CFPB Mortgage Rules Glory LeDu Legislative and Regulatory Affairs Specialist
Agenda • Ability to Repay / Qualified Mortgages • Loan Originator Compensation • Valuations and Appraisal Requirements • HOEPA Rules • Mortgage Servicing • Escrow Rules / HPMLs
Ability to Repay/Qualified Mortgage What types of loans are covered? • Closed end secured by a dwelling • First or second lien • Not limited to primary residences What types of loans are excluded? • Open end plans (HELOCs) • Time-share plans • Reverse Mortgage • Temporary or bridge loan (12 months or less) • Construction phase of 12 months or less of a construction-to-permanent loan
Ability to Repay Requirements Effective January 10, 2014 At a minimum creditors must consider 8 underwriting factors: • Current or reasonably expected income or assets; • Current employment status; • Monthly payment on the covered transaction; • Monthly payment on any simultaneous loan secured by same property; • Monthly payment for mortgage-related obligations; • Current debt obligations, alimony, and child support; • Monthly debt-to-income ratio or residual income; and • Credit history Must use reasonably reliable third-party records to verify the information they use to evaluate the factors.
Qualified Mortgage (QM) Regulation provides a presumption that credit unions that originate QMs have complied with the ATR requirements. • Four types of Qualified Mortgages • General and Temporary – can be originated by ALL creditors • Small Creditor and Balloon-Payment – originated by small creditors.
Not a QM A Qualified Mortgage is not: • A no-doc loan; • Loan with interest only payments; • Negatively amortizing loan; • A balloon loan; • Terms exceeding 30 years; or • Points and fees exceed 3% of the loan amount ($100,000 and under loans – different)
General QM To meet the general QM category: • Underwrite based on fully-amortizing schedule using the maximum rate permitted during the first five years after the date of the first periodic payment. • Consider and verify the consumer’s income or assets, current debt obligations, alimony and child support obligations. • Determine total monthly debt-to-income ratio is no more than 43%.
Temporary QM To meet the temporary QM definition one of these requirements must apply: • Eligible for purchase or guarantee by Fannie Mae or Freddie Mac • Eligible for FHA insurance • Eligible to be guaranteed by the US Dept. of Veterans Affairs • Eligible to be guaranteed by the USDA • Eligible to be insured by the Rural Housing Service
Small Creditor QMs What is a small creditor? • Assets below $2 billion; AND • You and your affiliates together originated no more than 500 first lien, closed end residential mortgages that are subject to the ATR requirements in the preceding calendar year. “Affiliate”: means any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C 1841 et seq.). The Bank Holding Company Act describes “control” as: “Any company has control over a bank or over any company if - (A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; (B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or (C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company.”
Small Creditor QMs To meet the Small Creditor QM requirements: • Underwrite based on a fully amortizing schedule – use max rate first five years. • Loan NOT subject to forward commitment • Consider and verify income, assets, debt, alimony and child support. • Consider DTI or residual income, although no specific threshold. • Points and fees cannot exceed QM limits. *Generally lose QM status if you sell or transfer less than 3 years after consummation
Balloon Payment QM On or before January 10, 2016, small creditors can make balloon payment QMs regardless of where the small creditor operates (after that date, credit unions must operate predominately in rural and underserved areas). • No negative amortization or interest only features, must comply with points and fee limits (3%) • Fixed interest rate and periodic payments (other than the balloon) that would fully amortize the loan over 30 years or less. • Term of 5 years or longer. • Not subject to forward commitment. • Determine member will be able to make scheduled periodic payments and obligations other than the balloon payment. • Consider and verify income, assets, debt, alimony and child support. • Consider DTI, no specific threshold.
Higher Priced QM QM is higher-priced if: • It is a 1st lien mortgage with APR 1.5% or more over the APOR. • Subordinate-lien mortgage with an APR 3.5% or more over the APOR. A small creditor or balloon-payment QM is higher priced if: • 1st and subordinate lien mortgages that have an APR 3.5% or more over the APOR.
