2014 Mortgage Rules

1. 2014 Mortgage Rules

2. Ability to repay

3. ATR/QM Rule summary • Creditors are required to make a reasonable and good faith determination that the consumer will have a reasonable ability to repay a mortgage loan according to its terms. • Compliance is mandatory. • The way you comply is optional.

4. ATR/QM Summary Applies to almost all closed-end consumer credit transactions secured by a dwelling. These are also known as “covered transactions.” Does not apply to: • Open-end credit plans (home equity lines of credit, or HELOCs) • Time-share plans • Reverse mortgages • Temporary or bridge loans with terms of 12 months or less • A construction phase of 12 months or less (with possible renewal) of a construction-to-permanent loan • Loans secured by vacant land

5. ATR/QM Summary Qualified Mortgage ATR Requirements Unlimited loan features, points and fees Comply with 8 underwriting factors • Provides a presumption that you have complied with ATR requirements • Cannot contain certain risky features • Limits on points and fees • Meet strict underwriting criteria (General QMs)

6. ATR Underwriting Factors Looking at the Past Looking at the Future Monthly mortgage payment Monthly payment on any simultaneous loans secured by the same property Monthly payments for property taxes, required insurance, and other costs related to the property (HOA fees, lot rental Monthly DTI as a ratio of gross monthly income • Current or reasonably expected income or assets • Current employment status (if relied upon) • Current debts, alimony and child-support obligations • Credit history

7. Verify using third party sources • Only verify income needed to qualify for the loan • Oral verification of employment from employer OK as long as you make a written record (more extensive employment verification is required for General QMs) • Use credit reports to verify debts • Verify alimony and child support through court orders • Verify self-employment income through tax returns or profit and loss statements prepared by a third party • Verify HOA fees from statements

8. Calculating DTI Include the following: • The loan you are underwriting • Any simultaneous loans on the same property • Mortgage-related obligations • Current debt obligations, alimony and child support Calculating the loan payment on ARMs: • Substantially equal monthly payments that would fully amortize the loan • Use the fully indexed rate (do not use a discounted rate to determine ATR)

9. Calculating DTI Calculating the payment on balloon loans: • For non-higher priced loans: Use the maximum payment scheduled during the first five years after the first regular payment comes due. • For higher-priced loans: Use the maximum payment in the payment schedule, including any balloon

10. Qualified Mortgages • There are five types of QMs: • General (available to all creditors) • Agency/GSE (available to all creditors) • Balloon-Payment QM (available to small creditors in rural and underserved areas) • Small Creditor QM (available to all small creditors) • Small Creditor Balloon-Payment QM (temporarily available to all small creditors)

11. General QM • Loan feature limitations • Loan term limit • Points and fees limit • Use of Appendix Q to evaluate income and debt is REQUIRED (This will be the most difficult part to comply with)

12. Agency/GSE Qualified mortgages • Temporary until January 2021 • Loan feature limitations • Loan term limit • Points and fees limit • Use of Appendix Q to evaluate income and debt is not required as long a the loan was underwritten to GSE or Agency requirements

13. Balloon Payment QM • Allowed for small creditors operating primarily in rural and underserved areas • Loan feature limitations • Balloon payment feature permitted • Loan term limit: No more than 30, no less than 5 • Points and fees limit • Use of Appendix Q to evaluate income and debt is not required • Other underwriting factors must still be considered and verified

14. Small creditor qm • Loan feature limitations • Loan term limit • Points and fees limit • Use of Appendix Q to evaluate income and debt is not required • Other underwriting factors must still be considered and verified

15. Small Creditor Balloon-Payment Temporary QM • Temporary for all small creditors regardless of location until January 10, 2016 • Loan feature limitations • Balloon payment feature permitted • Loan term limit: No more than 30, no less than 5 • Points and fees limit • Use of Appendix Q to evaluate income and debt is not required • Other underwriting factors must still be considered and verified

