TIPS BULLETIN #13-17

Transcription

1 TIPS BULLETIN #13-17 To: Subject: All Credit Unions Ability to Repay & Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z) The material in this publication is provided for educational and informational purposes only, and does not constitute legal or financial advice. Use of any material or information in this publication should never be a substitute for seeking the advice of an attorney or a certified public accountant. Effective Date: January 10, 2014 Background The Consumer Financial Protection Bureau (CFPB) has issued a final rule to implement laws requiring mortgage lenders to consider consumers ability to repay home loans before extending them credit. Summary The Bureau is amending Regulation Z, which implements the Truth in Lending Act (TILA). Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer s ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which generally require creditors to make a reasonable, good faith determination of a consumer s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for qualified mortgages ( QM ). The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. The final rule also requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. Consistent with the Act, the final rule applies the ability-to-repay requirement to all consumer-purpose mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans). Ability-to-Repay Determinations. The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: Current or reasonably expected income or assets Current employment status The monthly payment on the covered transaction The monthly payment on any simultaneous loan The monthly payment for mortgage-related obligations Current debt obligations, alimony, and child support

2 The monthly debt-to-income ratio or residual income Creditors must generally use reasonably reliable third party records to verify the information they use to evaluate the factors. The rule also provides guidance as to the application of these factors under the statute. For example, monthly payments must generally be calculated by assuming that the loan is repaid in substantially equal monthly payments during its term. For adjustable-rate mortgages, the monthly payment must be calculated using the fully indexed rate or an introductory rate, whichever is higher. Special payment calculation rules apply for loans with balloon payments, interest-only payments, or negative amortization. The final rule provides special rules to encourage creditors to refinance nonstandard mortgages, which include various types of mortgages which can lead to payment shock that can result in default, into standard mortgages with fixed rates for at least five years that reduce consumers monthly payments. Evidence of the Assessment of a Consumer s Ability to Repay (c) (2) Under the commentary, a consumer s statement or attestation that the consumer has the ability to repay a loan is not indicative of whether the creditor s determination was reasonable and in good faith. The following may provide evidence that a creditor s ability-to-repay assessment was reasonable: The consumer demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, for a significant period of time after consummation or, for an adjustable-rate, interest-only, or negative-amortization mortgage, for a significant period of time after recast. The creditor used underwriting standards that have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions. The creditor used underwriting standards based on empirically derived, demonstrably and statistically sound models. The following may be evidence that a creditor s ability-to-repay determination was not reasonable: The consumer defaulted on the loan a short time after consummation or, for an adjustable-rate, interest-only, or negative-amortization mortgage, a short time after recast. The creditor used underwriting standards that have historically resulted in comparatively high levels of delinquency and default during adverse economic conditions. The creditor applied underwriting standards inconsistently or used underwriting standards different from those used for similar loans without reasonable justification. The creditor disregarded evidence that the underwriting standards it used are not effective at determining consumers repayment ability.

