Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-i

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1 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-i 7 - Table of Contents 7 - UNDERWRITING OVERVIEW Description Philosophy Options Methods Important Help Loan Quality Validation of Social Security Number LQI-Undisclosed Debt Policy REGULATORY COMPLIANCE Overview RESPA S.A.F.E. Act and FHFA-Data Capture S.A.F.E. Act Instructions for the Delaware, Maine and Missouri-NMLS Company ID Risk Based Pricing Rules Financial Reform CFPB Consumer Financial Protection Board Residual Income and Reserves for QM Rebuttal Presumption CFPB ATR Standards (QM Requirements) QM Points and Fees Additional Notes to Points/Fees Regarding Credits CFPB - Additional Requirements Lock Agreements MSI UNDERWRITING Flood Zone Determination - Life of Loan HMDA Data Purpose of Refinance Mortgage Insurance Notice of Loan Decision Conditions/ Stipulation AUTOMATED UNDERWRITING Overview Acceptable AUS Decisions AUS Assignment AUS Tolerances Maximum Number of Borrowers Submission Requirements for AUS Loans MSI Submission AUS Data Fannie Mae Casefile ID and Freddie Mac LP AUS Key Number Excessive Submissions UNDERWRITING GUIDELINES Overview Conventional Guidelines Overview Government Guidelines Product Summary Precedence Presentation Continued on Next Page

2 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-ii Table of Contents, Continued ASSETS AND LIQUIDITY Overview AUS Supporting Documents Borrower Funds Secured by an Asset Bridge Loan Business Funds Cash Value of Life Insurance Credit Card Financing Checking and Savings Accounts Departure from Principal Residence Deposit on Sales Contract Eligible Assets Verification Requirements Funds to Close Gift of Equity Ineligible Assets Large Deposit Real Estate Proceeds Rent Credit for Options to Purchase Reserves AUS Underwritten Principal Residence Pending Sale Acceptable funds for Reserves Retirement Sale of Stocks or Bonds Tax Deferred Exchange Verification of Deposits Sale of Personal Assets BORROWERS Overview Borrowers ARMs Length Transactions First Time Homebuyers Illinois Land Trust Eligibility Requirements Documentation Requirements Signature Requirements Inter Vivos Revocable Trust (IVRT) Eligibility Requirements Required Documentation IVRT & Illinois Trust Checklists Multiple Mortgages to the Same Borrower Property Limitations Matrix Non-Arms Length or Identity of Interest Transaction Credit and Requirements for Non-ARMs Length/Identity of Interest Transactions Non-Occupant Co-Borrower Non-Permanent Resident Alien Requirements NAFTA Continued on Next Page

3 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-iii Table of Contents, Continued Non-Purchasing Spouse Permanent Resident Alien Power of Attorney Purchasing Co-Borrower Owner Occupancy Primary Residence MSI Definition of Primary Residence (Owner Occupancy) Spousal Property Rights Trailing Borrower Income U.S. Citizen CERTIFICATIONS Summary CONSTRUCTION TO PERMANENT FINANCING Overview Characteristics MSI Requirements MSI Construction-to-Perm Requirements Matrix Single Close/ Integrated Documentation CONTRIBUTIONS Interested Party Contributions Seller Concessions Realtor Commissions Limitations Sales Abatement CREDIT Overview MSI Approved Credit Reporting Vendors Age of Documents Conventional Loans Authorized User Accounts Bankruptcy/ Foreclosure Bankruptcy Extenuating Circumstances for Bankruptcy Only Re-established credit considerations Documentation Requirements Pre-Foreclosure, Short Sale or Deed-in Lieu Short Sale Additional Guidelines Additional Requirements Purchase Transactions-Subject in Short Sale Short Sale Fees Purchase Transaction Collections, Charge-offs, Judgments, Garnishments, and Outstanding Liens Consumer Credit Counseling Credit Report Inquiries Credit Score (FICO) Disputed Credit Information Conventional, FHA and VA Loans USDA loans Electronic Credit Reports Modified Mortgage-Credit History Consideration Mortgage/ Rental Payment Non-Traditional Credit Frozen Credit Trade lines Continued on Next Page

4 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-iv Table of Contents, Continued Residential Mortgage Credit Report Summary Information Single Payment Notes DISASTER POLICY Overview Timing Definition Areas subject to Disaster Policy Appraisal Requirements Appraisals Completed on or before the Incident Period End Date FHA Streamlines and USDA Streamlines Appraisals Completed up to 90-days after the Incident Period End Date Minor Damage Requirements Major Damage Requirements Damage Inspection Requirements DOCUMENTATION REQUIREMENTS Age of Documentation General Requirements Direct VOE Requirements Tax Extensions IRS Tax Transcripts Review Amended Tax Returns Tax Payer Identification Theft Verbal Verification of Employment Verbal Verification Requirements ESCROW (COMPLETION) HOLDBACKS Overview Eligibility Roof Repairs ESCROW WAIVER POLICY Overview Underwriter Responsibility GOVERNMENT UNDERWRITING Overview Guidelines INCOME AND EMPLOYMENT Important Overview Recent Tax Returns and a clarification of Income and additional income DU/LP Alimony / Child Support / Separate Maintenance Boarder Income Bonus and Overtime Capital Gains Commission Income Disability Benefits Dividends and Interest Continued on Next Page

