Webinar Wednesday, March 26, :00 3:15 pm ET For Audio Dial (800)

Transcription

1 Webinar Wednesday, March 26, :00 3:15 pm ET For Audio Dial (800)

2

3 Webinar Wednesday, March 26, :00 3:15 pm ET For Audio Dial (800)

4 Moderator Nathan Marinchick Editor, Dodd Frank Update October Research, LLC

5 Submit questions and comments through the instant chat box feature. Questions can be submitted at any time throughout the Webinar.

6 Handouts The following materials can be downloaded at Today s PowerPoint presentation Articles from Dodd Frank Update Tensions run high as U.S. House committee grills Cordray on QM impact Hearing defines baseline for measuring impact of QM rule Industry watchers discuss top pressure points as mortgage rules go live Dodd-Frank in 2014: Mortgage industry braces for controlled chaos Community institutions quiz CFPB on new mortgage rules CFPB QM/ATR Final Rule

7 Today s Presenters Richard Andreano Partner Ballard Spahr LLP andreanor@ballardspahr.com (202) Paul H. Schieber Shareholder Stevens & Lee, P.C. phs@stevenslee.com (610)

8 The future ain t what it used to be Yogi Berra

9 Regulation Z Ability-to-Repay (ATR) Highlights Effective January 10, 2014 Lender Must Make a Reasonable, Good Faith Determination of Ability to Repay If a loan is not a QM, a lender must consider and verify at least these eight underwriting criteria to determine ability to repay. (1) income or assets; (2) employment; (3) monthly payment; (4) simultaneous loan payment obligations; (5) mortgage related payments; (6) debt obligations; (7) debt-to-income (DTI) ratio; and (8) credit history. Information on which a lender relies must be verified Exceptions: Prime loan Safe Harbor QMs Subprime loan (HPML) Rebuttable Presumption QMs GSE/Agency Loans Temporary QM Status Portfolio Rural/Underserved Balloon Loans Limited Exception for Refinancing of Non-Standard Loans into Standard Loans

10 Regulation Z Ability-to-Repay (ATR) Highlights Effective January 10, 2014 (cont d) QM Standard No negative amortization No interest only payments No balloon payments Terms not greater than 30 years No no doc 3% points and fees limitation see expansive definition of affiliate under the Bank Holding Company Act Underwriting Monthly payments based on highest payment in first five years DTI ratio of not more than 43% Limited prepayment penalties Record retention three years No disguising closed-end into open-end loans to evade Rule Confirm income, assets, other mortgage and non-mortgage debts Results Safe Harbor Rebuttable Presumption

11 Bona Fide Discount Points Points and fees include, among other items, all finance charges unless there is an exclusion. There is an exclusion for bona fide discount points: Up to 2 points may be excluded if the interest rate without any discount is no more than 1 point over the average prime offer rate. Up to 1 point may be excluded if the interest rate without any discount is no more than 2 points over the average prime offer rate (and no points have been excluded under first element). Bona fide discount point means an amount equal to 1% of the loan amount paid by the consumer that reduces the interest rate based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate appropriate for the amount of discount points paid by the consumer.

12 What is the interest rate without any discount? How are Loan Level Price Adjustments treated? What is an interest rate reduction that is consistent with established industry practices for the amount of discount points paid by the consumer? Industry struggling with these issues. Informal CFPB guidance on rate without any discount and LLPA treatment: Apply LLPAs to arrive at starting adjusted rate for the specific consumer s transaction, and that rate must actually be available to the consumer. A discount point is the amount but for the payment of which the consumer would have paid the starting adjusted rate. If the starting adjusted rate includes any point amount, that amount is not a discount point eligible for exclusion from points and fees.

13 Commentary guidance on an interest rate reduction that is consistent with established industry practices for the amount of discount points paid by the consumer: Creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary market mortgage transactions. For example, a creditor may rely on pricing in the to-be-announced market for mortgage-backed securities. Creditor may establish that its interest rate reduction is consistent with established industry practices by showing that its calculation complies with requirements prescribed in Fannie Mae or Freddie Mac guidelines for interest rate reductions from bona fide discount points. Notes as an example 25 basis point reduction in the guides per each point. Fannie and Freddie removed the guidance from their guides.

14 For items paid by someone other than the consumer: Items paid by third parties treated the same as if paid by the consumer. Items paid by seller treated the same as if paid by the consumer, but seller s points that qualify for the exclusion from the finance charge are excluded from points and fees. Items paid by the creditor are excluded from points and fees, except for compensation paid by a creditor to a non-employee loan originator (i.e., a mortgage broker). Seller s points exclusion based on seller s points guidance and not bona discount point requirements.

