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Presented to the DFW REI Club July 27, 2013 Haltom City, Texas Bryan Dunklin

New Mortgage Rules from the Consumer Financial Protection Bureau An Update On the Dodd-Frank Mortgage Reform Act Regarding Lender’s Duty to Document the Borrower’s Ability To Repay. Presented to the DFW REI Club July 27, 2013 Haltom City, Texas Bryan Dunklin. 1. Background.

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Presented to the DFW REI Club July 27, 2013 Haltom City, Texas Bryan Dunklin

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  1. New Mortgage Rules from the Consumer Financial Protection BureauAn Update Onthe Dodd-Frank Mortgage Reform ActRegarding Lender’s Duty toDocument the Borrower’sAbility To Repay Presented to the DFW REI Club July 27, 2013 Haltom City, Texas Bryan Dunklin 1

  2. Background • Dodd/Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) – 2,315 page bill signed by President Obama on July 21, 2010 • Title XIV of Dodd-Frank modified previous versions of the Mortgage Reform and Anti-Predatory Lending Act • Established the Consumer Financial Protection Bureau (CFPB) and generally consolidated the rulemaking authority for 18 Federal consumer financial laws, including TILA and RESPA, in the CFPB • www.consumerfinance.gov

  3. Background • Regulations under the Mortgage Reform and Anti-Predatory Lending Act were to be prescribed in final form within 18 months (January 21, 2012) • The regulations would then take effect 12 months after the issuance of the regulations in final form (January 21, 2013) • A section for which regulations had not been issued in 18 months would take effect on that date (January 21, 2012) • Proposed rule on ability-to-repay initially issued by the Federal Reserve on May 11, 2011 • Responsibility for the issuance and enforcement of Dodd-Frank rules was transferred to the CFPB on July 21, 2011

  4. Director Richard Cordray • U.S. Circuit Court of Appeals issued a decision in Noel Canning v. NLRB, January 25, 2013 • Case held appointment of NLRB members were illegal as vacancy appointments • CFPB Director Richard Cordray’s appointment presents similar issues • Issues presented respecting CFPB’s powers and rules • Government will appeal • Cordray’s appointment was recently approved • Amendment Q – amends upcoming rules

  5. Congressional concerns • Consumers received loans that they had no reasonable ability to repay • Consumers were steered to less safe and more expensive products by loan originators, often because of compensation incentives • The mortgage industry lacked the capacity to address consumer needs in connection with the servicing of loans, particularly delinquent borrowers

  6. Ability To Repay (ATR)Qualified Mortgage (QM) • On 1/10/13, CFPB issued final rule: • Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act - 804 pages • Published in the Federal Register 1-30-2013 at https://www.federalregister.gov/articles/2013/01/30/2013-00736/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z#h-227 • Implements sections 1411 and 1412 of Dodd-Frank • Rule effective for applications taken after 1/10/14

  7. Residential mortgage loan • Sections 1411, 1412 and 1414 of Dodd-Frank add new TILA section 129C, which requires lenders to determine a consumer's ability to repay a “residential mortgage loan” • Section 1401 of Dodd-Frank adds new TILA section 103(cc), which defines “residential mortgage loan” to mean, with some exceptions, any consumer credit transaction secured by a mortgage, deed of trust, or other equivalent consensual securityinterest on “a dwelling or on residential real property that includes a dwelling.”

  8. Dwelling • TILA section 103(v) defines “dwelling” to mean a residential structure or mobile home which contains one- to four-family housing units, or individual units of condominiums or cooperatives. Thus, a “residential mortgage loan” is a dwelling-secured consumer credit transaction, regardless of whether the consumer credit transaction involves a home purchase, refinancing, home equity loan, first lien or subordinate lien, and regardless of whether the dwelling is a principal residence, second home, vacation home (other than a timeshare residence), a one- to four-unit residence, condominium, cooperative, mobile home, or manufactured home.

  9. What about seller financing? • “The Bureau received numerous letters from individuals concerned that the rule would cover individual home sellers who finance the buyer's purchase, either through a loan or an installment sale. However, because the definition of ‘creditor’ for mortgages generally covers only persons who extend credit secured by a dwelling more than five times in a calendar year, the overwhelming majority of individual seller-financed transactions will not be covered by the rule. Those creditors who self-finance six or more transactions in a calendar year, whether through loans or installment sales, will need to comply with the ability-to-repay provisions of § 1026.43, just as they must comply with other relevant provisions of Regulation Z.”

