and fees caps encourage the assessment of junk fees and these incentives should not be part of loan programs meant to shore up needs in vulnerable communities. The commenter stated that the Title I loan program in particular has had a long history of abusive lending, primarily in low-income communities. Other commenters, however, identified various loan products that they stated should be treated by HUD similarly to the proposed treatment of Title I, Sections 184, and Section 184A loans. Commenters recommended that HUD automatically make Section 203(k) repair and rehabilitation loans, energy efficient mortgages, and mortgages involving real estate-owned (REO) properties safe harbor qualified mortgages. One of the commenters stated that these types of loans, especially 203(k) loans, require more work for the lender, and consequently, the lender is compensated more. The commenter stated that this higher compensation could jeopardize the qualified mortgage status of the loan if the rule does not permit a higher points and fees threshold for such loans. Another commenter stated that housing finance agencies (HFAs) often use 203(k) loans to support the purchase of 14 See HUD s plan at hudportal/hud?src=/program_offices/general_ counsel/review_of_regulations. affordable homes in need of repair or modernization for traditionally underserved consumers. The commenter stated that because of the increased costs associated with these loans, HFAs often pay lenders higher levels of compensation for originating them and also have to charge higher fees to borrowers. The commenter stated that if these loans are subject to HUD s proposed qualified mortgage requirements, it would become costprohibitive for HFAs, or other lenders, to continue originating these loans. Response: HUD s final rule will continue to designate Title I, Section 184 and Section 184A loans as safe harbor qualified mortgages. HUD believes that the final rule HUD published on November 7, 2001, entitled, Strengthening the Title I Property Improvement and Manufactured Home Loan Insurance Programs and Title I Lender/Title II Mortgagee Approval Requirements (66 FR 56410) strengthened the Title I program and that the Title I program is sound. The Title I loan program insures maximum loan amounts of $25,000 for single family home loans to finance the light or moderate rehabilitation of properties, as well as the construction of nonresidential buildings on the property. Additionally, Title I covers the Manufactured Home Loan program which provides a source of financing for buyers of manufactured homes and allows buyers to finance their home purchase at a longer term and lower interest rate than with conventional loans. Considering the small size of the Title I property improvement loans and the limited access to conventional financing otherwise available to manufactured home loans, HUD believes these loans should be designated as safe harbor qualified mortgages until further study can be conducted on how to apply the qualified mortgage definition. HUD declines to designate Section 203(k) repair and rehabilitation loans as safe harbor qualified mortgages. HUD does clarify that non-affiliated consultation fees authorized under the Section 203(k) program are exempt from the CFPB s points and fees calculation, adopted by HUD. Section 203(k) mortgages cover both the acquisition of a property and its rehabilitation. While Section 203(k) loans involve minimal financing amounts, Section 203(k) mortgages can cover the virtual reconstruction of a property. For example, a home that has been demolished or will be razed as part of rehabilitation is eligible for financing under FHA s Section 203(k) mortgage program provided that the existing VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 foundation remains in place. HUD also declines to designate an FHA-insured mortgage on property acquired by a borrower through FHA s REO process as a safe harbor qualified mortgage. An FHA-insured mortgage on a REO property is a standard single familyinsured mortgage, and therefore would need to meet the qualifications for either a safe harbor qualified mortgage or a rebuttable presumption qualified mortgage. In addition, HUD exempts housing finance agencies from the qualified mortgage rule, consistent with the CFPB s rule, as explained further in Section IV of the preamble. Comment: Provide an exemption for HFAs as exempted under CFPB s rule: With respect to loans originated by HFAs, certain commenters requested that HFAs should be exempt from ability-to-repay requirements and FHA should classify all HFAs loans as safe harbor qualified mortgages. The commenters stated that HFAs have a consistent record of providing good lending for affordable housing, have never engaged in subprime or other risky lending, and the revenues generated are reinvested in furtherance of their affordable housing mission. The commenter stated that recently, 75 percent of HFA mortgages funded by tax-exempt Mortgage Revenue Bonds have been FHA-insured. Another commenter stated that the proposed safe harbor qualified mortgage APR to APOR rate of 1.15 percentage points plus MIP would hinder the ability of an HFA to finance FHAinsured loans. The commenter stated many lenders are reluctant to finance HFA loans because the HFA requirements already add extra costs to HFA loans. Some of the extra costs which lenders might try to pass onto borrowers with slightly higher interest rates reflect a legitimate business expense incurred by the lender but could cause a loan to exceed the safe harbor APR cap. As a result, HFA lending could be curtailed, particularly when the CFPB allows for a more flexible APR limit on conventional loans. Response: As noted earlier in this preamble, HUD agrees with the commenters and has exempted HFAs from the requirement to comply with FHA s qualified mortgage regulations, consistent with the CFPB. Comment: Exempt FHA streamlined refinancing from qualified mortgage requirements: Commenters stated that streamlined refinances should be excluded from the higher-priced mortgage loan limitations or the APR threshold increased to meet the unique needs of refinancing. The commenter 98

99 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES stated that the rates on streamlined refinances are higher because lenders include the closing cost in the rate and may, therefore, result in some streamlined refinances losing safe harbor qualified mortgage status. A commenter stated that under TILA, HUD has been granted the authority to exempt streamlined refinancings from the income verification requirements of the ability-to-repay rule, as long as the refinancings meet certain requirements. The commenter stated that HUD, however, intimates that including streamlined refinancings in the proposed qualified mortgage requirements would meet similar objectives of a broader exemption, as the proposed qualified mortgage definition would still require these types of loans to meet the three percent points and fees requirements and HUD s existing requirements for streamlined refinances. In contrast to these commenters, a commenter expressed support for HUD s inclusion of the points and fees cap in the FHA qualified mortgage definition for streamline refinancings and for all Title II loans. The commenter stated that this will help ensure that FHA borrowers obtain loans in a more fair and transparent market while discouraging price gouging. The commenter stated that the points and fees cap ensures that homeowners are not subject to inflated costs and junk fees associated with the initial making of the loan. The commenter stated that while the streamlined refinance program provides needed access to capital for many homeowners, HUD s guidelines assume that a borrower making payments on the previous loan can actually afford those payments. The commenter stated that the program does not account for instances where the previous loan s payments were paid out of proceeds from that loan (and therefore out of equity from the property). Response: HUD declines to exempt streamlined refinances from the safe harbor and rebuttable presumption qualified mortgage definition. As HUD stated in the proposed rule, HUD advised that it did not consider it necessary to exercise this authority because HUD s qualified mortgage definition results in an exemption similar to the one contemplated under section 129C(a)(5) of TILA. HUD also believes that the points and fees requirement is appropriate for streamlined refinances just as it is for other Title II products, and that the revised APR to APOR threshold will benefit refinances the same as other Title II products. While HUD maintains that subjecting streamlined refinances to the qualified mortgage definition is appropriate now, HUD recognizes that in times of stress, the current qualified mortgage definition may inhibit access to streamlined refinancing, and if this were to occur, HUD will reexamine whether streamlined refinances should be exempt. Comment: Establish clear criteria for rebutting the presumption of a rebuttable presumption loan: Several commenters stated that HUD needs to establish clear criteria on the basis for a borrower rebutting the presumption of one s ability to repay a mortgage. A commenter stated that the proposed rule appears to significantly change the requirements for a borrower to rebut the presumption of compliance from the CFPB s relatively narrow focus on whether the borrower had sufficient residual income to one that is a far broader inquiry of whether the general ability to repay test was satisfied. The commenter stated that a qualified mortgage is designed to provide a means for a lender, by meeting product and underwriting standards, to gain a