CFPB s Final Mortgage Regulations: Ability-to-Repay and Qualified Mortgage Rules March 6, E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.

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1 CFPB s Final Mortgage Regulations: Ability-to-Repay and Qualified Mortgage Rules March 6, 2013 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.

2 Ability-to-Repay and Qualified Mortgage Rules

3 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA (757) Meagan J. Thomasson Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA (757)

4 Credit Unions Hit Another Mortgage Record: Callahan credit unions originated $84.5 billion in housing finance loans activity through the first six months totaled $157 billion. Credit Unions Experience Record Breaking Loan Quarter Since 2007, credit unions have originated more than 105 million loans, amounting to $1.5 trillion.

5 330, , , , ,729 # of 1 st Mortgages Originated Through 3Q Source: Callahan & Associates

6 $56,462,353,519 $77,066,186,748 $55,997,564,511 $54,315,197,762 $89,251,359,972 $ of 1 st Mortgages Originated Through 3Q Source: Callahan & Associates

7 History Proposed Regulation: 474 pages Comments Received: 1800 Final Regulation: 804 pages Effective Date: January 10, 2014 Number of Days Remaining: 317 Let s Roll!

8 Overview Applies to all credit unions offering mortgage loans Must determine a consumer s ability to repay a mortgage before making the loan. Regulation covers all consumer mortgages except home equity (HELOCs), timeshare plans, reverse mortgages or temporary loans. General overview of Ability-to-Repay determination and underwriting considerations Closer look at the individual underwriting considerations Qualified mortgages and a Safe Harbor Exemptions from Ability-to-Repay rule for refinancing non-standard mortgages

9 Background Enacted in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau ( CFPB ) and consolidated the rulemaking authority for federal consumer financial laws in the CFPB The CFPB has undertaken large regulatory reform efforts since its inception, including issuing new regulations governing mortgage lending requirements, the Ability-to-Repay and Qualified Mortgage Rule

10 Background Other CFPB regulatory reform efforts implementing requirements under title XIV of the Dodd-Frank Act relating to mortgages include new rules on mortgage loan servicing, escrow accounts, HOEPA, loan origination compensation, and appraisals Many NAFCU webinars are already scheduled.

11 The CFPB s Mortgage Reform Webcast Series CFPB s Final Mortgage Regulations On-Demand CFPB Ability to Repay/Qualified Mortgages Wednesday, March 6 I 2:00 p.m. 3:30 p.m. EST Digging Deeper: CFPB s Mortgage Rules Wednesday, March 27 I 2:00 p.m. 3:30 p.m. EST What new requirements apply to HELOCs? Wednesday, April 10 I 2:00 p.m. 3:30 p.m. EST Mortgage Periodic Statements Wednesday, April 17 I 2:00 p.m. 3:30 p.m. EST Consumer Information Request & Error Resolution Procedures Wednesday, May 15 I 2:00 p.m. 3:30 p.m. EST Mortgage Loan Origination Wednesday, August 21 I 2:00 p.m. 3:30 p.m. EST CFPB Compliance Update by NAFCU s Compliance Team Wednesday, November 6 I 2:00 p.m. 3:30 p.m. EST

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13 Ability to Repay and Qualified Mortgage Rule In January 2013, the CFPB amended Regulation Z (implementing the Truth in Lending Act) by issuing new regulations governing mortgage lending requirements, known as the Ability-to-Repay and Qualified Mortgage Rule

14 Ability to Repay and Qualified Mortgage Rule Regulation Z currently prohibits lenders from making a higher-priced or higher-cost mortgage loan without regard for the consumer s ability to repay the loan New Rule establishes minimum requirements for all lenders to make an ability-to-repay determination prior to extending a residential mortgage loan

15 Ability to Repay and Qualified Mortgage Rule New Ability-to-Repay Rule applies to all closed-end mortgage loans (home purchases, refinancings, home equity loans, vacation home loans, etc.) Does not apply to open-end credit plans, time share plans, reverse mortgages or temporary loans (i.e., 12 months or less) New Rule goes into effect on January 10, 2014 But, some rule changes may be in the works

