CFPB’s Final Mortgage Regulations:Ability-to-Repay and Qualified Mortgage Rules

CFPB’s
Final Mortgage Regulations:
Ability-to-Repay and
Qualified Mortgage Rules
March 6, 2013

E. Andrew Keeney, Esq.
Kaufman & Canoles, P.C.

Ability-to-Repay and Qualified
Mortgage Rules

E. Andrew Keeney, Esq.
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3153
eakeeney@kaufcan.com

Meagan J. Thomasson
150 West Main Street, Suite 2100
Norfolk, VA 23510
(757) 624-3014
mjthomasson@kaufcan.com

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Mortgage Record: Callahan 0
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…credit unions originated $84.5 billion in housing finance il li
on
loans…activity through the first six months totaled $157
billion.

Credit Unions Experience Record
Breaking Loan Quarter
Since 2007, credit unions have originated more than 105
million loans, amounting to $1.5 trillion.

# of 1st Mortgages Originated Through 3Q

330,023

463,584

341,113

345,002

536,729
Source: Callahan & Associates

$56,462,353,519

$77,066,186,748

$55,997,564,511

Source: Callahan & Associates
$54,315,197,762

$89,251,359,972
$ of 1st Mortgages Originated Through 3Q

History
Proposed Regulation: 474 pages
Comments Received: 1800
Final Regulation: 804 pages
Effective Date: January 10, 2014
Number of Days Remaining: 317

Let’s Roll!

Overview
• Applies to all credit unions offering mortgage loans
• Must determine a consumer’s ability to repay a mortgage
before making the loan.
• Regulation covers all consumer mortgages except home
equity (HELOCs), timeshare plans, reverse mortgages or
temporary loans.
• General overview of Ability-to-Repay determination and
underwriting considerations
• Closer look at the individual underwriting considerations
• Qualified mortgages and a “Safe Harbor”
• Exemptions from Ability-to-Repay rule for refinancing
non-standard mortgages

Background
• Enacted in 2010, the Dodd-Frank Wall Street
Reform and Consumer Protection Act established
the Consumer Financial Protection Bureau
(“CFPB”) and consolidated the rulemaking
authority for federal consumer financial laws in
the CFPB
• The CFPB has undertaken large regulatory
reform efforts since its inception, including issuing
new regulations governing mortgage lending
requirements, the “Ability-to-Repay and Qualified
Mortgage Rule”

Background
• Other CFPB regulatory reform efforts
implementing requirements under title XIV of the
Dodd-Frank Act relating to mortgages include
new rules on mortgage loan servicing, escrow
accounts, HOEPA, loan origination
compensation, and appraisals
• Many NAFCU webinars are already scheduled.

The CFPB’s Mortgage Reform
Webcast Series
• CFPB’s Final Mortgage Regulations – On-Demand
• CFPB Ability to Repay/Qualified Mortgages
Wednesday, March 6 I 2:00 p.m. – 3:30 p.m. EST

• Digging Deeper: CFPB’s Mortgage Rules
Wednesday, March 27 I 2:00 p.m. – 3:30 p.m. EST

• What new requirements apply to HELOCs?
Wednesday, April 10 I 2:00 p.m. – 3:30 p.m. EST

• Mortgage Periodic Statements
Wednesday, April 17 I 2:00 p.m. – 3:30 p.m. EST

• Consumer Information Request & Error Resolution Procedures
Wednesday, May 15 I 2:00 p.m. – 3:30 p.m. EST

• Mortgage Loan Origination
Wednesday, August 21 I 2:00 p.m. – 3:30 p.m. EST

• CFPB Compliance Update by NAFCU’s Compliance Team
Wednesday, November 6 I 2:00 p.m. – 3:30 p.m. EST

Ability to Repay and Qualified
Mortgage Rule
• In January 2013, the CFPB amended
Regulation Z (implementing the Truth in
Lending Act) by issuing new regulations
governing mortgage lending requirements,
known as the “Ability-to-Repay and Qualified
Mortgage Rule”

Mortgage Rule
• Regulation Z currently prohibits lenders from
making a higher-priced or higher-cost mortgage
loan without regard for the consumer’s ability to
repay the loan
• New Rule establishes minimum requirements
for all lenders to make an ability-to-repay
determination prior to extending a residential
mortgage loan