presumption that the lender has satisfied the ability to repay requirements without undergoing the statute s factor by factor analysis and demonstrating that the borrower had a reasonable ability to repay. The commenter stated that HUD s rebuttable presumption definition, however, appears to render the presumption nearly meaningless by returning the inquiry to whether the lender made a reasonable and good faith determination that the borrower had the ability to repay the loan. The commenter stated that if the proposed rule goes forward, it is unlikely that lenders that participate in the FHA program will be willing to assume the greater liability that comes with a relatively unbounded rebuttable presumption. The commenter stated that lenders are more likely to confine their lending to safe harbor loans and in some cases will choose to operate well within qualified mortgage s safe harbor standards to avoid liability. Another commenter stated that it understood that the CFPB s rebuttable presumption standard is not appropriate for FHA because residual income calculations are not currently required by FHA, but nevertheless, it is important for HUD to establish a limited, objective and clear inquiry into the presumption. In a similar vein, a commenter stated that FHA underwriting requirements do not contain a residual income requirement and do not require that a creditor assess a consumer s residual income on an FHA loan. The commenter stated that, therefore, a consumer cannot challenge VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 the creditor s assessment of their ability to repay on an FHA loan based on a claim of insufficient residual income, even if that loan is a higher priced mortgage as defined under Regulation Z. The commenter stated that to avoid any possible confusion among creditors and to ensure the greatest number of creditworthy consumers are served by FHA, the commenter asked that HUD confirm this understanding is accurate in the final rule. A commenter stated that under HUD s rebuttable presumption standard, the borrower may prove the lender did not make a reasonable and good faith determination of the borrower s repayment ability. The commenter stated that it is not clear, however, whether this requires the lender to show it followed the specific HUD requirements or whether the borrower can use other evidence to prove the lender did not consider the borrower s ability to repay, even if the lender followed HUD requirements. Another commenter stated that HUD needs to elaborate on what is meant by a reasonable and good faith determination of the borrower s ability to repay. A few commenters stated that HUD s rebuttable presumption standard appears to permit rebuttal of the presumption of compliance based on lending standards that are in addition to FHA underwriting requirements, and therefore HUD is establishing new underwriting requirements. The commenters stated that, as proposed, the presumption of compliance could be rebutted in two ways: One relates to points and fees and the other basis is a showing that, despite the mortgage being insured under the National Housing Act, the mortgagee did not make a reasonable and good-faith determination of the mortgagor s repayment ability at the time of consummation, by failing to consider the mortgagor s income, debt obligations, alimony, child support, monthly payment on any simultaneous loans, and monthly payment (including mortgage-related obligations) on the mortgage, as applicable to the type of mortgage, when underwriting the mortgage in accordance with HUD requirements. The commenters stated that if underwriting in accordance with HUD s requirements is insufficient to establish sufficient repayment ability under TILA, and if FHA does not revise its requirements to correct that problem, then this language appears to create a new FHA underwriting requirement for rebuttable presumption FHA loans. The commenters stated that the quoted 99

100 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations language in the rule differs from FHA underwriting standards, yet this aspect of the rebuttal standard can only apply to loans that are FHA-insured. The commenters stated that the list of factors in HUD s qualified mortgage rule differs from the list in the FHA Handbook monthly housing expense as defined in section C.4.b of the Handbook. The commenters stated that HUD uses, in its rule, mortgage-related obligations, which is undefined in FHA s Handbook. The commenters stated that all the types of income and all the types of obligations that are relevant to rebutting the presumption need to be clearly defined, and mortgagees need to know how and be able to quantify them. The commenters suggested that HUD use standards that do not differ from existing FHA loan underwriting requirements. A commenter suggested that HUD establish a clear standard for rebutting the presumption by adopting the following language: The mortgagee did not make a reasonable and good-faith determination of the mortgagor s repayment ability at the time of consummation, by failing to consider, to the extent required by applicable HUD requirements, the mortgagor s income, debt obligations, alimony, child support, monthly payment on any simultaneous loans and monthly payment (including mortgage-related obligations) on the mortgage, as applicable to the type of mortgage. Other commenters stated that HUD proposed to permit rebuttal of the presumption by showing points and fees. The commenters stated that such a standard is meaningless because, under HUD s regulation, any loan with points and fees above the cap cannot be an FHA loan or a qualified mortgage loan. One of the commenters stated that even if HUD s regulations were to apply to a non-fha loan, a showing of points and fees above the qualified mortgage cap cannot establish a violation of the ability-to-repay requirement. The commenter requested that HUD clarify that it did not intend to imply that points and fees above the cap, without more, could establish a violation of TILA s ability-to-repay requirement. Another commenter stated that HUD should establish a materiality standard by which only uncured underwriting errors that make a material difference to a borrower s ability to repay a loan should be a permissible basis for rebutting a presumption of compliance with the ability-to-repay requirement. Response: In response to the comments, HUD has sought to clarify the rebuttable presumption language in this final rule. As addressed above in Section IV, HUD adopted the list of the CFPB s factors, mortgagor s income, debt obligations, alimony, child support, monthly payment on any simultaneous loans, and monthly payment, to remain consistent with the CFPB s rebuttable presumption standard, but intended those factors to harmonize with HUD s existing underwriting requirements. In response to the comments, HUD will reference FHA s underwriting categories as the applicable categories and believes that this better clarifies that HUD-specific underwriting requirements shall be used for rebutting the presumption, rather than the list provided by CFPB. The applicable categories can be found in FHA Handbook , Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit Mortgage Loans. Additionally, HUD clarifies that instead of merely considering the factors listed, the mortgagee must evaluate the factors as required by HUD underwriting requirements for each applicable transaction. Comment: HUD s rule will delay lender compliance with foreclosure timeframes during prolonged rebuttable presumption litigation: A commenter suggested that protracted litigation resulting from the rebuttable presumption could result in the curtailment of an interest claim by a lender because lenders are required to meet reasonable diligence timeframes in prosecuting foreclosure proceedings and acquiring title as set forth in 24 CFR The commenter stated that it is unclear whether litigation resulting from a rebuttable presumption challenge would be viewed as lender error and thus lenders would be ineligible for a timeframe extension. Response: Litigation resulting from a rebuttable presumption challenge will not in and of itself make a lender ineligible for timeframe extension for submission of a claim. The existence of a challenge to rebuttable presumption does not necessarily indicate lender error rendering the lender ineligible for an extension of the deadline. However, where the presumption is successfully rebutted, FHA will not entertain requests for extensions of foreclosures and claim deadlines. Comment: Rule needs a cure provision; indemnification demand is not dispositive of loan s qualified mortgage status: Several commenters requested that HUD establish a mechanism by which lenders can cure loans where there was a miscalculation in points and fees or any other failure to satisfy the qualified mortgage test. The commenters stated that a cure VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 provision is necessary for those situations when technical violations are discovered by lenders and can be easily corrected. The commenters stated that this is particularly important if qualified mortgage status is to equate with FHA eligibility. The commenters stated that these types of procedures encourage early action by lenders and foster more advantageous loans for borrowers. One of the commenters stated that if HUD does not create a mechanism to cure loans where there are qualified mortgage defects, such loans will simply become uninsurable by FHA in the short run and cause greater caution and lack of credit to consumers over the long term. A commenter asked whether FHA would allow lenders to correct a points and fees violation by refunding the