Ability to Repay / Qualified Mortgages Frequently Asked Questions January 15, 2014

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1 Q: Which transactions are covered and excluded? Covered transactions - First liens - Fixed Seconds - Refinances Excluded transactions Home Equity Line of Credit loans (HELOCs) Interest-only (QM) Transactions secured by interest in a timeshare Reverse mortgages Bridge or construction loans with terms of 12 months or less Q: Which CSL programs were retired as a result of ATR/QM? - Interest Only on all Adjustable Rate Mortgage (ARM) products - Jumbo loans over 43% Debt-to-Income (DTI) - Loan-to-Value (LTV)/Combined LTV (CLTV)/High CLTV (HCLTV) ratios > 95% Q: What is included in QM points and fees? Item Items included in the finance charge Notes For example: Admin fee Processing Fee Application Fee Origination Fee Most charges in the finance charge are included in the points and fees, with some exceptions. Exceptions are listed in the Charges Excluded From QM s Points and Fees Calculation chart immediately following this one. Compensation paid to broker Borrower-Paid or Lender-Paid Page 1 of 9

2 - A mortgage broker firm or a lender/creditor acting as a mortgage broker - The lender/creditor or brokerage company from the borrower (but not compensation paid by the borrower to a broker if the compensation is already included in points and fees as a finance charge) Real-Estate-Related fees paid to an Affiliate of the Broker 1. Compensation paid by a mortgage broker originator to an employee include in points & fees. 2. Compensation paid by a lender originator to an employee- not included in points and fees. 3. Compensation paid by a lender/creditor to a mortgage broker - included in points and fees, in addition to any origination charges paid by a borrower to a lender/creditor. Include any fees charged by an affiliate, including fees for: Title examination, abstract of title, title insurance, property survey, messenger, wire fees, administration fees, and similar Preparing deeds, mortgages, and reconveyance or settlement documents Notary and credit report Property appraisal or inspections Escrow/settlement CSL uses outside appraisers and Appraisal Management Companies (AMCs) (no affiliate arrangement). Other forms of Credit Insurance or insurance where creditor is the beneficiary Prepayment penalties Premiums payable at or before consummation including charges for any credit life, disability, unemployment, property insurance or most other insurance where the creditor is beneficiary; payments for any debt cancellation or suspension agreement or contract. CSL does not offer products/charge prepayment penalties. Q: What is excluded from QM points and fees? Item Per diem interest /Time price differential Notes See Terms & Definition Section for additional information Page 2 of 9

3 Bona fide Third Party Charge not retained by the broker or the lender, or an affiliate of the broker or lender Third party charges that are not paid to an affiliate of the creditor, are reasonable and are not direct or indirect compensation to the creditor are excluded, such as: Tax service, transfer tax Flood certification or flood-hazard determinations Title examination, abstract of title, title insurance, property survey, title courier fee, title notary fee Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents Notary and credit report Property appraisal or inspections - Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation Escrow/settlement Prepaid interest Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge Mortgage insurance - Government mortgage insurance premium. Any premium payable to HUD. Federal or State guaranty or insurance premiums (FHA) Government mortgage insurance premium. Some Private Mortgage Insurance generally the amount equal to or less than government mortgage insurance premiums payable at or before consummation as well as post consummation payments. Premium or other charge is payable at or before consummation, the portion of any such premium or other charge that is not in excess of the amount payable under FHA policies in effect at the time of origination provided that the premium or charge is required to be refundable on a pro rata basis and the refund is automatically issued upon notification of the satisfaction of the underlying mortgage loan; Premium or other charge is payable after consummation, the entire amount of such premium or other charge. It is refundable on a pro rata basis, and the refund is automatically issued upon notification of the satisfaction of the loan. Page 3 of 9

4 See MI Chart for additional guidance Discount points - Up to 2 bona fide discount points, where the undiscounted rate does not exceed the APOR by more than 1% - Up to 1 bona fide discount point if the undiscounted rate does not exceed the APOR by more than 2% This is an area of confusion among many. Here are some relevant quotes from the final rule, where it discusses Bona Fide Discount Points: "...to be bona fide, a discount point must reduce the interest rate based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer. To satisfy this standard, a lender/creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions, means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point. Generally this would include all rate and price adjustment. Any other points that may lower the interest rate would be considered a bona fide discount. Individual Compensation Compensation paid by a Lender/Creditor or a Mortgage Broker to an individual who is an employee of the creditor or mortgage broker. Seller points Charges paid by the seller should be included if they pay for any other items required to be included in points and fees. In addition to the exclusion for seller s points, certain charges paid by a seller may be excluded if they are not among the charges listed above Page 4 of 9

5 in the chart on Charges Included in QM Points and Fees Calculation. Example: Seller s points are not included in points and fees as they are not included in the finance charge. But they still may be included in points and fees if for example, they cover loan originator compensation. Q: Can the broker charge a flat fee? A: Yes. The broker can also put a ceiling and floor in place. Q: What other checks must CSL perform to conform to Dodd-Frank? Channel NMLS Name and ID Document Wholesale Broker (Originator: NMLSR ID) Broker Company (Originator Organization: NMLSR ID) 1003 Application Note Deed of Trust/Mortgage Originator & Originator Organization NMLSR ID must reflect on last page of Note & Deed If CSL discovers prior to funding that the loan originator (broker interviewer) on the initial signed 1003 is no longer employed by the broker company or does not have an active NMLS ID: CSL does not need to reissue previously completed documents merely to update a loan originator name and NMLS ID. On all subsequent loan documentation, including the final 1003, CSL includes the information about the loan originator who now has primary responsibility, and not the information about the loan originator who formerly had primary responsibility. A new initial 1003 is required only if the loan originator (broker interviewer) did not have a valid NMLS ID number at time of application. The borrower s acknowledgement is not required if the loan originator s name or NMLS ID changes. QM: MI Premiums Page 5 of 9