Mortgage Rule
• New Ability-to-Repay Rule applies to all
closed-end mortgage loans (home purchases,
refinancings, home equity loans, vacation
home loans, etc.)
• Does not apply to open-end credit plans, time
share plans, reverse mortgages or temporary
loans (i.e., 12 months or less)
• New Rule goes into effect on January 10, 2014
• But, some rule changes may be in the works

Ability to repay determinations
(at a minimum credit unions must consider 8
underwriting factors in determining a borrower’s
ability to pay)

Minimum Underwriting Factors
1. Current or reasonably expected income or assets

2. Current Employment Status

3. The monthly payment on the covered transaction

4. The monthly payment on any simultaneous loans

5. The monthly payment for mortgage-related
obligations

obligations
6. Current debt obligations, alimony and child support

obligations
7. The monthly debt-to-income ratio or residual
income

obligations
7. The monthly debt-to-income ratio or residual
income
8. Credit history

Current or Reasonably Expected
Income or Assets Determination
• Section 1026.43(b)(4) prescribes the manner
in which the creditor verifies the borrower’s
assets or income
• May review specified records to satisfy this
requirement
– Tax returns
– IRS Form W-2 (or similar forms)
– Employer records
– Government agency records (e.g., Social Security
Administration “proof of income” letter)

Current or Reasonably Expected
Income or Assets Determination
• May review specified records to satisfy this
requirement (cont.)
– Financial institution records
– Check cashing receipts
– Receipts from consumer’s use of funds transfer
services
• Credit union needs to verify only the
income/assets actually relied upon in making
its determination of whether to extend credit

Qualified Mortgages - General
Qualified mortgage: a residential mortgage that
provides for regular, substantially equal payments and
does not include any of the following -
– Negative amortization loans
– Interest-only loans
– Balloon payment loans (with some exceptions)
– Loan with a term exceeding 30 years
– “No-doc” loans (where creditor does not verify
income or assets)
– Points and fees in excess of or exceeding 3% of
total loan amount (for loans over $100,000)

Qualified Mortgages –
Safe Harbor
• Presumption of Compliance

• Higher-Priced Covered Transaction

Qualified Mortgages
Financial Institutions are not required to issue only
Qualified Mortgages. CFPB Director Richard
Cordray indicated to financial industry
representatives that it would be a mistake for
prudential regulators to examine institutions in a
way that steers them toward providing only
mortgages defined as “qualified” under the ability-
to-repay rule. Cordray said the CFPB wants other
types of mortgages to flourish as well. BUT…

Special Rules

Limits on Points and Fees
Points and fees on qualified mortgages cannot
exceed 3% on loans of $100,000 or more
(varies for loans less than $100,000)

Qualified Mortgage Presumption
• Rule provides a presumption that “qualified
mortgages” satisfy the ability-to-repay
requirements:
– Conclusive presumption (i.e., a safe harbor) for
qualified mortgages that are not higher-priced /
subprime
– Rebuttable presumption for qualified mortgages
that are higher-priced / subprime
• Benefits?

Qualified Mortgage Presumption Cont.

• Rule establishes underwriting criteria for
qualified mortgages:
– Monthly payments must be calculated based on
the highest payment that will apply in the first five
years of the loan
– Consumer has a total debt-to-income ratio that is
less than or equal to 43%

Qualified Mortgage & Fannie/Freddie
Underwriting Standards
• Compliance with Fannie Mae / Freddie Mac
underwriting guidelines alone does not
necessarily mean a loan is a Qualified
Mortgage
• However, there is a temporary special rule
(sunset date no later than 1/10/2021) where a
loan that meets Fannie/Freddie underwriting
standards PLUS additional criteria will be
considered a Qualified Mortgage

Qualified Mortgage & Fannie/Freddie
Underwriting Standards
• A loan that satisfies Fannie/Freddie
underwriting standards is considered a
Qualified Mortgage if it also meets the
following requirements:
– Regular, substantially equal periodic payments
– Term is 30 years or less, and
– Total points and fees do not exceed prescribed
thresholds

Higher Priced Covered
Transaction
Defined as a covered transaction with an APR
that exceeds the average prime offer rate for a
comparable transaction as of the date the
interest rate is set by 1.5 or more percentage
points for a first-lien covered transaction, or by
3.5 or more percentage points for a
subordinate-lien transaction

Balloon – Payment Qualified
Mortgages
A qualified mortgage may provide for a balloon-
payment, provided:
•No increase in principal balance (negative
amortization)
•Term does not exceed 30 years
•Total points and fees do not exceed 3% (for
loans greater than $100,000)

Mortgages (Cont.)

