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Rules under Dodd-Frank Act. Todd Prout – Connecticut DOB March 6, 2014. Topics. Remittance Rule Derivative Lending L imits Loan Originator Compensation Ability to Repay Qualified Mortgages Temporary Government Patch – QM. Remittance Rule. REMITTANCE RULE.

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Rules under dodd frank act

Rules under Dodd-Frank Act

Todd Prout – Connecticut DOB

March 6, 2014


Topics

Topics

Remittance Rule

Derivative Lending Limits

Loan Originator Compensation

Ability to Repay

Qualified Mortgages

Temporary Government Patch – QM


Remittance rule

Remittance Rule


Remittance rule1

REMITTANCE RULE

Generally requires that the remittance transfer provider disclose appropriate contact information for the remittance transfer provider, its State regulator, and the Bureau.

Appropriate contact information includes the name, telephone number, and web site of these entities, so that senders would have multiple options for addressing any issues that may arise with respect to a remittance transfer provider.


Remittance rule2

REMITTANCE RULE

Contact Information

Connecticut Department of BankingGovernment Relations and Consumer Affairs260 Constitution PlazaHartford, CT 06103-1800

Telephone #860-240-8299 or Toll-free #1-800-831-7225

Website link to the Complaint Form:

http://www.ct.gov/dob/cwp/view.asp?a=2235&q=297974&dobNAV_GID=1659


Remittance rule3

REMITTANCE RULE

Examination Procedures

Ensure steps were taken to implement the contact information requirements.


Derivative lending limits

Derivative Lending Limits


Derivative lending limits1

DERIVATIVE LENDING LIMITS

  • The Commissioner’s Guidance follows the OCC rule and a CSBS Model Rule was also used to guide this and other state’s in developing their guidance.

  • The lending limits final rule provides a number of alternative methods for calculating credit exposure arising from derivatives transactions.


Derivative lending limits2

DERIVATIVE LENDING LIMITS

  • Unless required to use a specific method by the appropriate federal banking agency for safety and soundness reasons, a bank may choose which of these methods it will use.

  • Our final rule clarifies that the Commissioner may, at his discretion, permit a bank to use a specific method to calculate credit exposure, and that this method may apply to all or specific transactions if it is determined that such method is consistent with the safety and soundness of the bank.


Derivative lending limits3

DERIVATIVE LENDING LIMITS

Definitions

  • Derivative transaction - any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.


Derivative lending limits4

DERIVATIVE LENDING LIMITS

Definitions

  • Credit derivative - a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider).


Derivative lending limits5

DERIVATIVE LENDING LIMITS

Three Methods

  • Model Method

  • Conversion Factor Matrix Method

  • Current Exposure Method

    Key Concepts

  • Current Credit Exposure – Mark-to-Market

  • Potential Future Exposure – Model or Table


Derivative lending limits6

DERIVATIVE LENDING LIMITS

Model Method

  • While this methodology is intended to improve the accuracy of the calculation of a bank’s credit exposures, use by community banks is expected to be limited due to the cost of developing and supporting an internal model.

  • Model Method Credit Exposure = Current Credit Exposure (CCE) + Potential Future (Credit) Exposure (PFE)


Derivative lending limits7

DERIVATIVE LENDING LIMITS

Model Method

  • Regulator-approved internal model to calculate credit exposure arising from derivatives.

    • Approved in writing by the appropriate federal banking agency for purposes of Section 32(d) of the advanced approaches capital rules

    • or any other appropriate model the use of which for lending limits purposes has been approved in writing by the appropriate federal banking agency


Derivative lending limits8

DERIVATIVE LENDING LIMITS

Model Method

  • Under the Model Method, current credit exposure equals the greater of the mark-to-market value of the derivative and zero.

  • The final rule clarifies that if a bank makes a substantive revision to a model after receiving the appropriate federal banking agency’s approval, the use of the revised model must be approved by the agency before it may be used for purposes of calculating lending limits. The OCC also declined to allow the use of a model on a provisional basis pending its approval.


Derivative lending limits9

DERIVATIVE LENDING LIMITS

Conversion Factor Matrix Method

  • While probably not an option for banks with significant derivative positions, it is the easiest to apply and manage.

  • Likely method for banks with limited derivative positions.


Derivative lending limits10

DERIVATIVE LENDING LIMITS

Conversion Factor Matrix Method

  • Credit Exposure = Notional Amount x Conversion Factor (look-up table)

  • Credit exposure will equal and remain fixed at the PFE of a derivative transaction.


Derivative lending limits11

DERIVATIVE LENDING LIMITS

Conversion Factor Matrix Method

  • Similar to the Current Exposure Method, except that the exposure amount remains fixed.

