Break Out Session: Mortgage Loan Underwriting and Pricing

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2 Break Out Session: Mortgage Loan Underwriting and Pricing

3 Agenda Ability to Repay (ATR)/Qualified Mortgages (QMs) Effective Date: Applications received on or after January 10, Home Ownership and Equity Protection Act (HOEPA) Effective Date: Applications received on or after January 10, 2014 Truth in Lending Act (TILA) Higher Priced Mortgage Loans Appraisal and Equal Credit Opportunity Act (ECOA) Valuations Effective Date: Applications received on or after January 18, 2014 Many of the final rules issued this past January have been revised through subsequent final rule making. In addition, there are existing pending proposals that may result in even further amendments to the rules. 3

4 Agenda ATR/QMs Effective Date: Applications received on or after January 10, HOEPA Effective Date: Applications received on or after January 10, 2014 TILA Higher Priced Mortgage Loans Appraisal and ECOA Valuations Effective Date: Applications received on or after January 18,

5 ATR: General Standards Coverage Exemptions Requirements All lenders making closed end residential loans Home Equity Line of Credit (HELOC) Timeshares Reverse Mortgages, temporary, bridge, or construction loans w/terms of 12 months or less Exempt transactions under Loan modifications Streamline refinances of non standard loans to standard loans Creditors must make a reasonable, good faith determination of a consumer s ATR Establishes certain legal protections for loans meeting eligibility requirements for a qualified mortgage Places limitations on prepayment penalties 5

6 ATR: 8 Underwriting Factors 1. Payment Underwriting 2. Mortgage Related Obligations Principal and Interest* *if adjustable rate mortgage (ARM), use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 6

7 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 7

8 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 8

9 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 9

10 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 10

11 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 11

12 ATR: 8 Underwriting Factors 1. Payment Consideration Principal and Interest* 2. Mortgage Related Obligations *if ARM, use greater of fully indexed or introductory rate 3. Income or Assets 4. Employment Status 5. Simultaneous Loans Consider and Verify 6. Debt, Alimony, Child Support 7. DTI or Residual Income 8. Credit History H1 12

13 ATR: Third Party Records Definition Exception A third party record is a document or other record prepared or reviewed by an appropriate person other than the consumer or the creditor A record the creditor maintains for an account of the consumer held by the creditor (e.g. bank statements, CDs, etc.) 13

14 ATR: QM Loans Types of Qualified Mortgage Loans 1. General 2. Small Creditor 3. Balloon Payment 4. Agency/Government Sponsored Enterprise Types of Legal Protection 1. Safe Harbor 2. Rebuttable Presumption H2 H3 14

15 ATR: QM Points and Fee Calculations For QMs, points and fees are calculated according to the revised rules in and are capped, as follows, based on the loan amount on the face of the note: Loan Amount Points and Fees Cap > $100,000 3% of the total loan amount > $60,000, but less than $100,000 $3,000 > $20,000, but less than $60,000 5% of the total loan amount > $12,500, but less than $20,000 $1,000 < $12,500 8% of the total loan amount Dollar amounts listed above will be adjusted annually for inflation and published each year in the commentary to Regulation Z H4 15

16 ATR: Examiner Expectations Identify acceptable third party verification documentation and develop processes to obtain verification of the ATR underwriting factors, particularly for those factors that the bank has addressed informally in the past. Conduct appropriate loan staff training regarding the bank s policies and procedures for considering and verifying the eight underwriting factors outlined in the final rule and/or the requirements for QM eligibility, if applicable. Develop policies, procedures, training, and internal controls to ensure eligibility requirements are met, particularly if the QM status is being relied upon for exemption of other regulatory requirements if the bank elects to originate QMs 16

17 Agenda ATR/Qualified Mortgages Effective Date: Applications received on or after January 10, HOEPA Effective Date: Applications received on or after January 10, 2014 TILA Higher Priced Mortgage Loans Appraisal and ECOA Valuations Effective Date: Applications received on or after January 18,

18 HOEPA: General Standards Coverage Exemptions Requirements Consumer credit secured by the consumer s principal dwelling Now includes purchase money transactions and HELOCs in addition to refinance and home improvement loans. Also, includes manufactured housing, mobile homes, and personal property. Reverse Mortgages Construction loans to finance the initial construction of a new dwelling Construction to perm (2 separate transactions) construction loan exempt, but perm is not Construction to perm (1 transaction) accordance with Appendix D to Regulation Z Loans to finance a vacation or second home Additional disclosures Expands restrictions and adds consumer protections Two additional counseling requirements, regardless if loan is high cost Revised annual percentage rate (APR)/points and fees trigger calculation to capture more transactions 18

19 HOEPA: Determining Coverage APR Fees Prepayment Penalty APR: Calculation is tiered based on loan amount and lien position; then compared to Average Prime Offer Rate for a comparable transaction Fees: Calculated differently than in the past and meant to expand coverage Prepayment Penalty (New): Certain prepayment penalties may result in HOEPA coverage if: Charged more than 36 months after consummation or account opening, or In an amount more than 2% of the amount prepaid H5 19

20 HOEPA: APR and Fee Calculations CAUTION The APR on the HOEPA test is calculated differently than the APR on the TILA disclosures (Primarily affects ARMs and Step rate transactions). The total loan amount used in the fee coverage test may not be the same as the loan amount on the face of the note (Amount financed less certain excludable fees, even if normally a finance charge). The points and fees for HOEPA coverage of HELOCs uses the same general calculation approach as closed end transactions, but also includes participation fees payable at or before account opening and fees you charge consumers to draw on their HELOCs (assuming at least one draw). 20