5 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-v Table of Contents, Continued Employment by Relatives or Transaction Participants Foster Care Income Foreign Income Military Income Non-Taxable Income Mortgage Credit Certificate Note Receivable Income Part-Time, Second or Multiple Income Pension / Retirement Individual Retirement Account (IRA) Income Public Assistance Rental Income - Primary Rental Income - Investment Rental Income Other Properties Rental Income- Special Circumstance Rental Property is borrower s former primary residence Rental Income Through S-Corp or Partnership Qualifying Without Rental Income Royalty Payments Salaried Borrower Salaried Income History Salaried Documentation Salaried Verification of Employment Seasonal Income Social Security Retirement Benefits Self-Employed Borrowers Self-Employed Documentation Business Debt Use of Corporate Net Profit Self-Employed Income History Temporary Employment Income Temporary Leave-Short Term Disability Income Income Verification Requirements Calculation of Qualifying Income Trust Income Unacceptable Sources of Income Unemployment Benefits US Tax Returns VA Retirement Benefits LIABILITIES AND DEBT Overview Debt-to-Income Conversion of (or departure from) Principal Residence LOAN PURPOSE Overview Purchase Transactions Refinance Credit Rule Refinance Continued on Next Page

6 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-vi Table of Contents, Continued Refinance Requirements General Refinance Requirements Seasoning Requirements Continuity of Obligation No Continuity of Obligation LLC Rate/Term (R/T) or Limited Cash Out (LCO) Refinance Cash Out Refinance Delayed Financing Exception Investment (NOO) Cash Out Delinquent Property Taxes Listed for Sale Modified/ Restructured Loans Special Purpose Refinance MORTGAGE INSURANCE Overview Approved Mortgage Insurance Companies Standard MI Coverage Requirements MI Premium Options PROPERTY Appraisal Standards and Requirements Interior Photos Appraiser Independence Requirements (AIR) AIR/CFPB Audit Guidelines Matrix New Appraisals MSI Appraiser List Limitations Market Conditions Addendum Age of Appraisal Appraisal Forms AUS High Value Messages Appraisal Photographs UAD MSI Appraisal Ratings Overlays UCDP Uniform Loan Delivery Dataset Adverse Marketing Conditions Special Appraisal Requirements for Adverse Market Conditions Agricultural Properties Builder Bail Out Policy Comparables New Projects and/or New Subdivisions Comparable Requirements Chinese Drywall Condominium Overview Condominium Appraisal Condominium Characteristics Continued on Next Page

7 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-vii Table of Contents, Continued MSI Acceptable Condos DU Limited Review LP Streamline Review Unit Condos Fannie Mae Approved Project CPM FHA-Approved Project Non-Warrantable Condos Freddie Mac (LP) MSI Ineligible Condos General Condo Requirements Degree of Development Deed Restrictions Occupancy Restrictions Property with Resale Deed Restrictions Age Restrictions Documentation Requirements for Age-Restricted Properties Environmental Issues and Other Hazards Ineligible Property Types Land Contracts the Land Contract for Sale Leasehold Estate Overview Leasehold Requirements Matrix Legal Non-Conforming Use Location Log Homes Lot Size- Maximum Acreage New Construction Modular/ Factory Built Homes Mixed Use Properties Outbuildings Private Road Maintenance Purchase Agreement (Contract) Re-Negotiated PUDS Overview Attached PUD Insurance REO/Repo Properties Right of Redemption Rural Property Security Bars Subject Property Size PROPERTY FLIPPING Overview Chain of Title Requirements for Purchase Transactions Red Flags Property Seller is LLC Property Flopping Continued on Next Page

8 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-viii Table of Contents, Continued QUALIFYING RATIOS AND LIABILITIES Summary Product Suites Debt-To-Income Ratio Calculation Alimony Automobiles Paying off Debt Monthly Payments Co-Signed Obligations Real Estate Obligation HELOC For qualifying purposes Revolving Debt Student Loans SUBORDINATE FINANCING Overview Subordinate Financing Requirements Matrix Documentation Requirements Home Equity Line of Credit

9 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-1 Overview 7 - Description The Chapter outlines the types of underwriting offered by Mortgage Services III, LLC (MSI) as well as providing underwriting requirements for MSI loan products. Philosophy MSI is committed to closing/purchasing investment quality loans that meet acceptable risk standards as defined by the mortgage industry. All loans closed/purchased by MSI must be underwritten according to the guidelines and requirements of MSI; Fannie Mae; Freddie Mac; End Investors; Ginnie Mae (GNMA); FHA, VA, or USDA as applicable. MSI must deliver loans in accordance with the standards and requirements stated in the MSI Mod Corr Selling Guide. Options MSI offers the following underwriting options: MSI Prior Approval MSI does not offer delegated underwriting to our Sellers, regardless whether or not the loan is closed in the Seller s name. Notes: MSI requires Sellers to originate loans in full compliance with all state/federal and local regulatory requirements. All loans must meet MSI guidelines. Methods MSI purchases/funds loans that are: Submitted to Automated System (AUS) Underwritten MSI accepts the Fannie Mae DU approve or Freddie Mac LP accept decision with loan product parameter over-lays. FHA Total Score Card. VA DU or LP. USDA GUS.