3 The creditor disregarded evidence that the consumer may have insufficient residual income to cover other recurring obligations and expenses, taking into account the consumer s assets other than the property securing the loan, after paying his or her monthly payments for the covered transaction, any simultaneous loans, mortgage-related obligations, and any current debt obligations. The creditor disregarded evidence that the consumer would have the ability to repay only if the consumer subsequently refinanced the loan or sold the property securing the loan. All of the considerations above may be relevant to whether a creditor s ability-to-repay determination was reasonable and in good faith but they are not requirements or prohibitions with which creditors must comply. Also, under the rule: Creditors are not required to validate their underwriting criteria using mathematical models. The commentary provides that in some cases inconsistent application of underwriting standards may indicate that a creditor is manipulating those standards to approve a loan despite a consumer s inability to repay. However, in other cases inconsistently applied underwriting standards may be the result of, for example, inadequate training and may nonetheless result in a reasonable determination. A change in the consumer s circumstances after consummation (for example, a significant reduction in income because of a job loss or from a major medical expense) that cannot be reasonably anticipated from the consumer s application or the records used to determine repayment ability is not relevant to determine a creditor s compliance. If the application or records considered at or before consummation indicates there will be a change in a consumer s repayment ability, the creditor must consider that information. Payment Calculations (c) (5) A creditor must make its determination of a consumer s ability to repay using the following payment calculations: The fully indexed rate or any introductory interest rate, whichever is greater; and monthly, fully amortizing payments that are substantially equal. For a loan with a balloon payment, the creditor must use the maximum payment scheduled during the first five years after the date on which the first regular periodic payment will be due for a loan that is not a higher-priced covered transaction; or the maximum payment in the payment schedule, including any balloon payment, for a higher-priced covered transaction. For an interest-only loan and negative amortization loans, the creditor must use the fully indexed rate or any introductory interest rate, whichever is greater; and substantially equal, monthly payments of principal and interest that will repay the loan amount over the term of the loan remaining as of the date the loan is recast. For a negative amortization loan, the creditor must use the fully indexed rate or any introductory interest rate, whichever is greater; and substantially equal, monthly payments of principal and

4 interest that will repay the maximum loan amount over the term of the loan remaining as of the date the loan is recast. For payment calculation a creditor must consider a consumer s payment on a simultaneous loan that is: (i) A covered transaction, or (ii) A home equity line of credit By using the periodic payment required under the terms of the plan and the amount of credit to be drawn at or before consummation of the covered transaction. If a creditor considers the consumer s monthly debt-to-income ratio, the creditor must consider the ratio of the consumer s total monthly debt obligations to the consumer s total monthly income. If a creditor considers the consumer s monthly residual income the creditor must consider the consumer s remaining income after subtracting the consumer s total monthly debt obligations from the consumer s total monthly income. Certain Refinancing are Exempt from the Ability to Repay Provisions, (d) The refinancing of a non-standard mortgage into a standard mortgage may be exempt from the general ability to repay provisions. To qualify for the exemptions, a creditor must consider first whether the consumer is likely to default on the existing mortgage once that loan is recast and, second, whether the new mortgage likely would prevent the consumer s default. The following conditions must also be met: The creditor for the standard mortgage is the current holder of the existing nonstandard mortgage or the servicer acting on behalf of the current holder; The monthly payment for the standard mortgage is materially lower than the monthly payment for the non-standard mortgage, as calculated under the rule. In all cases, a payment reduction of 10 percent or more meets the materially lower standard. (See the below page for more provisions regarding a materially lower standard mortgage payment.) For purposes of the comparison, the monthly payment for a standard mortgage must be based on substantially equal, monthly, fully amortizing payments based on the maximum interest rate that may apply during the first five years after consummation. The creditor must receive the consumer s written application for the standard mortgage no later than two months after the non-standard mortgage has recast. The consumer may not have made more than one payment more than 30 days late on the nonstandard mortgage during the 12 months immediately preceding the creditor s receipt of the consumer s written application for the standard mortgage. The consumer has made no payments more than 30 days late during the six months immediately preceding the creditors receipt of the consumer s written application for the standard mortgage. If the non-standard mortgage was consummated on or after January 10, 2014, the non-standard mortgage must be made in accordance with the ability to repay provisions or was a QM.