6 Under QM, the treatment of MI premiums as a component of the points and fees calculation is a key determinant of whether a loan is in the safe harbor or has no legal protection. The chart below is a helpful guide as you navigate the new QM Rule and apply to the two current products offered by CSL: MI Product BPMI Deferred Monthly (Non-Refundable) LPMI Singles (Non-Refundable) Included in Points & Fees Calculation? No No Notes Periodic payments including any initial payment due at closing are not included in points and fees calculation. If MI premium is reflected in the interest rate, it is not included in the points and fees calculation. It s important to note that payments by a seller toward finance charges or seller s points are not included in the points and fees calculation as long as the consumer will not be legally bound to the creditor by the charges. MI premiums are considered finance charges, and therefore a seller s payment of an upfront MI premium would not count toward the points and fees test. Q: What high cost tests do loans have to pass? A: Mortgages must now pass these updated high cost tests: Test Fannie Mae/Freddie Mac Description Follows same points and fees as for Ability-to-Repay (ATR)/Qualified Mortgages (QM). Section 32 (Home Ownership and Equity Protection Act ) (HOEPA) APR The APR exceeds Annual Percentage Offer Rate (APOR) for a comparable transaction by more than: 6.5%for first lien transactions, other than described in the next bullet 8.5% for a first lien transaction if the dwelling is personal property and the loan amount is less than $50, % for a subordinate lien Page 6 of 9

7 transaction Total Points and Fees 5% of total loan amount, for loan amounts > $20,000 The lesser of 8% of total loan amount or $1,000, for loan amounts < $20,000 Q: What is the impact of ATR/QM to the pipeline? A: The ATR/QM rule is effective for all new loan applications CSL receives January 10, 2014 or later Q: If a pre-approval application is taken prior to January 10, does it have to adhere to ATR/QM guidelines? A: A pre-approval application is not a completed application, so unless it becomes an application prior to January 10, it must adhere to ATR/QM guidelines. Term Ability-to-Repay Definition At minimum, the following underwriting factors must be considered: - Continuity of income - Reserves and assets - Current and previous employment status - Monthly payment on the subject transaction - Monthly payment on any simultaneous loan - Monthly payment(s) for mortgage obligations - Current debt obligations, including alimony or child support - DTI and residual income - Credit history Affiliate Any company that controls, is controlled by, or is under common control with another Page 7 of 9

8 company. Example: Broker in-house escrow APOR Bona fide Discount Points Average Prime Offer Rate An annual percentage rate (APR) 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. An amount paid by the borrower that reduces the interest rate for the transaction in a manner that is consistent with established industry practice. Example: Interest Rate Adjusters and Price Adjusters Credit Insurance Credit insurance is a type of life insurance policy purchased by a borrower that pays off one or more existing debts in the event of a death, disability, or in rare cases, unemployment. CSL does not offer or require credit insurance. Example on TIL below: HOEPA Home Ownership Equity Protection Act - The ACT is a major change in the Federal Truth in Lending Act and Regulation Z. Mortgages originated under this ACT are called HOEPA mortgages, Section 32 mortgages, Section 129 mortgages, High Cost mortgages or High Interest Rate mortgages. The three loan types are: - Prime Loans - Higher-priced loans - High Cost loans (HOEPA loans) Not all residential loans are HOEPA mortgages Only a loan on a principal residence can be a HOEPA loan. A mortgage is a HOEPA loan if it fails a total points and fees test or an interest rate test. Page 8 of 9

9 Points and Fees Qualified Mortgage (QM) CSL Eligible Safe Harbor Temporary QM (Agency QM) CSL Eligible Time Price Differential QM Total Loan Amount Charges known at or before closing associated with obtaining financing for the loan transaction. A home loan that meets certain standards set forth by the federal government. Lenders that generate such loans will be presumed to have also met the Ability-to-Repay rule mandated by the Dodd-Frank Act. Loans with APRs less than 1.5 percentage points (or 150 basis points) over the APOR. (The APOR is determined weekly and relates to Freddie Mac s survey.) A safe harbor loan is harder for the borrower to challenge in court because the lender is conclusively considered as having fulfilled the Ability-to-Repay rule. An agency-eligible or government insured or guaranteed loan that meets underwriting and documentation standards, to remain in place until the government agencies write their own QM rules, the GSE conservatorships end, or a period of seven years. The difference between the purchase price of a property and the higher total price paid if the purchase is financed. The Truth in Lending Act requires disclosure of the time-price differential in an installment sale contract. Amount financed from the Truth-in-Lending statement minus any points and fees included in the loan amount. The total loan amount equals the amount financed ( ) minus any points and fees that are rolled into the loan amount. Multiply the total loan amount by the percentage cap to determine the maximum allowable points and fees. Refer to Calyx Point QM Findings Report Points and Fees Analysis Section. Page 9 of 9