Points and Fees For a loan to be a QM, the points and fees cannot exceed:
Points and Fees To calculate the points and fees you will add together the amounts paid in connection with the transaction including: • Finance charges • Charges that can be excluded: • Interest or time-price differential • Mortgage insurance premiums (MIP) • Federal or State government sponsored MIP (up front and annual FHA premiums, VA funding fees, etc.) • PMI premiums (exception for FHA loans) • Bona fide third party charges not retained by the creditor, LO or affiliate of either
Points and Fees • Finance charges (cont’d): • Charges that can be excluded: • Bona fide discount points • Exclude up to 2 points IF the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 1% point • Exclude up to 1 point IF the interest rate before the discount does not exceed the APOR for a comparable transaction by more than 2% points. 2. LO Compensation • Include compensation paid directly or indirectly by a member or a creditor to a loan originator OTHER than compensation paid by a mortgage broker, creditor or retailer of manufactured homes to an employee.
Points and Fees 3. Real Estate Related Fees • Charges can be excluded IF: • The charge is reasonable; • The credit union receives no direct or indirect compensation in connection with the charge; and • The charge is not paid to an affiliate of the credit union. If one or more of those conditions is NOT satisfied you must include these charges, even if they would be excluded from the finance charge: • Fees for title examination (abstract of title, title insurance, etc.) • Fees for preparing loan-related docs (deeds, mortgages) • Notary and credit report fees • Property appraisal or inspection fees • Amounts paid into escrow (that are not otherwise included in finance charge)
Points and Fees 4. Premiums for credit insurance (life, accident, credit property) • Include for these types of insurance that are payable at or before consummation even if they are rolled into the loan amount (if permitted by law) • No need to include if paid after consummation (monthly premiums) • No need to include premiums for life, accident, health or loss of income insurance if the member (or another person designated by the member) is the sole beneficiary of the insurance.
Points and Fees 5. Maximum Prepayment penalty 6. Prepayment penalty paid in a refinance
Prepared Remarks of CFPB Director Cordray at the American Mortgage Conference: “One further illustration of our data-driven decision-making is our treatment of smaller creditors under the rule. Through extensive discussions with community banks and credit unions, we came to recognize that most of their traditional lending practices should not be put into question by the Ability-to-Repay rule. Especially where smaller institutions make loans that they keep in their own portfolios, they have every incentive to pay close attention to the borrower’s ability to repay the loan. They are more immediately subject to community norms, and their underwriting standards did not deteriorate in the heady days before the financial crisis; indeed, they often lost market share to those engaged in the more irresponsible lending practices of that era. So we avoided a “one-size-fits-all” approach by proposing and then finalizing specific provisions to meet the special circumstances of smaller mortgage lenders. Qualified mortgages cover the vast majority of loans made in today’s market, but they are by no means all of the mortgage market. This point is important and it should not be misunderstood. There are plenty of good loans made every year that are non-QM. For example, loans made to borrowers with considerable other assets may not meet the 43 percent debt-to-income ratio, be eligible for purchase by the government-sponsored enterprises (GSEs), or qualify under the small creditor exemption, but nonetheless are based on sound underwriting standards and routinely perform well over time. Lenders that have long upheld such standards have little to fear from the Ability-to-Repay rule; the strong performance of their loans demonstrates the care they have taken in underwriting to borrowers who have the ability to repay. Nothing about their traditional lending model has changed, and they should continue to offer the same kinds of mortgages to borrowers whom they evaluate as posing reasonable credit risk – whether or not they meet the criteria to be classified as qualified mortgages.”
Loan Originator Compensation Mandatory Arbitration Clauses Effective June 1, 2013 Prohibition on mandatory arbitration clauses and waivers of certain consumer rights (for consumer credit transaction secured by a dwelling, including HELOCs): • No terms that require arbitration • No language to bar a consumer from bringing a claim in court in connection with any alleged violation of Federal law. (under Loan Originator Compensation Amendments)
Loan Originator Compensation Effective January 1, 2014 Definition of a Loan Originator?? “A person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assist a consumer in obtaining or applying to obtain, negotiates or otherwise obtains or makes and extension of credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities.”
Loan Originator Compensation AS OF 9/13/13 “Managers and administrative staff” exemption. Loan originator does not include: • Credit union employee who provides a credit application form from the credit union to the member for completion, without assisting in completing the credit application, processing or analyzing the information, or discussing particular credit terms that are or may be available from the credit union based on the member's financial characteristics. • Delivers the credit application from a member to a loan originator.
Loan Originator Compensation AS OF 9/13/13 Responding to Member Inquires. Loan originator does not include: • Employees that provide general explanations, information or descriptions in response to member queries, such as explaining credit terminology or lending policies or who confirm written offer terms already transmitted to the member. • Employees who provide LO contact information for employee of the credit union, provided particular terms are not discussed and the employee does not direct the member, based on his/her assessment of the member’s financial characteristics to a particular loan originator.
