the new ability to repay and qualified mortgage rule

Overview and Insight:

The CFPB’s New Ability to

Repay and Qualified Mortgage

Rule

By Jim Milano

1

An Overview and Understanding of the CFPB’s New

Ability to Repay and Qualified Mortgage Rule

Today's’ Agenda

• A Brief History of Suitability in Mortgage Lending

• An Overview of the Rule

• A Deeper Dive into Qualified Mortgages

• An Overview of the Concurrent Proposal

• An Overview of the Inter-play of Other CFPB and Agencies’ rules

with ATR-QM

• Some Comments on What the ATR-QM Rule will mean for the

Mortgage Industry Going Forward

• Questions We Are Receiving and Questions from the Audience

2

History of Suitability in Mortgage Lending

An Important Chapter is Finalized

• The first reported case of “suitability” in consumer financial services was a

1942 lawsuit brought against a “boiler-room” securities brokerage for selling

“penny” stocks to a little old lady

• The mortgage industry, particularly mortgage lenders and banks, have

resisted a suitability standard in mortgage lending

• The concept or “seed” of “suitability” in mortgage lending was planted in

1994 when Congress amended TILA through the enactment of the first

version of the Home Ownership and Equity Protection Act (and the Federal

Reserve Board implemented finalized regulations under HOEPA, as part of

Regulation Z, in 1995)

• In 1999, New York enacted state high cost home loan regulations, and in

that same year North Carolina enacted an anti-predatory lending law; Both

states’ initiatives were based on federal HOEPA, but generally had a lower

“points and fees” thresholds, and other requirements that go beyond federal

law

3



• In 2001, the Federal Reserve Board added, eff. Oct. 2002, an Ability to

Repay Requirement to HOEPA Regulations under Regulation Z

• Leading up to and after the “Financial Crisis” in 2007 and 2008, many

states added subprime mortgage laws or regulations that had lower

thresholds or triggers, and if tripped, required an ability to repay

assessment

• During this time, states also began to enact or institute Tangible Net

Benefit Requirements

• In 2008, the Federal Reserve Board proposed the Higher Priced

Mortgage Loan Rules (these rules became effective in Oct. 2009)

• In 2010, the Dodd-Frank Act was enacted, enacting the Mortgage

Reform and Anti-Predatory Lending Act (Title XIV of the DFA)

4



• Title XIV of the Dodd-Frank Act (DFA) enacted the Mortgage Reform

and Anti-Predatory Lending Act

• Sections 1411, 1412 and 1413 of the Dodd-Frank Act address ability

to repay issues

“…no creditor may make a residential mortgage loan unless the

creditor makes a reasonable and good faith determination based

on verified and documented information that, at the time the loan is

consummated, the consumer has a reasonable ability to repay the

loan, according to its terms, and all applicable taxes, insurance

(including mortgage guarantee insurance), and assessments.”

(Section 1411(a)(2), adding section 129C(a)(1) to TILA).

• Section 1411 of the DFA also added to the TILA requirements for the

basis of determination of the borrower’s ability to repay a mortgage

loan, and income verification

• Section 1412 sets out the parameters of a “Qualified Mortgage”

5



• Section 1413 of the DFA amends the liability provisions under TILA to

provide consumers with a defense to foreclosure by way of set-off or

recoupment for the life of the loan if there is a violation of the Ability to

Repay provisions

• Such set-off or recoupment can include TILA damages which include

statutory damages, actual damages, three years of finance charges and

attorney fees and court costs

• These extended liability provisions apply to assignees of the mortgage

• Other amendments to TILA made by the DFA extended the Statute of

Limitations from one year to three (3) years

• Section 1414 of the DFA adds restrictions to PPPs on residential

mortgage loans

6



• In May 2011, the Federal Reserve Board proposed the Ability to

Repay – Qualified Mortgage Rule (ATR-QM)

• On July 21, 2011, authority over TILA and 17 other enumerated

consumer laws (i.e., federal consumer financial services laws)

transferred to the Consumer Financial Protection Bureau (the CFPB, or

Bureau) and the Bureau “inherited” pending proposed rules of other

agencies, including the Fed’s ATR-QM Proposed Rule

• On June 9, 2011, the Bureau re-opened the comment period of the

ATR-QM Proposed Rule on several distinct issues, including the use of

DTI ratios and residual income in underwriting a Qualified Mortgage,

and Litigation Risk from the use of a Rebuttable Presumption vs. a

Safe Harbor

• On January 10, 2013, the Bureau published the final ATR-QM Rule

on its website indicating the Rule will become effective one year later

on January 10, 2014

7

The CFPB ATR-QM Rule

Highlights

• The CFPB’s ATR-QM Rule Implements the statutory changes made by

the DFA to TILA, adopts many of the original proposals of the rule as

set forth by the Federal Reverse Board, but makes some very important

changes

The General ATR Requirements

5 or 6 new Classes of Qualified Mortgages

Qualified Mortgage (Safe Harbor)