excess costs to bring the loan in compliance. Another commenter requested that HUD continue to insure mortgages which were originated as qualified mortgage loans, but through audit or self-discovery were later found to have certain errors. The commenter stated, for example, if the 3 percent threshold of fees was exceeded, that in lieu of requiring indemnification, HUD allow for the lender to cure the overage. The commenter stated that this would allow the loan to maintain its qualified mortgage status. The commenter requested that if the error was related to an alternative matter (i.e., income/asset related) it would request that HUD allow a lender to indemnify a loan, and through that indemnification, allow for the loan to maintain its qualified mortgage status. The commenter stated that this would allow lenders to continue to treat the loan as a qualified mortgage to avoid unnecessary secondary market ramifications. Another commenter suggested that HUD should adopt an approach similar to that adopted by Fannie Mae which was that, during the initial roll-out of its qualified mortgage standard, at least during an initial twelve month roll-out period, Fannie Mae would allow the industry to adjust systems and take corrective actions to comply. Without this leniency, the commenter stated that it is concerned that the consumers served will be faced with increased costs, extensive delays and, unfortunately, may find they are unable to obtain the financing they need to secure the American dream. A commenter stated that recently, the CFPB explained that a defect under the underwriting procedures of the government-sponsored enterprises (GSEs) that is unrelated to the ability to repay should not affect qualified mortgage status. 100

101 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES Another commenter requested clarification of the impact on qualified mortgage status if FHA insurance of a loan is subsequently revoked. The commenter requested that as such revocation may be wholly unrelated to the applicant s ability to repay the loan or to the creditor s compliance with the underwriting requirements, the commenter requested that HUD include in its final rule a statement that such a loan will retain qualified mortgage status following revocation of FHA insurance, provided that all pertinent underwriting criteria had been met. To address the qualified mortgage status concerns, one commenter requested that include a new paragraph (b)(4) to read as follows: (b)(4) Indemnification Demands-An indemnification demand by HUD is not dispositive of qualified mortgage status. Qualified mortgage status depends on whether a loan is guaranteed or insured, provided that other requirements under this section are satisfied. Even where an indemnification demand relates to whether the loan satisfied relevant eligibility requirements at time of consummation, the mere fact that a demand has been made, or even resolved, between a creditor and HUD is not dispositive for purposes of establishing a loan s qualified mortgage status. Response: As addressed above in Section IV, HUD adds at the final rule stage a section clarifying that a demand for indemnification or an indemnification does not per se remove qualified mortgage status in the regulations for Title I and Title II. Requested clarifications: The final rule needs to provide clarification in a number of areas: Several commenters requested that HUD clarify its position in certain areas. Clarify that this rule preempts CFPB s rule in its entirety for FHA loans: Response: Except to the extent that FHA s regulation cross-references to terms defined by CFPB, FHA s underwriting requirements and qualified mortgage definition govern FHA insurance of single family mortgages. Clarify the presumption afforded a safe harbor qualified mortgage: Response: A safe harbor qualified mortgage is one that provides a conclusive presumption of compliance with the ability to repay requirements for loans that satisfy the definition of a safe harbor qualified mortgage. Clarify eligibility for insurance versus actual insurance: A commenter stated that HUD s proposed rule appears to base qualified mortgage status on whether a loan is actually insured by FHA, rather than whether the loan is eligible for insurance. The commenter stated that if the commenter is understanding HUD correctly, HUD s position is inconsistent with the transitional qualified mortgage category created by the CFPB in (e)(4) of Regulation Z for loans eligible for purchase, guarantee or insurance by various government agencies and government-sponsored enterprises. The commenter stated that the FHA guidelines impose a variety of requirements relating not only to underwriting, but to the procedures of sale, guarantee, and insurance, as well as to post-consummation activities, which may be wholly unrelated to the applicant s ability to repay. The commenter stated that to avoid basing qualified mortgage status on the actual insurance status of a loan, the commenter requested that HUD clarify in its final rule that the qualified mortgage status of a loan is based on whether the loan is eligible for insurance by FHA. Other commenters also supported that HUD provide qualified mortgage status for FHA Title II loans eligible for FHA insurance. One of the commenters requested that the qualified mortgage coverage be based on whether the loan qualifies or is eligible for FHA insurance so that any transaction defects that are not related to ability to repay would not affect qualified mortgage coverage. Response: The commenters understanding is correct. Under HUD s regulations, as promulgated through this final rule, qualified mortgage status for FHA Title II loans is provided only for loans that FHA insures. FHA s responsibility and oversight is only for the mortgages that it insures, not for those that may be eligible for FHA insurance but have not been insured by FHA. Clarify that there is no preemption of State fair lending laws: Two commenters requested that HUD make clear that it does not preempt State claims for fair lending abuses. The commenters stated that State enforcement of fair and responsible lending is essential to prevent unintended consequences. Response: This final rule does not preempt any claims a borrower may bring for violation of fair lending laws. Clarify that FHA s regulatory framework is unchanged: Commenters asked that the final rule specify that the regulatory framework of current FHA programs would remain the same with the addition of the qualified mortgage definition applied, specifically in reference to ability-to-repay. VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 Response: The commenters are correct that HUD is not changing the regulatory framework for its FHA programs with regard to ability to repay other than to establish the requirements for designation of a safe harbor qualified mortgage or rebuttable presumption qualified mortgage. It should be noted, however, that FHA will not insure a mortgage that is not a qualified mortgage but this is not a departure from existing standards since FHA has always had ability to repay standards and mortgages insured by FHA were based on these standards. Clarify which FHA loans are covered by HUD s qualified mortgage regulations when the regulations become effective: A commenter requested that HUD clarify if the intended January 10, 2014 effective date will apply to loans with an application date on or after January 10th (consistent with the CFPB effective date for ability-to-repay/qualified mortgage applicability) or with case number assignment dates on or after January 10, Response: This rule applies to all case numbers assigned on or after the effective date of this rule. Clarify whether escrows for taxes and insurance are included in the points and fees limitation: Another commenter stated that there is considerable confusion about whether escrows for taxes and insurance are included in the points and fees limitation. The commenter stated that these are just pass-through amounts that have no risk of imposing excessive costs on consumers, and they should not be included. The commenter stated that the CFPB was not clear on this matter. The commenter urged HUD to clarify that it will interpret the definition of points and fees to exclude escrows for taxes and insurance. Response: HUD is adopting the CFPB s definition of points and fees, and defers to CFPB s interpretations and guidance on that definition. The CFPB s regulation at 12 CFR (b)(1) excludes amounts held for future payment of taxes from the calculation of points and fees. See 12 CFR (b)(1)(iii). The CFPB also excludes from the calculation of points and fees any premium or other charge imposed in connection with any Federal or State agency program for any guaranty or insurance that protects the creditor against the consumer s default or other credit loss, and any guaranty or insurance that protects the creditor against the consumer s default or other credit loss and that is not in connection with any Federal or State agency program. See 12 CFR (b)(1)(i)(B) and (C). However, the CFPB includes in 101