21 HOEPA: Requirements Requirements Written disclosure provided at least 3 business days prior to consummation Certification of counseling (in written form) Restrictions and additional consumer protections Ability to repay H6 21

22 HOEPA: Homeownership Counseling Pre loan Counseling Written List of Counselors Pre loan counseling is required for: All high cost (Section 32) mortgages All negative amortization loans made to first time borrowers A written list of homeownership counseling organizations is required to be provided within 3 business days of receiving the application: All federally related mortgages Regardless of whether or not the application is for a high cost mortgage The Bureau is working with HUD to develop a website to generate the list 22

23 HOEPA: Examiner Expectations Develop and implement policies and procedures, as well as internal controls and training to: Ensure compliance with the revised HOEPA regulations contained in Regulation Z o Identification of covered transactions and proper handling Ensure that applicants for federally related mortgages (whether or not a high cost mortgage) receive a written list of homeownership counseling organizations within three business days of receiving the application. o If the bank originates negative amortization loans, the lender must obtain sufficient documentation showing that a first time borrower has received homeownership counseling. 23

24 Agenda ATR/Qualified Mortgages Effective Date: Applications received on or after January 10, HOEPA(HOEPA) Effective Date: Applications received on or after January 10, 2014 TILA Higher Priced Mortgage Loans Appraisal and ECOA Valuations Effective Date: Applications received on or after January 18,

25 TILA/ECOA: Appraisal Requirements Appraisals for Higher Priced Mortgage Loans under TILA Valuations under the ECOA There are two final rules, one rule amending the TILA and one rule amending the ECOA, that implement new requirements regarding the use and disclosure of appraisals for real estate transactions secured by a dwelling. 25

26 ECOA: Valuation Rules Coverage Exemptions Requirements Most closed end or open end credit secured by a first lien on a 1 4 family dwelling, whether or not the structure is attached to real property, and regardless of loan purpose (including business purpose) or credit decision outcome. Subordinate liens Must notify applicant within 3 days of application Must provide a free copy of written valuations promptly in connection with the transaction, whether or not the applicant requested copies regardless if credit is granted Must still deliver copies at or prior to consummation, or account opening, even if right to advanced copies of valuation(s) is waived H7 26

27 TILA: HPML Appraisal Rules Coverage Exemptions Requirements Applies only to covered HPMLs, first lien or subordinate lien closed end loans secured by a consumer s principal dwelling QMs Reverse Mortgages Bridge Loans (12 months or less for primary dwelling) Construction loans to finance the initial construction of a new dwelling (not limited to loans of 12 months or less) Loans secured by new manufactured homes Loans secured by boats, trailers, and mobile homes Requires appraisals meeting specified standards Provides applicants with a notification regarding the appraisal use Requires copies of the appraisal(s) be given to the applicants Requires an additional appraisal for flipped properties (additional exemptions apply) 27

28 TILA: HPML Appraisal Rule Safe Harbor 4 Steps for obtaining Safe Harbor for non exempt transactions: 1. Order an appraisal from a certified or licensed appraiser 2. Confirm that the appraisal contains certain information, including an interior inspection of the property 3. Verify that the appraiser is certified or licensed using the National Registry 4. You do not have knowledge contrary to the facts or certifications contained in the written appraisal 28

29 TILA: Flipped Property Rules Coverage Exemptions Requirements Flipped Properties Only applicable when a non exempt HPML is being used to purchase a home that is being sold within 90 to 180 days of its acquisition by the seller The exemptions most likely to apply include: Properties acquired through inheritance or divorce Properties located in presidentially declared disaster areas during which Title X of FIRREA requirements are waived Properties located in a rural county as published by the Bureau Refer to pages of the Small Entity Guide for a complete list of exemptions A second appraisal must be completed Additional appraisal fee cannot be charged to the consumer The price of the home being flipped must be a certain amount higher than the seller s acquisition cost 29

30 ECOA/TILA: Comparison Disclosure at Application Timing Requirements Copies of Appraisals Waivers of Copies ECOA disclosure also satisfies disclosure requirements of the HPML Appraisal Rules Proposed final rules regarding the RESPA/TILA disclosures may allow the appraisal disclosure to be integrated (yet to be finalized) If both rules apply, follow the rule that provides the earlier deadline for providing appraisal copies (Regulation Z) Copies must be free, but the cost of the appraisal may be charged However, the cost for the additional appraisal for flipped properties must be paid by creditor When there are multiple applicants, follow the ECOA Valuation Rule requirements for delivery of the disclosure and valuation copies to the primary applicant, when one is apparent Not an option under HPML Appraisal Rules Allowed under the ECOA Valuation Rules 30

31 ECOA/TILA: Appraisal Sample Notice Appendix C, Form C 9 We may order an appraisal to determine the property s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost. 31

32 ECOA/TILA: Examiner Expectations For any loan secured by a 1 st lien on a dwelling (including those originated by commercial lenders for business purposes), revise and/or implement policies and procedures as well as internal controls and training in place to ensure that applicants: Receive the appraisal disclosure within three business days of receiving the application (bank may also elect to provide the notice for any dwelling secured loan, regardless of lien position). Receive a copy of the appraisal or valuation used according to the timing requirements under the Regulation (regardless of the bank s credit decision). Identify all valuation methods utilized by lenders, and revise documentation procedures and checklists, as necessary, to ensure compliance with the ECOA rule. For non exempt HPML transactions, establish policies, procedures, and internal controls to address the requirements in the new rules. For creditors that choose to originate HPMLs that are exempt from the HPML Appraisals Rules, policies and procedures as well as internal controls should be established to ensure exemption eligibility. 32

33 Resources Federal Reserve Consumer Affairs Contact Consumer Financial Protection Bureau (Small Entity Compliance Guides) 33

34 34 Questions?

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