  10. The language is clear. Right?

  11. Ability to repay (ATR) • Applies to all consumer mortgages secured by a dwelling • Except • Home equity lines of credit • Timeshare plans • Reverse mortgages • Temporary loans

  12. Ability to repay (ATR) • A lender maynotmakea covered mortgage loanunlessthe lender makes a reasonable and good faith determination, based on verified and documented information, at or before consummation of the loan,that theborrower will have a reasonable ability to repay the loan according to its terms

  13. Liability for Violations of Ability to Repay Rule • Actual damages • e.g., lost down payment • Statutory damages equal to the sum of all finance charges and fees paid by the borrower (up to three years) • Court costs and reasonable attorney’s fees associated with the action • Defense to foreclosure by recoupment or set off

  14. Liability for Violations of Ability to Repay • Statute of limitations for suit increased to 3years from date of occurrence or violation • No statute of limitations for defense to foreclosure by recoupment or set off (although interest and fee damages are limited to 3 years) • Claim may be made against any lender,assignee, or other holder of a residential mortgage loan

  15. Mortgage lender can comply in four ways • 1. General ability to repay – must consider and verify 8 factors • 2. Originate a “Qualified Mortgage” (QM) • 3. Originate a Rural Balloon-Payment QM • 4. Refinance a “non-standard mortgage” into a “standard mortgage”

  16. ATR Requirements Underwriting • Lender must consider 8 factors • 1. Current or reasonably expected income or assets, excluding the value of the dwelling; • 2. Current employment status, if lender relies on employment income; • 3.Monthly payment on the covered loan, as calculated under the rule; • 4. Borrower’s monthly payment on any simultaneous loan the lender knows or has reason to know will be made, as calculated under the rule;

  17. ATR RequirementsUnderwriting • Lender must consider8factors • 5. Monthly payment for mortgage-related obligations; • 6.Current debt obligations, alimony and child support; • 7.Monthly Debt To Income (DTI) or residual income, as calculated under the rule; • 8.Credit history - “Section 1026.43(c)(2)(viii) does not require creditors to obtain or consider a consolidated credit score or prescribe a minimum credit score that creditors must apply.”

  18. Credit history • “Credit history” may include factors such as the number and age of credit lines, payment history, and any judgments, collections, or bankruptcies. Section 1026.43(c)(2)(viii) does not require creditors to obtain or consider a consolidated credit score or prescribe a minimum credit score that creditors must apply. The rule also does not specify which aspects of credit history a creditor must consider or how various aspects of credit history should be weighed against each other or against other underwriting factors. Some aspects of a consumer’s credit history, whether positive or negative, may not be directly indicative of the consumer’s ability to repay. A creditor therefore may give various aspects of a consumer’s credit history as much or as little weight as is appropriate to reach a reasonable, good faith determination of ability to repay. Where a consumer has obtained few or no extensions of traditional “credit,” as defined in § 1026.2(a)(14), a creditor may, but is not required to, look to nontraditional credit references, such as rental payment history or utility payments.

  19. Underwriting standards • “[T]he rule and commentary do not specify how much income is needed to support a particular level of debt or how credit history should be weighed against other factors. So long as creditors consider the factors set forth in § 1026.43(c)(2) according to the requirements of § 1026.43(c), creditors are permitted to develop their own underwriting standards and make changes to those standards over time in response to empirical information and changing economic and other conditions. Whether a particular ability-to-repay determination is reasonable and in good faith will depend not only on the underwriting standards adopted by the creditor, but on the facts and circumstances of an individual extension of credit and how a creditor’s underwriting standards were applied to those facts and circumstances. A consumer’s statement or attestation that the consumer has the ability to repay the loan is not indicative of whether the creditor’s determination was reasonable and in good faith.”

  20. ATR RequirementsVerification • Lender must verify information relied upon in determining borrower’s repayment ability using reasonably reliable third-party records. • For income or assets relied upon, third party records must provide reasonably reliable evidence of income or assets • IRS tax return transcript may be used for income

  21. ATR RequirementsVerification • Oral verifications of employment status are permitted, if lender prepares record of the information obtained orally. • When a credit report is used to verify debt obligations and application states a current debt not shown on the credit report, no requirement to independently verify that debt.

  22. ATR RequirementsPayments • Lender must use • Monthly, fully amortizing payments that are substantially equal; and • The higher of the fully indexed rate or introductory rate.

