THIS IS NOT LEGAL ADVICE

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1 I. Ability to Repay (ATR) Qualified Mortgage (QM) Overview In 2008 the Board of Governors of the Federal Reserve System adopted a rule under the Truth in Lending Act prohibiting creditors from making higher-priced mortgage loans without assessing consumers ability to repay the loans. Creditors have had to follow these since October In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), Congress adopted similar (but not identical) Ability-to-Repay (ATR) for virtually all closed-end residential mortgage loans. Congress also established a presumption of compliance with the ATR for a certain category of mortgages, called Qualified Mortgages (QMs). In 2013, the Consumer Financial Protection Bureau adopted a rule that implements the ATR/QM provisions of the Dodd-Frank Act. This rule generally applies to closed-end consumer credit transactions that are secured by a dwelling for which you receive an application on or after January 10, Effective Date: January 10, 2014 This rule applies to transactions covered under the rule for which you receive an application on or after January 10, This would be defined as the HMDA application date / Date Loan Officer signed 1003 Penalties for noncompliance with Ability To Repay Standard: Statutory damages equal to sum of all finance charges and fees paid by the consumer in addition to actual damages, and court costs and attorney s fees Statute of limitations: 3 years from date of violation Defense in a foreclosure action Can be used against whoever tries to foreclose (not just against the originator-thus assignee exposure) No time limit on use of defense, but consumer cannot recover more than first 3 years of finance charges & fees plus actual damages & fees (including reasonable attorney s fees). THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 1 of 10

2 Definitions: Covered Transaction: Closed-end consumer residential mortgages secured by 1-4 unit dwelling and covered by statute. Ability to Repay (ATR): General standard of verification & determination of a consumer s reasonable ability to repay the loan. Qualified Mortgage (QM): an ATR loan that meets certain underwriting, points and fees, and APR subsets. (General QM, Temporary QM, Balloon QM) Types of transactions covered under ATR/ QM Rule ( ( a ) ) The Bureau s ATR/QM rule applies to almost all closed-end consumer credit transactions secured by a dwelling including any real property attached to the dwelling. This means loans made to consumers and secured by residential structures that contain one to four units, including condominiums and co-ops. Unlike some other mortgage rules, the ATR/QM rule is not limited to first liens or to loans on primary residences. Types of transactions NOT covered by ATR/QM Open- end credit / HELOCS (cannot structure loans a first lien HELOC would be covered) Time-share plans Reverse Mortgages Bridge / Temporary or Mezzanine loans with terms of 12 months or less (with possible option to renew) A construction phase or 12 months or less (with possible renewal option) of a construction to-permanent loan. Land loans (unimproved) II. Ability to Repay (ATR): (Comment (c)(1)-2) Under the general ATR standard, you must make a reasonable, good-faith determination before or when you consummate a covered mortgage loan that the consumer has a reasonable ability to repay the loan. This must include 8 ATR Underwriting Factors. (Comment (c)(2)-4) 1. Current or reasonably expected income or assets that the consumer will rely on to repay the loan 2. Current employment status (if you rely on employment income when assessing the consumer s ability to repay) 3. Monthly mortgage payment for this loan. You calculate this using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments. 4. Monthly payment on any simultaneous loans secured by the same property 5. Monthly payments for property taxes and insurance that you require the consumer to buy, and certain other costs related to the property such as homeowners association fees or ground rent 6. Debts, alimony, and child- support obligations 7. Monthly debt-to-income ratio or residual income, that you calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income 8. Credit history *Lenders can use additional factors in making a loan but must at least use the eight above. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 2 of 10

3 Underwriting to Ability to Repay standard: 1. Verify information considered for loan using reliable third party records. (Comment (c)(3)-4) a. Paystubs, tax transcripts versus what a borrower orally tells you there income is. b. Credit reports c. Statements If certain income or assets are not needed or used for qualification, they do not need to be verified for ATR. Employment can be verified with a written or verbal VOE so long as records are retained. When the consumers applications list debt that does not show up on their credit reports, you must consider that debt in assessing either the consumers debt-to-income ratios or residual income, but you do not need to independently verify that debt. Non exhaustive list of factors to show that your ATR determination WAS reasonable and in good faith: 1. Underwriting Standards: You used standards to underwrite the transaction that have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions. 2. Payment History: The consumer paid on time for a significant time after origination or reset of an adjustable-rate mortgage. Non exhaustive list of factors to show that your ATR determination was NOT reasonable and in good faith. 1. Underwriting: Ignored evidence that your underwriting standards are not effective at determining a consumers ability to repay. 2. Inconsistency: You applied underwriting standards inconsistently or used underwriting standards different from those you used for similar loans without having a reasonable justification. 3. Payment history: The consumer defaults early in the loan, or shortly after the loan resets, without having experienced a significant financial challenge or life-altering event. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 3 of 10