10 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-2 Overview, Continued Important Important reminder: All prior to doc (aka prior to close ) conditions must be approved/accepted by the applicable underwriter prior to closing the loan. MSI must approve/clear the prior-to-doc conditions before documents are drawn and the loan closed. Failure to have the conditions cleared/approved may result in subsequent discovery of un-approved/cleared conditions in a postfunding audit. Help Use the following address to request underwriting assistance: MSIuw@msiloans.biz or any member of the underwriting staff. Loan Quality MSI complies fully with the Quality Mortgage and the Ability to Repay (QM/ATR) implemented by the Dodd-Frank CFPB requirements. Loan Quality, Continued Quality Topic Validation of Social Security Number Borrower Occupancy MSI Requirement/Audit Point MSI requires that the SSN is validated. MSI uses a Fraudguard product for all loans underwritten by MSI. Important Note: MSI will not close any loan for which the AUS has an outstanding Social Security Verification (SSN) Message on the final AUS finding. Follow the applicable agency guidelines for validating the SSN and resubmit the loan according the AUS Guidelines. Remember, if the SSN verification message is not removed on the final AUS finding, the loan is not eligible for closing. MSI requires that the borrower occupancy to be validated. (MSI requires an executed Borrower Occupancy Certification on all owner occupied loans.) MSI uses a Data Verify/FraudGuard product for all loans underwritten by MSI.

11 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-3 Overview, Continued Loan Quality, Continued Quality Topic Validation of Qualified Parties to the Transaction Borrower Credit- Undisclosed Liabilities Property Unit Number MSI Requirement/Audit Point MSI requires that each loan contain documentation (copy of screen print-outs) provided by the Seller that each party to the transaction has been checked/validated on the following Web Sites: GSA List: LDP List: Qualified Parties to be checked: Borrowers, Property Sellers, Title Company, Appraiser; Attorney; Loan Originator. Processor, Listing and Selling Agents, and Settlement Agent. You must check full and partial names (as applicable to the site). Additional Lists to validate include, but are not limited to: Condo Exclusionary Lists TPO lists. Settlement Agent Lists. Appraiser Exclusionary Lists, including applicable MSI and Fannie and/or Freddie. GSE Exclusionary Lists. Each loan file delivered to MSI for closing must be submitted through an appropriate Fraud/Quality System (e.g. Core Logic, etc.) to ensure that all debts have been disclosed. A copy of the system findings/report for each qualifying borrower must be included in the loan file. MSI will perform this test for each conventional loan underwritten by MSI. See LQI-Undisclosed Debt Policy Note: If an investor subsequently determines that any debts were not adequately disclosed on the application, nor included in the debt-to-income ratio such that the loan would not have met MSI s eligibility requirements, the mortgage loan will be subject to repurchase. Each loan is subject to a USPS review. Note: For any property that is identified by a unit or suite number, that number must be included as part of the property address and be present on all applicable loan file documents to including settlement documents.

12 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-4 Overview, Continued LQI- Undisclosed Debt Policy The following outlines the policy MSI follows to ensure compliance with the LQI-Undisclosed Debt Requirements: MSI underwrites the loan MSI underwriter must condition the conventional loan to Pull LQI Credit Report prior to issuing a Clear to Close. (Important Note: MSI will clear this condition, the report is ordered by MSI.) The underwriter must then review the LQI credit report for any new undisclosed debts, increase in debts, or inquiries for new debt. New or increased debt must be addressed by re-entering new/increased debt amounts into DU or LP and if applicable, the borrowers must provide an explanation for inquiries. Once reviewed and resolved, the Underwriter adds a new condition to the loan: MSI LQI Credit Report is good through (date 10-calendar days from date of LQI credit report). If loan does not close/disburse by (date) the loan must be returned to for a new LQI Credit Report. Important Notes: Review of previously undisclosed debt may result in the borrowers no longer qualifying for the loan, those loans may not be closed. MSI requires third party validation or credit supplement to validate new debt. New debt must be disclosed on the Income/Debt Worksheet, the 1003 and all applicable DataTrac entries.

13 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-5 Regulatory Compliance Overview Each mortgage loan must be originated and submitted in compliance with the applicable underwriting guidelines in this Selling Guide and all applicable governing statutes and regulations as amended including, but not limited to, the following: Equal Credit Opportunity Act (ECOA/Regulation B) Consumer Credit Protection Act Fair Credit Reporting Act Fair Housing Act Truth-in-Lending Act (TIL/Regulation Z) Real Estate Settlement Procedures Act (RESPA/Regulation X) Home Mortgage Disclosure Act (HMDA/Regulation C) Home Ownership and Equity Protection Act (HOEPA-Section 32) Agency, Federal, State and Municipal High-Cost and Anti-Predatory Laws (the more restrictive guideline always applies) The USA Patriot Act and Economic Sanctions as applied by the Office of Foreign Asset Control (OFAC) CFPB with QM/ATR. MSI does not discriminate against applicants on the basis of race, religion, national origin, sex, marital status, age (provided the applicant has the ability to enter into a binding contract) or because all or part of the applicant s income is derived from any public assistance program. RESPA RESPA is completed/reviewed by the MSI RESPA Team. During the course of underwriting any changes that may require re-disclosure must be noted as a condition on the NOLA for the Disclosure Division to re-disclose. S.A.F.E. Act and FHFA- Data Capture MSI requires that all loans meet applicable State, Federal and GSE requirements for the S.A.F.E. Act. MSI will validate the ID numbers provided on each Application and Appraisal prior to funding. Loans underwritten by MSI: MSI will validate the ID numbers provided against the NMLS Web Site. License ID/Numbers that are incorrect or missing will result in MSI not closing the loan until the issue is resolved.

