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Compliance Alert Update: Consumer Financial Protection Bureau Changes

Compliance Alert Update

October 2013

Consumer Financial Protection Bureau Changes

Exemptions

Regulation Z generally prohibits a creditor from making a mortgage loan unless the creditor determines that the consumer will have the ability to repay the loan. The June 2013 Ability to Repay/Qualified Mortgage (ATR/QM) Concurrent Final Rule provides an exemption to these requirements for:

  • Creditors with certain designations,
  • Loans pursuant to certain programs,
  • Certain nonprofit creditors, and
  • Mortgage loans made in connection with certain Federal emergency economic stabilization programs.


Qualified Mortgages (QMs)

Loans Held in Portfolio by Small Creditors (Under $2 billion in assets, made less than 500 1st mortgages a year). The June 2013 ATR/QM Concurrent Final Rule provides an additional definition of a qualified mortgage for certain loans made and held in portfolio by small creditors.

Balloon Loans The June 2013 ATR/QM Concurrent Final Rule provides a transitional definition of creditors eligible to originate Balloon-Payment QMs.

Higher-Priced Mortgage Determination The June 2013 ATR/QM Concurrent Final Rule shifts the annual percentage rate (APR) threshold for Small Creditor and Balloon-Payment QMs from 1.5 percentage points above the average


Rural and Underserved Areas

The Consumer Financial Protection Bureau (CFPB) has enacted the following rules with provisions that relate to mortgage loans made by creditors operating predominantly in rural or underserved counties or made in rural counties:

  • Escrow Requirements under the Truth in Lending Act rule (Escrows Rule), which took effect on June 1, 2013, requires certain creditors to create escrow accounts for a minimum of 5 years for higher-priced mortgage loans (HPMLs). However, such loans made by certain small creditors that operate predominantly in rural or underserved counties are exempt from this requirement.
  • Under the January 2013 Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act rule (ATR Rule), which is effective January 10, 2014, mortgage loans with balloon payments do not meet the qualified mortgage (QM) standard in most cases. However, certain small creditors that operate predominantly in rural or underserved counties will be eligible to originate balloon-payment QMs.

In addition, as part of the May 2013 Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act rule (ATR Concurrent Rule), we recently expanded this exemption to allow certain small creditors during the period from January 10, 2014, to January 10, 2016, to make balloon-payment qualified mortgages even if they do not operate predominantly in rural or underserved areas.

  • These same small creditors will be exempt, when making those balloon-payment QMs, from restrictions on balloon payments for certain high-cost mortgages under the Bureau’s High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act rule (HOEPA rule), which also goes into effect on January 10, 2014.
  • Also, certain HPMLs will be exempt from new second appraisal requirements if they are originated in rural counties under the interagency Appraisals for Higher-Priced Mortgage Loans rule, which goes into effect on January 18, 2014. To facilitate compliance with this requirement, because it is based only on rural status, we also are publishing a separate list that does not include counties that are underserved only (2014 rural-only list).

What is Higher Priced Mortgage Loan (HPML):

  • An HPML is any first-lien mortgage with an Annual Percentage Rate (APR) of:
  • 1.5% or more above the Average Prime Offer Rate (APOR) for a comparable mortgage.
  • 3.5% or more above the APOR for a comparable mortgage by certain small creditors
  • 3.5% or more above the APOR for any second-lien mortgage with an APR of 3.5% or more above the average prime offer rate for a comparable mortgage.

January 10, 2014 - Ability To Repay (ATR)

Under the Dodd-Frank Act, when the loan is a higher-priced mortgage loan when the Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR) by 1.5% or greater on 1st mortgage real estate and 3.5% for 2nd mortgages, is a closed end mortgage, and secured by a dwelling. Financial institution must qualify the mortgage and the borrower must possess the ability to repay which includes the following minimum underwriting factors to be considered:

  1. Current or reasonably expected income or assets
  2. Current employment status
  3. Monthly payment on the covered transaction
  4. Monthly payment on any simultaneous loan
  5. Monthly payment for mortgage-related obligations
  6. Current debt obligations, alimony, and child support
  7. The monthly debt-to-income ratio (43%) or residual income
  8. Credit history

These factors alone are not intended to be comprehensive underwriting standards but are necessary to comply with the Ability To Repay (ATR).

Each financial institution should develop a loan underwriting worksheet to record its compliance efforts to include the following:

Verification of the “Ability To Repay”, Income & Assets

Income - File documentation includes at least one of the following:

  • Tax Return(s)
  • W-2
  • Payroll stubs
  • Bank records

Assets - If assets, other than the collateral, are considered for repayment, file documentation includes:

  • Third party verification of value (appraisal, bank statement, etc.)

Obligations - File documentation includes the following as applicable:

  • Application showing all current debts
  • Credit report
  • Other documentation, including applicant’s statements and officer’s knowledge of debts, in addition to that found in the credit report

DTI - Calculation may not exceed 43% and includes:
Highest scheduled payment of P & I during the first 7 years of the loan $ (from fed box on TIL)
All mortgage related obligations as applicable

  • Property taxes – annual amount due / 12 = $
  • Hazard insurance – annual premium / 12 = $
  • Flood insurance – annual premium / 12 = $
  • Private Mortgage insurance – monthly payment $
  • Homeowner association dues – monthly payment $
  • Condo or coop fees – monthly payment $
  • Piggy back loan payment – monthly payment $

All debts as described under Obligations above
Total current obligations $ / Total verified income $ = DTI %

Balloon Payment

  • This loan does not have a balloon payment during the first seven years
  • This loan has a balloon feature and the following applies, DTI was calculated using the amount of the largest, scheduled payment of principal and interest, (the balloon payment.)

Escrow

  • This is a first lien mortgage, an escrow account for taxes and insurance will be established
  • Reserves for taxes and insurance will be collected prior to or at closing
  • Escrow not required