Transcript Ability to Repay and Qualified Mortgage Rules Under the
Ability to Repay and Qualified Mortgage Rules Under the Dodd-Frank Act: What Every Lender Should Know
David Elliott, Esq.
Richard Keller, Esq.
Introduction
• • In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress adopted similar (but not identical) Ability-to-Repay (ATR) requirements for virtually all closed-end residential mortgage loans.
Congress also established a presumption of compliance with the ATR requirements for a certain category of mortgages, called Qualified Mortgages (QMs).
Introduction
• • • In January 2013, the Consumer Financial Protection Bureau (CFPB) adopted a rule which implements the ATR/QM provisions of the Dodd-Frank Act. In May and July of 2013, the CFPB issued rules amending certain provisions of the January 2013 rule.
The ATR/QM rule is the subject of this presentation.
Introduction
• • • The ATR/QM rule generally applies to closed-end consumer credit transactions that are secured by a dwelling for which a lender receives an application on or after January 10, 2014.
The ATR rule describes the minimum standards which must be utilized to determine that consumers have the ability to repay the mortgages they are extended.
The rule also defines the requirements for Qualified Mortgages and how QM status works if there is a question about whether a creditor has properly assessed the borrower’s ATR.
Overview of the ATR/QM Rule
• The ATR/QM rule requires a lender make a reasonable, good-faith determination that the consumer has a reasonable ability to repay the loan, considering such factors as the consumer’s income or assets and employment status (if relied on) against: 1.
2.
3.
4.
The mortgage loan payment.
Ongoing expenses related to the mortgage loan or the property which secures it, such as property taxes and insurance the consumer is required to repay.
Payments on simultaneous loans which are secured by the same property.
Other debt obligations, alimony, and child-support payments.
What Loans Fall Within the Scope of the Rules
• • • • • Applies to all closed-end consumer credit transactions secured by a dwelling including: Any real property attached to a dwelling Loans made to consumers and secured by residential structures which contain one to four units Condominiums Co-ops Unlike some other mortgage rules, the ATR/QM rule is not limited to first liens or to loans on primary residences.
Exceptions
• • • • • • • Specific categories of loans are excluded from the rule: Open-end credit plans (HELOCs) Time-share plans Reverse mortgages Temporary or bridge loans with terms of 12 months of less (with possible renewal) A construction phase of 12 months or less (with possible renewal) of a construction-to-permanent loan.
Consumer credit transactions secured by vacant land Certain types of creditors or loan programs may also be exempt from the ATR requirements.
Implementation Tip
• • • • The TILA applies to a loan modification only if it is considered a refinancing under Reg. Z.
If a loan modification is not subject to the TILA, it is not subject to the ATR/QM rule.
Therefore, financial institutions should determine if a loan modification is a refinancing to see if the ATR/QM rule applies.
See Reg. Z at § 1026.20(a).
Underwriting Guidelines
• • Underwriting Guidelines Utilized in Making a Determination Regarding the Ability to Repay General ATR standard: • Financial institutions must make a reasonable, good faith determination before or when a covered mortgage loan is entered into that the consumer has a reasonable ability to repay the loan.
• Additionally, there are eight ATR underwriting factors which must be considered and verified. Comment 1026.43(c)(2)-(4).
Eight Underwriting Factors
1.
2.
3.
4.
5.
Current or reasonably expected income or assets.
Current employment status.
Monthly mortgage payment for this loan.
Monthly payment on any simultaneous loans secured by the same property.
Monthly payments for property taxes and insurance that the consumer is required to pay and other costs related to the property such as homeowners association fees or ground rent.
• 6.
7.
8.
Debts, alimony, and child support obligations.
Monthly debt-to-income ratio or residual income, calculated by using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income.
Credit history.
Additional criteria may be considered, but financial institutions must consider these eight factors.
Exceptions: to the ATR Rule
Which types of creditors are exempt from the ATR requirements? § 1026.43(a)(3)(iv) to (vi) • Extensions of credit made by creditors designated by HUD as either a: 1.
Community Housing Development Organization; or 2.
Down-payment Assistance Provider of Secondary Financing.
Exceptions: to the ATR Rule
• Which types of loan programs are exempt from the ATR requirements? § 1026.43(a)(3)(iv) to (vi) • Extensions of credit made: 1. By housing finance agencies directly to consumers.
2. By other creditors pursuant to a program administered by a housing finance agency.
3. Pursuant to a program administered by a housing finance agency, regardless of its funding source.
4. An Emergency Economic Stabilization Act program, such as a State Hardest Hit Fund program.
Exceptions: to the ATR Rule
• • An exempt loan remains exempt even if it is sold, assigned, or otherwise transferred to a creditor which would not qualify for the exemption.
Note that the ATR requirements do not apply to these loans. Thus, a loan which is 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 requirements.
Safe Harbor for Qualified Mortgages
• The rule provides a presumption that creditors which originate QMs have complied with the ATR requirements.