Higher Priced Qualified Mortgage (Rebuttable Presumption

of Compliance)

Agency Qualified Mortgage

Further Proposed exemptions for Nonprofit creditors,

certain Homeownership Stabilization Programs, and Qualified

Mortgage made and held in portfolio by Small Creditors

Refinances of Non-Standard Mortgages into Standard Mortgages

Balloon Payment Qualified Mortgages made by Community

Lenders serving Rural Areas 8


“Covered Transaction”

• The ATR Rule applies to Consumer Credit Transactions Secured

by a Dwelling

Does not apply to business purpose loans

Applies to a loan secured by a dwelling, not merely

consumer’s principal dwelling

• The ATR Rule Does Not Apply to:

HELOCs

Reverse mortgages

Timeshares

Temporary bridge loans with a term of 12 months or less

Construction phase of 12 months or less of construction-to-

perm loans

9


The General Rule - ATR

• A creditor shall not make a loan that is a covered transaction

unless the creditor makes a reasonable and good faith

determination at or before consummation that the consumer will

have a reasonable ability to repay the loan according to its terms.

• Unless a Covered Transaction is a Qualified Mortgage, Refinance

of a Non-Standard Mortgage into a Standard Mortgage, or a Balloon

Payment Qualified Mortgage, in determining the consumer’s

repayment ability, a creditor must consider eight (8) criteria

10



• The eight (8) criteria are:

1. The consumer’s current or reasonably expected income or

assets, other than the value of the dwelling, including any real

property attached to the dwelling, that secures the loan;

2. If the creditor relies on income from the consumer’s

employment in determining repayment ability, the consumer’s

current employment status;

3. The consumer’s monthly payment on the covered transaction;

4. The consumer’s monthly payment on any simultaneous loan

that the creditor knows or has reason to know will be made,

calculated;

5. The consumer’s monthly payment for mortgage-related

obligations;

6. The consumer’s current debt obligations, alimony, and child

support;

7. The consumer’s monthly debt-to-income ratio or residual

income; and

8. The consumer’s credit history 11



• There are specific rules with regard to verifying the consumer’s:

Income or assets (criteria 1),

Employment (criteria 2),

Mortgage payment on the covered transaction (criteria 3), and

Monthly debt-to-income ratio or residual income (criteria 7)

• A creditor must verify the information that the creditor relies upon

in making the consumer’s repayment ability, except:

In verifying the consumer’s income or assets (criteria 1), the

creditor must follow specific rules (addressed on the next slide)

A creditor may make an oral verification of employment (criteria

2) if it prepares a record of the information obtained orally, and

In verifying debt information on the consumer (criteria 6), if a

creditor relies on a consumer’s credit report to verify a consumer’s

current debt obligations and a consumer’s application states a

current debt obligation not shown in the consumer’s credit report,

the creditor need not independently verify such an obligation 12



• Verifying the consumer’s income or assets

(Criteria 1):

A creditor must verify the amounts of income or

assets that the creditor relies on under “criteria 1” to

determine a consumer’s ability to repay a covered

transaction using third-party records that provide

reasonably reliable evidence of the consumer’s

income or assets

A creditor may verify the consumer’s income

using a tax-return transcript issued by the Internal

Revenue Service (IRS)

13



• Verifying the consumer’s income or assets (Criteria 1):

Examples of other records the creditor may use to verify the

consumer’s income or assets include:

(i) Copies of tax returns the consumer filed with the IRS or a State

taxing authority;

(ii) IRS Form W-2s or similar IRS forms used for reporting wages

or tax withholding;

(iii) Payroll statements, including military Leave and Earnings

Statements;

(iv) Financial institution records;

(v) Records from the consumer’s employer or a third party that

obtained information from the employer;

(vi) Records from a Federal, State, or local government agency

stating the consumer’s income from benefits or entitlements;

(vii) Receipts from the consumer’s use of check cashing services;

and

(viii) Receipts from the consumer’s use of a funds transfer service

14



• Calculating the Consumer’s Monthly Payment

(Criteria 3):