5 Verification Using Third-Party Records (c) (3)2 A creditor must verify the information that the creditor relies on in determining a consumer s repayment ability. To the extent the creditor relies on these factors, they must be verified: Consumer s income or assets; Consumer s employment status if employment income is used to qualify for the loan; Consumer s credit report for the current debt obligations. If a consumer s application states a current debt obligation not shown in the consumer s credit report; the creditor need not independently verify such an obligation. A creditor may verify the consumer s income using a tax return transcript issued by the Internal Revenue Service (IRS). Examples of other records the creditor may use to verify the consumer s income or assets include: Copies of tax returns the consumer filed with the IRS or a State taxing authority; IRS Form W-2s or similar IRS forms used for reporting wages or tax withholding; Payroll statements, including Military Leave and Earnings Statements; Financial institution records; Records from the consumer s employer or a third party that obtained information from the employer; Records from a Federal, State, or local government agency stating the consumer s income from benefits or entitlements; Receipts from the consumer s use of check cashing services; and Receipts from the consumer s use of a funds transfer service. Qualified Mortgages, (e) This is a very important aspect of the regulation. It provides that creditors that follow the QM standards will be afforded a safe harbor for compliance with the ability to repay provisions. This means that creditors will be entitled to greater legal protection for qualified mortgages than for other mortgage loans should the creditor be sued by a consumer for noncompliance with the ability to repay provisions. However, certain mortgage loans will still be afforded a rebuttable presumption, which may provide lesser legal protection should compliance with the ability to repay provisions be challenged. A mortgage loan that complies with the QM requirements and is not higher-priced is in compliance with the ability to repay requirements. Most qualified mortgages will be standard loans that meet specific criteria as addressed below, but it is not required that any mortgage loan be underwritten as a QM. For higher-priced covered transactions, a consumer challenging a creditor s compliance must rebut the presumption that the creditor has complied by proving that despite meeting the requirements of a QM, a QM under the temporary provisions or a QM balloon mortgage loan (addressed below), the creditor did not make a reasonable and good faith determination of the consumer s repayment ability at the time of consummation. The consumer would have to show that his or her income, debt obligations, alimony, child support, and the consumer s monthly payment (including mortgage-related obligations) on the

6 covered transaction and on any simultaneous loans of which the creditor was aware at consummation would leave the consumer with insufficient residual income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan with which to meet living expenses. Presumption for Qualified Mortgages The Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor making the loan satisfied the ability-to repay requirements. However, the Act did not specify whether the presumption of compliance is conclusive (i.e., creates a safe harbor) or is rebuttable. The final rule provides that consumers may show a violation with regard to a subprime qualified mortgage by showing that, at the time the loan was originated, the consumer s income and debt obligations left insufficient residual income or assets to meet living expenses. The analysis would consider the consumer s monthly payments on the loan; loan related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware. Guidance accompanying the rule notes that the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, after consummation or, for an adjustable-rate mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income. With respect to prime loans which are not currently covered by the ability-to-repay rule, the final rule applies the new ability-to-repay requirements, but creates a strong presumption for those prime loans that constitute qualified mortgages. Thus, if a prime loan satisfies the qualified mortgage criteria described below, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumer s ability to repay. General Requirements for Qualified Mortgages The Dodd-Frank Act sets certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and vests discretion in the Bureau to decide whether additional underwriting or other requirements should apply. The final rule implements the statutory criteria, which generally prohibit loans from being qualified mortgages which include: Negative amortization Interest-only payments Balloon payments Terms exceeding 30 years So-called no-doc loans where the creditor does not verify income or assets also cannot be qualified mortgages.

7 A loan generally cannot be a qualified mortgage: If the points and fees paid by the consumer exceed three percent of the total loan amount, although certain bona fide discount points are excluded for prime loans. The rule provides guidance on the calculation of points and fees and thresholds for smaller loans. The final rule also establishes general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or back-end ) debt-to-income ratio that is less than or equal to 43 percent. The appendix to the rule details the calculation of debt-to-income for these purposes, drawing upon Federal Housing Administration guidelines for such calculations. The final rule therefore provides for a second, temporary category of qualified mortgages that have more flexible underwriting requirements so long as they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either: The Government Sponsored Enterprise such as Fannie Mae and Freddie Mac while they operate under Federal conservatorship or receivership The U.S. Department of Housing and Urban Development Department of Veterans Affairs or department of Agriculture or Rural Housing Service. This temporary provision will phase out over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event, after seven years. Specific Requirements There are specific requirements that must be met for a loan to be a qualified mortgage (QM). A qualified mortgage is a covered transaction: That provides for regular periodic payments that are substantially equal, except for the effect that any interest rate change after consummation has on the payment in the case of an adjustable-rate or step-rate mortgage, that do not: Result in an increase of the principal balance; Allow the consumer to defer repayment of principal, except as allowed under the rule; That does not result in a balloon payment, (some balloon payment QMs are allowed (addressed below); For which the loan term does not exceed 30 years; For which the total points and fees payable in connection with the loan do not exceed 3% of the total loan amount for a loan of $100,000 or more; For which the creditor underwrites the loan, taking into account the monthly payment for mortgage-related obligations, using: The maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due; and Periodic payments of principal and interest that will repay either:

8 The outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate, assuming the consumer will have made all required payments as due prior to that date; or The loan amount over the loan term. The creditor must consider and verify at or before consummation the following: The consumer s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan; The consumer s current debt obligations, alimony, and child support; and For which the ratio of the consumer s total monthly debt to total monthly income at the time of consummation does not exceed 43 percent. The ratio of the consumer s total monthly debt to total monthly income is determined generally under Appendix Q. Points and Fees for Qualified Mortgages, (3) Total points and fees for a QM generally may not exceed: For a loan amount greater than or equal to $100,000 (indexed for inflation): 3 percent of the total loan amount; For a loan amount greater than or equal to $60,000 (indexed for inflation) but less than $100,000 (indexed for inflation): $3,000 (indexed for inflation); For a loan amount greater than or equal to $20,000 (indexed for inflation) but less than $60,000 (indexed for inflation): 5 percent of the total loan amount; For a loan amount greater than or equal to $12,500 (indexed for inflation) but less than $20,000 (indexed for inflation): $1,000 (indexed for inflation); For a loan amount less than $12,500 (indexed for inflation): 8 percent of the total loan amount. The dollar amounts must be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index for All Urban Consumers (CPI-U) that was reported on the preceding June 1. Additional Categories of QMs, (e)(4) and (f) The CFPB is also permitting other types of QMs that may provide more flexibility to creditors under special rules or an exemption. These mortgage loans will also qualify for a safe harbor regarding compliance as long as the following conditions are met: The loan terms does not exceed 30 years; Total points and fees are generally no more than 3% of the total loan amount or fall under other applicable point and fee caps under the rule; and The payments are substantially equal. The loans must also be eligible for one more of these actions: Purchased by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation or purchased or guaranteed by any limitedlife regulatory entity succeeding FNMA or FHLMC.

9 Insured by the U.S. Department of Housing and Urban Development Guaranteed by the U.S. Department of Veterans Affairs or the U.S. Department of Agriculture. Insured by the Rural Housing Service. Eligible loans must be consummated no later than January Agencies listed above may issue rules with shorter effective periods. Balloon Payment QMs Despite other provisions, a qualified mortgage may include a balloon payment if: The transaction has regular periodic payments that are substantially equal and do not result in an increase in the principal balance; The loan term does not exceed 30 years; The total points and fees do not generally exceed 3% of the total loan amount or other applicable cap under the rule; and The creditor has considered and verified at or before consummation the consumer s income and debt obligations (but does not have to follow Appendix Q in regard to the debt obligations). Additional requirements: The creditor must determine at or before consummation that the consumer can make all of the scheduled payments under the terms of the legal obligation, excluding the balloon payment, from the consumers current or reasonably expected income or assets other than the dwelling that secures the loan; The creditor must consider at or before consummation the consumer s monthly debt-to income ratio or residual income. The credit must also verify the debt obligations and income used to determine that ratio in accordance with the rule. The calculation of the payment on the covered transaction for purposes of determining the consumer s total monthly debt obligations must be determined in accordance with the rule, using substantially equal payments calculated based on an amortization period that does not exceed 30 years, together with the consumer s monthly payments for all mortgage-related obligations, excluding the balloon payment. Also, the legal obligation must provide for: Scheduled payments that are substantially equal, calculated using an amortization period that does not exceed 30 years; An interest rate that does not increase over the term of the loan; and A loan term of five years or longer. Also, the creditor must provide that the provision will not apply after the two-year period following consummation; the penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and the amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.