102 75232 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES the calculation of points and fees any premiums or other charges payable at or before consummation for any credit life, credit disability, credit unemployment, or credit property insurance, or any other life, accident, health, or loss-ofincome insurance for which the creditor is a beneficiary, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract. See 12 CFR (b)(1)(iv). Clarify meaning of reasonable ability to repay: A commenter stated that HUD s rule includes a statement that the monthly payments on a mortgage must not be in excess of a borrower s reasonable ability to repay. The commenter stated that this is too vague and subject to subjective interpretation. The commenter stated that what is reasonable for one person may not be reasonable for another in a similar financial position. The commenter stated that there would be almost no safe harbor for lenders on FHA loans. The commenter requested that HUD clarify the meaning of reasonable in this context. Response: The guiding basis for whether a determination has been made of a borrower s reasonable ability to repay a mortgage is by the lender following the underwriting guidelines in FHA Handbook , Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Unit Mortgage Loans, or subsequent handbook. Recommendations: Several commenters offered recommendations for additional provisions to be included in HUD s rule: Mandate prepurchase counseling: A commenter stated that pre-purchase counseling by a HUD-certified housing counselor should become a mandatory component of all FHA qualified mortgage loans. The commenter stated that housing counseling has proven to be an invaluable tool for creating successful homeowners. The commenter stated that a study of counseling programs found that prepurchase counseling can help reduce the likelihood of default and foreclosures from the start by helping prospective homeowners determine if they are ready to buy. Response: As a result of changes made to HUD s housing counseling program by the Dodd-Frank Act, and counseling requirements, HUD is examining a variety of counseling issues, several of which will be addressed through separate rulemaking. Enforce loss mitigation requirements: Two commenters stated that rigorous loss mitigation requirements and compliance with those rules is essential to a sustainable system. The commenters stated that HUD should fully review its loss mitigation options and compliance programs to maximize beneficial outcomes for homeowners, communities, investors and the FHA insurance fund. Response: FHA has strong loss mitigation requirements and undertakes periodic review of them. HUD invites the commenters to view the following Web site which identifies mortgagee letters addressing the subject of loss mitigation, recently and previously issued by FHA. See portal.hud.gov/hudportal/hud?src=/ program_offices/housing/sfh/nsc/ lmmltrs. Prohibit prepayment penalties: A commenter stated that under the CFPB s regulation, covered transactions, including FHA loans that are covered transactions, must not include a prepayment penalty unless the loan is a qualified mortgage loan, and prepayment penalties are payable only during the first three years after consummation. The commenter urged FHA to amend its notes to be clear that they do not permit any interest charge for any time after a loan is fully paid, even for a partial month. Response: HUD is developing a proposed rule that addresses prepayment penalties for an FHAinsured loan. Provide better lending oversight: A commenter stated the industry does not need more restrictions. The commenter stated that instead of rewarding institutions that have always adhered to the HUD regulations, HUD is treating the good the same as the bad actors. Other commenters stated that government enforcement is a key component to securing widespread industry compliance with regulation. One of the commenters stated that HUD should engage in active oversight of FHA lending, including direct endorsement lenders, with aggressive consequences for non-compliance. The commenter stated that oversight should include proactive resolution of consumer complaints, including requirements for lenders and servicers to document answers to HUD in response to consumer complaints. Another commenter stated that HUD must adopt strong compliance and enforcement provisions to ensure that the required minimum standards are being met in practice and to ensure borrowers have appropriate recourse when these standards are not actually complied with. Another commenter recommended that HUD avoid unnecessary regulation of FHA lending and that it rely on its existing standards to continue to ensure VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 that FHA loans are appropriate and affordable. The commenter stated that it does not believe another layer of abilityto-repay regulation similar to existing FHA underwriting standards would improve or even alter the quality of FHA loans. The commenter stated that, instead, it would run the risk of constraining lending unless the additional standard is substantially clearer than the proposed rebuttable presumption standard. Response: FHA continually strives to strengthen its oversight of FHAapproved lenders. HUD values the input of its FHA-approved lenders and other interested parties and members of the public and is considering recommendations offered by the commenters on this notice. HUD also believes that implementation of the final rule improves the quality of FHA loans, which protects borrowers from higher priced loans. HUD questions in the preamble feedback offered by commenters: The preamble to HUD s September 30, 2013, proposed rule included several questions for which HUD specifically sought comment. One question which received the most feedback was HUD s question of whether lenders participating in FHA s mortgage insurance and loan guarantee programs would lower the APR relative to the APOR such that the lenders in essence always opt for the safe harbor qualified mortgage and never make a rebuttable presumption qualified mortgage. HUD asked if commenters thought that was the case, and welcomed comments on the effect this incentive may have on lenders, borrowers, and the broader economy. Feedback: Several stated that it would be extremely difficult to find lenders to make rebuttable presumption mortgages for the 7 percent 15 of Title II loans that will not qualify as safe harbor qualified mortgages. The commenter stated that mortgage professionals will favor safe harbor qualified mortgages and will avoid the potential legal risk associated with rebuttable presumption qualified mortgages. This will result in disparate impact of homeownership throughout the country. Another commenter agreed that lenders are likely to elect only to offer safe harbor qualified mortgages due to the uncertainty surrounding lending outside of the safe harbor qualified mortgage category. The 15 The 7 percent referred to by the commenter is in fact the number of loans that would not be considered a qualified mortgage under FHA s rule or eligible for insurance as a result of the points and fees. Only 1 percent of Title II loans would be designated rebuttable presumption under the proposed and final rule. 102

103 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES commenter stated that if this occurs, the result will mean less available credit. Another commenter stated that due to the high legal fees related to making a rebuttable presumption loan, lenders are more likely not to make loans that would be rebuttable presumption. The commenter stated that the result will be that some borrowers are prevented from obtaining loans due to the risk aversion of lenders. A commenter stated that the consequences of the 1.15% threshold set by FHA is that loans above that amount will not be made and or will have a disparate impact on minorities who often present somewhat higher risks. A commenter stated that, after polling its members, the consensus was that, at least in the beginning, members would not make rebuttable presumption loans because of the risk of substantial liability if the courts interpreted rebuttable presumption in an adverse manner. As for lowering the APR to be a safe harbor loan, the commenter stated that a small number may be in the margins, but for a substantially larger number, especially small balance loans, it will not be profitable to lower the APR and lenders will simply not make the loans to an otherwise qualified borrower. A commenter stated that it believes the majority of FHA qualified mortgages made will qualify for the safe harbor due to the pricing of the loan and the level of protection that such status provides, much the same as under the CFPB s qualified mortgage rule. The commenter also stated that it is possible that lenders may make a small reduction in the APR if that is the only requirement standing in the way of a loan qualifying as a safe harbor. Another commenter expressed disagreement with HUD s hypothesis that the APR standard would put pressure on the conventional market because HUD s MIP is so high in relation to conventional private mortgage insurance (PMI) or loans without PMI. The commenter stated that FHA s market share is likely to decrease and only people who could not obtain conventional insurance will turn to FHA, presenting danger to the fund. The commenter further stated that HUD s lower threshold for exceeding the safe harbor is also a negative incentive for originating an FHA loan versus a conventional loan and is compounded by excluding the annual MIP in the APOR calculation. Another commenter stated that, with respect to interest rates, FHA is a relatively competitive market, and the purported benefits of the dichotomy is marginal at best and less effective than FHA s current protections. The commenter stated that it will, however, have the result of limiting some otherwise eligible borrowers from receiving an FHA loan. Response: HUD appreciates all the feedback provided in response to this question. As HUD stated in the preamble to its September 30, 2013, proposed rule and reiterates in this final rule, HUD will carefully monitor how HUD s definition of safe harbor qualified mortgage and rebuttable presumption qualified mortgage for the majority of its