16. Appendix Q • REQUIRED on General QMs to evaluate income and debts • May be used as guidance for other QMs and for complying with ATR requirements • Extensive rules cover a wide range of income types and debt obligations • May look to GSE or Agency guidance when Appendix Q doesn’t cover how a particular type of income or debt should be treated • Creditors may always exclude income or include a debt if Appendix Q or Agency/GSE guidance does not resolve the issue

17. Recordkeeping • Keep records to evidence compliance for three years after consummation.

18. HOEPA

19. HOEPA SUMMARY When you originate a high-cost mortgage, you must: • Give additional disclosures • Avoid certain loan terms • Ensure the consumer receives additional protections, including homeownership counseling

20. HOEPA COVERAGE HOEPA applies to: • Purchase-money mortgages • Refinances • Closed-end home equity loans • Open-end credit plans (i.e., HELOCs) Exempt transactions: • Reverse mortgages • Constructions loans

21. HOEPA Coverage Tests • APR • Points and fees • Prepayment penalty

22. HOEPA APR TEST A transaction is a high-cost mortgage if its APR (measured as of the date the interest rate for the transaction is set) exceeds the Average Prime Offer Rate (APOR) for a comparable transaction on that date by more than: • 6.5 percentage points for first-lien transactions, generally • 8.5 percentage points for first-lien transactions that are for less than $50,000 and secured by personal property (e.g., RVs, houseboats, and manufactured homes titled as personal property) • 8.5 percentage points for junior-lien transactions

23. Points and Fees Test • 5 percent of the total loan amount for a loan amount greater than or equal to $20,000 • 8 percent of the total loan amount or $1,000 (whichever is less) for a loan amount less than $20,000

24. Existing HOEPA RULES • Pre-closing disclosure • No balloon payments (in general) • No pre-payment penalties • No due on demand features

25. New HOEPA RULES • No recommending default on an existing loan to be refinanced by a high-cost mortgage. • No charging fees to modify, defer, renew, extend or amend • Late fees are restricted to 4 percent of the past due payment, and pyramiding of late fees is prohibited. • No fees for generation of payoff • No financing points and fees • No structuring loans to avoid HOEPA coverage • ATR for HELOCs • Proof of Homeownership counseling

26. Homeownership Counseling Notice

27. Homeownership counseling notice • Creditors must give all applicants for mortgages loans a written list of homeownership counseling organizations within three business days of receiving an application. • Includes all consumer loans secured by a dwelling except reverse mortgages and loans for time-shares. • Generate a list of homeownership counseling organizations through the Bureau’s website (http://www.consumerfinance.gov/find-a-housing-counselor/) or use the data provided by the Bureau or HUD. • The list must be specific to the consumer’s location and be current within the last 30 days (hint – you’ll be printing a new list out for each transaction)

28. Loan originator compensation

29. Who is A loan originator • Taking an application • Arranging a credit transaction • Assisting a consumer in applying for credit • Offering or negotiating credit terms • Making an extension of credit • Referring a consumer to a loan originator or creditor • Advertising or communicating to the public that you can or will perform any loan origination services

30. Allowed Compensation • Prohibits a loan originator’s compensation from being based on the terms of a transaction. • Permits contributions to and benefits under designated tax-advantaged plans and certain bonuses and other compensation under non-deferred profits-based compensation plans based on mortgage-related business profits. • Prohibits loan originators in a transaction from being compensated by both a consumer and another person, such as a creditor.

31. BIG HINT: Have an attorney review all MLO compensation agreements that include compensation other than salary.

32. ID on Loan documents Include the following information on certain mortgage loan documents: • Originator name • NMLSR ID • Name of loan originator assigned to the loan Include information on the following loan documents: • Credit application • Note or loan contract • Security instrument

33. Policies and Procedures Establish and maintain written policies and procedures to monitor compliance with various new and existing rules applicable to loan originator employees.

34. Mandatory arbitration and waivers of federal claims Restricts creditors from including in their contracts mandatory arbitration clauses and provisions where consumers would waive federal statutory causes of action.

35. prohibition on financing credit insurance • You may not finance, directly or indirectly, any premiums or fees for credit insurance in connection with a closed-end consumer credit transaction secured by a dwelling • This prohibition does not apply to credit insurance when the premiums or fees are calculated and paid in full on a monthly basis.