14 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-6 Regulatory Compliance, Continued S.A.F.E. Act and FHFA-Data Capture, Continued MSI currently requires the following in compliance with the GSE(Federal Housing Finance Agency) data capture requirements and the S.A.F.E. Act: The following data elements/information must be captured: For the S.A.F.E Act: Loan Originator ID Provide on the 1003, initial and final. Loan Originator Company ID Provide on the 1003, initial and final. For the GSE s: Field Appraiser License Number Provide on the Appraisal No state exceptions Supervisory Appraiser License Number Provide on the Appraisal No state exceptions. Notes: While FHA and VA have not yet enacted a requirement to disclose the NMLS numbers; MSI does require the information for government loans delivered/sold to us. Federally Insured Banks/Credit Unions: Effective for loan applications on/after 7/29/11, all federally regulated originators will be required to provide their NMLS identifiers and meet the requirements of the S.A.F.E. Act. MSI uses the following web site to validate NMLS numbers ( NMLS Number Tips: The NMLS Number should not: Be the branch ID. GSE s require the Loan Origination Company ID to be provided. Include letters or special characters or be shorter than four or longer than twelve digits. Consist of Social Security Numbers, phone numbers, state license numbers, or your client code. Include leading zeros at the beginning of a number that do not factor into the total number of digits. Be the same for both the Individual ID and the Company ID. The Loan Originator Company ID will always be different from the Loan Originator Individual ID.

15 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-7 Regulatory Compliance, Continued S.A.F.E. Act and FHFA-Data Capture, Continued S.A.F.E. Act Instructions for the 1003 Field on the 1003 (Use the Current Version) Loan Originator Name Loan Originator Identifier Loan Originator Company Name Loan Originator Company Identifier Loan Origination Company Address Instructions Name of the LO originating the loan. Must match the exact name of the LO as documented in NMLS. Unique NMLS LO Number. Name of the company originating the loan. Must match the exact name of the company as documented in NMLS. Unique NMLS Number assigned to that company (the corporate ID). Note: If the company has multiple locations, the ID number for the corporate office is required on the 1003 Branch address where the loan originated. REV (8/24/15) Delaware, Maine and Missouri-NMLS Company ID These states must comply with the S.A.F.E. Act and originators and loan officer NMLS ID numbers are required.

16 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-8 Regulatory Compliance, Continued Risk Based Pricing Rules All loans with an application date on/after 1/01/11 the new Risk- Based Pricing rules, issued by the Federal Reserve Board and Federal Trade Commission are effective. Risk-Based Pricing rules are an amendment to The Fair and Accurate Credit Transactions Act of 2003 (FACT Act). The FACT Act amended the Fair Credit Reporting Act (FCRA). The Risk Based Pricing notice replaces the Notice to Home Loan Applicant Disclosure (FACTA credit score disclosure). The new federal law requires that all borrowers are provided with the Risk-Based Pricing notice within 3 business days of having credit pulled. The notice provides borrowers with information regarding their credit, including how their credit score compares to the credit scores of other borrowers. Lenders should consult with their legal counsel or credit reporting vendors to ensure that the Notice they intend to provide to their applicants, on/after January 1, 2011, meets the disclosure requirements detailed under FCRA. MSI will accept the Risk Based Pricing Notice included on the Credit Report. The notice provided must be in full compliance with the new Risk Based Pricing Rules.