Title II programs works. HUD will also study, as it has committed to do so, the HUD mortgage insurance and guarantee programs whose mortgages have been designated safe harbor qualified mortgage, and the appropriateness of such designation. HUD recognized that there may be a transition period before the one percent of rebuttable presumption loans in FHA portfolio are made, but HUD s changes to the rebuttable presumption definition should clarify for lenders and borrowers the standard that applies for rebuttable presumption qualified mortgage loans. The transition period should be similar to that of the conventional market where the market will assess the legal risk and costs of making a rebuttable presumption loan before proceeding. Additionally, as provided in HUD s accompanying regulatory impact analysis, while there may be programming changes needed to comply with HUD s definition of qualified mortgage, HUD estimates that the costs are de minimis. Procedural Issues: A few commenters raised concerns with certain procedural issues pertaining to the rule: Comment: Additional public comment should be provided: A few commenters stated that the 30-day comment period was too short to fully identify and compare policy alternatives and the likely consequences, especially when compared to the time used by the CFPB to explore the issues involved in creating a qualified mortgage rule. The commenters requested HUD extend the comment period for at least 60 days after the CFPB issues its final integrated disclosure rule and clarifies the APR calculation. Response: HUD recognizes that the comment period provided for its qualified mortgage rule was an abbreviated one. However, since HUD strived to closely align its definition of safe harbor qualified mortgage and rebuttable presumption qualified mortgage, HUD had the advantage of reviewing the comments submitted to the CFPB on issues and approaches that HUD considered in its proposed rule, VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 and the benefit of reviewing the CFPB s analysis of such issues. As HUD stated in its proposed rule, HUD accepted and reviewed comments submitted after the 30-day public comment period closed. Comment: HUD s regulatory impact analysis did not support the policy taken in HUD s rule: A few commenters stated that HUD s assessment of the probable effects of its rule on important mortgage market stakeholders is not well supported. The commenter stated that borrowers, lenders, U.S. taxpayers, and other private market participants have important interests that have not been analyzed within a robust cost/ benefit framework. Another commenter stated that HUD s supporting economic analysis did not consider the broader mortgage market context, the interaction between HUD s proposed rule and the CFPB qualified mortgage rule, and lender incentives to minimize litigation risk. The commenter suggested that HUD examine the likely credit risk management and loan performance consequences to FHA of reduced conventional access to higher loan-to-value (LTV) loans, combined with the more expansive qualified mortgage standard included in HUD s proposed rule. A commenter stated that significant questions remain unanswered regarding the likely effect of HUD s rule on the size and allocation of the insured low down-payment market. HUD should examine those questions before issuing a final rule. Another commenter stated that the economic analysis in the preamble to HUD s rule posits that lenders will have an incentive to keep their costs low to minimize the number of loans that would be ineligible for FHA insurance, in light of lower compliance and litigation costs under the FHA program that HUD expects to result from its proposal. The commenter stated that it believes that lenders are likely to reduce the points and fees to 3 percent or less in more cases, further minimizing the impact even on the 7 percent. The commenter stated that if the APOR or 3 percent cap tests turn out to have onerous effects on first-time homebuyers and other potential FHA borrowers, it trusts HUD will reconsider the rule and take action to eliminate such unintended consequences. Response: HUD appreciates the comments raised in response to HUD s regulatory analysis. HUD acknowledges that, without a qualified structure yet in place for the majority of FHA Title II loans as provided in this final rule, and without the CFPB s qualified mortgage regulations yet in operation, the data provided in the regulatory impact 103

104 rmajette on DSK2TPTVN1PROD with RULES Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations analysis are estimates to the best of HUD s ability on how the impact will play out when both sets of regulations are in effect. HUD does not believe that this final rule will have an impact on the LTV in the conventional market and the regulatory impact analysis does not analyze the effect of the CFPB s rule on the number of high loan-to-value (LTV) ratio loans made in the conventional market. The regulatory impact analysis uses a base case scenario in which the CFPB rule is in effect on January 10, In the regulatory impact analysis that accompanies this final rule, HUD strives to address some of the questions raised by the commenters, but a more accurate analysis may not be possible until the annual actuarial report for FHA prepared in the fall of each year, is prepared in the fall of Comment: HUD s Regulatory Flexibility Act analysis failed to discuss the impact on small mortgage brokers: Two commenters stated that data from mortgage broker operations and business models indicate a significant impact on small business mortgage broker firms if the rule is finalized. The commenters stated that HUD s rule could cause a high percentage of mortgage broker firms to change business models, merge with lending operations or cease operations in order to remain in business based on HUD s qualified mortgage proposed rule. Response: Please see HUD s Regulatory Flexibility Act analysis provided in the preamble of this final rule. HUD continues to maintain that this final rule will not have a significant economic impact on a substantial number of small entities, but HUD addresses the comments raised by the commenters. VI. Findings and Certifications Consultation With the Consumer Financial Protection Bureau In accordance with section 129C(b)(3)(B)(ii) of TILA, HUD consulted with CFPB regarding this final rule. Executive Order 12866, Regulatory Planning and Review The Office of Management and Budget (OMB) reviewed this rule under Executive Order (entitled Regulatory Planning and Review ). This proposed rule was determined to be a significant regulatory action, as defined in section 3(f) of the Order (although not economically significant, as provided in section 3(f)(1) of the Order). The docket file is available for public inspection in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC As already discussed in the preamble, this rule would define qualified mortgage for loans insured, guaranteed, or otherwise administered by HUD and, in so defining this term, replace application of CFPB s qualified mortgage regulation to these loans. Neither the economic costs nor the benefits of this proposed rule are greater than the $100 million threshold that determines economic significance under Executive Orders and The expected impact of the rule is no greater than an annual reduction of lenders legal costs of $40.7 million on the high end to $12.2 million on the low end, and may even fall below this range. HUD s final rule, in effect, reclassifies a sizeable group (about 19 percent) of Title II loans insured under the National Housing Act from rebuttable presumption qualified mortgages under the CFPB regulations to safe harbor qualified mortgages under HUD s regulation. A small percentage (about 1 percent) of Title II loans insured under the National Housing Act would remain rebuttable presumption qualified mortgages under HUD s rule based on HUD s APR threshold. Some HUD insured or guaranteed loans, the same number under the CFPB s definition of qualified mortgage, would be nonqualified mortgage due to points and fees rising above the CFPB points and fees limit. Under HUD s rule, these loans would also be non-qualified mortgage. The difference is that HUD, as provided in HUD s proposed rule and retained in this final rule, will no longer insure loans with points and fees above the CFPB level for qualified mortgage. This policy provides a very strong incentive for HUD mortgagees to reduce points and fees to comply with HUD s qualified mortgage requirements. A vast majority of these loans could be expected to be made as lenders could be expected to find ways to comply with the QM requirement and still originate the loan with HUD insurance. As a result, HUD believes only a fraction of the 7 percent of non-qualified mortgage loans that HUD would have insured prior to this rulemaking (from HUD s 2012 analysis) would have to find alternatives to FHA, or not be made at all, once HUD s qualified mortgage rule is issued and effective. However, most of the 7 percent of the non-qualified loans (from HUD s 2012 analysis) are expected to comply and to continue to be insured by HUD, once the rule is in place. In addition, HUD classifies all Title I, Title II manufactured housing and VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 Section 184 and Section 184A insured mortgages and guaranteed loans as safe harbor qualified mortgages that would have most likely been non-qualified mortgages under the CFPB s rule. Classifying these programs as safe harbor recognizes the unique nature of these loans. For these programs, HUD believes that providing safe harbor status to these programs will not