Except for certain loans with a balloon payment,

interest-only loans, and negative amortization loans

(which we will not cover today), a creditor must calculate

the Consumer’s Monthly Payment using:

(A)The fully indexed rate or any introductory interest rate,

whichever is greater; and

(B) Monthly, fully amortizing payments that are

substantially equal

15



• Calculating Monthly DTI or Residual Income

Payment (Criteria 7):

If a creditor considers the consumer’s monthly debt-to-

income ratio under Criteria 7, the creditor must consider

the ratio of the consumer’s total monthly debt obligations

to the consumer’s total monthly income, or

If a creditor considers the consumer’s monthly residual

income under Criteria 7, the creditor must consider the

consumer’s remaining income after subtracting the

consumer’s total monthly debt obligations from the

consumer’s total monthly income

16


Re-Cap

• General Rule: A creditor shall not make a loan that is a covered

transaction unless the creditor makes a reasonable and good faith

determination at or before consummation that the consumer will

have a reasonable ability to repay the loan according to its terms

• 4 Ways to meet the above ATR requirements:

The General ATR Requirement

5 or 6 new Classes of Qualified Mortgages

Refinances of Non-Standard Mortgages into Standard

Mortgages

Balloon Payment Qualified Mortgages made by Community

Lenders serving Rural Areas

17


Qualified Mortgages

• 5 or 6 new Classes of Qualified Mortgages


Higher Priced Qualified Mortgage (Rebuttable Presumption

of Compliance)

Agency Qualified Mortgages

Further Proposed Exemptions (in the “Concurrent Proposal”)

for:

Nonprofit Creditors

Certain Homeownership Stabilization Programs, and

Qualified Mortgage made and held in portfolio by Small

Creditors

18



• A Creditor that Makes a “Qualified Mortgage” complies with the

ATR requirements

• Generally, a “Qualified Mortgage” is one that meets the following

six (6) criteria:

1. (Fully amortizing) - That provides for regular periodic

payments that are substantially equal, except for the effect that

any interest rate change after consummation has on the payment in

the case of an adjustable-rate or step-rate mortgage, that do not:

(A) Result in an increase of the principal balance;

(B) Allow the consumer to defer repayment of principal, or

(C) Result in a balloon payment

2. The loan term does not exceed 30 years

3. The total points and fees payable in connection with the

loan do not exceed 3% of the total loan amount (for loans of

$100,000 or more, and lesser amounts for lower loan balances)

19


Qualified Mortgage (Safe Harbor, cont’d)

4. For which the creditor underwrites the loan, taking into

account the monthly payment for mortgage-related

obligations, using:

(A) The maximum interest rate that may apply during the

first five years after the date on which the first regular

periodic payment will be due; and

(B) Periodic payments of principal and interest that will

repay either:

(1) The outstanding principal balance over the

remaining term of the loan as of the date the interest

rate adjusts to the maximum interest rate, assuming

the consumer will have made all required payments

as due prior to that date; or

(2) The loan amount over the loan term

20



5. For which the creditor considers and verifies at or before

consummation the following:

(A) The consumer’s current or reasonably expected

Income or Assets other than the value of the dwelling

(including any real property attached to the dwelling)

that secures the loan, in accordance with Appendix Q,

and Criteria 1 and 4 under the General Ability to

Repay requirement; and

(B) The consumer’s current Debt Obligations, alimony,

and child support in accordance with appendix Q and

Criteria 4 and third party document requirements of

the General Ability to Repay requirements

21



6. For which the Ratio of the consumer’s total monthly debt

to total monthly income at the time of consummation does

not exceed 43 percent

• The ratio of the consumer’s total monthly debt to total

monthly income is determined:

(A) Except as provided in (B) below, in accordance with

the standards in appendix Q;

(B) Using the consumer’s monthly payment on:

(1) The covered transaction, including the monthly

payment for mortgage-related obligations; and

(2) Any simultaneous loan that the creditor knows or

has reason to know will be made

22


Appendix Q

• What is Appendix Q?