17 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-9 Regulatory Compliance, Continued Financial Reform (7/02/14) CFPB Consumer Financial Protection Board All loans closed by MSI must meet the Qualified Mortgage/Ability to Repay requirements in the HUD and CFPB Final Rule. ATR/QM Requirements The following matrix outlines MSI s interpretation of the ATR/QM requirements of the Dodd-Frank provisions of the financial reform regulations. Category Safe Harbor QM (4) Rebuttable Presumption QM (4) Eligible for MSI Yes Yes But must be tested by a third party vendor and identified. ATR/QM Requirements Matrix All loans except FHA ATR/QM Requirements (2) (3) (4) (5) Term 30 years or less, no negative amortization, no interest only, no balloon payment; and adherence to the applicable points and fees thresholds; and APR < APOR + 1.5% (first liens); and 43% DTI underwriting requirements (based on Appendix Q guidelines); OR Fannie/Freddie eligible or insured by VA, HUD or Rural Housing in which case the 43% DTI may be increased [Temporary QM -until proposed rule is finalized. (1)]. Term 30 years or less, no negative amortization, no interest only, no balloon payment; and adherence to the applicable points and fees thresholds; and APR APOR + 1.5% (first liens); and 43% DTI underwriting requirements (based on Appendix Q guidelines); OR Fannie/Freddie eligible or insured by VA, HUD or Rural Housing in which case the 43% DTI may be increased [Temporary QM -until proposed rule is finalized. (1)]. The loan must be qualified using Residual Income and Reserve Requirements. See Residual Income and Reserves for QM Rebuttal Presumption. Note: If the loan is DU Refi Plus or LP Relief Refinance and identified as an HPML the maximum DTI is 45% regardless of the AUS approve/accept. Notes: 1. Temporary QM defines that loans that receive an Approve/Eligible (or equivalent result) or are eligible for insuring by VA, HUD or Rural Housing are considered to meet the requirements for QM. Note: VA & FHA require an AUS Approve/Accept and RD requires GUS approval. DTI, as approved by the AUS are permitted (MSI may have lower DTI requirements on a specific product.) 2. General/Standard QM : Loans that do not meet the underwriting requirements under Temporary QM must have a DTI 43% to meet the General/Standard QM underwriting requirement. The determination of DTI must be in accordance with Appendix Q as outlined in the ATR/QM rule. 3. Investment Properties/ Second Homes MSI requires that Investment Properties and Second Homes adhere to our ATR/QM requirements. 4. HPML must be confirmed by a 3 rd party vendor. 5. MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt in the context of ability to repay ; MSI requires a written Income and Debt Worksheet is each loan file.

18 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-10 Regulatory Compliance, Continued ATR/QM Requirements, Continued ATR/QM Requirements Matrix FHA Loans (HUD Final Rule) Category Eligible for MSI ATR/QM Requirements (2) (3) (4) (5) HUD Safe Harbor QM (4) Yes Term 30 years or less, no negative amortization, not interest only, no balloon payment; and adherence to the applicable points and fees thresholds (see Points and Fees below); and Loan is insured by FHA. APR < APOR % (115 bps) + annual MIP HUD Rebuttable Presumption QM (4) Yes But must be tested by a third party vendor and identified. Notes: MSI does not permit the downgrade of an FHA loan to a manual underwrite. Federal HPML prepayment and escrow requirements apply if APR APOR+1.5% Term 30 years or less, no negative amortization, not interest only, no balloon payment; and adherence to the applicable points and fees thresholds (see Points and Fees below); and Loan is insured by FHA. APR APOR % (115 bps)+ annual MIP The loan must be qualified using Residual Income and Reserve Requirements. See Residual Income and Reserves for QM Rebuttal Presumption. Notes: MSI does not permit the downgrade of an FHA loan to a manual underwrite. Federal HPML prepayment and escrow requirements apply if APR APOR+1.5% Notes: 1. Temporary QM defines that loans that receive an Approve/Eligible (or equivalent result) or are eligible for insuring by VA, HUD or Rural Housing are considered to meet the requirements for QM. Note: VA & FHA require an AUS Approve/Accept and RD requires GUS approval. DTI, as approved by the AUS are permitted (MSI may have lower DTI requirements on a specific product.) 2. General/Standard QM : Loans that do not meet the underwriting requirements under Temporary QM must have a DTI 43% to meet the General/Standard QM underwriting requirement. The determination of DTI must be in accordance with Appendix Q as outlined in the ATR/QM rule. 3. Investment Properties/ Second Homes MSI requires that Investment Properties and Second Homes adhere to our ATR/QM requirements. 4. HPML must be confirmed by a 3 rd party vendor. 5. MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt in the context of ability to repay ; MSI requires a written Income and Debt Worksheet is each loan file.

19 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-11 Regulatory Compliance, Continued ATR/QM Requirements, Continued ATR/QM Requirements Matrix VA Loans (VA Interim Rule) Category Eligible for MSI ATR/QM Requirements Safe Harbor QM VA Rebuttable Presumption Yes No All purchase money loans and credit-qualifying loans guaranteed/insured by the VA with the exception of certain IRRRLs. Term 30 years or less, no negative amortization, not interest only, no balloon payment; and adherence to the applicable points and fees thresholds IRRRL with Safe Harbor must meet the following to be eligible: Seasoning: The loan must be originated a minimum of 6 months from the prior loan closing date. The loan cannot be more than 30 days past due during the most recent 6 months. (MSI requires the loan to be current and does not accept any mortgage lates in the most current 12 month period.) Fees and charges may not exceed 3% (calculated from the amount financed less the funding fee) and the Borrower must recoup those fees within 36 months of loan closing. All VA requirements must be met. The loan must be guaranteed by VA. MSI will not purchase any VA loan that is Rebuttable Presumption. Notes: Note: MSI requires an AUS Approve/Accept. DTI, as approved by the AUS are permitted (MSI may have lower DTI requirements on a specific product.) MSI requires evidence written evidence of compliance with the ART/QM rules in each loan file; review Income & Debt in the context of ability to repay ; MSI requires a written Income and Debt Worksheet is each loan file.

