CoesterVMS and James Milano Present The New Ability to Repay and Qualified Mortgage Rule Webinar

Overview and Insight:
The CFPB’s New Ability to
Repay and Qualified Mortgage
Rule

By Jim Milano

1

An Overview and Understanding of the CFPB’s New
Ability to Repay and Qualified Mortgage Rule
Today's’ Agenda
• A Brief History of Suitability in Mortgage Lending

• An Overview of the Rule

• A Deeper Dive into Qualified Mortgages

• An Overview of the Concurrent Proposal

• An Overview of the Inter-play of Other CFPB and Agencies’ rules
with ATR-QM

• Some Comments on What the ATR-QM Rule will mean for the
Mortgage Industry Going Forward

• Questions We Are Receiving and Questions from the Audience

2

History of Suitability in Mortgage Lending
An Important Chapter is Finalized
• The first reported case of “suitability” in consumer financial services was a
1942 lawsuit brought against a “boiler-room” securities brokerage for selling
“penny” stocks to a little old lady

• The mortgage industry, particularly mortgage lenders and banks, have
resisted a suitability standard in mortgage lending

• The concept or “seed” of “suitability” in mortgage lending was planted in
1994 when Congress amended TILA through the enactment of the first
version of the Home Ownership and Equity Protection Act (and the Federal
Reserve Board implemented finalized regulations under HOEPA, as part of
Regulation Z, in 1995)

• In 1999, New York enacted state high cost home loan regulations, and in
that same year North Carolina enacted an anti-predatory lending law; Both
states’ initiatives were based on federal HOEPA, but generally had a lower
“points and fees” thresholds, and other requirements that go beyond federal
law
3

• In 2001, the Federal Reserve Board added, eff. Oct. 2002, an Ability to
Repay Requirement to HOEPA Regulations under Regulation Z

• Leading up to and after the “Financial Crisis” in 2007 and 2008, many
states added subprime mortgage laws or regulations that had lower
thresholds or triggers, and if tripped, required an ability to repay
assessment

• During this time, states also began to enact or institute Tangible Net
Benefit Requirements

• In 2008, the Federal Reserve Board proposed the Higher Priced
Mortgage Loan Rules (these rules became effective in Oct. 2009)

• In 2010, the Dodd-Frank Act was enacted, enacting the Mortgage
Reform and Anti-Predatory Lending Act (Title XIV of the DFA)
4


• Title XIV of the Dodd-Frank Act (DFA) enacted the Mortgage Reform
and Anti-Predatory Lending Act

• Sections 1411, 1412 and 1413 of the Dodd-Frank Act address ability
to repay issues

 “…no creditor may make a residential mortgage loan unless the
creditor makes a reasonable and good faith determination based
on verified and documented information that, at the time the loan is
consummated, the consumer has a reasonable ability to repay the
loan, according to its terms, and all applicable taxes, insurance
(including mortgage guarantee insurance), and assessments.”
(Section 1411(a)(2), adding section 129C(a)(1) to TILA).

• Section 1411 of the DFA also added to the TILA requirements for the
basis of determination of the borrower’s ability to repay a mortgage
loan, and income verification

• Section 1412 sets out the parameters of a “Qualified Mortgage”
5

• Section 1413 of the DFA amends the liability provisions under TILA to
provide consumers with a defense to foreclosure by way of set-off or
recoupment for the life of the loan if there is a violation of the Ability to
Repay provisions

• Such set-off or recoupment can include TILA damages which include
statutory damages, actual damages, three years of finance charges and
attorney fees and court costs

• These extended liability provisions apply to assignees of the mortgage

• Other amendments to TILA made by the DFA extended the Statute of
Limitations from one year to three (3) years

• Section 1414 of the DFA adds restrictions to PPPs on residential
mortgage loans

6

• In May 2011, the Federal Reserve Board proposed the Ability to
Repay – Qualified Mortgage Rule (ATR-QM)

• On July 21, 2011, authority over TILA and 17 other enumerated
consumer laws (i.e., federal consumer financial services laws)
transferred to the Consumer Financial Protection Bureau (the CFPB, or
Bureau) and the Bureau “inherited” pending proposed rules of other
agencies, including the Fed’s ATR-QM Proposed Rule

• On June 9, 2011, the Bureau re-opened the comment period of the
ATR-QM Proposed Rule on several distinct issues, including the use of
DTI ratios and residual income in underwriting a Qualified Mortgage,
and Litigation Risk from the use of a Rebuttable Presumption vs. a
Safe Harbor