  23. ATR RequirementsPayments • Special rules apply to loans with a balloon payment, interest-only payment or negative amortization feature.

  24. ATR RequirementsPayments • Simultaneous loan, lender must • For a loan that is a covered loan, follow the payment calculation requirements for the main transaction; or • For a HELOC subject to 1026.40, use the periodic payment required under the plan and the amount of credit to be drawn at or before consummation of the main loan.

  25. ATR RequirementsDebt to income ratio • Debt to income (DTI) • Consider total monthly debt obligations + total monthly income. • Total monthly debt obligations include payment on covered loan, payment on simultaneous loans, mortgage-related obligations, debt obligations, alimony + child support. • Total monthly income includes borrower’s current or reasonably expected income, including any income from assets.

  26. ATR Requirementsresidual income • Lender must consider the borrower’s remaining income after subtracting the borrower’s total monthly debt obligations from the borrower’s total monthly income

  27. Qualified Mortgage • To be a QM, the loan MUST • Provide regular periodic payments; • Have a loan term of 30 years or less, and not include negative amortization, interest–only, or balloon features (except balloon payment QMs discussed later) • Not have total points and fees exceeding 3% of the total loan amount for loans of $100,000 or more, or

  28. Qualified Mortgage • May not have total points and fees exceeding • $3,000, if the loan is > = $60,000, but < $100,000; • 5% of total loan amount, if the loan is > = $20,000, but < $60,000; • $1,000, indexed for inflation, if the loan is > = $12,500, but < $20,000; • 8% of the total loan amount, if the loan is < $12,500 (indexed for inflation).

  29. Definition ofPoints and Fees • Includes fees or charges knownat or before consummation including: • (1) All items included in finance charge under TILA rules • (2) All compensation paid directly or indirectly by a consumer or creditor to a loan originator including a mortgage brokerage firm and individual employee loan originators that can be attributed to the transaction at the time the interest rate is set;

  30. Definition ofPoints and Fees • (3) all bona fideand reasonable real estate related fees under Section 1026.4(c)(7) of TILA including title related charges (other than amounts held for future payments of taxes) unless the charge is reasonable; the creditor does not receive any compensation for the charge and charge is not paid to an affiliate • (4) credit-related insurance premiums or other charges payable at or before consummation for which the creditor is a beneficiary;

  31. Definition ofPoints and Fees • (5) Maximum prepayment penalty that may be charged under the mortgage; • (6) Total prepayment penalty if the consumer refinances existing mortgage with the current holder or servicer or affiliate of either.

  32. Real Estate Related FeesNot In Points and Fees • The following fees are excluded from points and fees if not paid to a creditor, originator or affiliate, and if the fees are bona fide and reasonable in amount: • (i) Fees for title examination, abstract of title, title insurance, property survey, and similar purposes. • (ii) Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.

  33. Real Estate Related FeesNot Points and Fees • (iii) Notary and credit-report fees. • (iv) Property appraisal fees or fees for inspections to assess the value or condition of the property if the service is performed prior to closing, including fees related to pest-infestation or flood-hazard determinations. • (v) Amounts required to be paid into escrow or trustee accounts if the amounts would not otherwise be included in the finance charge. • Rule defines bona fide discount point as amount equal to 1 percent of the loan amount paid by the consumer that reduces interest rate based on a calculation that is consistent with established industry practices.

  34. Not in Points and Fees • The following items that are included in the finance charge under current TILA rules are not included in the definition of points and fees: • (a) interest; • (b) premium or other charge imposed under any Federal or state guarantee or insurance that protects creditor against consumer default;

  35. Not in Points and Fees • The following items that are included in the finance charge under current TILA rules are not included in the definition of points and fees: • (c) PMI, if premium or charge is payable after consummation or, for any premium or charge payable at or before consummation, the portion of premium that is not in excess of amount payable under the Federal Housing Administration (FHA) program provided premium or charge is refundable on pro rata basis;

  36. Not in Points and Fees • The following items that are included in the finance charge under current TILA rules are not included in the definition of points and fees: • (d) 3rd party charges that are bona fide, not retained by the creditor, loan originator or an affiliate of either; • (e) up to 2 bona fide discount points if the interest rate without a discount does not exceed the APOR by 1 point, or 1 bona fide discount point if the interest rate does not exceed the APOR by more than 2 percentage points;

  37. Prepayment Penalties • Rule prohibits prepayment penalties unless: • (1) Otherwise permitted by law, • (2) Loan is a fixed-rate QM; • (3) Loan is not a higher-priced mortgage (APR 1.5 or more over APOR); • (4) Penalty does not apply for more than 3 years; • (5) Amount of penalty is limited to 2% if incurred during the first 2 years following consummation and 1% if incurred during the 3rd year following consummation.