16 Ability to repay determinations (at a minimum credit unions must consider 8 underwriting factors in determining a borrower s ability to pay)

17 Minimum Underwriting Factors 1. Current or reasonably expected income or assets

18 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status

19 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction

20 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans

21 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations

22 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support

23 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support 7. The monthly debt-to-income ratio or residual income

24 Minimum Underwriting Factors 1. Current or reasonably expected income or assets 2. Current Employment Status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loans 5. The monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support 7. The monthly debt-to-income ratio or residual income 8. Credit history

25 Current or Reasonably Expected Income or Assets Determination Section (b)(4) prescribes the manner in which the creditor verifies the borrower s assets or income May review specified records to satisfy this requirement Tax returns IRS Form W-2 (or similar forms) Employer records Government agency records (e.g., Social Security Administration proof of income letter)

26 Current or Reasonably Expected Income or Assets Determination May review specified records to satisfy this requirement (cont.) Financial institution records Check cashing receipts Receipts from consumer s use of funds transfer services Credit union needs to verify only the income/assets actually relied upon in making its determination of whether to extend credit

27 Qualified Mortgages

28 Qualified Mortgages - General Qualified mortgage: a residential mortgage that provides for regular, substantially equal payments and does not include any of the following - Negative amortization loans Interest-only loans Balloon payment loans (with some exceptions) Loan with a term exceeding 30 years No-doc loans (where creditor does not verify income or assets) Points and fees in excess of or exceeding 3% of total loan amount (for loans over $100,000)

29 Qualified Mortgages Safe Harbor Presumption of Compliance Higher-Priced Covered Transaction

30 Qualified Mortgages Financial Institutions are not required to issue only Qualified Mortgages. CFPB Director Richard Cordray indicated to financial industry representatives that it would be a mistake for prudential regulators to examine institutions in a way that steers them toward providing only mortgages defined as qualified under the abilityto-repay rule. Cordray said the CFPB wants other types of mortgages to flourish as well. BUT

31 Qualified Mortgages Special Rules

32 Qualified Mortgages Limits on Points and Fees Points and fees on qualified mortgages cannot exceed 3% on loans of $100,000 or more (varies for loans less than $100,000)

33 Qualified Mortgage Presumption Rule provides a presumption that qualified mortgages satisfy the ability-to-repay requirements: Conclusive presumption (i.e., a safe harbor) for qualified mortgages that are not higher-priced / subprime Rebuttable presumption for qualified mortgages that are higher-priced / subprime Benefits?

34 Qualified Mortgage Presumption Cont. Rule establishes underwriting criteria for qualified mortgages: Monthly payments must be calculated based on the highest payment that will apply in the first five years of the loan Consumer has a total debt-to-income ratio that is less than or equal to 43%

35 Qualified Mortgage & Fannie/Freddie Underwriting Standards Compliance with Fannie Mae / Freddie Mac underwriting guidelines alone does not necessarily mean a loan is a Qualified Mortgage However, there is a temporary special rule (sunset date no later than 1/10/2021) where a loan that meets Fannie/Freddie underwriting standards PLUS additional criteria will be considered a Qualified Mortgage

36 Qualified Mortgage & Fannie/Freddie Underwriting Standards A loan that satisfies Fannie/Freddie underwriting standards is considered a Qualified Mortgage if it also meets the following requirements: Regular, substantially equal periodic payments Term is 30 years or less, and Total points and fees do not exceed prescribed thresholds

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38 Higher Priced Covered Transaction Defined as a covered transaction with an APR that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, or by 3.5 or more percentage points for a subordinate-lien transaction

39 Balloon Payment Qualified Mortgages A qualified mortgage may provide for a balloonpayment, provided: No increase in principal balance (negative amortization) Term does not exceed 30 years Total points and fees do not exceed 3% (for loans greater than $100,000)