• On January 10, 2013, the Bureau published the final ATR-QM Rule
on its website indicating the Rule will become effective one year later
on January 10, 2014

7

The CFPB ATR-QM Rule
Highlights
• The CFPB’s ATR-QM Rule Implements the statutory changes made by
the DFA to TILA, adopts many of the original proposals of the rule as
set forth by the Federal Reverse Board, but makes some very important
changes

 The General ATR Requirements

 5 or 6 new Classes of Qualified Mortgages

 Qualified Mortgage (Safe Harbor)
 Higher Priced Qualified Mortgage (Rebuttable Presumption
of Compliance)
 Agency Qualified Mortgage
 Further Proposed exemptions for Nonprofit creditors,
certain Homeownership Stabilization Programs, and Qualified
Mortgage made and held in portfolio by Small Creditors

 Refinances of Non-Standard Mortgages into Standard Mortgages

 Balloon Payment Qualified Mortgages made by Community
Lenders serving Rural Areas
8

“Covered Transaction”
• The ATR Rule applies to Consumer Credit Transactions Secured
by a Dwelling
 Does not apply to business purpose loans
 Applies to a loan secured by a dwelling, not merely
consumer’s principal dwelling

• The ATR Rule Does Not Apply to:
 HELOCs
 Reverse mortgages
 Timeshares
 Temporary bridge loans with a term of 12 months or less
 Construction phase of 12 months or less of construction-to-
perm loans

9

The General Rule - ATR

• A creditor shall not make a loan that is a covered transaction
unless the creditor makes a reasonable and good faith
determination at or before consummation that the consumer will
have a reasonable ability to repay the loan according to its terms.

• Unless a Covered Transaction is a Qualified Mortgage, Refinance
of a Non-Standard Mortgage into a Standard Mortgage, or a Balloon
Payment Qualified Mortgage, in determining the consumer’s
repayment ability, a creditor must consider eight (8) criteria

10

• The eight (8) criteria are:
1. The consumer’s current or reasonably expected income or
assets, other than the value of the dwelling, including any real
property attached to the dwelling, that secures the loan;
2. If the creditor relies on income from the consumer’s
employment in determining repayment ability, the consumer’s
current employment status;
3. The consumer’s monthly payment on the covered transaction;
4. The consumer’s monthly payment on any simultaneous loan
that the creditor knows or has reason to know will be made,
calculated;
5. The consumer’s monthly payment for mortgage-related
obligations;
6. The consumer’s current debt obligations, alimony, and child
support;
7. The consumer’s monthly debt-to-income ratio or residual
income; and
8. The consumer’s credit history
11


• There are specific rules with regard to verifying the consumer’s:
 Income or assets (criteria 1),
 Employment (criteria 2),
 Mortgage payment on the covered transaction (criteria 3), and
 Monthly debt-to-income ratio or residual income (criteria 7)

• A creditor must verify the information that the creditor relies upon
in making the consumer’s repayment ability, except:
 In verifying the consumer’s income or assets (criteria 1), the
creditor must follow specific rules (addressed on the next slide)
 A creditor may make an oral verification of employment (criteria
2) if it prepares a record of the information obtained orally, and
 In verifying debt information on the consumer (criteria 6), if a
creditor relies on a consumer’s credit report to verify a consumer’s
current debt obligations and a consumer’s application states a
current debt obligation not shown in the consumer’s credit report,
the creditor need not independently verify such an obligation
12


• Verifying the consumer’s income or assets
(Criteria 1):

 A creditor must verify the amounts of income or
assets that the creditor relies on under “criteria 1” to
determine a consumer’s ability to repay a covered
transaction using third-party records that provide
reasonably reliable evidence of the consumer’s
income or assets

 A creditor may verify the consumer’s income
using a tax-return transcript issued by the Internal
Revenue Service (IRS)
13

• Verifying the consumer’s income or assets (Criteria 1):
 Examples of other records the creditor may use to verify the
consumer’s income or assets include:
(i) Copies of tax returns the consumer filed with the IRS or a State
taxing authority;
(ii) IRS Form W-2s or similar IRS forms used for reporting wages
or tax withholding;
(iii) Payroll statements, including military Leave and Earnings
Statements;
(iv) Financial institution records;
(v) Records from the consumer’s employer or a third party that
obtained information from the employer;
(vi) Records from a Federal, State, or local government agency
stating the consumer’s income from benefits or entitlements;
(vii) Receipts from the consumer’s use of check cashing services;
and
(viii) Receipts from the consumer’s use of a funds transfer service
14


• Calculating the Consumer’s Monthly Payment
(Criteria 3):

 Except for certain loans with a balloon payment,
interest-only loans, and negative amortization loans
(which we will not cover today), a creditor must calculate
the Consumer’s Monthly Payment using:

(A)The fully indexed rate or any introductory interest rate,
whichever is greater; and

(B) Monthly, fully amortizing payments that are
substantially equal

15


• Calculating Monthly DTI or Residual Income
Payment (Criteria 7):

 If a creditor considers the consumer’s monthly debt-to-
income ratio under Criteria 7, the creditor must consider
the ratio of the consumer’s total monthly debt obligations
to the consumer’s total monthly income, or

 If a creditor considers the consumer’s monthly residual
income under Criteria 7, the creditor must consider the
consumer’s remaining income after subtracting the
consumer’s total monthly debt obligations from the
consumer’s total monthly income

16

Re-Cap
• General Rule: A creditor shall not make a loan that is a covered
transaction unless the creditor makes a reasonable and good faith
determination at or before consummation that the consumer will
have a reasonable ability to repay the loan according to its terms

• 4 Ways to meet the above ATR requirements:

The General ATR Requirement

 5 or 6 new Classes of Qualified Mortgages

 Refinances of Non-Standard Mortgages into Standard
Mortgages

 Balloon Payment Qualified Mortgages made by Community
Lenders serving Rural Areas

17

Qualified Mortgages
• 5 or 6 new Classes of Qualified Mortgages

 Qualified Mortgage (Safe Harbor)

 Higher Priced Qualified Mortgage (Rebuttable Presumption
of Compliance)

 Agency Qualified Mortgages

 Further Proposed Exemptions (in the “Concurrent Proposal”)
for:

 Nonprofit Creditors

 Certain Homeownership Stabilization Programs, and

 Qualified Mortgage made and held in portfolio by Small
Creditors
18

Qualified Mortgage (Safe Harbor)
• A Creditor that Makes a “Qualified Mortgage” complies with the
ATR requirements
• Generally, a “Qualified Mortgage” is one that meets the following
six (6) criteria:
1. (Fully amortizing) - That provides for regular periodic
payments that are substantially equal, except for the effect that
any interest rate change after consummation has on the payment in
the case of an adjustable-rate or step-rate mortgage, that do not:
(A) Result in an increase of the principal balance;
(B) Allow the consumer to defer repayment of principal, or
(C) Result in a balloon payment
2. The loan term does not exceed 30 years
3. The total points and fees payable in connection with the
loan do not exceed 3% of the total loan amount (for loans of
$100,000 or more, and lesser amounts for lower loan balances)

19

Qualified Mortgage (Safe Harbor, cont’d)
4. For which the creditor underwrites the loan, taking into
account the monthly payment for mortgage-related
obligations, using:

(A) The maximum interest rate that may apply during the
first five years after the date on which the first regular
periodic payment will be due; and

(B) Periodic payments of principal and interest that will
repay either:
(1) The outstanding principal balance over the
remaining term of the loan as of the date the interest
rate adjusts to the maximum interest rate, assuming
the consumer will have made all required payments
as due prior to that date; or

(2) The loan amount over the loan term
20


5. For which the creditor considers and verifies at or before
consummation the following:

(A) The consumer’s current or reasonably expected
Income or Assets other than the value of the dwelling
(including any real property attached to the dwelling)
that secures the loan, in accordance with Appendix Q,
and Criteria 1 and 4 under the General Ability to
Repay requirement; and

(B) The consumer’s current Debt Obligations, alimony,
and child support in accordance with appendix Q and
Criteria 4 and third party document requirements of
the General Ability to Repay requirements

21


6. For which the Ratio of the consumer’s total monthly debt
to total monthly income at the time of consummation does
not exceed 43 percent

• The ratio of the consumer’s total monthly debt to total
monthly income is determined:
(A) Except as provided in (B) below, in accordance with
the standards in appendix Q;
(B) Using the consumer’s monthly payment on:
(1) The covered transaction, including the monthly
payment for mortgage-related obligations; and
(2) Any simultaneous loan that the creditor knows or
has reason to know will be made

22

Appendix Q
• What is Appendix Q?