20 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-12 Regulatory Compliance, Continued Financial Reform, Continued Residual Income and Reserves for QM Rebuttal Presumption MSI requires specific Residual Income and Reserves on all QM Rebuttal Presumption loans. Residual Income is defined (and calculated) as Qualified Gross Monthly Income less the Gross Monthly Debt. Do not use the non-taxable grossed-up figure to calculate residual income. MSI requires a Residual Income Evaluation (RIE) on each Qualified Mortgage that tests as a Rebuttal Presumption loan. (Currently all products.) MSI has placed the RIE on the Summary Page of the Income and Debt Worksheet that must be included in each loan. The REI must be performed prior to loan consummation and document sufficient residual income to meet monthly living expenses after paying their mortgage and other debts. If the monthly residual income is Then, the minimum Reserve Requirements are Primary Residence $2500 No Minimum Reserve Requirement $800 < $2500 The greater of: 3 month s liquid(1) PITI OR Minimum reserves for the specific loan product. < $800 Loan is not eligible. Second Home or Investment Property $2500 No Minimum Reserve Requirement < $2500 Loan is not eligible. 1) Apply the definition for liquid reserves as required by the specific product (e.g. use the FHA definition of liquid reserves for FHA loans, the conventional definition for conventional loans, etc.)

21 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-13 Regulatory Compliance, Continued Financial Reform, Continued CFPB ATR Standards (QM Requirements) In addition to Points & Fees Restrictions (See QM Points and Fees), and No Negative Amortization, No Interest Only or Balloon Payments, No loan terms greater than 30 year, the Ability to Repay (ATR) is the backbone of a Qualified Mortgage. ATR standards require that the Underwriter (even when an AUS is used) must consider the following 8 underwriting factors when considering the borrower s ability to repay the loan: Income and Assets Employment status Monthly payments on the mortgage loan. Look at guides for qualifications on all ARMS loans Monthly payments on simultaneous loans secured by the same property Monthly payments on mortgage related obligations Current debt obligations/alimony/child Support Monthly DTI or residual Income Credit History Note: All loans must meet the ATR standards.

22 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-14 Regulatory Compliance, Continued Financial Reform, Continued QM Points and Fees To be considered for as a Qualified Mortgage all loans must meet the QM Points and Fees test. The following matrix provides the guidelines for that Points/Fees test. MSI performs a PredProtect test on every loan submitted for delivery and MSI reserves the right to refuse closing of the loan based on the results of the PredProtect test. There is no cure for loans that do not meet the ATR/QM and Points/Fees requirements for Financial Reform. Qualified Mortgage Points/Fees Cap (Maximum Points and Fees ) $100,000 and greater 3% $60,000 to $99,999 $3,000 $20,000 to $59,999 5% $12,500 to $19,999 $1,000 Points/Fees Included in 3% Cap MSI Interpretation Points/Fees Excluded in 3% Cap MSI Interpretation Finance charges that are not bona fide or reasonable Per Diem Interest Third Party fees paid to the Broker, an Affiliate of the Escrows (Impounds for taxes and insurance) Broker or Lender. This includes the MSI Admin Fee. Conventional Private Mortgage Insurance (PMI): Borrower paid Single Premiums refundable or non-refundable. The upfront portion of borrower paid Split Premiums. Wholesale Transactions Only: Lender Paid or Borrower Paid Compensation. Correspondent Transactions Only: All Borrower Paid LO Comp. Loan Level Price Adjustments (LLPA) charged to the borrower which are not risk based. Clarification to follow at a later date. Any premium payable to FHA MIP; VAFF; USDA GFEE; PMI may be excluded as follows: Borrower paid monthly premiums (no upfront fee required). The monthly portion of borrower paid Split Premiums. Lender Paid Single or Monthly Premiums. Up to 2% Bona Fide Discount points charged to borrower Correspondent Transactions Only: Lender Paid LO Comp paid by the creditor to their loan originator. Bona Fide & Reasonable third party fees charged to the borrower (e.g. Escrow; Title; Settlement; Appraisal; Credit (but not, if they are charged by an Affiliate.) Notes: MSI requires an Affiliated Business Certification (or notice of the use of business affiliates on the Doc Prep Form) and the Business Affiliate Disclosure signed by Borrower s at application. Applies to all consumer credit transactions that are secured by a dwelling and are subject to Reg Z. APOR (Average Prime Offer Rate): MSI will require evidence that loans meet the QM Points/Fees Cap prior to close. MSI is not providing this information as legal advice; this is our interpretation for loan acceptability to MSI. See Additional Notes to Points/Fees Regarding Credits for additional details.

23 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-15 Regulatory Compliance, Continued Financial Reform, Continued Additional Notes to Points/Fees Regarding Credits Any fees charged to the borrower, regardless who pays them, must be included in the Points and Fees test. Seller/Lender Credits cannot reduce points or fees for the purposes of the Points and Fees test. CFPB - Additional Requirements The following additional disclosure or documentation requirements also apply for Financial Reform: Disclosures Initial Appraisal Disclosure: Upfront disclosure to borrowers regarding their right to receive copies of all property valuations obtained during the loan process. o The borrower must also sign an AIR Borrower Acknowledgement that they did receive copies of their property valuations on/or 3-days before closing. Home Ownership Counseling Disclosure: Evidence in the loan file that the borrower was provided with a written list of Homeownership Counselor Resources in their area. Note: Effective for loans with a RESPA application date on/after 7/30/14, MSI requires that the disclosure be in full compliance with CFPB. Completed Income and Debt Worksheet in each loan file. Copy of complete listing of all Points/Fees on the loan (Fee Details Form). Complete and correct NMLS numbers on the Loan Application and the Note and Security Instrument. The numbers and full names of the loan originator and loan company must be correct to the current NMLS register. Notes: Loans must be in full compliance with Loan Originator Compensation Rules. MSI does not accept High Cost or Sub Prime loans.