• An Attachment to the QM Rule with Very Detailed Standards for

Determining a Borrower’s Monthly Debt and Income, including:

I. Consumer Eligibility

A. Stability of Income

B. Salary, Wage and Other forms of Income

C. Family Owned Businesses

D. Self employed Individuals

E. Tax Return Analysis

II. Non-Employment Related Income

A. Alimony, Child Support

B. Investment, Trust Income, Rental Property, Military and Non-taxable

Income

III. Consumer Liabilities: Recurring

IV. Consumer Liabilities: Non-recurring

23


3% Points and Fees

• Defined based off of Section 32 definition of

“Points and Fees”

• Includes payments to Loan Originators (but the

Concurrent Proposal asks for Comments on this

item)

• Includes non-Finance Charge Closing Costs paid

to the Creditor or Loan Originator, or an Affiliate of

the Creditor or Loan Originator

24


Points and Fees

• A covered transaction is not a qualified mortgage unless the

transaction’s total points and fees, as defined in §1026.32(b)(1), do

not exceed:

(A)For a loan amount greater than or equal to $100,000 (indexed for

inflation): 3 percent of the total loan amount;

(B) For a loan amount greater than or equal to $60,000 (indexed for

inflation) but less than $100,000 (indexed for inflation): $3,000

(indexed for inflation);

(C) For a loan amount greater than or equal to $20,000 (indexed for

inflation) but less than $60,000 (indexed for inflation): 5 percent of

the total loan amount;

(D) For a loan amount greater than or equal to $12,500 (indexed for

inflation) but less 25


Points and Fees

• Points and fees, as defined in §1026.32(b)(1), means the following

fees or charges that are known at or before consummation:

Finance charges, other than the interest rate,

All compensation paid directly or indirectly by a consumer or creditor

to a loan originator that can be attributed to that transaction at the time

the interest rate is set

The maximum PPP that may be charged (excluding recoupment of

bona fide 3rd party closing costs if the borrower prepays before 36

months, or post-prepayment per diem interest on FHA-insured loans

made before Jan. 21, 2015)

The total PPP if the PPP is paid to the current holder of the loan, the

servicer acting on behalf of the holder, or an affiliate of either

• Bona Fide Third Party Charges that are Not Retained by the

Creditor, LO or an Affiliate of either are Excluded from Points and

Fees

26


Points and Fees

• Points and fees also do not include :

FHA MIP (or any premium or charge imposed in any federal or

state agency program for guaranty or insurance that protects the

creditor against the consumer's default or other credit loss)

On-going BPMI, or up-front BPMI if the premium is not in excess

of the amount payable under policies in effect at the time of

origination the FHA insurance program for 203(b) loans, provided

that the premium or charge is required to be refundable on a pro rata basis

and the refund is automatically issued upon notification of the satisfaction

of the underlying mortgage loan;

Bona fide discount points (one or two points, if the APR does not

exceed the APOR by one or two points, respectively)

• Non-finance charge closing costs are excluded from points and fees as

long as:

they are reasonable;

the creditor receives no direct or indirect compensation in

connection with the charge; and

the charge is not paid to an affiliate of the creditor 27


Agency Qualified Mortgage

• If a covered transaction meets the full amortization, 30 year term

and 3% points and fees tests, then it is a qualified mortgage if it is

eligible to be:

1. Purchased or guaranteed by one the GSEs (Fannie Mae or Freddie

Mac) while they are in conservatorship, or receivership under FHFA,

or any limited-life regulatory entity succeeding the charter of either

GSE

2. Insured by HUD

3. Guaranteed by the VA

4. Guaranteed by the USDA, or

5. Insured by the RHS

A. If HUD, the VA, the USDA or the RHS publish rules for qualified

mortgages under their respective programs, as allowed by the Dodd-

Frank Act and section 129C(b)(3)(ii) of the TILA, then the above rule

for Agency Qualified Mortgages for such Agencies shall expire

• The above rule for “Agency Qualified Mortgages” will expire on Jan. 10,

2021, unless the conditions in A. above occur before that date

28


Qualified Mortgage (Higher Priced Covered

Transactions)

• If a qualified mortgage is a higher priced covered transaction,

then the creditor, and an assignee of such loan only has a

rebuttable presumption of compliance with the ATR Rule

• To rebut the presumption of compliance of the ATR, it must be proven

that, despite meeting the requirements of a QM, the creditor did not

make a reasonable and good faith determination of the consumer’s

repayment ability at the time of consummation, by showing that the

consumer’s income, debt obligations, alimony, child support, and the

consumer’s monthly payment (including mortgage-related obligations)

on the covered transaction and on any simultaneous loans of which

the creditor was aware at consummation would leave the consumer

with insufficient residual income or assets other than the value of the

dwelling (including any real property attached to the dwelling) that

secures the loan with which to meet living expenses, including any

recurring and material non-debt obligations of which the creditor was

aware at the time of consummation

29


Qualified Mortgage (Higher Priced Covered

Transactions)