4 III. Qualified Mortgage (QM) There are 3 different types of QM classification: 1. General QM: Meets ATR and additional underwriting and fee specifications in chart below. 2. Temporary or Agency QM: Meets ATR and eligible for sale to Fannie Mae or Freddie Mac while in conservatorship or FHA, VA and USDA until these respective agencies adopt their own QM definition Agency QM applies even if individual underwriting characteristics fail the general QM determination (DTI over 43% for example). Points-and-Fees still apply! 3. Balloon Payment QM: (Crescent Mortgage does not make balloon payments) Ability to Repay Standard (ATR) General QM Definition (QM) Loan feature limitations No limitations No negative amortization, interest-only, or balloon payments Temporary Agency/ GSE QM No negative amortization, interestonly, or balloon payments Balloon-Payment QM (Crescent does not offer) No negative amortization or interest-only payments Loan term limit No limitations 30 years 30 years 30 years Points & fees limit No limitations 3% 3% 3% Payment Underwriting Greater of fully indexed or introductory rate Max rate in first 5 years As applicable, per GSE or agency Amortization schedule no more than 30 years; loan term no less than 5 years Mortgage-related Consider and verify Included in underwriting monthly As applicable, per GSE or agency Consider and verify obligations payment and DTI Income or assets Consider and verify Consider and verify As applicable, per GSE or agency Consider and verify Employment status Consider and verify Included in underwriting DTI As applicable, per GSE or agency No specific requirement Simultaneous loans Consider and verify Included in underwriting DTI As applicable, per GSE or agency No specific requirement Debt, alimony, child Consider and verify Consider and verify As applicable, per GSE or agency Consider and verify support DTI or Residual Income Consider and verify DTI 43 percent As applicable, per GSE or agency Consider and verify Credit History Consider and verify Included in underwriting DTI As applicable, per GSE or agency No specific requirement 1 This chart compares the general ATR with the for originating QM loans. Additional may apply, particularly for balloon-payment QM loans. This chart is not a substitute for the rule. Only the rule and its Official Interpretations can provide complete and definitive information regarding its. The complete rule, including the Official Interpretations and small entity compliance guide, is available at 2 Included in underwriting monthly payment means that the rule does not require the creditor to separately consider and verify this factor. However, a creditor must consider and verify this factor when underwriting the consumer s monthly payment under the rule.. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 4 of 10

5 For All 3 QM classifications: No Toxic Features: Crescent Mortgage does not offer loans with Interest Only, Planned Negative Amortization, Balloon Payments Prepayment Penalties Limited ( 43(g)): Crescent Mortgage does not offer loans with prepayment penalties, Subject to Points-and-Fees test Safe Harbor Compliance versus Rebuttable Presumption based on APR/ APOR/ HPML thresholds Record Retention: ( (c)(3)) The rule requires that you retain evidence that you complied with the ATR/QM rule, including the prepayment penalty limitations, for three years after consummation, though you may want to keep records longer for business purposes. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 5 of 10