15 Effect of Payments to Affiliated Vendors Payment must be included in 3% pts. & fees calculation For definition of affiliate need to look to the Bank Holding Company Act even if you are not otherwise subject to the BHCA Factors/Indicia of control and thus an affiliate % of stock/partnership ownership (25%?; 15%?) Board members % of investment Controls management Influences management Groups of investors Organizational documents specifically limiting control Facts on the ground

16 Effect of Payments to Affiliated Vendors (cont d) Relevant sections of the BHCA provide that: The term affiliate... Means any company that controls the member bank and any other company that is controlled by the company that controls the member bank; a bank subsidiary of the member bank; any company that is controlled directly or indirectly, by a trust or otherwise, by or for the benefit of shareholders who beneficially or otherwise control, directly or indirectly, by trust or otherwise, the member bank or any company that controls the member bank; or in which a majority of its directors or trustees constitute a majority of the persons holding any such office with the member bank or any company that controls the member bank; any investment fund with respect to which a member bank or affiliate thereof is an investment adviser; and any company that the [Fed] determines... have a relationship with the member bank or any subsidiary or affiliate of the member bank, such that covered transactions... may be affected by the relationship to the detriment of the member bank or its subsidiary; and

17 Effect of Payments to Affiliated Vendors (cont d) A company or shareholder shall be deemed to have control over another company if such company or shareholder, directly or indirectly, or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the other company; such company or shareholder controls in any manner the election of a majority of the directors or trustees of the other company; or... that such company or shareholder, directly or indirectly, exercises a controlling influence over the management or policies of the other company;... Rebuttable Presumption Of Control Of Portfolio Companies.... a company or shareholder shall be presumed to control any other company if the company or shareholder, directly or indirectly, or acting through 1 or more other persons, owns or controls 15 percent or more of the equity capital of the other company...

18 Effect of Payments to Affiliated Vendors (cont d) See also FRB Policy Statement on equity investments in banks and bank holding companies, which states, in part: The BHC Act provides that a company has control over a banking organization if (i) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 percent or more of any class of voting securities of the banking organization; (ii) the company controls in any manner the election of a majority of the directors or trustees of the banking organization; or (iii)... the company directly or indirectly exercises a controlling influence over the management or policies of the banking organization U.S.C. 1841(a)(2).

19 Effect of Payments to Affiliated Vendors (cont d) Minority equity investments... These investments often raise questions, however, regarding whether the investor will be able to exercise a controlling influence over the management or policies of a banking organization 2 2 Contemporaneous minority investments in the same banking organization by multiple different investors also often raise questions about whether the multiple investors are a group acting in concert for purposes of the Change in Bank Control Act or are a single association for purposes of the BHC Act...

20 Effect of Payments to Affiliated Vendors (cont d) The text and legislative history of the control definition in the BHC Act make manifest that possession by an investor of a modicum of influence over a banking organization would not amount to a controlling influence. At the same time, the definition does not require that an investor have absolute control over the management and policies of a banking organization. Instead, the Act requires that an investor be able to exercise an amount of influence over a banking organization s management or policies that is significant but less than absolute control in fact of the banking organization. Notably, the primary definition of control in the Act is based on ownership of 25 percent or more of the voting shares of a banking organization an amount that does not provide an investor in most cases with complete control over decisions but would allow the investor to play a significant role in the decision-making process.

21 Effect of Payments to Affiliated Vendors (cont d)... Large minority investors in a[n] organization typically have avoided acquiring a controlling influence over the... organization by providing... a set of passivity commitments and by avoiding certain control-enhancing mechanisms. Specifically, minority investors have avoided acquiring control over a[n]... organization by, among other things: restricting the size of their voting and total equity investment in the... organization; avoiding covenants that would enable the investor to restrict the ability of the... organization s management to determine the major policies and operations of the... organization; not attempting to influence the... organization s process for making decisions about major policies and operations Limiting director and officer interlocks... ; and Limiting business relationships between the investor and [the] organization

22 Effect of Payments to Affiliated Vendors (cont d) Thus, you must begin your analysis of whether someone or some group has control by asking these questions to help determine if vendor payments need to be included in the 3%: 1) Does your company hold any ownership interest in any companies that provide your company with settlement services? 2) If so, what services do these companies provide and what is your company s ownership stake in the companies? 3) Do any companies that provide settlement services for your company s loans hold any ownership stake in your company? 4) If so, what services do these companies provide and what is their ownership stake(s) in your company? 5) Do any individuals, groups of individuals or entities that hold an ownership interest in your company also hold an ownership interest in a company or companies that provide settlement services for your company s loans? 6) If so, what are the respective ownership interests of such individuals/entities in your company and in each of the settlement service providers? 7) What do these other settlement service providers do?

23 CFPB Examination Guides Supervision and Examination Manual, v.2, October 2012 Does not address ability to repay/qm rule. Twelve additional examination procedures, including: Mortgage Origination Procedures, January 2014 TILA Procedures, November 2013 Mortgage Origination Procedures include Underwriting Module that references TILA Procedures. TILA Procedures address main aspects of ability to repay/qm rule, in less than 6 full pages.

24 Areas addressed regarding ability to repay/qm rule include: Scope of rule. General ability to repay standard. Safe harbor and rebuttable presumption for qualified mortgages (QMs). General QM. Temporary government-based QM. Small creditor portfolio loan QM. Small creditor/rural or underserved area balloon QM and temporary rural or underserved area exception. Overall compliance management system focus of examination guidelines. Board and management oversight. Compliance program. Response to consumer complaints. Compliance audit.

25 Effects on Marketplace Smaller universe of applicants Increased cost of origination Increased cost of compliance Originator training Management and board training Better loans (?) Cost of capital/start-up costs Shrinking margins or increased loan costs

26 Effects on Marketplace (cont d.) Available loan products Sale of loans QC reviews Timing Repurchase demands Loan modifications/forbearances Foreclosures Risk pricing

27 QUESTIONS Submit questions through the instant chat feature.

28 Thank You We welcome your feedback. Please take our survey. A CD of today s webinar can be purchased on October Research s product site at Today s PPT presentation and other handouts can be found at: