Ability to Repay and Qualified Mortgage

RulesMerrimack Mortgage Co, Inc.

In January 2013, the CFPB amended Reg Z by issuing new regulations governing mortgage lending requirements known as the “Ability-to-Repay and Qualified Mortgage Rule”

ATR/QM Rule

● Reg Z currently prohibits lenders from making a higher-priced or higher cost mortgage loan without regard for the consumer’s ability to repay the loan

● The new rule establishes minimum requirements for all lenders to make an ability-to-repay determination prior to extending a residential mortgage loan

● MMC will only accept Qualified Mortgages from all clients.

ATR/QM Rule

● The new ability-to-repay rules applies to all closed end mortgage loans

● It does not apply to open end credit plans, time shares, reverse mortgages or temporary mortgages (with terms of 12 mos or less)

● The new rule goes into effect on January 10, 2014

ATR/QM Rule

At a minimum, lenders must consider 8 underwriting factors to determine a borrower’s ability-to-repay

ATR Determinations

● Current or reasonably expected income and assets● Current employment status● The monthly payment on the current transaction● The monthly payment on any simultaneous loans● The monthly payment for mortgage-related obligations● Current debt obligations including child support and

alimony● The monthly debt-to-income ratio or residual income● Credit history

8 Minimum Underwriting Factors

Qualified Mortgage: A residential mortgage that provides for regular, substantially equal payments and does not carry any of the following:

● Negative amortization● Interest only● Balloon payments (some exceptions)● Loans with terms exceeding 30 years● ARM loans must be qualified using two tests methods. Clarification is forthcoming.● “No doc” loans (where income and assets are not verified)● Points and fees are in excess of 3% for loans amounts over $100,000● While HPML loans do qualify for QM, they have stricter qualifications. They fall under a

rebuttable presumption of compliance● DTI limited to 43% (temporary exceptions for FNMA, FHLMC, FHA, VA, RD and HFA loans)● All income, assets, debt, child support and alimony but be verified in accordance with

Appendix Q

Stipulations for Qualified Mortgages

● MMC will complete an Income and Debt Worksheet and a Fee Worksheet for our file

● You will submit a Fee Detail worksheet only as you do today

Income and Debt Worksheet & Fee Worksheet

Under the general definition of QM, the max allowable DTI is 43%. A temporary waiver of the 43% DTI limit is allowed on FNMA, FHLMC, VA and RD loans receiving AUS approval. The waiver has an expiration date of January 10, 2021 at the latest

*MMC will not manually underwrite FNMA and FHLMC loans

Debt to Income Limit

● By originating a Qualified Mortgage, the creditor is given a presumption of compliance, and for High Priced Mortgage Loans (HPML) a rebuttable presumption of compliance as long as the HPML loan meets QM standards

Qualified Mortgages - Safe Harbor

● Ability to repay requirements have been met for QM● QM that is not higher priced mortgage loan (HPML)● The consumer could attempt to show that the loan is

not a QM (for example, under the General QM definition that the DTI ratio was miscalculated and exceeds 43 percent), and therefore is not presumed to comply with the ATR requirements. However, if the loan is indeed a QM and is not higher-priced, the consumer has no recourse under this regulation.

Presumption of Compliance

● HPML transactions that meet the QM definition● APR exceeds APOR as of date rate is set by 1.5% for 1st lien, 3.5%

for subordinate lien● Under a rebuttable presumption, if a court finds that a mortgage

you originated was a higher-priced QM, a consumer can argue that you violated the ATR rule. However, to prevail on that argument, the consumer must show that based on the information available to you at the time the mortgage was made, the consumer did not have enough residual income left to meet living expenses after paying their mortgage and other debts

Rebuttable presumption of compliance

These loans have the benefit of a Rebuttable Presumption of compliance. Please review MMC’s HPML policy and state specific requirementsRestrictions from GSEs● HARP Loans (LP Open Access and DU Refi Plus programs):

Max 45% DTI

QM HPML Loans

● Loan amounts $100,000 >: 3% of total loan amount● Loan amounts $60,000 - $99,999: $3,000● Loan amounts $20,000 - $59,999: 5% of total loan

amount*● Loan amounts $12,500 - $19,999: $1,000*● Loan amounts $12,499 <: 8% of total loan amount*

*MMC’s minimum loan amount is $30,000

Qualified Mortgages - Cap on Points and Fees

Fees apply to fees paid by the borrower● Lender Paid compensation● Borrower paid compensation● All compensation paid directly or indirectly by a

consumer that can be attributed to that transaction at the time the interest rate is set (comp paid by a broker to an LO employee or comp paid by a lender to an LO employee does not count