36. ECOA EVALUATION RULE

37. Summary of ECOA valuations rule • Within three days of application, you must notify the applicant of the right to receive a copy of appraisals/valuations (sample notice in regulation) • “Promptly” share copies of appraisals and other written valuations with the applicant. • Provide valuations upon completion or at least three days prior to closing (closed-end) or at account opening (open-end) • Applicant can waive right to received valuations prior to closing (still must must be delivered at closing)

38. ECOA Valuation rule coverage • Applies to consumer and business transactions (dwellings only) • Applies only to transactions secured by a first lien on a dwelling • Applies to all loan applications whether they are originated, denied or approved, but not accepted.

39. What is a valuation? • An appraiser’s report • A document your staff prepares that assigns value to the property • A report approved by a government-sponsored enterprise • Automated valuation model reports • A broker price opinion

40. Other rules for valuations • You can charge for preparation of an appraisal, but not copies • Provide updated copies of appraisals, or the final version

41. TILA Higher Priced Mortgage Loan Appraisal rule

42. TILA HPML Appraisal rule/coverage Applies to higher priced, first lien or subordinate lien, closed-end loans secured by the borrower’s principal dwelling. Excludes the following: • QMs • Reverse mortgages • Bridge loans • Construction loans • Manufactured housing • Loans secured by boats, trailers and mobile homes

43. TILA HPML Appraisal rule/Requirements • Disclose to consumers within three business days after receiving the consumers’ applications that they are entitled to a free copy of any appraisal • Obtain a written appraisal performed by certified or licensed • Have the appraiser visit the interior of the property and provide a written report • Deliver copies of appraisals to applicants no later than three business days before consummation • An additional appraisals is required for certain “flipping transactions”

44. TILA ESCROW RULE

45. TILA ESCROW/COVERAGE • Applies to first lien, higher-priced mortgage loans • Became effective on June 1, 2013 • Lengthens the time a creditor must maintain an escrow account from 1 to 5 years.

46. TILA/RESPA Servicing rules

47. TILA/RESPA Servicing Coverage • Big exemptions for small servicers! • Small servicers must comply with the following rules: • ARM Notices • Prompt payment crediting/payoff statements • Forced placed insurance • Error and information requests

48. ARM Notices • Replaces old ARM notices • Two types of notices: • The 20(d) initial interest rate adjustment notice is required only for the first time the interest rate adjusts. It must be provided to a consumer between 210 days and 240 days before the first payment at the new rate is due. • The 20(c) ongoing interest rate adjustment notice must be provided to a consumer between 60 and 120 days before the first payment at the new rate is due each time an interest rate adjustment results in a payment change. • Use sample notices provided in the regulation

49. Prompt crediting/payoff statements • Periodic payments must be promptly credited as of the day of receipt. A periodic payment consists of the amount necessary to cover principal, interest, and escrow (if applicable). • If you receive a payment that is less than the amount due for a periodic payment, you may place the payment in a suspense account. When the amount in the suspense account covers a periodic payment, you must treat the accumulated amount as a periodic payment and promptly credit it to the consumer’s account. • In addition, creditors, assignees, and servicers must provide an accurate payoff balance to a consumer no later than 7 business days after receipt of a written request from the consumer for that information.

50. Forced placed insurance • Applies to hazard insurance • You must have a reasonable basis to believe that a consumer has failed to maintain required hazard insurance before charging for force-placed insurance. • You must send 2 notices to the consumer and not have received in response to these notices evidence that the consumer has had in place, continuously, required hazard insurance before you charge for force-placed insurance. (45 days, 15 days) • You must notify the consumer and not have received in response to this notice evidence that the consumer has purchased required hazard insurance before you charge the consumer for renewing force-placed insurance. • You must cancel force-placed insurance within 15 days of receiving evidence that the consumer has required hazard insurance in place and refund to the consumer any fees or charges for periods of overlapping coverage. • Force-placed insurance charges imposed by a servicer on a borrower, beyond those subject to state regulation as insurance charges, must be bona fide and reasonable