  • This is achieved by removing the current credit exposure component (which is based on the derivative transaction’s mark-to-market value) of the Current Exposure Method formula, which can fluctuate over time, and by adjusting the values in the conversion factor matrix to reflect the absence of the current credit exposure component.


Derivative lending limits12

DERIVATIVE LENDING LIMITS


Derivative lending limits13

DERIVATIVE LENDING LIMITS

Current Exposure Method

  • Balance between Model Method and Conversion Factor Matrix Method

  • For a single derivative transaction that is not subject to a qualifying master netting agreement:

    • Credit Exposure = Current credit exposure + PFE


Derivative lending limits14

DERIVATIVE LENDING LIMITS

Current Exposure Method

  • For multiple derivative transactions subject to a qualifying master netting agreement:

    • Credit Exposure = Net current credit exposure + Adjusted sum of PFE amounts

  • The Current Exposure Method (“CEM”), when combined with the Collateral Haircut Approach, allows a bank to take into account the credit risk-mitigating benefits of collateral.


Derivative lending limits15

DERIVATIVE LENDING LIMITS

2014 Examination Procedures

  • Ensure management has considered the derivatives lending limits and established a method for measurement.


Loan originator compensation

Loan Originator Compensation


Loan originator compensation1

LOAN ORIGINATOR COMPENSATION

Standard

Regulation Z prohibits certain practices relating to payments made to compensate mortgage brokers and other loan originators.

The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators.


Loan originator compensation2

LOAN ORIGINATOR COMPENSATION

Applicability

The prohibitions related to mortgage originator compensation and steering apply to closed-end consumer loans secured by a dwelling or real property that includes a dwelling.

The rule does not apply to open-end home equity lines of credit (HELOCs) or time-share transactions. It also does not apply to loans secured by real property if the property does not include a dwelling.


Loan originator compensation3

LOAN ORIGINATOR COMPENSATION

Exceptions

  • There are compensation exceptions for

    • (1) certain deferred compensation plans and

    • (2) certain non-deferred profit-based compensation plans.


Loan originator compensation4

LOAN ORIGINATOR COMPENSATION

Definition of Loan Originator

  • The term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities:

    • Takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or


Loan originator compensation5

LOAN ORIGINATOR COMPENSATION

Definition of Loan Originator

  • Through advertising or other means of communication represents to the public that such person can or will perform any of these activities.

  • The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition.


Loan originator compensation6

LOAN ORIGINATOR COMPENSATION

Individual loan originator

A natural person who meets the definition of “loan originator.”

Loan originator organization

Any loan originator that is not an individual loan originator. A loan originator organization would include banks, thrifts, finance companies, credit unions and mortgage brokers.


Loan originator compensation7

LOAN ORIGINATOR COMPENSATION

Prohibited Practices

Compensation based on the terms of a transaction

Dual compensation

Steering


Loan originator compensation8

LOAN ORIGINATOR COMPENSATION

2014 Examination Procedures

Discuss process for identifying loan originators and communicating restrictions to other employees that interact with customers.

Discuss the structure of loan originator compensation including salary, commissions, bonuses, awards and incentives.

Discuss any controls or reviews to ensure compliance with compensation restrictions.


Ability to repay

Ability-to-Repay


Ability to repay1

ABILITY-TO-REPAY

Applicability

Closed-end consumer purpose loans that are secured by a dwelling, including refinances and closed-ended home equity loans.

Determined at or before consummation.


Ability to repay2

ABILITY-TO-REPAY

Exceptions

  • HELOCS

  • Mortgages secured by a timeshare

  • Reverse mortgages

  • Temporary or “bridge” loans

  • Construction portion of construction-to-perm loan if less than 12 months

  • Business purpose

  • Modification unless it constitutes a refinance


Ability to repay3

ABILITY-TO-REPAY

Standard - Loan must meet 8 factors:

  • Current or reasonably expected income or assets – no need to consider excess

  • Current employment status – full/part/seasonal/irregular/military/self

  • Monthly payment on transaction – complicated test with additional subtests for I/O, N/A

    • Max in 5 years for prime-rate loans

    • Max payment in payment schedule including balloon payment for higher-priced

  • Monthly payment on simultaneous loans – must consider HELOCs made at the same time


Ability to repay4

ABILITY-TO-REPAY

Standard - Loan must meet 8 factors:

  • Monthly payment on mortgage related obligations – taxes, insurance, fees

  • Current debt obligations, alimony and child support – consumer loans, other mortgages

  • Monthly DTI or residual income – no defined ratio as with Qualified Mortgage

  • Consumer’s credit history – no credit score requirement, do not need to consider secondary

    Must use reliable third-party records


Qualified mortgages

Qualified Mortgages


Qualified mortgage

QUALIFIED MORTGAGE

Temporary Government Patch

Standard Qualified Mortgage

Safe Harbor Qualified Mortgage

Small Creditor Qualified Mortgage

Small Creditor Rural/Underserved Qualified Mort.