6 Computation of Loan Amount and Comparison of Points-and-Fees Caps ( (b)(1) and (b)(3)) The total loan amount equals the amount financed (see ) 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. Example: Loan Amount: $100,000 Points-and-Fees rolled into loan amount: $2,500 New Loan Amount on Note: $102,500 Loan amount for points-and-fees calculation: $100,000 Maximum allowable points and fees: $3,000 ($100,000 x 3%) NOT ($102,500 x 3%) Points-and-Fees Caps: >= $100,000 >=60,000 but <$100,000 >= $20,000 but < $60,000 >=$12,500 but < $20,000 < $12,000 3% $3,000 5% $1,000 8% Percent Cap Fixed-Dollar Cap Percent Cap Fixed-Dollar Cap Percent Cap The dollar amounts listed above will be adjusted annually for inflation and published each year in the commentary to Regulation Z. (See (e)(3)(ii) Points-and-Fees Calculation: Points-and-fees calculation ( (b)(1)) To calculate points and fees for the QM points-and-fees caps, you will use the same approach that you use for calculating points and fees for closed-end loans under the Home Ownership and Equity Protection Act (HOEPA) thresholds in the Bureau s High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) rulemakings. Those rules are available online at: Unless specified otherwise, include amounts that are known at or before consummation, even if the consumer pays them after consummation by rolling them into the loan amount. In addition, unless specified otherwise, closing costs that you pay and recoup from the consumer over time through the interest rate are not counted in points and fees. To calculate points and fees, add together the amounts paid in connection with the transaction for the six categories of charges listed below: THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 6 of 10

7 Fee type Fee Broker Creditor Comment (Wholesale) (Correspondent) Origination Lender Paid Origination (total) X Broker/ Wholesale Specific Origination Borrower Paid Origination X X Box 1 GFE fees paid out of pocket by borrower, by YSP credit, or financed by the creditor Origination SRP Credit to Correspondent Never counts in Points-and-Fees Origination Processing fee X X Box 1 GFE fees paid out of pocket by borrower, financed by creditor or by YSP credit (negative discount). Processing is considered part of origination expense even if paid to third party. Origination Compensation paid to LO by employer Does not count in Points-and-Fees Origination Credit report Does not count in Points-and-Fees Origination Creditor underwriting or admin fees X X Only counts if not absorbed in interest rate Origination Up to 2% Bona fide discount points Counts if rate prior to discount is not >=APOR plus 1% (see bona fide definition) Origination Up to 1% bona fide discount point Counts if rate prior to discount is not >=APOR plus 2% (see bona fide definition) Origination Loan Level Pricing Adjustments not Any LLPA paid by borrower is included in Points-and Fees. LLPAs absorbed in interest rate are tested in X X absorbed into interest rate APOR test. Origination FHA/ VA/ USDA Upfront premium or guaranty fee. Does not count in Points-and-Fees Origination (PMI) paid upfront by borrower is included in Points-and-Fees by the amount it exceeds the FHA MIP Upfront conventional MI premiums X X premium. Additionally, the upfront premium must be refundable on pro rata basis in event of (BPMI single or split premiums prepayment. Property Appraisal or inspection fee of creditor Property Pest Inspection/ Flood Certificate of creditor Settlement Closing Fee of creditor Settlement Attorney/ Closing/ Title/ Escrow Agents fees of creditor Settlement Recording/ Notary of creditor Settlement Title Exam/ Title Insurance of creditor. Settlement Escrowed amounts for insurance **Still under Discussion** of creditor. Settlement Escrowed amounts for taxes Never counts Settlement Per Diem Interest Never counts THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 7 of 10

8 1. Finance charge ( (b)(1)(i)) In general, include all items included in the finance charge (see (a), (b)). However, you may exclude the following types and amounts of charges, even if they normally would be included in the finance charge: Interest or the time-price differential (Per Diem) Mortgage insurance premiums (MIPs) Federal or state government-sponsored MIPs: For example, exclude up-front and annual FHA premiums, VA funding fees, and USDA guarantee fees. You may also exclude up-front PMI premiums if the premium is refundable on a prorated basis and a refund is automatically issued upon loan satisfaction. (non refundable upfront private mortgage insurance would not be excludable. However, even if the premium is excludable, you must include any portion that exceeds the up-front MIP for FHA loans. Those amounts are published in HUD Mortgagee Letters, which you can access on HUD s website at Bona fide third-party charges not retained by the creditor, loan originator, or an affiliate of either ( (b)(1)(D)) In general, you may exclude these types of charges even if they would be included in the finance charge. For example, you may exclude a bona fide charge imposed by a third-party settlement agent (for example, an attorney) so long as neither the creditor nor the loan originator (or their affiliates) retains a portion of the charge. (Non-affiliated) However, you must still include any third-party charges that are specifically required to be included under other provisions of the points-and-fees calculation (for example, certain PMI premiums, certain real estate-related charges, and premiums for certain credit insurance and debt cancellation or suspension coverage). *Note that up-front fees you charge consumers to recover the costs of loan-level price adjustments (LLPA) imposed by secondary market purchasers of loans, including the GSEs, are not considered bona fide third-party charges and must be included in points and fees. Example:.25 Escrow Waiver Fee. If a borrower opts to pay this fee out of pocket or by adding the fee to the loan amount, it would be included in Points-and-Fees test. If it is absorbed in the interest rate, it would not be included in the Points-and Fees test. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 8 of 10