24 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-16 Regulatory Compliance, Continued Lock Agreements CLAR (8/21/15) Required for all Sellers that close loans in their names (Correspondent Lending Transactions). MSI requires that a Lock In Agreement signed by each Borrower is included in each loan file delivered for purchase. MSI does not require the that our form is used (see MSI Sample Lock Agreement Form), however, the form used by the Seller must be equivalent in the basic information included in the Lock In Agreement. Note: The form is required if/when the Borrower elects to float the loan and then each time a lock is made for the Borrower, a new Lock In Agreement must be prepared and executed. Do not forget that the applicable revised GFE/TILs (issued within regulatory timeframes) must also be included in the loan delivery file. Loan files delivered without a Lock In Agreement may not be eligible for purchase.

25 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-17 MSI Flood Zone Determination - Life of Loan MSI requires a Life of Loan Flood Zone Determination (LOL FZD Cert) in the loan file at time of underwriting. The LOL/FZD must be received in the file from one of the MSI-approved vendors. If the LOL/FZD is not included in the underwriting delivery file, MSI will condition for it. MSI is not responsible for ordering or obtaining the LOL/FZD under any circumstances. MSI-Approved Flood Vendors Contact CoreLogic (fka First American Flood Data Services, Inc. FDSI) Elite Lender Services (an FDSI affiliate) ServiceLink (fka FIS Flood Services /fka LSI Flood/fka LPS) Wells Fargo Flood Service AFR Services (fka American Flood Research, Inc) fka = formerly known as HMDA Data Note: MSI is responsible for reporting detailed HMDA information on loans we underwrite or submit for prior approval, MSI will perform an audit of certain loan information (e.g. the Government Monitoring section of the 1003, etc.). Purpose of Refinance MSI does require that the purpose of refinance be completed on the 1003 to HMDA requirements for each refinance loan. Mortgage Insurance Loans Requiring Mortgage Insurance MSI will order MI unless the Seller indicates that they will order the MI upon underwriting approval.

26 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-18 MSI, Continued Notice of Loan Decision Notice of Loan Approval or Suspension Via . Notice of Loan Denial Via Phone call and Important Note: Once MSI declines a loan in underwriting, the lock is automatically cancelled. The loan is no longer locked. Conditions/ Stipulation MSI requires the following: All prior-to-doc conditions must be cleared/approved by the underwriter prior to the loan being sent for closing/ disbursement. MSI requires that all prior-to-close (prior-to-doc) conditions be sent to the underwriter at one time. Important Note: Conditions that are sent to MSI separately will not be reviewed until all conditions for the loan have been received.

27 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-19 Automated Overview Subject to product limitations within the Retail Guide, MSI will accept loans that are submitted to the following Automated Systems (AUS): Fannie Mae Desktop Underwriter (DU) FHA Total Score Card Freddie Mac Loan Prospector (LP) FHA Total Score Card USDA GUS Notes: All loans submitted to AUS must be submitted to the most current DU/LP version available. Acceptable AUS Decisions Varies per product, see product guidelines. AUS Assignment MSI requires all Sellers to be signed up and have direct access to Fannie DO/DU and Freddie LP. DO/DU:When working with MSI, choose to assign DO loans to First State Bank dba Mortgage Services III, LLC. LP: When working with MSI, choose to assign LP loans to Mortgage Services III, LLC, a subsidiary of First State Bank. AUS Tolerances Each loan file submitted to an AUS must have in the Delivery file, the final AUS report that reflects the loan information as approved and closed. The following information on the final AUS must meet the information included in the closed loan file: Income Assets Liabilities Loan Amount Sales Price Appraised Value Property Type Interest Rate Loan Type Loan Term Loan Purpose Property Taxes: Must use the higher of: appraisal, title, tax certificate or appraiser s estimate (land and improvements) for reassessment. Refi purpose Occupancy Subordinate Loan Amount

28 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-20 Automated, Continued Maximum Number of Borrowers MSI will not accept loans where there are more than 4 borrowers on a loan. The AUS will accept more than 4 borrowers; however MSI requires no more than 4, and MSI does require an AUS approval. Submission Requirements for AUS Loans MSI Submission MSI requires a copy of the complete AUS Findings from the applicable AUS as well as the AUS-ran credit report from Fannie DU or Freddie LP in the underwriting file. See Excessive Submissions. AUS Data With the onset of the Uniform Data Collection initiative with Fannie and Freddie Mac, it is critical now that MSI ensures that accurate data is input into DU and LP and delivered to MSI to ensure salability of the loans. The Final Data must match the closed loan: Information in DU or LP must be updated to match the closed loan prior to loan closing. The most current Findings Report must be included, and must match the closed loan information. The final Findings report must reflect an Approve/Accept Eligible (unless an ineligible is permitted specifically by MSI). Fannie Mae may permit the re-submission of data after the Note Date to correct the data, but this practice is not recommended. Freddie Mac does not permit re-submission of data after the Note Date. In all cases, MSI must follow the applicable AUS (DU or LP) guidelines regarding data input and/or correction. Fannie Mae Casefile ID and Freddie Mac LP AUS Key Number Each AUS assigns a unique identifier for each case submitted to the AUS. It is assigned to that specific loan and cannot be used for any other loan, even if the same borrower(s) is involved. If at any time the Casefile ID or LP AUS Key Number is determined to be associated with a prior loan, that loan is ineligible for MSI since it is subject to refusal by the agency resulting in a re-purchase situation for MSI.