increase market share but instead maintain availability of these products to the underserved borrowers targeted. In addition, HUD considers the additional benefit of homeownership provided under these programs, which might otherwise be lost if HUD applied the points and fees and APR requirements to these programs, justifies the loss of some borrowers access to the broader ability-to-repay challenge afforded a rebuttable presumption loan. Assuming that all of these loans are reclassified from non-qms or rebuttable presumptions QMs to safe harbor QMs, the expected reduction in costs is no greater than an annual reduction of lenders legal costs of $2.8 million on the high end to $900 thousand on the low end, and may even fall below this range. A difference between HUD s proposed rule and this final rule is that this final rule exempts certain institutions such as state and local housing finance agencies (HFAs) from the TILA ability-to-pay requirements, thereby aligning with CFPB s regulations in this regard. Since the loans from these institutions would be exempt under both the CFPB s regulation and HUD s regulation, it is reasonable to expect a symmetric effect in both scenarios. Typically, the loans from HFAs are made to lower income families with some form of downpayment assistance, and often with below market interest rates. By HUD s estimate, about 1.3 percent (or 0.9 percent as a share of aggregate principal balance) of its fiscal year (FY) 2012 endorsements were funded by HFAs. Although HUD is exempting certain institutions from the TILA ability-torepay requirements, the analysis made at the proposed rule stage and the analysis made at this final rule stage remains the same in that the majority of HUD loans insured or guaranteed prior to the implementation of this rule will qualify as safe harbor qualified mortgage under this final rule. HUD does not expect FHA s loan volume to increase nor does it expect the volume of conventional loans to be materially affected as a result of this rule, and consequently HUD s market share is not expected to increase as a result of this rule. 104

105 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES While HUD considered whether it should make all loans safe harbor as requested by a number of commenters, HUD believes that if the largest category of FHA loans, Title II non-manufactured housing loans, were all designated safe harbor than FHA would see an increase in market share and borrowers would be charged higher APRs than those in the conventional market. HUD does not believe that this alternative would benefit borrowers. As a result of these reclassifications, HUD continues to maintain that lenders face lower costs of compliance under HUD s regulations than under the CFPB regulations and therefore receive incentives to continue making these loans without having to pass on their increased compliance costs to borrowers. While, under HUD s regulations, borrowers benefit from not having to pay for the higher lender costs, HUD acknowledges that they also face less opportunity to challenge the lender with regard to ability to repay. Given that litigation involves many wasteful costs, HUD expects that almost all borrowers will gain from the reduction in litigation and that the reduction of the interest rate will compensate for the loss of the option to more easily challenge a lender. As a result of the reclassification of some of HUD loans, the expected impact of the rule is an annual reduction of legal costs from $12.2 to $40.7 million, and may even fall below this range, as the range was derived from the CFPB s estimate of the range of legal cost differences between a qualified mortgage loan and a non-qualified mortgage loan. Thus, the FHA qualified mortgage rule would not have an economic impact above $100 million, and the rule is not economically significant. HUD s full economic analysis of the costs and benefits and possible impacts of this rule is available on Due to security measures at the HUD Headquarters building, please schedule an appointment to review the docket file by calling the Regulations Division at (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling the Federal Relay Service at (this is a toll-free number). Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) generally requires an agency to conduct a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements, unless the agency certifies that the rule will not have a significant economic impact on a substantial number of small entities. For the reasons provided in the preamble to this final rule and further discussed in this section, this rule will not have a significant economic impact on a substantial number of small entities. As provided in this final rule (and as proposed in the September 30, 2013, rule), HUD makes no change to the current requirements governing its Title I loans, its Section 184 and 184A guaranteed loans, and HECM loans. Therefore, this rule has no impact on either lenders or prospective borrowers under these programs. In addition to the exemptions provided in the proposed rule, and as discussed in the preamble to this final rule, HUD is also exempting Title I and Title II manufactured home mortgages, and certain transactions from compliance with HUD s qualified mortgage regulations. (See the second and third bulleted paragraphs in Section IV of the preamble to this final rule.) Consequently, there is also no impact on either lenders or prospective borrowers under these programs or transactions. These exemptions address several of the concerns raised by small entities in public comments submitted in response to HUD s September 30, 2013, proposed rule. In this final rule, HUD also provides clarifications that address certain other issues raised by small entities. HUD clarifies that housing counseling fees and rehabilitation consultant fees under HUD s 203(k) program may be excluded from points and fees if made by a thirdparty and is not retained by the creditor, loan originator, or an affiliate of either. HUD-approved housing counseling for borrowers seeking FHA-insured mortgages, whether such counseling is voluntary or required, is not part of the points and fees calculation. HUD also clarifies that exempt from the points and fees calculation are consultant fees for ensuring program compliance and for drafting the required architectural exhibits for the 203(k) program by nonaffiliated entities. HUD requires the use of a HUD consultant to ensure 203(k) program compliance and strongly encourages the use of an independent consultant to prepare the required architectural exhibits. Both consultation fees, if obtained by non-affiliated entities on the 203(k) consultant list, are not included in the points and fees calculation, and therefore adoption of the CFPB points and fees definition should not reduce access to the 203(k) program. The primary concern, however, of commenter raising small entity concerns was the time needed to adjust systems in order to be able to comply with VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 HUD s qualified mortgage regulation. The commenters were particularly concerned about changes that would need to be made to address the rebuttable presumption distinction for FHA loans. The commenters questioned why such a distinction was needed since, as they stated per HUD s own analysis, this category would cover only a small percentage of FHA loans. This concern was reiterated in a November 4, 2013, letter to HUD s FHA Commissioner from the Office of Advocacy of the Small Business Administration (SBA). As stated earlier in the preamble to this final rule, HUD respects the analysis that CFPB undertook in defining qualified mortgage for the conventional mortgage market, and sees value in having a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage as established in regulation by the CFPB. HUD s regulation differs from CFPB s regulation in distinguishing between the two types of qualified mortgages for FHA Title II mortgages based on the mortgage s APR. HUD incorporates the APR as an internal element of HUD s definition of qualified mortgages to distinguish safe harbor qualified mortgages from the rebuttable presumption qualified mortgages. The CFPB s higher-priced covered transaction is an external element that is applied to a single definition of qualified mortgage. Under this final rule, for a Title II FHA mortgage to meet the safe harbor qualified mortgage definition, the mortgage is required to have an APR that does not exceed the APOR for a comparable mortgage by more than the combined annual mortgage insurance premium (MIP) and 1.15 percentage points. HUD adopts a higher APR than that adopted by CFPB to remediate the fact that some FHA loans would fall under CFPB s higher-priced covered transaction as a result of the MIP. The MIP by itself should not be the factor that determines whether a loan is a higher-priced transaction. By reclassifying some loans that would have been rebuttable presumption loans under CFPB s higher-priced covered transaction definition to safe harbor qualified mortgage loans under HUD s rule, HUD thus reduces the potential cost of litigation for those loans. The reclassification will result in lenders facing lower costs under HUD s regulations than under the CFPB regulations and therefore receive incentives to continue making these loans without having to pass on their increased compliance costs to borrowers. 105