10 A balloon payment qualified mortgage will immediately loose its status as a qualified mortgage if legal title to the balloon-payment qualified mortgage is sold, assigned, or otherwise transferred to another person except when: It is sold, etc., three years or more after consummation of the balloon-payment qualified mortgage; The balloon-payment qualified mortgage is sold, assigned, or otherwise transferred to another person pursuant to a capital restoration plan or other prompt corrective action; or To a bankruptcy trustee or under an order of a State or Federal governmental agency; or The balloon-payment qualified mortgage is sold, assigned, or otherwise transferred pursuant to a merger of the creditor with another person or acquisition of the creditor by another person or of another person by the creditor. Prepayment Penalties, (g) A covered transaction must not include a prepayment penalty unless: The prepayment penalty is otherwise permitted by law; and the transaction has an annual percentage rate that cannot increase after consummation. Is a qualified mortgage. Is not a higher-priced mortgage loan. Limits on Prepayment Penalties A prepayment penalty: Must not apply after the three-year period following consummation; and Must not exceed the following percentages of the amount of the outstanding loan balance prepaid: 2 percent, if incurred during the first two years following consummation; and 1 percent, if incurred during the third year following consummation. Alternative Offer Required A creditor must not offer a consumer a mortgage covered by this rule with a prepayment penalty unless the creditor also offers the consumer an alternative covered transaction without a prepayment penalty. The alternative covered transaction must: Have an annual percentage rate that cannot increase after consummation and the same type of interest rate as the covered transaction with a prepayment penalty; Have the same loan term as the loan term for the covered transaction with a prepayment penalty; Satisfy the periodic payment conditions ; Satisfy the points and fees conditions based on the information known to the creditor at the time the transaction is offered; and

11 Be a transaction for which the creditor has a good faith belief that the consumer likely qualifies, based on the information known to the creditor at the time the creditor offers the covered transaction without a prepayment penalty. Offer through a mortgage broker. If the creditor offers a covered transaction with a prepayment penalty to the consumer through a mortgage broker, the creditor must: Present the mortgage broker an alternative covered transaction without a prepayment penalty that satisfies the requirements of the rule and establish by agreement that the mortgage broker must present the consumer an alternative covered transaction without a prepayment penalty that satisfies the requirements of the rule. The alternative must be offered by: The creditor; or Another creditor, if the transaction offered by the other creditor has a lower interest rate or a lower total dollar amount of discount points and origination points or fees. If the creditor is a loan originator, and the creditor presents the consumer a mortgage loan covered by this rule that is offered by an entity to which the creditor would assign the loan after consummation, the creditor must present the consumer an alternative without a prepayment penalty that satisfies the requirements of the rule regarding alternatives, offered by the assignee or another person, if the transaction offered by the other person has a lower interest rate or a lower total dollar amount of origination discount points and points or fees. Prohibition on Structuring an Otherwise Covered Loan as Open-End Credit, (h) The rule prohibits creditors from structuring a closed-end mortgage loan as an open end plan to avoid complying with the ability to repay requirements. Record Retention, The rule provides that creditors must keep evidence of compliance with the new provisions for three years after consummation of a covered transaction. Additional Links CFPB Final Rule-Ability-to-Repay CUNA s Summary Chart of the CFPB s Mortgage Lending Rules Questions If you have any questions regarding this information, please contact the Research and Information s tollfree hotline at Want to find more great information like this? Visit members.ccul.org anytime to search related topics, download TIPS bulletins and access additional resources for League members only.