Loan Originator Compensation AS OF 9/13/13 Responding to Member Inquires. Loan originator does not include: • Employee describing product-related services (optional monthly payment methods, availability and features of online account access, etc.) • Employees explaining or describing steps that a member would need to take to obtain an offer of credit, including general guidance on qualifications or criteria (not specific to member’s circumstances).
Loan Originator Compensation • MLO cannot receive compensation on any of the mortgage loans’ terms or conditions or proxy for any loan term or condition. • No Dual Compensation – if the MLO receives compensation from the borrower in connection with a mortgage loan, s/he cannot receive compensation from their organization or another person for the same transaction.
Loan Originator Compensation CFPB Transaction Terms • The interest rate • The annual percentage rate • The collateral type (e.g., condominium, cooperative, detached home, or manufactured housing) • The product type • The origination points or fees paid to the creditor or loan originator • Fees for creditor-required title insurance
Loan Originator Compensation • MLO’s must be registered according to the SAFE Act. • *MLO’s AND CREDIT UNIONS must include their name and NMLS ID on the following loan documents: • Credit application • Note or loan contract • Security instrument Generally include on documents that require a member’s signature. *The MLO primarily responsible for origination of the loan.
Loan Originator Compensation Financing of Single Premium Credit Insurance Effective January 10, 2014 • Closed-end consumer credit transactions secured by a dwelling and open-end loans secured by the member’s principal dwelling. • Prohibits the financing (directly or indirectly) of any premium, but excludes premiums that are calculated and paid-in-full on a monthly basis. • Financing is the right to defer payment of a credit insurance premium owed by the consumer beyond the monthly period in which the premium is due.
HPML Appraisal Rule TILA – Effective January 18, 2014 • Applies to first lien or subordinate lien closed end loans secured by a member’s principal dwelling. • Higher Priced Mortgage Loan (HPML): • First lien with an APR that exceeds the APOR by 1.5% or more • First lien jumbo loan with an APR that exceeds the APOR by 2.5% or more. • Subordinate lien with an APR that exceeds the APOR by 3.5% or more • http://www.ffiec.gov/ratespread/newcalc.aspx
HPML Appraisal Rule Loans EXEMPT from appraisal requirements: • Qualified Mortgages (QMs) • Reverse mortgages • Bridge loans (for 12 months or less and intended to be used to acquire a new principal dwelling) • Loans for initial construction of a dwelling (not limited to loans of 12 months or less) • Loans secured by new manufactured homes • Loans secured by boats, trailers, and mobile homes • loans:
HPML Appraisal Rule Appraisal Requirements: • Disclose to members within three business days after receiving the members’ applications that they are entitled to a free copy of any appraisal the credit union orders and also they can hire their own appraiser at their own expense for their own use. • Obtain a written appraisal performed by certified or licensed appraiser in conformity with the USPAP and Title XI of FIRREA and its implementing regulations. • 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.
ECOA Valuations Equal Credit Opportunity Act (ECOA) Valuations Effective January 10, 2014 • Covers closed-end or open-end secured by 1st lien on a dwelling, including: • Loans for business purposes, investment or vacation property, or consumer purposes (regular mortgage loan) • Loss mitigation transactions; loan modifications, short sales, etc. • Loans secured by mobile or manufactured homes • Reverse Mortgages • Time-share loans, if covered by ECOA
ECOA Valuations Rule ECOA Valuations Requirements: • Within three business days of receiving a member’s application, notify the applicant of the right to receive a copy of appraisals/valuations. • Promptly share copies of appraisals and other written valuations with the applicant. • Promptly means upon completion or at least three business days before consummation (for closed end) or account opening (for open end), whichever is earlier. • The member can waive the right to receive copies of the appraisal/valuations in advance of closing, but you must still deliver the copies at or prior to consummation or account opening.
ECOA Valuations Disclosure Requirement (Appendix C – Form C-9) “We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.”
ECOA Valuations What is considered a valuation or appraisal? • An appraiser’s report (whether licensed or certified), including estimate of the property’s value or opinion of value. • Document prepared by staff that assigns value to the property. • Report approved by a GSE for describing to the applicant an estimate developed by the GSE’s proprietary methodology or mechanism. • Automated valuation model reports use to estimate the property’s value. • Broker’s opinion prepared by a real estate broker, agent or sales person to estimate the property’s value.