• Credit union should first consider:
– Borrower’s current or reasonably expected
income or assets (other than the dwelling that
secured the loan)
– Borrower’s current debt obligations, alimony
and child support

Mortgages (Cont.)
• Credit union determines borrower can make all of
the scheduled payments together with the
monthly payments for mortgage-related
obligations and excluding the balloon payment
• Credit union considers debt-to-income ratio and
verifies debt obligations and income
• Regular, scheduled payments are substantially
equal
• Term must be at least 5 years

Mortgages (Cont.)
• Credit unions meet specific requirements:
– At least 50% of first-lien covered transactions in
rural or underserved counties in previous year
• Predominantly rural or underserved areas
– Rural: a county that is neither:
» Metropolitan area, nor
» Micropolitan area adjacent to a metropolitan area
– Underserved: a county in which no more than 2
creditors have extended five or more first-lien
mortgages.

Mortgages (Cont.)
• Predominantly rural or underserved areas (cont.)
– A list of “rural” and “underserved” counties will be
designated each year
• NCUA definition: The Federal Credit Union Act defines
an underserved area as a local community,
neighborhood, or rural district that is an “investment
area” as defined in Section 103(16) of the Community
Development Banking and Financial Institutions Act of
1994. Examples of underserved areas: An area where
the percentage of population living in poverty is at least
20%, unemployment rate is at least 1.5 times the
national average, etc.

Mortgages (Cont.)
• Credit unions meet specific requirements
(cont.):
– No more than 500 first lien covered transactions
in previous year, and
– Had less than $2 billion in the previous calendar
year

Mortgages (Cont.)
Generally, balloon payment qualified mortgages cannot be
transferred or assigned without losing their exempt status.
This restriction does not apply where:
1.Sales/assignments occurring at least 3 years after
consummation of the loan
2.Buyer/assignee operates predominantly in rural or
underserved area
3.Buyer/assignee originated 500 or fewer first-lien
mortgages
4.Buyer/assignee had less than $2 billion in assets at end
of preceding year

Balloon Payment Qualified
Mortgage (Cont.)
For higher-priced covered transactions (i.e., APR is
greater than average prime offer rate for comparable
transaction) with a balloon payment, the creditor must
consider the consumer’s ability to repay the loan based
on the payment schedule, including any required
balloon payment. For loans with a balloon payment that
are not higher-priced covered transactions, the creditor
should use the maximum payment scheduled during the
first five years of the loan following the date on which
the first regular periodic payment will be due.

Mortgage Example 1
Assume a loan that provides for regular monthly
payments and a balloon payment due at the
end of a six-year loan term. The loan is
consummated on August 15, 2014, and the first
monthly payment is due on October 1, 2014.
The first five years after the first monthly
payment end on October 1, 2019.

Mortgage Example 1 (Cont.)
The balloon payment must be made on the due
date of the 72nd monthly payment, which is
September 1, 2020. For purposes of
determining the consumer’s ability to repay the
loan under § 1026.43(c)(2)(iii), the creditor need
not consider the balloon payment that is due on
September 1, 2020.

Mortgage Example 2
Loan agreement provides for a fixed interest
rate of 6 percent, which is below the APOR-
calculated threshold for a comparable
transaction; thus the loan is not a higher-priced
covered transaction. The loan amount is
$200,000, and the loan has a three-year loan
term but is amortized over 30 years.

Mortgage Example 2 (cont.)
The monthly payment scheduled for the first
three years following consummation is $1,199,
with a balloon payment of $193,367 due at the
end of the third year. For purposes of
§ 1026.43(c)(2)(iii), the creditor must determine
the consumer’s ability to repay the loan based
on the balloon payment of $193,367.

