Break Out - Federal Reserve Bank of Kansas City · Equal Credit Opportunity Act (ECOA) Valuations ... *if ARM, use greater of fully indexed or introductory 2. ... Refer to pages 23‐24

Break Out Session:Mortgage Loan

Underwriting and Pricing

Agenda

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Ability to Repay (ATR)/Qualified Mortgages (QMs)Effective Date: Applications received on or after January 10, 2014

2013 Home Ownership and Equity Protection Act (HOEPA)Effective Date: Applications received on or after January 10, 2014

Truth‐in‐Lending Act (TILA) Higher‐Priced Mortgage Loans Appraisal and Equal Credit Opportunity Act (ECOA) Valuations

Effective Date: Applications received on or after January 18, 2014

Many of the final rules issued this past January have been revised through subsequent final rule making. In addition, there are existing pending proposals that may result in even further amendments to the rules.

Agenda

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ATR/QMsEffective Date: Applications received on or after January 10, 2014

2013 HOEPAEffective Date: Applications received on or after January 10, 2014

TILA Higher‐Priced Mortgage Loans Appraisal and ECOA ValuationsEffective Date: Applications received on or after January 18, 2014

ATR: General Standards

• All lenders making closed‐end residential loans

• Home Equity Line of Credit (HELOC)• Timeshares• Reverse Mortgages, temporary, bridge, or construction loans w/terms of 12 months or less

• Exempt transactions under 1026.3• Loan modifications• Streamline refinances of “non‐standard” loans to “standard” loans

Exemptions

Coverage

• Creditors must make a reasonable, good faith determination of a consumer’s ATR

• Establishes certain legal protections for loans meeting eligibility requirements for a qualified mortgage

• Places limitations on prepayment penalties

Requirements

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ATR: 8 Underwriting Factors

1. Payment Underwriting

2. Mortgage Related Obligations

3. Income or Assets

4. Employment Status

5. Simultaneous Loans

6. Debt, Alimony, Child Support

7. DTI or Residual Income

8. Credit History

Principal and Interest**if adjustable rate mortgage (ARM), use greater of fully indexed or introductory rate

Consider and Verify

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H1

1. Payment Consideration Principal and Interest**if ARM, use greater of fully indexed or introductory rate2. Mortgage Related Obligations

3. Income or Assets





8. Credit History

Consider and Verify


H1

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1. Payment Consideration Principal and Interest**if ARM, use greater of fully indexed or introductory rate

3. Income or Assets





8. Credit History


Consider and Verify


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H1






8. Credit History

Consider and Verify


3. Income or Assets


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H1


3. Income or Assets




8. Credit History

Consider and Verify




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H1


3. Income or Assets




8. Credit History

Consider and Verify




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H1


3. Income or Assets





Consider and Verify


8. Credit History


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H1

ATR: Third‐Party Records

• A third party record is a document or other record prepared or reviewed by an appropriate person other than the consumer or the creditor

Definition

• A record the creditor maintains for an account of the consumer held by the creditor (e.g. bank statements, CDs, etc.)

Exception

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ATR: QM Loans

1. General2. Small Creditor3. Balloon Payment4. Agency/Government‐Sponsored

Enterprise

Types of Qualified Mortgage Loans

1. Safe Harbor2. Rebuttable Presumption

Types of Legal Protection

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H3H2

ATR: QM Points and Fee Calculations

• For QMs, points and fees are calculated according to the revised rules in 1026.32 and are capped, as follows, based on the loan amount on the face of the note:

Loan Amount Points and Fees Cap

> $100,000 3% of the total loan amount

> $60,000, but less than $100,000 $3,000

> $20,000, but less than $60,000 5% of the total loan amount

> $12,500, but less than $20,000 $1,000

< $12,500 8% of the total loan amount• Dollar amounts listed above will be adjusted annually for inflation and

published each year in the commentary to Regulation Z

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H4

ATR: Examiner Expectations

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• Identify acceptable third party verification documentation and develop processes to obtain verification of the ATR underwriting factors, particularly for those factors that the bank has addressed informally in the past.

• Conduct appropriate loan staff training regarding the bank’s policies and procedures for considering and verifying the eight underwriting factors outlined in the final rule and/or the requirements for QM eligibility, if applicable.

