Changes in Reg. Z
Abound! Are you ready for 2014?
For most of our clients there is a great deal of energy
(worry?) being expended while getting prepared for the new mortgage rules that
will come into effect at the beginning of 2014.
Chief among these are the rules that apply to higher priced mortgages
also known as “qualified mortgages” or “QM”.
Ability to Repay
and Qualified Mortgages
Since 2009, Regulation Z has required that creditors assess
the ability of a borrower to repay loans that are designated higher price loans[1] In
2010 the requirement to consider the ability to pay was greatly expanded and
now includes almost all closed- in consumer transactions that are secured by a
dwelling. .
The 2010 regulations also established “qualified loans” and
along with, a presumption of compliance for creditors that make qualified
loans. As with many regulations, there
is some good news and some bad news. The
good news is that if your bank makes qualified mortgages that are not high
priced, there is an irrefutable presumption that the ATR requirements have been
met and significantly reduced liability follows.
When does the Rule
“Kick In”?
The complete set of rules will take effect for any
application that is received on or after January 10, 2014. The CFPB has noted that examiners will start
testing for compliance “after a reasonable time” which generally means about
six months after implementation.
The rules apply to all consumer transactions that are closed
end and are secured by real estate. This
means that these rules are not limited to first liens or primary
residences. There are a few
exceptions to the QM/ATR rules. These
are;
1. HELOCS
2. Time-Shares
3. Reverse
Mortgages
4. Construction
or temporary loans
5. Consumer
loan secured by vacant land
For all loan applications accepted after this date, the Bank must keep
a record of its documentation of ability to pay for these from the date of
receipt.
Ability to Repay
Although the rules do not specifically state the
underwriting guidelines for a bank, there are 8 factors that must be included
in credit analysis
i.
Current or reasonable expected income or assets
(not including the property) that the borrower will use to repay
ii.
Current employment status
iii.
Monthly mortgage payment for this loan (using
the fully indexed rate or full amortizing payments-whichever is higher )
iv.
Monthly payments on any simultaneous loans
securing the property
v.
Monthly payments for property taxes and
insurance that is required by the bank; homeowners fees
vi.
Debts, alimony and child support
vii.
Monthly debt ratio as a ration of gross monthly
income
viii.
Credit history
Others factors can be used, but these 8 must be included at a
minimum Verification of this
information can be documented by various means, but they must be documented and
maintained for three years after the receipt of the application! There is a list of acceptable documents in
the regulation guide including records from government agencies, statements
provided by a cooperative or homeowners association, lease agreements, credit
reports, etc.
The guidance in this area is clear that there are many
different factors that can be considered when considering whether or the
determination of ATR was reasonable.
Two strong factors in determining whether or not a loan decision was
reasonable are:
·
You used a standard set of underwriting
standards that have been proven to show a low rate of delinquency and/or
default
·
The particular borrower has paid on time for a
significant part of the loan since the rate adjusted or re-set.
On the other hand there are considerations that indicate
that the ATR decision was NOT in good faith. These include:
·
Ignored underwriting standards (a large number
of exceptions to policy)
·
Inconsistent application of underwriting
standards
·
Early defaults in loans (without a
catastrophe)
There are specific guidelines for the way to calculate the
DTI ratios for the borrower. In summary,
these rules direct the lender to use the worst case scenario to determine
ATR. That is, use the highest payment
that the borrower will have to make under the loan terms as well as the amount
of income that can be reasonably established.
Why Should I care
whether the loan is Qualified or not?
The whole “quid pro quo” in this area is powerful. In the event that a loan is not determined to
be qualified and the borrower defaults, it is the borrower who can sue the
Bank. A successful suit for not properly
qualifying a borrower can result in the Bank paying the customer three years’
worth of interest and fees. This, by the
way, is the reason that records must be retained for three years from the date
of the loan origination.
On the other hand, if the loan is qualified and not a high
cost loan, then there is a presumption that the Bank properly considered the
borrowers ATR. The Bank wins!
What is a
Qualified Mortgage?
There are two characteristics that qualified mortgages
should have.
·
The DTI should not exceed 43 percent
Neither of these characteristics is directly required by the
regulation, but these are guidelines that will be used by regulators. In the event that the loan is considered a
high-priced, loan, the presumption that the Bank has established ATR is a
rebuttable one. The borrower would have
to meet a high standard to show that Bank did not properly consider ATR
Conclusion
The CFPB is considering making exceptions for small
lenders. However, we advise that all banks
should prepare to meet the QM/ATR
standard as much as possible.
[1] Higher-priced
loans are generally defined as having an annual percentage rate (APR) that,
as of the date the interest rate is set, exceeds the Average Prime Offer Rate
(APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage
points or more for subordinate-lien loans
[1] Higher-priced
loans are generally defined as having an annual percentage rate (APR) that,
as of the date the interest rate is set, exceeds the Average Prime Offer Rate
(APOR) by 1.5 percentage points or more for first-lien loans and 3.5 percentage
points or more for subordinate-lien loans
[2]
For loans less than $100,000 there is a schedule of points and fees that will
qualify the loan
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