Mortgage
If a qualified mortgage provides for a balloon
payment, the creditor must determine that the
consumer is able to make all scheduled
payments under the legal obligation other than
the balloon payment.

Mortgage Example 3
Assume a loan in an amount of $200,000 that
has a five-year loan term, but is amortized over
30 years. The loan agreement provides for a
fixed interest rate of 6 percent. The loan
consummates on March 3, 2014, and the
monthly payment of principal and interest
scheduled for the first five years is $1,199, with
the first monthly payment due on April 1, 2014.

Mortgage Example 3 (cont.)
The balloon payment of $187,308 is required on
the due date of the 60th monthly payment,
which is April 1, 2019. The loan can be a
qualified mortgage if the creditor underwrites
the loan using the scheduled principal and
interest payment of $1,199, plus the consumer’s
monthly payment for all mortgage-related
obligations, and satisfies the other criteria set
forth in § 1026.43(f).

Refinancing Loans

The term refinancing has the same meaning as
in § 1026.20(a). A refinancing occurs when an
existing obligation that was subject to Subpart C
of 12 C.F.R. § 1026 (closed-end credit
requirements) is satisfied and replaced by a new
obligation undertaken by the same consumer.

Exemptions for Refinancing Non-
Standard Mortgages
• Refinancing a non-standard mortgage (i.e., an
adjustable rate mortgage with introductory
interest rate of at least 1 year, an interest-only
loan or a negative amortization loan) into a
standard mortgage may be exempt from the
ability-to-repay rules if certain conditions are met
• Standard mortgage has the following
characteristics:
– Regular periodic payments may not:
• (1) increase principal,
• (2) allow deferred payment of principal, or
• (3) result in a balloon payment

Standard Mortgages
• Standard mortgage has the following
characteristics (cont.):
– Total points and fees associated with the
mortgage do not exceed 3% of the loan
– Term is 40 years or less
– Interest rate is fixed for first 5 years
– Use of Loan Proceeds is restricted to:
• Outstanding balance of non-standard mortgage
• Closing or settlement charges

Standard Mortgages
• Conditions for exemption from ability-to-repay
requirements:
– Credit union extending the standard mortgage is
the current holder or servicer of the non-standard
mortgage
– Monthly payment is materially lower than non-
standard mortgage monthly payment
• “Materially lower” means more than a de minimus
amount
• 10% lower is always considered “materially lower”

Standard Mortgages
• Conditions for exemption from ability-to-repay
requirements (cont.):
– Credit union receives borrower’s application for
the refinancing no later than 2 months after non-
standard mortgage is recast
– Borrower has not made a late payment more than
once in the preceding 12 month period, and
– Borrower has not been more than 30 days late in
making a payment in the preceding 6 month
period

Yawning
1. 2.

3. 4.

VOTE

1. Baby

2. Monkey

3. Grandpa

4. Puppy

Record Retention

• Must retain records evidencing compliance
with ability-to-repay and prepayment penalty
provisions for 3 years

Points and Fees
Points and fees include the following that are
known at or before consummation:
•All finance charges, except:
– Interest;
– premium/charge imposed in connection with any
guaranty or insurance on borrower default;
– Bona fide third party charge not retained by
lender, loan originator, or affiliate or either.

Points and Fees
• All finance charges, except (cont.):
– 2 discount points where interest rate with discount does
not exceed:
• APR by more than 1%; or
• For transactions secured by personal property, the average rate
under National Housing Act by more than 1%.
– 1 discount point where interest rate with discount does
not exceed:
• APR by more than 2%; or
• For transactions secured by personal property, the average rate
under the National Housing Act by more than 2%.