• Creditors will be presumed to have complied with the ATR requirements if they issue QMs.
Qualified Mortgage: Definition
• • § 1026.43(e) and (f): Four types of Qualified Mortgages under the rule: 1.
General QM Can be originated by all creditors 2.
Temporary QM 3.
Small Creditor QM 4.
Balloon Payment QM Originated only by small creditors
Qualified Mortgage: Definition(s)
• QM requirements common across all four types include: 1.
2.
3.
4.
Prohibition on negative amortization Prohibition on interest-only periods and balloon payments; and Prohibition on loan terms longer than 30 years.
Limitations on points/fees Generally, may not exceed 3% of the total loan amount Exception: for loans under $100,000, higher thresholds are permitted.
General QM: Definition
• • § 1026.43(e)(2) In addition to the four common QM requirements, the creditor must: 1.
2.
3.
Underwrite based on a fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment.
Consider and verify the consumer’s income or assets, current debt obligations, alimony and child support obligations.
Determine that the consumer’s total monthly debt-to income ratio is no more than 43%.
Temporary QM: Definition
• • • • § 1026.43(e)(4) In addition to the four common QM requirements, a Temporary QM must meet at least one of the following: 1.
2.
3.
4.
Eligible for purchase guarantee by Fannie Mae or Freddie Mac while operating under federal conservatorship or receivership.
Eligible for FHA insurance.
Eligible to be guaranteed by the U.S. Dept. of VA Affairs.
Eligible to be guaranteed by the U.S. Dept. of Agriculture.
Temporary QMs do not need to meet the 43% DTI ratio The creditor does not have to satisfy GSE or agency standards
Small Creditor QM: Definition
• • § 1026.43(e)(5) In addition to the four common QM requirements, a Small Creditor QM must: 1.
2.
3.
4.
Be underwritten based on a fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment.
Not be subject to a forward commitment.
Have taken into consideration and verify the consumer’s income or assets, debts, alimony, and child support.
Have taken into consideration and verify the consumer’s DTI ratio or residual income.
However, the rule sets no specific threshold for DTI or residual income.
Small Creditor QM: Definition cont.
• • Small Creditor QMs generally lose their QM status if small creditor sells or otherwise transfers the QM less than three years after consummation.
However, a Small Creditor QM keeps its QM status if it meets one of the following: 1.
2.
3.
4.
It’s sold more than 3 years after consummation.
It’s sold to another creditor that meets the criteria regarding number of originations and asset size, at any time.
It’s sold pursuant to a supervisory action or agreement, at any time.
It’s transferred as part of a merger or acquisition of or by the creditor, at any time.
Balloon Payment QM: Definition
• § 1026.43(e)(6) and (f) •
On or before Jan. 10, 2016
(two years after the effective date of the ATR/QM Rule), • Financial Institutions can originate Balloon Payment QMs if they satisfy the asset size and number of originations requirements. • Balloon Payment QMs which are originated during this two-year period will retain their QM status after Jan. 10, 2016.
•
After Jan. 10, 2016
• Financial institutions can originate Balloon Payment QMs only if they meet the asset size and number of originations criteria as well as a requirement that they operate predominantly in rural or underserved areas.
Balloon Payment QM: Definition cont.
• In addition to the four common requirements for all QMs, Balloon Payment QMs must: 1.
2.
3.
Have a fixed interest rate and periodic payments (other than the balloon payment) that would fully amortize the loan over 30 years or less.
Have a term of five years or longer.
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 to a creditor that itself is eligible to make Balloon Payment QMs).
• The financial institution must: 1.
2.
3.
Determine that the consumer will be able to make the scheduled periodic payments (including mortgage-related obligations) other than the balloon payment.
Consider and verify the consumer’s income or assets, and debts, alimony, and child support.
Consider the consumer’s DTI ratio or residual income, although the rule sets no specific threshold for DTI or residual income.
Balloon Payment QM: Definition cont.
• • Like Small Creditor QMs, Balloon Payment QMs generally lose their QM status if a lender sells or otherwise transfers them less than three years after consummation.
However, a Balloon Payment QM keeps its QM status if it meets one of these criteria: 1.
2.
3.
4.
It’s sold more than three years after consummation.
It’s sold to another creditor which meets the criteria regarding operating in rural or underserved areas, number of originations, and asset size, at any time.
It’s sold pursuant to a supervisory action or agreement, at any time.
It’s transferred as part of a merger or acquisition of or by the creditor, at any time.
Safe Harbor for QMs
• • • QMs can receive two different levels of protection from liability depending on whether the loan is
higher-priced or not
.
QMs which are
NOT
higher-priced have a safe harbor, meaning that they are
conclusively presumed
to comply with the ATR requirements.
Under a finding
safe harbor
, if a court finds that a mortgage a lender originates is a QM, then that
conclusively establishes that the lender complied with the ATR requirements
originated the mortgage.
when it
“Safe Harbor” Status for Higher –Priced QMs
• • QMs which are higher-priced have a rebuttable presumption that they comply.