Qualified mortgage1

QUALIFIED MORTGAGE

Temporary Government Patch

At consummation, loan must be eligible for:

  • Purchase or guarantee by the GSEs, while under conservatorship of the FHFA

  • Insurance or guarantee by the FHA, VA, USDA or RHS

  • Meet the first 3 requirements of the standard QM

    • Prohibitions of negative-am, interest-only, balloon features

    • Maximum term of 30 years

    • Point and fee restrictions


  • Qualified mortgage2

    QUALIFIED MORTGAGE

    Temporary Government Patch - Phase out

    • When GSEs issue own guidance or conservatorship ends

    • No later than January 10, 2021


    Qualified mortgage3

    QUALIFIED MORTGAGE

    Standard QM - Six factors

    • Regular periodic payments – no I/O, balloon, negative am

    • Maximum 30 year-term

    • 3% points and fees cap – bona fide discount points excluded

    • Sound underwriting

    • Verification of income and debt

    • 43% back-end DTI

      Provides rebuttable presumption


    Qualified mortgage4

    QUALIFIED MORTGAGE

    Safe Harbor QM

    • Meets all of the requirements of a QM (including temp) plus has an APR that is less than:

    • 3.5% above APOR for small creditor QMs

      • Less than $2 Billion and under 500 loans

      • All subordinated loans

    • 1.5% above APOR first lien QMs except small creditor

    • Provides irrebuttable presumption


    Qualified mortgage5

    QUALIFIED MORTGAGE

    Small Creditor Portfolio Loans

    • Kept in portfolio at least three years

    • Small Creditor

      • Less than $2 billion in assets adjusted for inflation

      • Originates no more than 500 closed-end first lien ‘covered transactions’ a year, along with their affiliates


    Qualified mortgage6

    QUALIFIED MORTGAGE

    Small Creditor Qualified Mortgage

    • Regular periodic payments – no I/O, balloon, negative amortization

    • Maximum 30 year-term

    • 3% points and fees cap – bona fide discount points excluded

    • Must be underwritten in the same way as a standard QM

    • Must consider DTI or residual income

      • No specific DTI limit


    Qualified mortgage7

    QUALIFIED MORTGAGE

    Small Creditor Rural/Underserved Qualified Mortgage

    • Exception to allow balloon-payment mortgages to be considered qualified mortgages

    • Must be originated and held in portfolio by small creditors operating predominantly in rural or underserved areas.

      • Rural and underserved test does not have to be met until January10, 2016


    Qualified mortgage8

    QUALIFIED MORTGAGE

    Small Creditor Rural/Underserved Qualified Mortgage

    Maintains QM status if creditor transfers the loan to another creditor that meets the requirements to be a small rural lender, or when the loan is transferred due to a capital restoration plan, bankruptcy, or state or federal governmental agency order, or if the mortgage is transferred pursuant to a merger or acquisition of the creditor.


    Qualified mortgage9

    QUALIFIED MORTGAGE

    Small Creditor Rural/Underserved Qualified Mortgage

    • Criteria to meet test:

      • Prohibitions on negative-amortization and interest-only features;

        • 30 year maximum amortization

      • Term of at 5 years minimum, 30 year maximum.

      • 3% cap on points-and-fees.


    Qualified mortgage10

    QUALIFIED MORTGAGE

    Small Creditor Rural/Underserved Qualified Mortgage

    • Fixed interest rate.

    • QM underwriting standards based on regular monthly payment without balloon

    • Debt-to-income ratios must be considered and verified.

      • 43 percent threshold for QMs under the general definition does not apply.

    • Verify the consumer’s current or reasonably expected income or assets and current debt obligations, alimony, and child support, but without regard to the standards in Appendix Q.


    Qualified mortgage11

    QUALIFIED MORTGAGE

    2014 Examination Procedures

    • Review the number and dollar amount of loan originations to determine if the bank is a small creditor – documentation purposes.

    • Review process for determining Ability-to-Repay.

    • Determine if the bank originates Qualified Mortgages (QMs).

    • If bank is originating QMs, determine if one of the patches is used.

    • Review the documentation process for QMs.

    • Review analysis and documentation procedures for Safe Harbor QMs


    Legislative package raised bills

    Legislative Package – Raised Bills

    Closing notice for Loan Production Offices HB5353

    Application fee increases HB5353

    New fee for bank name change HB5353

    Clarifies ATM with video capability is ATM (not a branch) HB5353

    Make mortgage servicers a regulated activity HB5352

    Regulations are under review as part of Governor’s Bill. Out-of-State Banks and Public Deposits


    Questions

    Questions?

    Todd Prout – 860.240.8184 – [email protected]


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