106 75236 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES Because all FHA-insured mortgages include a MIP that may vary from time to time to address HUD s financial soundness responsibilities, including the MIP as an element of the threshold that distinguishes safe harbor from rebuttable presumption allows the threshold to float in a manner that allows HUD to fulfill its responsibilities that would not be feasible if HUD adopted a threshold based only on the amount that APR exceeds APOR. If a straight APR over APOR threshold were adopted by HUD, every time HUD would change the MIP, to ensure the financial soundness of its insurance fund and reduce risk to the fund or to reflect a more positive market, HUD would also have to consider changing the threshold APR limit. As further stated in the preamble of this final rule HUD expects that a rebuttable presumption category could place downward pressure on the APRs of FHA mortgages. This downward pressure could have positive implications for FHA borrowers. Moreover, HUD, through having its own rebuttable presumption standard, keeps pressure on conventional lenders to keep APR within the limit for CFPB s standard for safe harbor as well. For example, a consumer who applies for a higher risk conventional loan may not meet the CFPB s QM on the basis of high points and fees, or if the points and fees are reduced to 3 percent, the APR may become too high for safe harbor under CFPB rules. However, the consumer might instead be offered a higher interest rate FHA loan in return for lower points and fees, and the lender could achieve QM with safe harbor status as an FHA loan in the absence of an FHA rebuttable presumption standard. With the FHA rebuttable presumption standard, the conventional lender would have incentive to work within the CFPB s APR APOR spread to maintain a safe harbor status. It is for these reasons that HUD believes it is important to retain a rebuttable presumption category for Title II mortgages. With respect to concerns about insufficient time to adjust systems to accommodate the different categories of loans, HUD has clarified that lenders can identify a safe harbor qualified mortgage for Title II loans under HUD s regulations by using the same compliance mechanisms for identifying qualified mortgages under the CFPB s definition. Systems that lenders have put in place to identify safe harbor qualified mortgages under the CFPB s 1.5 percent APR threshold should also identify the substantial majority of safe harbor qualified mortgages under HUD s APR threshold. A loan that meets the 1.5 percent threshold will also be in compliance with the HUD threshold. Only HUD safe harbor loans that exceed the 1.5 percent threshold and rebuttable presumption loans would not be picked up by such systems. Thus, lenders are no worse off under HUD s rule in terms of making safe harbor qualified mortgages, using systems already required to be in place, than they would be if HUD had taken no action. HUD has heard from the industry that a change to the system would require resources but not that the specific system as proposed would be more costly than any other system. A system to identify HUD safe harbor qualified mortgage would need to pull the MIP from a specific source or be manually inputted by the individual lender to calculate an APR to APOR threshold similar to CFPB s metric. All system changes require resources and time, but, in accordance with a timetable and allocation of resources of their choosing, when lenders do implement HUD s rule it provides an immediate opportunity for lenders to increase the number of HUD-insured safe harbor qualified mortgages they make in accordance with a timetable and allocation of resources of their choosing. HUD does not consider it necessary for any lender to change systems immediately to adapt to HUD s requirements in order to make the same number of insured safe harbor qualified mortgages as a lender would otherwise make. For the reasons provided above and in this preamble overall, the undersigned certifies that this rule would not have a significant economic impact on a substantial number of small entities. Environmental Impact A Finding of No Significant Impact (FONSI) with respect to the environment was made at the proposed rule stage in accordance with HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of the National Environmental Policy Act of 1969 (42 U.S.C. 4332(2)(C)). That FONSI remains applicable to this final rule and is available for public inspection between 8 a.m. and 5 p.m., weekdays, in the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC Due to security measures at the HUD Headquarters building, an advance appointment to review the docket file must be scheduled by calling the Regulations Division at (this is not a toll-free number). Hearingor speech-impaired individuals may VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 access this number through TTY by calling the Federal Relay Service at (this is a toll-free number). Executive Order 13132, Federalism Executive Order (entitled Federalism ) prohibits an agency from publishing any rule that has federalism implications if the rule either (i) imposes substantial direct compliance costs on state and local governments and is not required by statute, or (ii) preempts state law, unless the agency meets the consultation and funding requirements of section 6 of the Executive Order. This rule will not have federalism implications and will not impose substantial direct compliance costs on state and local governments or preempt state law within the meaning of the Executive Order. Unfunded Mandates Reform Act Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C ) (UMRA) establishes requirements for Federal agencies to assess the effects of their regulatory actions on state, local, and tribal governments, and on the private sector. This rule does not impose any Federal mandates on any state, local, or tribal governments, or on the private sector, within the meaning of the UMRA. Catalog of Federal Domestic Assistance The Catalog of Federal Domestic Assistance number for Mortgage Insurance- Homes is ; for the Section 184 Loan Guarantees for Indian Housing is , and for the Section 184A Loan Guarantees is List of Subjects 24 CFR Part 201 Claims, Health facilities, Historic preservation, Home improvement, Loan programs housing and community development, Manufactured homes, Mortgage insurance, Reporting and recording requirements. 24 CFR Part 203 Hawaiian Natives, Home improvement, Indians-lands, Loan programs-housing and community development, Mortgage insurance, Reporting and recordkeeping requirements, Solar energy. 24 CFR Part 1005 Indians, Loan programs Indians, Reporting and recordkeeping requirements. 24 CFR Part 1007 Loan programs Native Hawaiians, Native Hawaiians, Reporting and recordkeeping requirements. 106

107 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES Accordingly, for the reasons stated above, HUD amends 24 CFR parts 201, 203, 1005 and 1007 as follows: PART 201 TITLE I PROPERTY IMPROVEMENT AND MANUFACTURED HOME LOANS 1. The authority citation for part 201 is revised to read as follows: Authority: 12 U.S.C. 1703; 15 U.S.C. 1639c; 42 U.S.C. 3535(d). 2. A new is added to subpart A to read as follows: Qualified mortgage. (a) Qualified mortgage. A mortgage insured under section 2 of title I of the National Housing Act (12 U.S.C. 1703), except for mortgage transactions exempted under (c)(2), is a safe harbor qualified mortgage that meets the ability to repay requirements in 15 U.S.C. 1639c(a). (b) Effect of indemnification on qualified mortgage status. An indemnification demand or resolution of a demand that relates to whether the loan satisfied relevant eligibility and underwriting requirements at the time of consummation may result from facts that could allow a change to qualified mortgage status, but the existence of an indemnification does not per se remove qualified mortgage status. PART 203 SINGLE FAMILY MORTGAGE INSURANCE 3. The authority citation for part 203 is revised to read as follows: Authority: 12 U.S.C. 1709, 1710, 1715b, 1715z 16, 1715u, and 1717z 21; 15 U.S.C. 1639c; 42 U.S.C. 3535(d). 4. A new is added to read as follows: Qualified mortgage. (a) Definitions. As used in this section: (1) Average prime offer rate means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to mortgagors by a representative sample of mortgagees for mortgage transactions that have low-risk pricing characteristics as published by the Consumer Financial Protection Bureau (CFPB) from time to time in accordance with the CFPB s regulations at 12 CFR , pertaining to prohibited acts or practices in connection with higherpriced mortgage loans. (2) Annual percentage rate is the measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the mortgagor to the amount and timing of payments made and is the rate required to be disclosed by the mortgagee under 12 CFR , pertaining to disclosure of finance charges for mortgages. (3) Points and fees has the meaning given to points and fees in 12 CFR (b)(1) as of January 10, Any changes made by the CFPB to the points and fees definition may be adopted by HUD through publication of a notice and after providing FHAapproved mortgagees with time, as may be determined necessary, to implement. (b) Qualified mortgage. (1) Limit. For a single family mortgage to be insured under title II of the National Housing Act (12 U.S.C et seq.), except for mortgages for manufactured housing and mortgages under paragraph (c) of this section, the total points and fees payable in connection with a loan used to secure a dwelling shall not exceed the CFPB s limit on points and fees for qualified mortgage in its regulations at 12 CFR (e)(3) as of January 10, Any changes made by the CFPB to the limit on points and fees may be adopted by HUD through publication of a notice and after providing FHAapproved mortgagees with time, as may be determined necessary, to implement. (2) Rebuttable presumption qualified