40 Balloon Payment Qualified Mortgages (Cont.) Credit union should first consider: Borrower s current or reasonably expected income or assets (other than the dwelling that secured the loan) Borrower s current debt obligations, alimony and child support

41 Balloon Payment Qualified Mortgages (Cont.) Credit union determines borrower can make all of the scheduled payments together with the monthly payments for mortgage-related obligations and excluding the balloon payment Credit union considers debt-to-income ratio and verifies debt obligations and income Regular, scheduled payments are substantially equal Term must be at least 5 years

42 Balloon Payment Qualified Mortgages (Cont.) Credit unions meet specific requirements: At least 50% of first-lien covered transactions in rural or underserved counties in previous year Predominantly rural or underserved areas Rural: a county that is neither:» Metropolitan area, nor» Micropolitan area adjacent to a metropolitan area Underserved: a county in which no more than 2 creditors have extended five or more first-lien mortgages.

43 Balloon Payment Qualified Mortgages (Cont.) Predominantly rural or underserved areas (cont.) A list of rural and underserved counties will be designated each year NCUA definition: The Federal Credit Union Act defines an underserved area as a local community, neighborhood, or rural district that is an investment area as defined in Section 103(16) of the Community Development Banking and Financial Institutions Act of Examples of underserved areas: An area where the percentage of population living in poverty is at least 20%, unemployment rate is at least 1.5 times the national average, etc.

44 Balloon Payment Qualified Mortgages (Cont.) Credit unions meet specific requirements (cont.): No more than 500 first lien covered transactions in previous year, and Had less than $2 billion in the previous calendar year

45 Balloon Payment Qualified Mortgages (Cont.) Generally, balloon payment qualified mortgages cannot be transferred or assigned without losing their exempt status. This restriction does not apply where: 1.Sales/assignments occurring at least 3 years after consummation of the loan 2.Buyer/assignee operates predominantly in rural or underserved area 3.Buyer/assignee originated 500 or fewer first-lien mortgages 4.Buyer/assignee had less than $2 billion in assets at end of preceding year

46 Balloon Payment Qualified Mortgage (Cont.) For higher-priced covered transactions (i.e., APR is greater than average prime offer rate for comparable transaction) with a balloon payment, the creditor must consider the consumer s ability to repay the loan based on the payment schedule, including any required balloon payment. For loans with a balloon payment that are not higher-priced covered transactions, the creditor should use the maximum payment scheduled during the first five years of the loan following the date on which the first regular periodic payment will be due.

47 Balloon Payment Qualified Mortgage Example 1 Assume a loan that provides for regular monthly payments and a balloon payment due at the end of a six-year loan term. The loan is consummated on August 15, 2014, and the first monthly payment is due on October 1, The first five years after the first monthly payment end on October 1, 2019.

48 Balloon Payment Qualified Mortgage Example 1 (Cont.) The balloon payment must be made on the due date of the 72 nd monthly payment, which is September 1, For purposes of determining the consumer s ability to repay the loan under (c)(2)(iii), the creditor need not consider the balloon payment that is due on September 1, 2020.

49 Balloon Payment Qualified Mortgage Example 2 Loan agreement provides for a fixed interest rate of 6 percent, which is below the APORcalculated threshold for a comparable transaction; thus the loan is not a higher-priced covered transaction. The loan amount is $200,000, and the loan has a three-year loan term but is amortized over 30 years.

50 Balloon Payment Qualified Mortgage Example 2 (cont.) The monthly payment scheduled for the first three years following consummation is $1,199, with a balloon payment of $193,367 due at the end of the third year. For purposes of (c)(2)(iii), the creditor must determine the consumer s ability to repay the loan based on the balloon payment of $193,367.

51 Balloon Payment Qualified Mortgage If a qualified mortgage provides for a balloon payment, the creditor must determine that the consumer is able to make all scheduled payments under the legal obligation other than the balloon payment.

52 Balloon Payment Qualified Mortgage Example 3 Assume a loan in an amount of $200,000 that has a five-year loan term, but is amortized over 30 years. The loan agreement provides for a fixed interest rate of 6 percent. The loan consummates on March 3, 2014, and the monthly payment of principal and interest scheduled for the first five years is $1,199, with the first monthly payment due on April 1, 2014.

53 Balloon Payment Qualified Mortgage Example 3 (cont.) The balloon payment of $187,308 is required on the due date of the 60th monthly payment, which is April 1, The loan can be a qualified mortgage if the creditor underwrites the loan using the scheduled principal and interest payment of $1,199, plus the consumer s monthly payment for all mortgage-related obligations, and satisfies the other criteria set forth in (f).

54 Refinancing Loans The term refinancing has the same meaning as in (a). A refinancing occurs when an existing obligation that was subject to Subpart C of 12 C.F.R (closed-end credit requirements) is satisfied and replaced by a new obligation undertaken by the same consumer.

55 Exemptions for Refinancing Non- Standard Mortgages Refinancing a non-standard mortgage (i.e., an adjustable rate mortgage with introductory interest rate of at least 1 year, an interest-only loan or a negative amortization loan) into a standard mortgage may be exempt from the ability-to-repay rules if certain conditions are met Standard mortgage has the following characteristics: Regular periodic payments may not: (1) increase principal, (2) allow deferred payment of principal, or (3) result in a balloon payment

56 Exemptions for Refinancing Non- Standard Mortgages Standard mortgage has the following characteristics (cont.): Total points and fees associated with the mortgage do not exceed 3% of the loan Term is 40 years or less Interest rate is fixed for first 5 years Use of Loan Proceeds is restricted to: Outstanding balance of non-standard mortgage Closing or settlement charges

57 Exemptions for Refinancing Non- Standard Mortgages Conditions for exemption from ability-to-repay requirements: Credit union extending the standard mortgage is the current holder or servicer of the non-standard mortgage Monthly payment is materially lower than nonstandard mortgage monthly payment Materially lower means more than a de minimus amount 10% lower is always considered materially lower

58 Exemptions for Refinancing Non- Standard Mortgages Conditions for exemption from ability-to-repay requirements (cont.): Credit union receives borrower s application for the refinancing no later than 2 months after nonstandard mortgage is recast Borrower has not made a late payment more than once in the preceding 12 month period, and Borrower has not been more than 30 days late in making a payment in the preceding 6 month period

59 Yawning

60 VOTE 1. Baby 2. Monkey 3. Grandpa 4. Puppy

61 Record Retention Must retain records evidencing compliance with ability-to-repay and prepayment penalty provisions for 3 years

62 Points and Fees

63 Points and Fees Points and fees include the following that are known at or before consummation: All finance charges, except: Interest; premium/charge imposed in connection with any guaranty or insurance on borrower default; Bona fide third party charge not retained by lender, loan originator, or affiliate or either.

64 Points and Fees All finance charges, except (cont.): 2 discount points where interest rate with discount does not exceed: APR by more than 1%; or For transactions secured by personal property, the average rate under National Housing Act by more than 1%. 1 discount point where interest rate with discount does not exceed: APR by more than 2%; or For transactions secured by personal property, the average rate under the National Housing Act by more than 2%.

65 Points and Fees Points and fees include the following that are known at or before consummation (cont.): Compensation paid by consumer or creditor to loan originator Real-estate related fees (e.g., title insurance, title examination, survey, loan-related document preparation, notary, appraisals, etc.), unless: Reasonable charge Not paid to lender Not paid to an affiliate of lender

66 Points and Fees Points and fees include the following that are known at or before consummation (cont.): Premiums/other charges for any life, credit disability, unemployment, property, etc. insurance for which lender is the beneficiary Max prepayment penalty Total prepayment penalty for refinancing Loan level pricing adjustments

67 Total Loan Amount

68 Total Loan Amount Calculated by taking the amount financed and deducting any finance charge, insurance premium, or refinancing prepayment penalty that is both (i) included as a point/fee, and (ii) financed by lender Amount financed = principal loan amount + other amounts financed by lender that are not part of the finance charge any prepaid finance charge