• An Attachment to the QM Rule with Very Detailed Standards for
Determining a Borrower’s Monthly Debt and Income, including:

I. Consumer Eligibility
A. Stability of Income
B. Salary, Wage and Other forms of Income
C. Family Owned Businesses
D. Self employed Individuals
E. Tax Return Analysis

II. Non-Employment Related Income
A. Alimony, Child Support
B. Investment, Trust Income, Rental Property, Military and Non-taxable
Income
III. Consumer Liabilities: Recurring
IV. Consumer Liabilities: Non-recurring
23

3% Points and Fees

• Defined based off of Section 32 definition of
“Points and Fees”

• Includes payments to Loan Originators (but the
Concurrent Proposal asks for Comments on this
item)

• Includes non-Finance Charge Closing Costs paid
to the Creditor or Loan Originator, or an Affiliate of
the Creditor or Loan Originator

24

Points and Fees
• A covered transaction is not a qualified mortgage unless the
transaction’s total points and fees, as defined in §1026.32(b)(1), do
not exceed:

(A)For a loan amount greater than or equal to $100,000 (indexed for
inflation): 3 percent of the total loan amount;

(B) For a loan amount greater than or equal to $60,000 (indexed for
inflation) but less than $100,000 (indexed for inflation): $3,000
(indexed for inflation);

(C) For a loan amount greater than or equal to $20,000 (indexed for
inflation) but less than $60,000 (indexed for inflation): 5 percent of
the total loan amount;

(D) For a loan amount greater than or equal to $12,500 (indexed for
inflation) but less
25

Points and Fees
• Points and fees, as defined in §1026.32(b)(1), means the following
fees or charges that are known at or before consummation:

 Finance charges, other than the interest rate,
 All compensation paid directly or indirectly by a consumer or creditor
to a loan originator that can be attributed to that transaction at the time
the interest rate is set
 The maximum PPP that may be charged (excluding recoupment of
bona fide 3rd party closing costs if the borrower prepays before 36
months, or post-prepayment per diem interest on FHA-insured loans
made before Jan. 21, 2015)
 The total PPP if the PPP is paid to the current holder of the loan, the
servicer acting on behalf of the holder, or an affiliate of either

• Bona Fide Third Party Charges that are Not Retained by the
Creditor, LO or an Affiliate of either are Excluded from Points and
Fees

26

Points and Fees
• Points and fees also do not include :

 FHA MIP (or any premium or charge imposed in any federal or
state agency program for guaranty or insurance that protects the
creditor against the consumer's default or other credit loss)
 On-going BPMI, or up-front BPMI if the premium is not in excess
of the amount payable under policies in effect at the time of
origination the FHA insurance program for 203(b) loans, provided
that the premium or charge is required to be refundable on a pro rata basis
and the refund is automatically issued upon notification of the satisfaction
of the underlying mortgage loan;
 Bona fide discount points (one or two points, if the APR does not
exceed the APOR by one or two points, respectively)
• Non-finance charge closing costs are excluded from points and fees as
long as:
 they are reasonable;
 the creditor receives no direct or indirect compensation in
connection with the charge; and
 the charge is not paid to an affiliate of the creditor
27

Agency Qualified Mortgage
• If a covered transaction meets the full amortization, 30 year term
and 3% points and fees tests, then it is a qualified mortgage if it is
eligible to be:

1. Purchased or guaranteed by one the GSEs (Fannie Mae or Freddie
Mac) while they are in conservatorship, or receivership under FHFA,
or any limited-life regulatory entity succeeding the charter of either
GSE
2. Insured by HUD
3. Guaranteed by the VA
4. Guaranteed by the USDA, or
5. Insured by the RHS

A. If HUD, the VA, the USDA or the RHS publish rules for qualified
mortgages under their respective programs, as allowed by the Dodd-
Frank Act and section 129C(b)(3)(ii) of the TILA, then the above rule
for Agency Qualified Mortgages for such Agencies shall expire

• The above rule for “Agency Qualified Mortgages” will expire on Jan. 10,
2021, unless the conditions in A. above occur before that date 28

Qualified Mortgage (Higher Priced Covered
Transactions)
• If a qualified mortgage is a higher priced covered transaction,
then the creditor, and an assignee of such loan only has a
rebuttable presumption of compliance with the ATR Rule

• To rebut the presumption of compliance of the ATR, it must be proven
that, despite meeting the requirements of a QM, the creditor did not
make a reasonable and good faith determination of the consumer’s
repayment ability at the time of consummation, by showing that the
consumer’s income, debt obligations, alimony, child support, and the
consumer’s monthly payment (including mortgage-related obligations)
on the covered transaction and on any simultaneous loans of which
the creditor was aware at consummation would leave the consumer
with insufficient residual income or assets other than the value of the
dwelling (including any real property attached to the dwelling) that
secures the loan with which to meet living expenses, including any
recurring and material non-debt obligations of which the creditor was
aware at the time of consummation

29

Qualified Mortgage (Higher Priced Covered
Transactions)