Under a rebuttable presumption, if a court finds that the mortgage a financial institution originated was a higher-priced QM, a consumer can argue that the lender violated the ATR rule.
• To prevail, the consumer must show that based on the information available to the financial institution 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.
July 2013 Amendment:
• • In July 2013, the CFPB issued its final rule making several amendments.
These amendments clarified, corrected, or amended six provisions: 1.
The relation to state law Reg. X’s servicing provisions; 2.
3.
4.
Implementation dates for ARM disclosures; Exclusions from the repayment ability and prepayment penalty requirements for HPMLs; The small servicer exemption from certain new servicing rules; 5.
6.
Use of government sponsored enterprise and federal agency purchase, guarantee or insurance eligibility for determining QM status.
The determination of debt and income for purpose of originating QMs.
Amendment One
• The CFPB amended the commentary to the preemption provision of Reg. X to clarify that the regulation does not occupy the field of regulation of the practices covered by the RESPA or Reg. X, including with respect to mortgage servicers or mortgage servicing.
Amendment Two
• • In response to industry requests, the CFPB provided clarification of the implementation dates for ARM provisions § 1026.20(c) and (d) of the 2013 TILA Servicing Final Rule.
This clarification does not revise the 2013 TILA Servicing Final Rule or its official commentary.
Amendment Three
• The CFPB revised § 1026.35(e) of Reg. Z, as amended by the Amendments to the 2013 Escrows Final Rule, to clarify that construction and bridge loans and reverse mortgages are not subject to its requirements regarding repayment abilities and prepayment penalties for HPMLs.
Amendment Four
• • • The CFPB clarified the scope and application of the exemption for small servicers that is set forth in Reg. Z’s periodic statement provision, § 1026.41, and incorporated by cross-reference in certain provisions of Reg. X.
The rule clarifies which mortgage loans to consider in determining small servicer status and the application of the small servicer exemption with regard to servicer/affiliate and master servicer/subservicer relationships.
The rule also provides three types of mortgage loans that will not be considered in determining small servicer status: 1.
2.
3.
Mortgage loans voluntarily serviced for an unaffiliated entity without remuneration; Reverse mortgages; Mortgage loans secured by a consumer’s interest in timeshare plans.
Amendment Five
• The CFPB revised regulatory text and an official interpretation adopted in the 2013 ATR Final Rule and added a new official interpretation to described QMs that are entitled to a presumption of compliance with the ATR requirements under the Dodd-Frank Act. Specifically: • § 1026.43(e)(4) allows QM status to certain loans which are eligible for purchase, guarantee, or insurance by the GSEs or federal agencies.
• § 1026.43(e)(4)(ii)(A)-(E) was amended to make clear that matters wholly unrelated to the ATR will not be relevant to determination of QM status under this provision.
• - Comment 43(e)(4)-4 explains that matters wholly unrelated to ATR are those matters that are wholly unrelated to credit risk or the underwriting of the loan.
Comment 43(e)(4)-4 also clarifies the standards a creditor must meet when relying on a written guide or an automated underwriting system to determine QM status under § 1026.43(e)(4).
Amendment Five cont.
• • Comment 43(e)(4)-4 clarifies that a loan meeting eligibility requirements provided in a written agreement with one of the GSEs, HUD, VA, USDA, or RHS is also eligible for purchase or guarantee by the GSEs or insured or guaranteed by the agencies.
• The comment has also been clarified to provide that loans receiving individual waivers from GSEs or agencies will be considered eligible as well.
The CFPB issued a new comment 43(e)(4)-5, which provides that a repurchase or indemnification demand by the GSEs, HUD, VA, USDA, or RHS, is not dispositive for ascertaining QM status.
Amendment Six
• • The CFPB amended appendix Q of Reg. Z to facilitate compliance and ensure access to credit by assisting creditor in determining a consumer’s DTI ratio for the purposes of § 1026.43(e)(2), the primary QM provision.
The Bureau’s revisions include clarification on: 1.
Stability of income and the creditor requirement to evaluate the probability of the consumer’s continued employment; 2.
With regard to salary, wage, and other forms of consumer income, the creditor requirement to determine whether the consumer’s income level can reasonably be expected to continue;
Amendment Six cont.
3.
4.
5.
6.
7.
Creditor analysis of consumer overtime and bonus income; Creditor analysis of consumer Social Security Income; Requirements related to the analysis of self-employed consumer income; Requirements related to the analysis of self-employed consumer income, including creditor analysis of consumer trust income; and Creditor analysis of rental income.
CFPB Enforcement
• • A creditor must retain evidence of compliance with this regulation for two years after the date disclosures are required to be made or action is required to be taken. § 1026.25
Administrative agencies responsible for enforcing the regulation may require a creditor under their jurisdiction to retain records for a longer period if necessary to carry out their enforcement responsibilities under § 108 of the Act
Questions