• Develop policies, procedures, training, and internal controls to ensure eligibility requirements are met, particularly if the QM status is being relied upon for exemption of other regulatory requirements if the bank elects to originate QMs

Agenda

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ATR/Qualified MortgagesEffective Date: Applications received on or after January 10, 2014

2013 HOEPAEffective Date: Applications received on or after January 10, 2014


HOEPA: General Standards

• Consumer credit secured by the consumer’s principal dwelling• Now includes purchase money transactions and HELOCs in addition to

refinance and home improvement loans. Also, includes manufactured housing, mobile homes, and personal property.

• Reverse Mortgages• Construction loans to finance the initial construction of a new dwelling • Construction‐to‐perm (2 separate transactions) – construction loan

exempt, but perm is not• Construction‐to‐perm (1 transaction) – accordance with Appendix D to

Regulation Z• Loans to finance a vacation or second home

Exemptions

Coverage

• Additional disclosures• Expands restrictions and adds consumer protections• Two additional counseling requirements, regardless if loan is high cost• Revised annual percentage rate (APR)/points and fees trigger

calculation to capture more transactions

Requirements

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HOEPA: Determining Coverage

APR Fees Prepayment Penalty

• APR: Calculation is tiered based on loan amount and lien position; then compared to Average Prime Offer Rate for a comparable transaction

• Fees: Calculated differently than in the past and meant to expand coverage• Prepayment Penalty (New): Certain prepayment penalties may result in HOEPA

coverage if:– Charged more than 36 months after consummation or account opening, or– In an amount more than 2% of the amount prepaid

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H5

The points and fees for HOEPA coverage of HELOCs uses the same general calculation approach as closed‐end transactions, but also includes participation fees payable at or before account opening and fees you charge consumers to draw on their HELOCs (assuming at least one draw).

The total loan amount used in the fee coverage test may not be the same as the loan amount on the face of the note (Amount financed less certain excludable fees, even if normally a finance charge).

The APR on the HOEPA test is calculated differently than the APR on the TILA disclosures (Primarily affects ARMs and Step‐rate transactions).

HOEPA: APR and Fee CalculationsCAUTION

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HOEPA: Requirements

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• Written disclosure provided at least 3 business days prior to consummation

• Certification of counseling (in written form)• Restrictions and additional consumer protections• Ability to repay

Requirements

H6

HOEPA: Homeownership Counseling

Pre‐loan counseling is required for:• All high‐cost (Section 32) mortgages• All negative‐amortization loansmade to first‐time borrowers

A written list of homeownership counseling organizations is required to be provided within 3 business days of receiving the application:

• All federally‐related mortgages• Regardless of whether or not the application is for a high‐cost mortgage

• The Bureau is working with HUD to develop a website to generate the list

Written List of Counselors

Pre‐loan Counseling

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HOEPA: Examiner Expectations

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• Develop and implement policies and procedures, as well as internal controls and training to:– Ensure compliance with the revised HOEPA regulations contained in

Regulation Zo Identification of covered transactions and proper handling

– Ensure that applicants for federally‐related mortgages (whether or not a high‐cost mortgage) receive a written list of homeownership counseling organizations within three business days of receiving the application.o If the bank originates negative amortization loans, the lender must obtain

sufficient documentation showing that a first‐time borrower has received homeownership counseling.

Agenda

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ATR/Qualified MortgagesEffective Date: Applications received on or after January 10, 2014

2013 HOEPA(HOEPA)Effective Date: Applications received on or after January 10, 2014


TILA/ECOA: Appraisal Requirements

There are two final rules, one rule amending the TILA and one rule amending the ECOA, that implement new requirements regarding the use and disclosure of

appraisals for real estate transactions secured by a dwelling.

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Appraisals for Higher Priced Mortgage Loans under TILA Valuations under the ECOA

ECOA: Valuation Rules

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• Most closed‐end or open‐end credit secured by a first lien on a 1‐4 family dwelling, whether or not the structure is attached to real property, and regardless of loan purpose (including business purpose) or credit decision outcome.