• A Higher Priced Covered Transactions is a first
lien transaction wherein the APR exceeds by
more than 1.5 percentage the APOR

 A “Higher-priced Covered Transaction” means a covered
transaction with an Annual Percentage Rate that exceeds
the Average Prime Offer Rate (APOR) for a comparable
transaction as of the date the interest rate is set by 1.5 or
more percentage points for a first-lien covered transaction,
or by 3.5 or more percentage points for a subordinate-lien
covered transaction

 Note, unlike the general HPML rule, a Higher-priced
Covered Transaction does not have an Exclusion for
“Jumbo Loans”
30

The “Concurrent Proposal”

• Concurrently with the Issuance of the final ATR-QM Rule, the
Bureau issued a Concurrent Proposal and Proposed certain
exemptions from the Ability to Repay Requirements for:

 Nonprofit creditors,
 Certain Homeownership Stabilization Programs, and
 Qualified Mortgage made and held in portfolio by Small
Creditors

• The Bureau also requested comments on revisions to the
inclusion in the 3% “Points and Fees” test for QMs of certain Loan
Originators fees

• Comments on these items are due Feb. 25, 2013

31

Inter-Play of Other CFPB and Agencies’ Rules
with ATR-QM
• In Early January 2013, the Bureau also issued final rules on:
1. HOEPA and Counseling Requirements
2. Escrow Rules under TILA
3. The Mortgage Servicing Rule
4. Escrow Rules under ECOA and Regulation B (regarding delivery
of Appraisals to Consumers)
5. Appraisals for Higher Priced Mortgages, and
6. A New LO Comp Rule

• With the exception of the Escrow Rules under TILA, which is
effective on June 1, 2013, these other rules generally become
effective on January 10, 2014.
• The Rules under ECOA and Regulation B (regarding delivery of
Appraisals to Consumers) and the Appraisals for Higher Priced
Mortgages rules become effective on January 18, 2014.
• Risk Retention Rule and QRMs - Yet to be Finalized
32

Re-Cap
• Rule - Lenders Cannot Make Mortgage Loans without verifying
the Borrower’s Ability to Repay
 Generally, there are 4 ways to do this, and 2 are very limited exceptions
(Qualified Balloon Loans made by Certain Lenders in Rural Areas, and
Refinances of Non-standard Loans)

• One way to verify the Borrower’s Ability to Repay is the General
Ability to Repay Process
Recall – 8 Criteria to be met to Determine a Consumer’s Ability to Repay
a Mortgage Loan)
 No Safe Harbor or Rebuttable Presumption

• Another way to meet the to the Borrower’s Ability to Repay is to
make a Qualified Mortgage
 Qualified Mortgage (3 Loan Type criteria [Full am., 30 yr., 3% P&F], and
3 Underwriting Criteria, incl. DTI ratio)
 Higher Priced Qualified Mortgage (APR 1.5 % pts. over APOR) –
Rebuttable Presumption
“Agency Qualified Mortgage” (3 Loan Type criteria, and meets Agency
Underwriting Criteria, but no CFPB DTI ratio) 33

The Meaning of the ATR-QM Rule Going Forward
• Seems Unlikely Many Lenders will Make Loans based solely upon
ATR

• Lenders will try to make QMs

• The Rule Contains a species of “Assignee Liability”

• Standard QM’s have a 43% DTI ratio; Agency QMs do Not –
 This will perpetuate the federal Govt’s Role in the Mortgage
Industry

• Systems and Vendor Augmentation and Reliance will be Paramount
 3% Points and Fees Test
 Discrimination against Affiliates
 Hyper-technical rules and underwriting requirements with Liability
for failure to Comply
 Failure to meet Agency requirements may Disqualify a Loan from
being a QM

34

Questions We Are Receiving and Question from the
Audience

• Is there “assignee liability” for violating this rule?

• Are fees paid to affiliates included in the 3% points and fees test?

• How will this rule affect my JV’s?

• Will Loan Originator Compensation be “double-counted”?

• Is this Really Happening and when will it be effective?

• Is there any chance that Congress could overrule this rule?

• Why are they doing this? (No one make exotic loans any more)

• Other Questions ???

35

An Overview and Understanding of the CFPB’s New
Ability to Repay and Qualified Mortgage Rule

James (“Jim”) M. Milano
WEINER BRODSKY KIDER PC
1300 19th Street, NW., 5th Floor
Washington, DC 20036
Phone: 202-628-2000
milano@thewbkfirm.com

Washington, DC Dallas, TX Newport Beach, CA
www.wbsk.com

36

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