29 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-21 Automated, Continued Excessive Submissions MSI will not close a loan with an Excessive Submission message in the DU or LP Findings. Manipulation of the data to receive an acceptable decision in the AUS for a non-credit worthy borrower is not acceptable to MSI.

30 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-22 Guidelines Overview Conventional Guidelines MSI Conventional Guidelines are based on the blended (fungible) guidelines. MSI follows these guidelines unless otherwise noted in the specific product suites. Overview Government Guidelines Government loans must be underwritten to the current FHA, VA or USDA guidelines (as applicable to the loan product) unless otherwise specifically indicated in the product guidelines. Product Summary Precedence In all cases, if the product suite specifically addresses an underwriting requirement, the guidelines in the product suite prevail over this Chapter. Presentation The subjects in the underwriting requirements section of this chapter are presented alphabetically to facilitate research.

31 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-23 Assets and Liquidity Overview Liquidity or cash reserve describes cash or the ability to convert assets to cash in a short time. Net worth without liquidity is not enough. A borrower s balance sheet should reflect and validate the estimates concerning his or her prior and current income stream. Higher incomes should translate into liquidity found on the borrower s balance sheet. AUS Supporting Documents Assets entered into the AUS, must include supporting documentation in the loan file. Borrower Funds Secured by an Asset A loan secured by an asset may be used as Assets as follows: May be used as a source of funds for down payment, closing costs, and financial reserves. Document terms of the secured loan. Calculate monthly payments and consider in debt ratio. Bridge Loan Bridge (or swing) loans are a form of second trust that is collateralized by the borrower s present home, which is usually for sale. The debt payment must be included for qualification. By using funds from a bridge loan, the borrower can close on a new house before selling his/her existing house. A specified limitation on the term of a bridge loan is not required. The bridge loan amount may not exceed 90.00% of the current appraised value of the bridge property. This type of financing is acceptable if: The purchaser has the ability to carry the payment on: The new home (PITI). The payment on the other obligations. The payment on the current home (PITI). The payment on the bridge loan. If the repayment schedule for the bridge loan is not monthly, it must be converted to a monthly amount for qualifying purposes. The bridge loan is not cross-collateralized against the new property.

32 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-24 Assets and Liquidity, Continued Business Funds In some cases, business accounts are an acceptable source of down payment (they are never acceptable as reserves); however, they are not acceptable under all circumstances because these funds are typically required to meet current business overhead and future capital requirements and generally are not representative of the borrower s savings history. Consideration for use of business accounts is an exception to policy. The exception may be considered by the underwriter if the borrower can evidence that the withdrawal of the funds will not negatively impact the operation of the business. Businesses other than the following types may require additional supportive documentation as deemed appropriate by the underwriter: Sole proprietor Sub Chapter S Individually owned Corporation Notes: The borrower must be listed as an owner of the account and the account must be verified. The borrower must document 100% ownership to use business funds, as permitted. Documentation from a disinterested third party (CPA, Tax Attorney, etc.) must confirm that the borrower has access to the funds. MSI requires a cash flow analysis/balance sheet to confirm/validate that the use of business funds will not negatively impact the business. A letter from a third party (including a CPA) is not sufficient evidence alone.

33 Version 5/15/14 REV (08/10/16) Posted 08/10/16 Page 7-25 Assets and Liquidity, Continued Cash Value of Life Insurance The surrender of life insurance is acceptable under the following parameters: Can be used as a source of funds for the down payment, closing costs, and financial reserves. Document by providing a copy of the check from the insurer or a copy of the payout statement issued by the insurer. If being used for financial reserves only, the cash-value does not need to be liquidated but it must be fully documented. Credit Card Financing Charges to a personal credit card may be used as follows: The total borrowed may not exceed 1% of the loan amount, which may only include the following costs incurred in the loan process: Actual cost of appraisal up to $550 may be charged on a credit card. May be used for application fee process charges (i.e., lock-in fees, credit report, appraisal) Checking and Savings Accounts Borrower s bank statements for the most recent two months. The statement must be a copy of the original bank statement showing the borrower s name, institution name, and account number. o Underwriters reserve the right to request additional supporting documentation. If a direct Verification of Deposit is provided, it must be accompanied by a copy of the original bank statements. Large deposits and recently opened accounts must be documented and explained. See Large Deposit for details. Departure from Principal Residence See the following for full details: Conversion of (or departure from) Principal Residence. Equity position is no longer required to be verified. Rental Income- Special Circumstance Rental Property is borrower s former primary residence.