Points and Fees
Points and fees include the following that are known
at or before consummation (cont.):
•Compensation paid by consumer or creditor to loan
originator
•Real-estate related fees (e.g., title insurance, title
examination, survey, loan-related document
preparation, notary, appraisals, etc.), unless:
– Reasonable charge
– Not paid to lender
– Not paid to an affiliate of lender

Points and Fees
Points and fees include the following that are known
at or before consummation (cont.):
•Premiums/other charges for any life, credit
disability, unemployment, property, etc. insurance
for which lender is the beneficiary
•Max prepayment penalty
•Total prepayment penalty for refinancing
•Loan level pricing adjustments

Total Loan Amount
Calculated by taking the amount financed and
deducting any finance charge, insurance
premium, or refinancing prepayment penalty
that is both (i) included as a point/fee, and
(ii) financed by lender
•Amount financed = principal loan amount +
other amounts financed by lender that are not
part of the finance charge – any prepaid finance
charge

Other Final Rule Provisions –
Prepayment Penalties
• New Rules generally prohibit prepayment
penalties (except for certain fixed-rate,
qualified mortgages where the penalties
satisfy certain criteria and the creditor has
offered the borrower an alternative loan
without such penalties)
• Credit unions are already restricted from
charging prepayment penalties under Federal
Credit Union Act and accompanying
regulations

A Glossary of Other Key
Terms or Definitions
• Fully Indexed Rate
• Higher Priced Covered Transaction
• Maximum Loan Amount
• Mortgage Related Obligations
• Simultaneous Loan
• Third Party Record
• Repayment Ability

Fully Indexed Rate
The interest rate calculated using the index or
formula that will apply after recasting the loan,
as determined at the time of loan
consummation, with the maximum margin that
can be applied at any time during the loan term

Higher Priced Covered
Transaction
Covered transaction with an APR that exceeds
the average prime rate by more than:
•1.5% for first-lien covered transaction
•3.5% for a second-lien covered transaction

Maximum Loan Amount
Means the loan amount plus any increase in
principal balance that results from negative
amortization assuming:
•Consumer makes only minimum periodic
payment
•Max interest rate is reached at earliest possible
time

Mortgage Related Obligations
• Property taxes, premiums and similar
charges required by the lender
• Fees and special assessments imposed by a
condo/homeowners association
• Ground rent
• Leasehold payments

Simultaneous Loan
Another covered transaction or open-end home
equity line of credit secured by the same
dwelling made at or before consummation of
the covered transaction or, if after
consummation, will cover closing costs of first
transaction

Third Party Record
• Document/record prepared by appropriate
person other than borrower, lender, mortgage
broker or their agent
• Tax return (federal or state)
• Account records maintained by lender
• If employee of lender or broker, a document
regarding employment status or income
maintained by lender or broker

Repayment Ability
General requirement: Lender shall not make a
covered-transaction loan unless it makes a
reasonable and good faith determination that
the borrower will have a reasonable ability to
repay the loan

Payment Calculations

• Balloon Payment Loans

• Interest Only Loans

• Negative Amortization Loans

• Simultaneous Loans

Calculation of Monthly Payment
Amount
• In general: a lender must determine monthly
payment amount using the fully indexed rate or the
introductory rate, whichever is greater.
• Balloon payment loans: use maximum payment
scheduled in first 5 years after closing
• Interest-only loans: use substantially equal monthly
payments of principal and interest to repay loan as
of the date upon which interest-only payments
expire
• Negative amortization loans: use substantially
equal monthly payments of principal and interest
that will repay the maximum loan amount over the
term of the loan as of the date the loan is recast

Monthly Debt-to-Income
Ratio or Residual Income

Determination of Debt-to-Income
Ratio
– Credit union is required to consider the borrower’s
monthly debt-to-income ratio (“residual income”) prior to
extending a mortgage loan
– Lender must consider the borrower’s total monthly debt
obligations, including mortgage loan payments, other
loan payments, payment of any other mortgage-related
obligations and any other debt obligations
– The regulation does not prescribe a maximum debt-to-
income threshold. The lender must use its discretion to
make a good faith reasonable determination of whether
a potential borrower’s debt-to-income ratio is too high
and would adversely affect their ability to pay

What are the biggest challenges facing credit union leaders on
a personal level?

(Source: Anthony Demagone, SVP & COO for NAFCU)

Best Practices
1. Sign up for the NAFCU Webcasts on Mortgage
Lending
2. Form an in-house credit union team that meets
regularly
3. Involve credit union management
4. Hold the third part vendors accountable
5. Involve NAFCU Compliance Team
6. Review all policies and procedures
7. Establish a timetable with achievable deadlines –
stick to it

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