cfpb’s final mortgage regulations:ability-to-repay and qualified mortgage rules

CFPB’s CFPB’s Final Mortgage Regulations:Final Mortgage Regulations:

Ability-to-Repay and Ability-to-Repay and Qualified Mortgage Rules Qualified Mortgage Rules

March 6, 2013March 6, 2013

E. Andrew Keeney, Esq.

Kaufman & Canoles, P.C.

Ability-to-Repay and Qualified Ability-to-Repay and Qualified Mortgage RulesMortgage Rules



150 West Main Street, Suite 2100

Norfolk, VA 23510

(757) 624-3153

[email protected]

Meagan J. Thomasson



Norfolk, VA 23510

(757) 624-3014

[email protected]

Record Year f

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More Borrowers Turn to

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Credit Unions for Mortgages

Credit Unions for Mortgages

…expected to surpass a record-breaking $100 billion

…expected to surpass a record-breaking $100 billion

in mortgage loan originations this year…

in mortgage loan originations this year…Credit Unions Hit Another Credit Unions Hit Another Mortgage Record: CallahanMortgage Record: Callahan…credit unions originated $84.5 billion in housing finance …credit unions originated $84.5 billion in housing finance loans…activity through the first six months totaled $157 loans…activity through the first six months totaled $157 billion.billion.

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

# of 1# of 1stst Mortgages Originated Through 3Q Mortgages Originated Through 3Q

Source: Callahan & Associates

330

,023

463

,584

341

,113

536

,729

345

,002

$ of 1$ of 1stst Mortgages Originated Through 3Q Mortgages Originated Through 3Q

Source: Callahan & Associates

$56,

462,

353,

519

$77,

066,

186,

748

$55,

997,

564,

511

$54,

315,

197,

762

$89,

251,

359,

972

Proposed Regulation: 474 pagesProposed Regulation: 474 pages

Comments Received: 1800Comments Received: 1800

Final Regulation: 804 pagesFinal Regulation: 804 pages

Effective Date: January 10, 2014Effective Date: January 10, 2014

Number of Days Remaining: 317Number of Days Remaining: 317

Let’s Roll!Let’s Roll!

HistoryHistory

OverviewOverview• 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

BackgroundBackground• 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”

BackgroundBackground

• 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 The CFPB’s Mortgage Reform Webcast SeriesWebcast Series

• CFPB’s Final Mortgage Regulations – On-Demand

• CFPB Ability to Repay/Qualified MortgagesWednesday, March 6 I 2:00 p.m. – 3:30 p.m. EST

• Digging Deeper: CFPB’s Mortgage RulesWednesday, 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 StatementsWednesday, April 17 I 2:00 p.m. – 3:30 p.m. EST

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

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

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

Ability to Repay and Qualified Ability to Repay and Qualified Mortgage RuleMortgage 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”


• 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


• 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 determinationsAbility to repay determinations(at a minimum credit unions must consider 8 (at a minimum credit unions must consider 8

underwriting factors in determining a borrower’s underwriting factors in determining a borrower’s ability to pay)ability to pay)

Minimum Underwriting FactorsMinimum 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







6. Current debt obligations, alimony and child support








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








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

8. Credit history

Current or Reasonably Expected Current or Reasonably Expected Income or Assets DeterminationIncome 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 Current or Reasonably Expected Income or Assets DeterminationIncome 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 MortgagesQualified Mortgages

Qualified Mortgages - GeneralQualified Mortgages - GeneralQualified 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 – Qualified Mortgages – Safe HarborSafe Harbor

• Presumption of Compliance

• Higher-Priced Covered Transaction

Qualified Mortgages 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…

Qualified Mortgages – Qualified Mortgages – Special RulesSpecial Rules

Qualified Mortgages – Qualified Mortgages – Limits on Points and FeesLimits 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 PresumptionQualified 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.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 Qualified Mortgage & Fannie/Freddie Underwriting StandardsUnderwriting 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 Qualified Mortgage & Fannie/Freddie Underwriting StandardsUnderwriting 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 Higher Priced Covered TransactionTransaction

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 Balloon – Payment Qualified MortgagesMortgages

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)

Balloon – Payment Qualified Balloon – Payment Qualified Mortgages (Cont.)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


• 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


• 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.


• 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.


• 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


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 Balloon Payment Qualified Mortgage (Cont.)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.

Balloon Payment Qualified Balloon Payment Qualified Mortgage Example 1Mortgage 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.

Balloon Payment Qualified Balloon Payment Qualified Mortgage Example 1 (Cont.) 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.


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.

Balloon Payment Qualified Balloon Payment Qualified Mortgage Example 2 (cont.)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.

Balloon Payment Qualified Balloon Payment Qualified MortgageMortgage

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.


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.

Balloon Payment Qualified Balloon Payment Qualified Mortgage Example 3 (cont.)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 LoansRefinancing 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-Exemptions for Refinancing Non-Standard MortgagesStandard 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 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


• 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”


• 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

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Record RetentionRecord Retention

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

Points and FeesPoints 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.


• 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 FeesPoints and FeesPoints 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 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 AmountTotal Loan Amount

Total Loan AmountTotal 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

Prepayment PenaltyPrepayment Penalty

Other Final Rule Provisions – Other Final Rule Provisions – Prepayment PenaltiesPrepayment 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 A Glossary of Other Key Terms or DefinitionsTerms or Definitions

• Fully Indexed Rate

• Higher Priced Covered Transaction

• Maximum Loan Amount

• Mortgage Related Obligations

• Simultaneous Loan

• Third Party Record

• Repayment Ability

Fully Indexed RateFully 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 Higher Priced Covered TransactionTransaction

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 AmountMaximum 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 ObligationsMortgage 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 LoanSimultaneous 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 RecordThird 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 AbilityRepayment 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 CalculationsPayment Calculations

• Balloon Payment Loans

• Interest Only Loans

• Negative Amortization Loans

• Simultaneous Loans

Calculation of Monthly Payment Calculation of Monthly Payment AmountAmount

• 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 Monthly Debt-to-Income Ratio or Residual IncomeRatio or Residual Income

Determination of Debt-to-Income Determination of Debt-to-Income RatioRatio

– 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

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

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

Best PracticesBest 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




Norfolk, VA 23510

(757) 624-3153

[email protected]

Meagan J. Thomasson



Norfolk, VA 23510

(757) 624-3014

[email protected]

CFPB’s CFPB’s Final Mortgage Regulations:Final Mortgage Regulations:

Ability-to-Repay and Ability-to-Repay and Qualified Mortgage Rules Qualified Mortgage Rules

March 6, 2013March 6, 2013



cfpb’s final mortgage regulations:ability-to-repay and qualified mortgage rules

Economy & Finance