2014 MORTGAGE RULES

ABILITY TO REPAY

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.

ATR/QM RULE 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 lessA construction phase of 12 months or less (with possible

renewal) of a construction-to-permanent loan Loans secured by vacant land

ATR/QM SUMMARY

Qualified MortgageProvides 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)

ATR RequirementsUnlimited loan

features, points and fees

Comply with 8 underwriting factors

ATR/QM SUMMARY

Looking at the Past1. Current or

reasonably expected income or assets

2. Current employment status (if relied upon)

3. Current debts, alimony and child-support obligations

4. Credit history

Looking at the Future5. Monthly mortgage

payment 6. Monthly payment on any

simultaneous loans secured by the same property

7. Monthly payments for property taxes, required insurance, and other costs related to the property (HOA fees, lot rental

8. Monthly DTI as a ratio of gross monthly income

ATR UNDERWRITING FACTORS

Only verify income needed to qualify for the loanOral 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 debtsVerify alimony and child support through court ordersVerify self-employment income through tax returns or

profit and loss statements prepared by a third partyVerify HOA fees from statements

VERIFY USING THIRD PARTY SOURCES

Include the following:The loan you are underwritingAny simultaneous loans on the same propertyMortgage-related obligationsCurrent debt obligations, alimony and child support

Calculating the loan payment on ARMs:Substantially equal monthly payments that would

fully amortize the loanUse the fully indexed rate (do not use a discounted

rate to determine ATR)

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

CALCULATING DTI

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)

QUALIFIED MORTGAGES

Loan feature limitationsLoan term limitPoints and fees limitUse of Appendix Q to evaluate income and debt is

REQUIRED (This will be the most difficult part to comply with)

GENERAL QM

Temporary until January 2021Loan feature limitationsLoan term limitPoints and fees limitUse of Appendix Q to evaluate income and debt is not

required as long a the loan was underwritten to GSE or Agency requirements

AGENCY/GSE QUALIFIED MORTGAGES

Allowed for small creditors operating primarily in rural and underserved areas

Loan feature limitationsBalloon payment feature permittedLoan term limit: No more than 30, no less than 5Points and fees limitUse of Appendix Q to evaluate income and debt is not

requiredOther underwriting factors must still be considered

and verified

BALLOON PAYMENT QM

Loan feature limitationsLoan term limitPoints and fees limitUse of Appendix Q to evaluate income and debt is not

requiredOther underwriting factors must still be considered

and verified

SMALL CREDITOR QM

Temporary for all small creditors regardless of location until January 10, 2016

Loan feature limitationsBalloon payment feature permittedLoan term limit: No more than 30, no less than 5Points and fees limitUse of Appendix Q to evaluate income and debt is not

requiredOther underwriting factors must still be considered

and verified

SMALL CREDITOR BALLOON-PAYMENT TEMPORARY QM

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

APPENDIX Q

Keep records to evidence compliance for three years after consummation.

RECORDKEEPING

HOEPA

When you originate a high-cost mortgage, you must:Give additional disclosuresAvoid certain loan termsEnsure the consumer receives additional protections,

including homeownership counseling

HOEPA SUMMARY

HOEPA applies to:Purchase-money mortgagesRefinancesClosed-end home equity loansOpen-end credit plans (i.e., HELOCs)

Exempt transactions:Reverse mortgagesConstructions loans

HOEPA COVERAGE

APRPoints and feesPrepayment penalty

HOEPA COVERAGE TESTS

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

HOEPA APR 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

POINTS AND FEES TEST

Pre-closing disclosureNo balloon payments (in general)No pre-payment penaltiesNo due on demand features

EXISTING 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 payoffNo financing points and feesNo structuring loans to avoid HOEPA coverageATR for HELOCsProof of Homeownership counseling

NEW HOEPA RULES

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)

HOMEOWNERSHIP COUNSELING NOTICE

LOAN ORIGINATOR COMPENSATION

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

WHO IS A LOAN ORIGINATOR

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.

ALLOWED COMPENSATION

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

Include the following information on certain mortgage loan documents:Originator nameNMLSR IDName of loan originator assigned to the loan

Include information on the following loan documents:Credit application Note or loan contract Security instrument

ID ON LOAN DOCUMENTS

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

POLICIES AND PROCEDURES

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

MANDATORY ARBITRATION AND WAIVERS OF FEDERAL CLAIMS

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.

PROHIBITION ON FINANCING CREDIT INSURANCE

ECOA EVALUATION 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)

SUMMARY OF ECOA VALUATIONS RULE

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.

ECOA VALUATION RULE COVERAGE

An appraiser’s reportA document your staff prepares that assigns value to

the propertyA report approved by a government-sponsored

enterpriseAutomated valuation model reportsA broker price opinion

WHAT IS A VALUATION?

You can charge for preparation of an appraisal, but not copies

Provide updated copies of appraisals, or the final version

OTHER RULES FOR VALUATIONS

TILA HIGHER PRICED MORTGAGE LOAN APPRAISAL RULE

Applies to higher priced, first lien or subordinate lien, closed-end loans secured by the borrower’s principal dwelling.

Excludes the following:QMsReverse mortgagesBridge loansConstruction loansManufactured housingLoans secured by boats, trailers and mobile homes

TILA HPML APPRAISAL RULE/COVERAGE

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”

TILA HPML APPRAISAL RULE/REQUIREMENTS

TILA ESCROW RULE

Applies to first lien, higher-priced mortgage loansBecame effective on June 1, 2013Lengthens the time a creditor must maintain an

escrow account from 1 to 5 years.

TILA ESCROW/COVERAGE

TILA/RESPA SERVICING RULES

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

TILA/RESPA SERVICING COVERAGE

Replaces old ARM noticesTwo 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

ARM NOTICES

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.

PROMPT CREDITING/PAYOFF STATEMENTS

Applies to hazard insurance You must have a reasonable basis to bel ieve that a consumer has fai led

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

FORCED PLACED INSURANCE

In general, when consumers send a written request asking you to resolve an error or to send information about their account, you must:

Within 5 days, acknowledge the request or notice of error.

Within 30 to 45 days, correct the error and provide the consumer written notification of the correction, or conduct an investigation and provide the consumer written notification that no error occurred.

Within 30 to 45 days, provide the information or conduct a reasonable search for the requested information and provide the consumer with a written notification explaining why the information is not available.

ERROR AND INFORMATION REQUESTS