69 Prepayment Penalty

70 Other Final Rule Provisions Prepayment Penalties New Rules generally prohibit prepayment penalties (except for certain fixed-rate, qualified mortgages where the penalties satisfy certain criteria and the creditor has offered the borrower an alternative loan without such penalties) Credit unions are already restricted from charging prepayment penalties under Federal Credit Union Act and accompanying regulations

71 A Glossary of Other Key Terms or Definitions Fully Indexed Rate Higher Priced Covered Transaction Maximum Loan Amount Mortgage Related Obligations Simultaneous Loan Third Party Record Repayment Ability

72 Fully Indexed Rate The interest rate calculated using the index or formula that will apply after recasting the loan, as determined at the time of loan consummation, with the maximum margin that can be applied at any time during the loan term

73 Higher Priced Covered Transaction Covered transaction with an APR that exceeds the average prime rate by more than: 1.5% for first-lien covered transaction 3.5% for a second-lien covered transaction

74 Maximum Loan Amount Means the loan amount plus any increase in principal balance that results from negative amortization assuming: Consumer makes only minimum periodic payment Max interest rate is reached at earliest possible time

75 Mortgage Related Obligations Property taxes, premiums and similar charges required by the lender Fees and special assessments imposed by a condo/homeowners association Ground rent Leasehold payments

76 Simultaneous Loan Another covered transaction or open-end home equity line of credit secured by the same dwelling made at or before consummation of the covered transaction or, if after consummation, will cover closing costs of first transaction

77 Third Party Record Document/record prepared by appropriate person other than borrower, lender, mortgage broker or their agent Tax return (federal or state) Account records maintained by lender If employee of lender or broker, a document regarding employment status or income maintained by lender or broker

78 Repayment Ability General requirement: Lender shall not make a covered-transaction loan unless it makes a reasonable and good faith determination that the borrower will have a reasonable ability to repay the loan

79 Payment Calculations Balloon Payment Loans Interest Only Loans Negative Amortization Loans Simultaneous Loans

80 Calculation of Monthly Payment Amount In general: a lender must determine monthly payment amount using the fully indexed rate or the introductory rate, whichever is greater. Balloon payment loans: use maximum payment scheduled in first 5 years after closing Interest-only loans: use substantially equal monthly payments of principal and interest to repay loan as of the date upon which interest-only payments expire Negative amortization loans: use substantially equal monthly payments of principal and interest that will repay the maximum loan amount over the term of the loan as of the date the loan is recast

81 Monthly Debt-to-Income Ratio or Residual Income

82 Determination of Debt-to-Income Ratio Credit union is required to consider the borrower s monthly debt-to-income ratio ( residual income ) prior to extending a mortgage loan Lender must consider the borrower s total monthly debt obligations, including mortgage loan payments, other loan payments, payment of any other mortgage-related obligations and any other debt obligations The regulation does not prescribe a maximum debt-toincome threshold. The lender must use its discretion to make a good faith reasonable determination of whether a potential borrower s debt-to-income ratio is too high and would adversely affect their ability to pay

83 What are the biggest challenges facing credit union leaders on a personal level? (Source: Anthony Demagone, SVP & COO for NAFCU)

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86 Best Practices 1. Sign up for the NAFCU Webcasts on Mortgage Lending 2. Form an in-house credit union team that meets regularly 3. Involve credit union management 4. Hold the third part vendors accountable 5. Involve NAFCU Compliance Team 6. Review all policies and procedures 7. Establish a timetable with achievable deadlines stick to it

87 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA (757) Meagan J. Thomasson Kaufman & Canoles, P.C. 150 West Main Street, Suite 2100 Norfolk, VA (757)

88 CFPB s Final Mortgage Regulations: Ability-to-Repay and Qualified Mortgage Rules March 6, 2013 E. Andrew Keeney, Esq. Kaufman & Canoles, P.C.