  38. Prepayment Penalties • Rule requires creditor offering loan with prepayment penalty to also offer consumer loan without prepayment penalty, and requires creditor offering prepayment penalty through mortgage broker to offer loan without prepayment penalty to such broker, and to establish agreement so broker presents such loan to consumer. • Rule excludes from definition of prepayment penalty interest charged consistent with the monthly interest accrual amortization method for FHA loans consummated before January 21, 2015.

  39. Qualified Mortgage • To be a QM, the loan MUST • Be underwritten by taking into account the monthly payment for all loan related obligationsusing the maximum interest rate that may apply during the first five years and periodic payments of P+I based on such interest rate • Involve lender consideration and verification of • Borrower’s current or reasonably expected income or assets, and • Current debt obligations, alimony and child support

  40. Qualified Mortgage • To be a QM • Borrower’s monthly debt to total monthly income (DTI) at time of loan consummation may not exceed 43%, using the borrower’s monthly payment on the loan and any other simultaneous loan lender knows or has reason to know will be made

  41. Temporary QM • Under special rules, loan may be treated as a QM if it • Satisfies QM criteria for • Regular periodic payments • Maximum 30-year loan term • Maximum points and fees for a QM • AND

  42. Temporary QM • Is eligible • 1. For purchase or guarantee by Fannie Mae or Freddie Mac under conservatorship or a limited-life regulatory entity successor to FNMA or FHLMC; • 2. For insurance by HUD/FHA or the Rural Housing Service; or • 3. For a VA or Department of Agriculture guarantee These rules expire on effective date of QM rule issued by these agencies or 1/10/2021

  43. QMTwo Presumptions • 1. Conclusive Presumption of Compliance or “Safe Harbor” – provides conclusive presumption that ATR requirements have been met for QM that satisfies other requirements and has APRthat does not exceed Average Prime Offer Rate (APOR) by 1.5 or more percentage points for a first lienor3.5 percentage points for a subordinate lien mortgage • 2. Presumption of Compliance (“rebuttable presumption of compliance”) • CFPB gives safe harbor to prime market QMs, and rebuttable presumption for subprime market QMs

  44. QMTwo Presumptions • 2. Presumption of Compliance – provides rebuttable presumption of compliance that ATR requirements have been metfor QM that satisfies other requirements and has APR that exceedsAPOR by 1.5 or more percentage points for a first lienor3.5 percentage points for a subordinate lien mortgage • 2. Presumption of Compliance (“rebuttable presumption of compliance”) • CFPB gives safe harbor to prime market QMs, and rebuttable presumption for subprime market QMs

  45. APOR • Average Prime Offer Rate • APOR can be found at ffiec.gov • Currently APOR on a 30 year, fixed rate note is 3.62% • Currently APOR on a 30 year, adjustable rate note is 3.49%

  46. QMTwo Presumptions IF A QM, then • Safe harbor given to prime market • Rebuttable presumption for subprime market • No special threshold for jumbo mortgages

  47. Rebuttable presumption • A borrower may rebut the presumption of compliance by showing that despite meeting QM requirements, lender did not make a reasonable and good faith determination of the borrower’s ability to repay at the time of consummation of the loan

  48. Rebuttable presumption • Borrower could rebut presumption of compliance by showing that his income less his debt obligations, alimony, child support, and monthly payment (including mortgage-related obligations) on the covered loan and simultaneous loans of which the lender should have been aware would leave the borrower with insufficient residual income or assets to pay his living expenses

  49. Rebuttable presumption • Generally, the longer the borrower demonstrates his ability to pay by making timely payments (whether after closing or after a payment change for an ARM), without modification or accommodation, less likely borrower will be able to rebut the presumption based on insufficient residual income.

  50. Rural Balloon Payment QM • Lender operating in a predominantly rural or underserved area (designated by CFPB) may originate a balloon-payment QM if: • Loan meets other requirements for QM (except those for balloon payments), including limits on points and fees • Lender determines at or before consummation that borrower can make all scheduled payments and other mortgage-related obligations (excluding balloon payment) from current or reasonably expected income and assets

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