Qualified Mortgages-Update Wilkes B. Hardin, MBA, CFE VP, Lending Compliance WSECU
Agenda Items ATR/QM rule review Impact Discussion Secondary Developments Supervisory Environment Wrap-up/Questions
Why?
Reg Z ATR/QM rule In January, 2013 The CFPB issued a final Ability-to-Repay rule. ( 1026.43 Minimum Standards for Transactions Secured by a Dwelling) The rule implements provisions of the Dodd-Frank Act. The rule specifies standards all lenders must use when considering a borrower s ability to repay the loan. The rule also establishes requirements for a Qualified mortgage under Regulation Z, the Truth in Lending Act. Lenders were given 12 months to implement the rule.
ATR/QM Background Prior to the mortgage crisis, a lot of mortgage loans were made without regard to the borrower s ability to repay the loans. In 2008, rules were issued requiring lenders to evaluate a borrower s ability to repay the loan for higher-priced mortgage loans. In the 2010 Dodd-Frank Act, similar Ability-to-Repay requirements were adopted for virtually all closed-end residential mortgage loans
Reg Z ATR/QM rule Scope Consumer Credit Transactions Secured by a dwelling, including any real property attached to a dwelling. Dwelling-as defined by Reg Z A residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence. HELOCs, Timeshare mortgages, and Reverse mortgages are specifically excluded
Ability to Repay Provisions Creditors must consider 8 underwriting factors and generally use reasonably reliable third-party records to verify the information they use to evaluate the factors considered. The rule also all but eliminates the pre-payment penalty. It is still allowed, but there are severe restrictions.
Ability to Repay Provisions 8 Required Factors of Consideration: 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; The monthly debt-to-income ratio or residual income; and Credit history
Ability to Repay Provisions Verification of information considered is required using reasonably reliable third-party records, such as: W-2s Paycheck stubs Financial institution account statements Tax returns Employer records
Ability to Repay Provisions Verification can consist of: Verbal VOEs Credit reports to verify stated debts Verbal VODs Verbal VOMs Tax return transcripts, etc
Ability to Repay Provisions Exemption: Refinancing a borrower from a Non-Standard mortgage into a Standard mortgage. Conditions Apply: Must be same lender as non-standard mortgage being refinanced Application must be within 2 months of payment re-cast New payment must be at least 10% lower No more than one 30 day late payment in preceding 12 months, none in preceding 6 months No cash out. Loan proceeds only used for satisfying nonstandard mortgage being refinanced, plus associated costs.
Qualified Mortgages What is a Qualified Mortgage? It is a designation given to certain mortgage loans that meet standards relating to Debt-to-Income ratios, points and fees, riskier loan features, and consideration of repayment ability over a longer period of time Qualified Mortgages are seen as less risky, more conservatively underwritten, and presenting a lesser degree of legal risk to the originator and default risk to the creditor/investor.
Qualified Mortgages Important Detail: All creditors must follow Ability-to-Repay requirements Creditors aren t required to originate Qualified Mortgages.
Qualified Mortgage Legal Protection Types Safe Harbor Qualified Mortgage Rebuttable Presumption Qualified Mortgage
Qualified Mortgages Types For all Creditors: General Qualified Mortgage Temporary Qualified Mortgage For Small Creditors: Small Creditor Qualified Mortgage Balloon Payment Qualified Mortgage
General Qualified Mortgage Requirements for Qualified Mortgages: No risky loan features such as negative amortization, interest-only payments, balloon payments, or terms exceeding thirty years No no-doc loans where income or assets aren t verified Points and Fees to consummate the transaction don t exceed 3% of the loan amount, generally Monthly payments calculated based on the highest payment that can apply in the first five years The consumer s Debt-to-Income ratio doesn t exceed 43%
Temporary Qualified Mortgage Requirements for Temporary Qualified Mortgages: Loans that are eligible for sale, guaranty, or insurance by any of the GSEs while under Federal conservatorship. Max. 7 year exemption (January, 2021) Loan terms cannot exceed 30 years Points and Fees to consummate the transaction don t exceed 3% of the loan amount, generally Payments are substantially equal
Small Creditor Qualified Mortgage Requirements for Small Creditor Qualified Mortgages: No risky loan features such as negative amortization, interest-only payments, balloon payments, or terms exceeding thirty years Points and Fees to consummate the transaction don t exceed 3% of the loan amount, generally Monthly payments calculated based on the highest payment that can apply in the first five years Loan cannot be committed to the secondary market Creditor must consider income or assets, debts, alimony, and child support The consumer s Debt-to-Income must be evaluated, no firm limit.
Balloon Payment Qualified Mortgage Requirements for Qualified Mortgages: No risky loan features such as negative amortization, interest-only payments, balloon payments, or terms exceeding thirty years Fixed rate that contemplates full amortization over thirty years Points and Fees to consummate the transaction don t exceed 3% of the loan amount, generally Loan cannot be committed to the secondary market Borrower must be able to afford the periodic payment Creditor must consider income or assets, debts, alimony, and child support The consumer s Debt-to-Income must be evaluated, no firm limit.
Practical Impact All creditors must follow Ability-to-Repay rules (With Limited Exceptions) Evaluate existing policies, procedures, and underwriting guidelines against new standards Make adjustments accordingly to meet minimum standards. Make sure controls are in place to ensure compliance
Practical Impact-QM decisions What is your default and legal risk appetite? What do your members need? What do your investors require? Portfolio concentration concerns? Based on membership diversification, will writing only QMs create a fair lending concern?
Secondary Market/GSE Developments Department of Veterans Affairs HUD/FHA Fannie Mae Freddie Mac
Supervisory/Regulatory Update NCUA Supervisory Letter SL No. 14-01 Interagency Statement on Fair Lending Compliance and the Ability-to-Repay and Qualified Mortgage Standards rule Proposed amendments to Ability-to- Repay/QM rule
Questions? Thank you all very much!