• Subordinate liensExemptions

Coverage

• Must notify applicant within 3 days of application• Must provide a free copy of written valuations promptly

in connection with the transaction, whether or not the applicant requested copies regardless if credit is granted

• Must still deliver copies at or prior to consummation, or account opening, even if right to advanced copies of valuation(s) is waived

Requirements

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TILA: HPML Appraisal Rules

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• Applies only to covered HPMLs, first lien or subordinate‐lien closed‐end loans secured by a consumer’s principal dwelling

• QMs• Reverse Mortgages• Bridge Loans (12 months or less for primary dwelling)• Construction loans to finance the initial construction of a new

dwelling (not limited to loans of 12 months or less)• Loans secured by new manufactured homes• Loans secured by boats, trailers, and mobile homes

Exemptions

Coverage

• Requires appraisals meeting specified standards• Provides applicants with a notification regarding the appraisal use• Requires copies of the appraisal(s) be given to the applicants• Requires an additional appraisal for flipped properties (additional

exemptions apply)

Requirements

TILA: HPML Appraisal Rule Safe Harbor

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4 Steps for obtaining Safe Harbor for non‐exempt transactions:1. Order an appraisal from a certified or licensed appraiser2. Confirm that the appraisal contains certain information, including an interior

inspection of the property3. Verify that the appraiser is certified or licensed using the National Registry4. You do not have knowledge contrary to the facts or certifications contained in

the written appraisal

TILA: “Flipped” Property Rules

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• “Flipped” Properties – Only applicable when a non‐exempt HPML is being used to purchase a home that is being sold within 90 to 180 days of its acquisition by the seller

The exemptions most likely to apply include:• Properties acquired through inheritance or divorce• Properties located in presidentially‐declared disaster areas during which Title X of FIRREA requirements are waived

• Properties located in a rural county as published by the Bureau

Refer to pages 23‐24 of the “Small Entity Guide” for a complete list of exemptions

Exemptions

Coverage

• A second appraisal must be completed• Additional appraisal fee cannot be charged to the consumer• The price of the home being flipped must be a certain amount higher than the seller’s acquisition cost

Requirements

ECOA/TILA: Comparison

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• ECOA disclosure also satisfies disclosure requirements of the HPML Appraisal Rules

• Proposed final rules regarding the RESPA/TILA disclosures may allow the appraisal disclosure to be integrated (yet to be finalized)

Disclosure at Application

• If both rules apply, follow the rule that provides the earlier deadline for providing appraisal copies (Regulation Z)

Timing Requirements

• Copies must be free, but the cost of the appraisal may be charged• However, the cost for the additional appraisal for “flipped” properties must be paid by creditor

• When there are multiple applicants, follow the ECOA Valuation Rule requirements for delivery of the disclosure and valuation copies to the primary applicant, when one is apparent

Copies of Appraisals

• Not an option under HPML Appraisal Rules• Allowed under the ECOA Valuation Rules

Waivers of Copies

ECOA/TILA: Appraisal Sample Notice

Appendix C, Form C‐9

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“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. You can pay for an additional appraisal for your own use at your own cost.”

ECOA/TILA: Examiner Expectations

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• For any loan secured by a 1st lien on a dwelling (including those originated by commercial lenders for business purposes), revise and/or implement policies and procedures as well as internal controls and training in place to ensure that applicants:– Receive the appraisal disclosure within three business days of receiving the application (bank may

also elect to provide the notice for any dwelling secured loan, regardless of lien position).– Receive a copy of the appraisal or valuation used according to the timing requirements under the

Regulation (regardless of the bank’s credit decision).• Identify all valuation methods utilized by lenders, and revise documentation

procedures and checklists, as necessary, to ensure compliance with the ECOA rule.• For non‐exempt HPML transactions, establish policies, procedures, and internal

controls to address the requirements in the new rules.– For creditors that choose to originate HPMLs that are exempt from the HPML Appraisals Rules,

policies and procedures as well as internal controls should be established to ensure exemption eligibility.

Resources

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• Federal Reserve Consumer Affairs Contact• Consumer Financial Protection Bureau (Small Entity Compliance

Guides)

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Questions?

Documents

Break Out - Federal Reserve Bank of Kansas City · Equal Credit Opportunity Act (ECOA) Valuations ... *if ARM, use greater of fully indexed or introductory 2. ... Refer to pages 23‐24