mortgage. (i) A single family mortgage insured under title II of the National Housing Act (12 U.S.C et seq.), except for mortgages for manufactured housing and mortgages under paragraph (c) of this section, that has an annual percentage rate that exceeds the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium and 1.15 percentage points for a firstlien mortgage is a rebuttable presumption qualified mortgage that is presumed to comply with the ability to repay requirements in 15 U.S.C. 1639c(a). (ii) To rebut the presumption of compliance, it must be proven that the mortgage exceeded the points and fees limit in paragraph (b)(1) of this section or that, despite the mortgage having been endorsed for insurance under the National Housing Act, the mortgagee did not make a reasonable and goodfaith determination of the mortgagor s repayment ability at the time of consummation, by failing to evaluate the mortgagor s income, credit, and assets in accordance with HUD underwriting requirements. (3) Safe harbor qualified mortgage. (i) A mortgage for manufactured housing that is insured under Title II of the National Housing Act (12 U.S.C et seq.) is a safe harbor qualified mortgage VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 that meets the ability to repay requirements in 15 U.S.C. 1639c(a); and (ii) A single family mortgage insured under title II of the National Housing Act (12 U.S.C et seq.), except for mortgages under paragraph (c) of this section, that has an annual percentage rate that does not exceed the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium and 1.15 percentage points for a firstlien mortgage is a safe harbor qualified mortgage that meets the ability to repay requirements in 15 U.S.C. 1639c(a). (4) Effect of indemnification on qualified mortgage status. An indemnification demand or resolution of a demand that relates to whether the loan satisfied relevant eligibility and underwriting requirements at the time of consummation may result from facts that could allow a change to qualified mortgage status, but the existence of an indemnification does not per se remove qualified mortgage status. (c) Exempted transactions. The following transactions are exempted from the requirements in paragraph (b) of this section: (1) Home Equity Conversion Mortgages under section 255 of the National Housing Act (12 U.S.C. 1715z 20); and (2) Mortgage transactions exempted by the CFPB in its regulations at 12 CFR (a)(3) as of January 10, Any changes made by CFPB to the list of exempted transactions may be adopted by HUD through publication of a notice and after providing FHAapproved mortgagees with time, as may be determined necessary, to implement. (d) Ability to make adjustments to this section by notice. The FHA Commissioner may make adjustments to this section, including the calculations of fees or the list of transactions excluded from compliance with the requirements of this section as the Commissioner determines necessary for purposes of meeting FHA s mission, after solicitation and consideration of public comments. PART 1005 LOAN GUARANTEES FOR INDIAN HOUSING 5. The authority citation for part 1005 is revised to read as follows: Authority: 12 U.S.C. 1715z 13a; 15 U.S.C. 1639c; 42 U.S.C. 3535(d). 6. A new is added to read as follows: Qualified mortgage. A mortgage guaranteed under section 184 of the Housing and Community 107

108 75238 Federal Register / Vol. 78, No. 238 / Wednesday, December 11, 2013 / Rules and Regulations rmajette on DSK2TPTVN1PROD with RULES Development Act of 1992 (12 U.S.C. 1715z 13a), except for mortgage transactions exempted under (c)(2), is a safe harbor qualified mortgage that meets the ability-to-repay requirements in 15 U.S.C. 1639c(a). PART 1007 SECTION 184A LOAN GUARANTEES FOR NATIVE HAWAIIAN HOUSING 7. The authority citation for part 1007 is revised to read as follows: Authority: 12 U.S.C. 1715z 13b; 15 U.S.C. 1639c; 42 U.S.C. 3535(d). 8. A new is added to read as follows: Qualified mortgage. A mortgage guaranteed under section 184A of the Housing and Community Development Act of 1992 (1715z 13b), except for mortgage transactions exempted under (c)(2), is a safe harbor qualified mortgage that meets the ability-to-repay requirements in 15 U.S.C. 1639c(a). Dated: December 5, Shaun Donovan, Secretary. [FR Doc Filed ; 8:45 am] BILLING CODE P DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 24 CFR Chapter II [Docket No. FR 5595 N 01] RIN 2502 AJ07 Federal Housing Administration (FHA) Risk Management Initiatives: New Manual Underwriting Requirements AGENCY: Office of the Assistant Secretary for Housing Federal Housing Commissioner, HUD. ACTION: Final notice of new manual underwriting requirements. SUMMARY: On July 15, 2010, HUD issued a document seeking comment on three initiatives that HUD proposed would contribute to the restoration of the Mutual Mortgage Insurance Fund capital reserve account. This document implements one of these proposals. Specifically, through this document, FHA is providing more definitive underwriting standards for mortgage loan transactions that are manually underwritten. DATES: Effective date: This document will be effective for FHA case numbers assigned on or after a date to be established by Mortgagee Letter following publication of this document. The effective date shall be no earlier March 11, HUD will publish a document in the Federal Register announcing the effective date. Comment due date: February 10, ADDRESSES: Interested persons are invited to submit comments regarding the revised credit score threshold for use of compensating factors to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC Communications must refer to the above docket number and title. There are two methods for submitting public comments. All submissions must refer to the above docket number and title. 1. Submission of Comments by Mail. Comments may be submitted by mail to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street SW., Room 10276, Washington, DC Electronic Submission of Comments. Interested persons may submit comments electronically through the Federal erulemaking Portal at HUD strongly encourages commenters to submit comments electronically. Electronic submission of comments allows the commenter maximum time to prepare and submit a comment, ensures timely receipt by HUD, and enables HUD to make them immediately available to the public. Comments submitted electronically through the Web site can be viewed by other commenters and interested members of the public. Commenters should follow the instructions provided on that site to submit comments electronically. Note: To receive consideration as public comments, comments must be submitted through one of the two methods specified above. Again, all submissions must refer to the docket number and title of the rule. No Facsimile Comments. Facsimile (FAX) comments are not acceptable. Public Inspection of Public Comments. All properly submitted comments and communications submitted to HUD will be available for public inspection and copying between 8 a.m. and 5 p.m. weekdays at the above address. Due to security measures at the HUD Headquarters building, an appointment to review the public comments must be scheduled in advance by calling the Regulations Division at (this is not a toll-free number). Individuals with speech or hearing impairments may access this number via TTY by calling VerDate Mar<15> :26 Dec 10, 2013 Jkt PO Frm Fmt 4700 Sfmt 4700 E:\FR\FM\11DER1.SGM 11DER1 the Federal Relay Service at Copies of all comments submitted are available for inspection and downloading at FOR FURTHER INFORMATION CONTACT: Karin Hill, Director, Office of Single Family Program Development, Office of Housing, Department of Housing and Urban Development, 451 7th Street SW., Room 9278, Washington, DC 20410; telephone number (this is not a toll-free number). Persons with hearing or speech impairments may access this number through TTY by calling the toll-free Federal Relay Service at SUPPLEMENTARY INFORMATION: I. Executive Summary A. Purpose and Legal Authority Under the National Housing Act (12 U.S.C et seq.), which authorizes Federal Housing Administration (FHA) mortgage insurance, HUD has a responsibility to ensure that the Mutual Mortgage Insurance Fund (MMIF) remains financially sound. During times of economic volatility, FHA has maintained its countercyclical influence, supporting the private sector when access to housing finance capital is otherwise constrained. FHA played this role in the recent housing crisis, and the volume of FHA insurance increased rapidly as private sources of mortgage finance retreated from the market. However, the growth in the MMIF portfolio over such a short period of time contributed significantly to the projected losses to, and financial soundness of, the Fund. 1 Consistent with the Secretary s responsibility under the National Housing Act to ensure that the MMIF remains financially sound, FHA has taken steps to improve the health of the Fund. Therefore, HUD published a July 15, 2010, notice, and sought public comment on three proposals designed to address features of FHA mortgage insurance that have resulted in high mortgage insurance claim rates and risk of loss to FHA. At the close of the public comment period on August 16, 2010, HUD received 902 public comments in response to the July 15, 2010, notice. The majority of the public comments focused on the proposal to reduce allowable seller concessions. In order to provide itself with the necessary additional time to consider the issues 1 U.S. Department of Housing and Urban Development, Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund, Fiscal Year See portal.hud.gov/hudportal/documents/ huddoc?id=f12mmifundrepcong pdf. 108