Ability to Repay/Qualified Mortgage Rule Note: This document was - PowerPoint PPT Presentation

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

Disclaimer The Bureau issued the Title XIV mortgage rules in January of 2013 to • implement provisions under the Dodd Frank Wall Street Reform and Consumer Protection Act. The rules have been further clarified and updated by final rules issued • in May, July and September, 2013. Most of the rules will take effect in January 2014. • This presentation is current as of November 7, 2013. This • presentation does not represent legal interpretation, guidance or advice of the Bureau. While efforts have been made to ensure accuracy, this presentation is not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding requirements. This document does not bind the Bureau and does not create any rights, benefits, or defenses, substantive or procedural, that are enforceable by any party in any manner. 1

Background • Bureau finalized amendments to Regulations B, X, and Z that relate to mortgage origination; most amendments take effect in January 2014.  Ability-to-Repay and Qualified Mortgages (1026.32 and .43)  High-cost Mortgages (HOEPA) (1026.32 and .34)  New Counseling-Related Requirements (1024.20 and 1026.36)  Escrows for Higher-priced Mortgage Loans (1026.35)  New Appraisal Requirements (1002.14 and 1026.35)  Loan Originators (1026.36) • A summary of each rule and the rules themselves are available on the Bureau’s website at: w w w .consum erfinance.gov/ regulations 2

ABI LI TY-TO-REPAY/ QUALI FI ED MORTGAGES FI NAL RULE 3

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

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

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

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

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

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

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

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

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

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

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

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

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