• A Higher Priced Covered Transactions is a first

lien transaction wherein the APR exceeds by

more than 1.5 percentage the APOR

A “Higher-priced Covered Transaction” means a covered

transaction with an Annual Percentage Rate that exceeds

the Average Prime Offer Rate (APOR) 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

covered transaction

Note, unlike the general HPML rule, a Higher-priced

Covered Transaction does not have an Exclusion for

“Jumbo Loans”

30


The “Concurrent Proposal”

• Concurrently with the Issuance of the final ATR-QM Rule, the

Bureau issued a Concurrent Proposal and Proposed certain

exemptions from the Ability to Repay Requirements for:

Nonprofit creditors,

Certain Homeownership Stabilization Programs, and

Qualified Mortgage made and held in portfolio by Small

Creditors

• The Bureau also requested comments on revisions to the

inclusion in the 3% “Points and Fees” test for QMs of certain Loan

Originators fees

• Comments on these items are due Feb. 25, 2013

31


Inter-Play of Other CFPB and Agencies’ Rules

with ATR-QM

• In Early January 2013, the Bureau also issued final rules on:

1. HOEPA and Counseling Requirements

2. Escrow Rules under TILA

3. The Mortgage Servicing Rule

4. Escrow Rules under ECOA and Regulation B (regarding delivery

of Appraisals to Consumers)

5. Appraisals for Higher Priced Mortgages, and

6. A New LO Comp Rule

• With the exception of the Escrow Rules under TILA, which is

effective on June 1, 2013, these other rules generally become

effective on January 10, 2014.

• The Rules under ECOA and Regulation B (regarding delivery of

Appraisals to Consumers) and the Appraisals for Higher Priced

Mortgages rules become effective on January 18, 2014.

• Risk Retention Rule and QRMs - Yet to be Finalized

32


Re-Cap

• Rule - Lenders Cannot Make Mortgage Loans without verifying

the Borrower’s Ability to Repay

Generally, there are 4 ways to do this, and 2 are very limited exceptions

(Qualified Balloon Loans made by Certain Lenders in Rural Areas, and

Refinances of Non-standard Loans)

• One way to verify the Borrower’s Ability to Repay is the General

Ability to Repay Process Recall – 8 Criteria to be met to Determine a Consumer’s Ability to Repay

a Mortgage Loan)

No Safe Harbor or Rebuttable Presumption

• Another way to meet the to the Borrower’s Ability to Repay is to

make a Qualified Mortgage Qualified Mortgage (3 Loan Type criteria [Full am., 30 yr., 3% P&F], and

3 Underwriting Criteria, incl. DTI ratio)

Higher Priced Qualified Mortgage (APR 1.5 % pts. over APOR) –

Rebuttable Presumption

“Agency Qualified Mortgage” (3 Loan Type criteria, and meets Agency

Underwriting Criteria, but no CFPB DTI ratio) 33


The Meaning of the ATR-QM Rule Going Forward

• Seems Unlikely Many Lenders will Make Loans based solely upon

ATR

• Lenders will try to make QMs

• The Rule Contains a species of “Assignee Liability”

• Standard QM’s have a 43% DTI ratio; Agency QMs do Not – This will perpetuate the federal Govt’s Role in the Mortgage

Industry

• Systems and Vendor Augmentation and Reliance will be Paramount 3% Points and Fees Test

Discrimination against Affiliates

Hyper-technical rules and underwriting requirements with Liability

for failure to Comply

Failure to meet Agency requirements may Disqualify a Loan from

being a QM

34


Questions We Are Receiving and Question from the

Audience

• Is there “assignee liability” for violating this rule?

• Are fees paid to affiliates included in the 3% points and fees test?

• How will this rule affect my JV’s?

• Will Loan Originator Compensation be “double-counted”?

• Is this Really Happening and when will it be effective?

• Is there any chance that Congress could overrule this rule?

• Why are they doing this? (No one make exotic loans any more)

• Other Questions ???

35

An Overview and Understanding of the CFPB’s New

Ability to Repay and Qualified Mortgage Rule

36

Washington, DC Dallas, TX Newport Beach, CA

www.wbsk.com

James (“Jim”) M. Milano

WEINER BRODSKY KIDER PC

1300 19th Street, NW., 5th Floor

Washington, DC 20036

Phone: 202-628-2000

[email protected]

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