9 Bona fide discount points ( (b)(1)(i)(E) and (F) and (b)(3)) Exclude up to 2 bona fide discount points if the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 1 percentage point; or Exclude up to 1 bona fide discount point if the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 2 percentage points. Definition of bona fide : A discount point is bona fide if it reduces the consumer s interest rate by an amount that reflects established industry practices, such as secondary mortgage market norms. Example: Interest rate on 30 year fixed before discount is 4.5 Percent. APOR for 30 year fixed is at time of lock. Difference is less than 1%. Therefore consumer could pay 2% bona fide discount to buy the rate down. For it to be bona fide, the actual cost to buy down the rate would have to be 2%. If the 4.5 rate was priced at for example, and borrower wished to pay 2% to buy don the interest rate, the end rate would have to be priced at In this instance the 2% bona fide discount would be excluded from Points-and-Fees test. Non- bona-fide: In same example above borrower pays 2% discount and rate price goes from to it would be considered non bona fide and thus, not excluded from Points-and-Fees calculation. 2. Loan originator compensation ( (b)(1)(ii)) Borrower Paid Origination (BPO): Compensation paid directly by a consumer to a mortgage broker: Include the amount the consumer pays directly to the mortgage broker, regardless if paid out of pocket or financed by creditor. Lender Paid Origination (LPO): Compensation paid by a creditor to a mortgage broker: Include the amount the creditor pays to the broker for the transaction, it is financed by the creditor, or even if the creditor does not receive an up-front payment from the consumer to cover the broker s fee but rather recoups the fee from the consumer through the interest rate over time. Not Included: Creditor Compensation (SRP). Only Borrower charged and paid origination (box1 of GFE) is included on transactions where your institution is acting as the creditor. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 9 of 10

10 3. Real estate-related fees ( (b)(1)(iii)) The following categories of charges are excluded from points and fees only if: The charge is reasonable; The creditor receives no direct or indirect compensation in connection with the charge; and The charge is not paid to an affiliate of the creditor. If one or more of those three conditions is not satisfied, you must include these charges in points and fees even if they would be excluded from the finance charge: Fees for title examination, abstract of title, title insurance, property survey, and similar purposes Fees for preparing loan-related documents, such as deeds, mortgages, and re-conveyance or settlement documents Notary and credit-report fees Property appraisal fees or inspection fees to assess the value or condition of the property if the service is performed prior to consummation, including fees related to pest-infestation or flood-hazard determinations Amounts paid into escrow or trustee accounts that are not otherwise included in the finance charge (except amounts held for future payment of taxes) 4. Premiums for credit insurance; credit property insurance; other life, accident, health or loss-of-income insurance where the creditor is beneficiary; or debt cancellation or suspension coverage payments ( (b)(1)(iv)) Include premiums for these types of insurance that are payable at or before consummation even if such premiums are rolled into the loan amount, if permitted by law. You do not need to include these charges if they are paid after consummation (e.g., monthly premiums). Note that credit property insurance means insurance that protects the creditor s interest in the property. It does not include homeowner s insurance that protects the consumer. You do not need to include premiums for life, accident, health, or loss-of-income insurance if the consumer (or another person designated by the consumer) is the sole beneficiary of the insurance. 5. Maximum prepayment penalty ( (b)(1)(v)) Include the maximum prepayment penalty that a consumer could be charged for prepaying the loan. To determine if you are permitted to charge a prepayment penalty, see Can I charge prepayment fees on a covered transaction? below. 6. Prepayment penalty paid in a refinance ( (b)(1)(vi)) If you are refinancing a loan that you or your affiliate currently holds or is currently servicing, then include any penalties you charge consumers for prepaying their previous loans. These prepayment fees would be subtracted from loan amount in computation of maximum points and fees. THIS IS NOT LEGAL ADVICE. Please consult with your counsel of regulator. Page 10 of 10