● MMC is requiring that all discount points be included

Fees to be included in the test

● Interest or price time differential● Government mortgage insurance fees● Monthly MI● Lender paid MI● Bona fide third party charges not

retained by the creditor, loan originator or affiliate of either

Fees not to be included in the test

The following categories of charges are excluded from points and fees only if:1. The charge is reasonable;2. The creditor receives no direct or indirect compensation in connection with the charge; and3. The charge is not paid to an affiliate of the creditor. If one or more of those three conditions is not satisfied, you must include these charges in points and fees even if they would be excluded from the finance charge:

● Fees for title examination, abstract of title, title insurance, property survey, and similar purposes● Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or

settlement documents● Notary and credit-report fees● Property appraisal fees or inspection fees to assess the value or condition of the property if the

service is performed prior to consummation, including fees related to pest-infestation or flood-hazard determinations

● Amounts paid into escrow or trustee accounts that are not otherwise included in the finance charge (except amounts held for future payment of taxes)

Real Estate Fees

● Effective case numbers assigned on and after 1/10/14● Loans must have periodic payments● Loans must not have terms >30 years● Loans must not have points and fees > 3% of the unpaid

principal balance. Loans with unpaid principals balances < $100,000 are given more flexibility

● Loans must be guaranteed and insured by HUD

HUD’s QM Definition

● Safe Harbor QM - A Mortgage where the APR is < the APOR plus 115 bps plus the UFMIP

● Rebuttable Presumption QM - Mortgage where the APR exceeds the APOR plus 115 bps plus to UFMIP

● MMC will required all Rebuttable Presumption QM loans to meet Ability-to-Repay standards. This means that FHA Streamlines will need to have income, assets and credit documentation. Where applicable an appraisal will not be applicable to determine the abilities Ability-to-Repay

HUD’s QM Categories

The VA will be issuing a proposal what defines a “qualified mortgage”. For now, VA loans will fall under the Temporary QM Exception

VA - QM Definition

● 3 years after consummation of the mortgage (MMC recommend retaining records for the life of the loan plus 3 years)

● Maintain paper of electronic copies● MMC recommends you evaluate your record retention

with your legal counsel as litigation for a defense to foreclose can now be brought through the life of the loan

Record Retention Requirements

● Compliance date January 18, 2014● An additional appraisal is required on an

HPML loan where the property has been held less that 180 days. This is required on owner occupied properties only.

● The fee for this appraisal must be paid by the creditor

TILA HPML Appraisal Requirements

● Compliance Date January 18, 2014● Creditors must provide a copy of all

appraisals and valuations to the borrowers at least 3 days prior to closing

● For Correspondent loans, MMC will require a statement of compliance

ECOA Requirements

● Purchase money and HELOC mortgages● Construction, RD and HFA loans are exempt● Rate Threshold and Calculation:

○ First Lien: APR exceeds APOR + 6.5%○ Second Lien and liens < $50K: APR exceeds APOR + 8.5%○ OR PPP more than 36 months after closing or of more than 2% of the amount pre-

paid○ OR Points and Fees exceed 5% of the total loan amount for loans 20K or greater

● Points and Fees Threshold and Definition: 5% of total loan amount (for loans greater than $20K)

● Lesser of $1000 or 8% if loan amount less than $20K● A borrower must be provided with a list of Homeownership Counseling Agencies within 3

days of application● MMC does not make HOEPA High Cost

Federal High Cost Changes (HOEPA Reg Z)

● Compliance Date: January 1, 2014● Dual compensation, compensation based on the terms

of the transaction and record keeping requirements are all addressed

● The rules expands the definition of “originating” by detailed who qualifies as a Loan Originator

LO Compensation Requirements

● Loan Originators are prohibited from compensation based on the terms of a transaction or a proxy for a transaction term

● If compensation is paid by the consumer to the Loan Originator, no other party can compensate the Loan Originator

● Compensation records must be maintained for a minimum of three years after payment or receipt of compensation

● Loan Originators are required to be licensed or registered under state or local law● Depository Institutions that are not required to be licensed must ensure Loan

Originators are registered within NMLS and Qualification and Background checks must be performed

● Depository Institutions must provide training to any non-licensed originators● Loan Originator NMLS ID must be identified on the Mortgage Application, Note and

Mortgage

LO Compensation Requirements

● Severe penalties for violating the ATR standard:○ Enhanced damages, an extended 3 year statute of limitations, a

recoupment or set-off provision as a defense to foreclosure and new enforcement authorities by State Attorney Generals

● Damages awarded equal to all finance charges and fees paid unless a creditor can provide failure to comply not materials, plus damages, plus court costs, plus attorney fees.

● Statute of limitation is 3 years

Penalties and risks for non-compliance

● The CFPB issued bulletin 2013-13 which provided guidance regarding the Homeownership Counseling Disclosure.

● The 2013 HOEPA rule requires lenders to provide applicants with a written list of HUD approved Homeownership Counseling Agencies and a Homeowners Counseling Disclosure

● The underwriter will condition for proof of Homeownership Counseling when required

Homeownership Counseling Disclosure