ECOA Valuations • If credit union does not close a loan, you still have to give the applicant a copy of appraisals/valuations “promptly upon completion”. • Mail copies to the last known address (can send electronically if comply with E-Sign). • Cannot charge for copying or postage. • You can charge for developing an appraisal or written valuation, except as otherwise prohibited by law. • Only need to provide copy to one applicant.
HOEPA RULES High-Cost Mortgages and Homeownership Counseling
High-Cost Mortgages High-Cost Mortgages Effective January 10, 2014 What transactions are covered? • Purchase-money mortgages • Refinances • Closed-end home equity loans • Open-end credit plans (i.e., HELOCs) Rule applies to consumer credit transactions secured by a principal dwelling.
High-Cost Mortgages High-Cost Mortgages – APR TEST Is the mortgage considered “high cost” under the rule? • APR (as of the date the interest rate for the transaction is set or locked) exceeds the APOR for a comparable transaction on that date by more than: • 6.5% for first lien generally • 8.5% for first lien less than $50K and secured by personal property (RV, houseboats, etc.) • 8.5% for junior lien HELOC APR compared to the APOR for the most closely comparable closed-end transaction.
High-Cost Mortgages High-Cost Mortgages – POINTS AND FEES TEST • A transaction is high-cost if its points and fees exceed: • 5% of the total loan amount for a loan greater than or equal to $20,000 • 8% of the total loan amount or $1,000 (whichever is less) for a loan amount less than $20,000 • What is included in points and fees calculation? • Closed end – same as for QM/ATR rule. • Open end – same as closed-end, but also include participation fees, fees you may charge for draws (assuming at least 1 draw).
High-Cost Mortgages High-Cost Mortgages – PREPAYMENT PENALTY COVERAGE TEST • A transaction is high cost if you charge a prepayment penalty: • More than 36 months after consummation or account opening; or • In an amount more than 2% of the amount prepaid.
High-Cost Mortgage Disclosures High-Cost Mortgages -Special disclosures • Provided 3 days prior to consummation or account opening. • In writing and a form the member can keep, including: • Loan will not be effective until consummation or account opening occurs. • Explain consequences of default. • Disclose loan terms such as APR, amount borrowed and monthly payment. • Variable rate – explain maximum monthly payment that may be required. Regulation Z – Appendix H (Sample H-16)
High-Cost Mortgage Restrictions High-Cost Mortgages – Restriction on Terms The rule bans certain loan features: • Balloon payments – except in 3 circumstances: • Payment schedule is adjusted to accommodate member’s seasonal or irregular income. • Short term bridge loan to finance new home purchase for member selling existing home. • Credit union serving predominately rural or underserved areas and meets the ATR/QM rule. • Prepayment Penalties • Due on Demand Features
High-Cost Mortgage Restrictions High-Cost Mortgages – Additional Restrictions and Prohibitions • Credit unions are prohibited from recommending default on an existing loan to be refinanced by high-cost mortgage. • Credit unions, servicers and assignees cannot charge a fee to modify, defer, renew, extend or amend a high-cost mortgage. • Late fees are restricted to 4% of the past due payment and pyramiding of late fees is prohibited.
High-Cost Mortgage Restrictions High-Cost Mortgages – Additional Restrictions and Prohibitions (cont’d) • Fees for generating payoff statements are generally banned. • Points and fees cannot be financed. You can finance closing charges excluded from the definition of points and fees (bona fide third party charges). • Cannot purposely structure a transaction to evade HOEPA coverage (splitting loan into 2 loans to divide loan fees to avoid points and fee thresholds).
High-Cost Mortgages ATR High-Cost Mortgages – Ability to Repay Requirement to make an ability to repay determination prior to consummation or account opening: • Closed-end – Follow the ATR/QM rule • Open-end – since these transactions are not covered under the ATR/QM rule, you must consider the member’s: • Current and reasonably expected income or assets (verified with W-2s, tax returns, etc.) • Current obligations, including any mortgage related obligations such as property, taxes, required insurance, etc.
Homeownership Counseling High-Cost Mortgages – Required Homeownership Counseling • Prior to making a high-cost mortgage, you must receive written certification that the member has received homeownership counseling on the advisability of the mortgage from a HUD approved counselor or state housing finance authority, if permitted by HUD. • The counselor must confirm that the member received ALL of the high-cost mortgage / RESPA disclosures before they can issue the certificate.