Presentation on theme: "TODD PROUT – CONNECTICUT DOB MARCH 6, 2014 Rules under Dodd-Frank Act."— Presentation transcript:
TODD PROUT – CONNECTICUT DOB MARCH 6, 2014 Rules under Dodd-Frank Act
Topics Remittance Rule Derivative Lending Limits Loan Originator Compensation Ability to Repay Qualified Mortgages Temporary Government Patch – QM
REMITTANCE RULE Generally requires that the remittance transfer provider disclose appropriate contact information for the remittance transfer provider, its State regulator, and the Bureau. Appropriate contact information includes the name, telephone number, and web site of these entities, so that senders would have multiple options for addressing any issues that may arise with respect to a remittance transfer provider.
REMITTANCE RULE Contact Information Connecticut Department of Banking Government Relations and Consumer Affairs 260 Constitution Plaza Hartford, CT Telephone # or Toll-free # Website link to the Complaint Form: &dobNAV_GID=1659
REMITTANCE RULE Examination Procedures Ensure steps were taken to implement the contact information requirements.
Derivative Lending Limits
DERIVATIVE LENDING LIMITS The Commissioner’s Guidance follows the OCC rule and a CSBS Model Rule was also used to guide this and other state’s in developing their guidance. The lending limits final rule provides a number of alternative methods for calculating credit exposure arising from derivatives transactions.
DERIVATIVE LENDING LIMITS Unless required to use a specific method by the appropriate federal banking agency for safety and soundness reasons, a bank may choose which of these methods it will use. Our final rule clarifies that the Commissioner may, at his discretion, permit a bank to use a specific method to calculate credit exposure, and that this method may apply to all or specific transactions if it is determined that such method is consistent with the safety and soundness of the bank.
DERIVATIVE LENDING LIMITS Definitions Derivative transaction - any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.
DERIVATIVE LENDING LIMITS Definitions Credit derivative - a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure) to another party (the protection provider).
DERIVATIVE LENDING LIMITS Three Methods 1. Model Method 2. Conversion Factor Matrix Method 3. Current Exposure Method Key Concepts Current Credit Exposure – Mark-to-Market Potential Future Exposure – Model or Table
DERIVATIVE LENDING LIMITS Model Method While this methodology is intended to improve the accuracy of the calculation of a bank’s credit exposures, use by community banks is expected to be limited due to the cost of developing and supporting an internal model. Model Method Credit Exposure = Current Credit Exposure (CCE) + Potential Future (Credit) Exposure (PFE)
DERIVATIVE LENDING LIMITS Model Method Regulator-approved internal model to calculate credit exposure arising from derivatives. Approved in writing by the appropriate federal banking agency for purposes of Section 32(d) of the advanced approaches capital rules or any other appropriate model the use of which for lending limits purposes has been approved in writing by the appropriate federal banking agency
DERIVATIVE LENDING LIMITS Model Method Under the Model Method, current credit exposure equals the greater of the mark-to-market value of the derivative and zero. The final rule clarifies that if a bank makes a substantive revision to a model after receiving the appropriate federal banking agency’s approval, the use of the revised model must be approved by the agency before it may be used for purposes of calculating lending limits. The OCC also declined to allow the use of a model on a provisional basis pending its approval.
DERIVATIVE LENDING LIMITS Conversion Factor Matrix Method While probably not an option for banks with significant derivative positions, it is the easiest to apply and manage. Likely method for banks with limited derivative positions.
DERIVATIVE LENDING LIMITS Conversion Factor Matrix Method Credit Exposure = Notional Amount x Conversion Factor (look-up table) Credit exposure will equal and remain fixed at the PFE of a derivative transaction.
DERIVATIVE LENDING LIMITS Conversion Factor Matrix Method Similar to the Current Exposure Method, except that the exposure amount remains fixed. This is achieved by removing the current credit exposure component (which is based on the derivative transaction’s mark-to-market value) of the Current Exposure Method formula, which can fluctuate over time, and by adjusting the values in the conversion factor matrix to reflect the absence of the current credit exposure component.
DERIVATIVE LENDING LIMITS Original maturityInterest Rate Foreign exchange rate and gold Equity Other (includes commodities and precious metals except gold) 1 year or less Over 1 to 3 years Over 3 to 5 years Over 5 to 10 years Over 10 years
DERIVATIVE LENDING LIMITS Current Exposure Method Balance between Model Method and Conversion Factor Matrix Method For a single derivative transaction that is not subject to a qualifying master netting agreement: Credit Exposure = Current credit exposure + PFE
DERIVATIVE LENDING LIMITS Current Exposure Method For multiple derivative transactions subject to a qualifying master netting agreement: Credit Exposure = Net current credit exposure + Adjusted sum of PFE amounts The Current Exposure Method (“CEM”), when combined with the Collateral Haircut Approach, allows a bank to take into account the credit risk- mitigating benefits of collateral.
DERIVATIVE LENDING LIMITS 2014 Examination Procedures Ensure management has considered the derivatives lending limits and established a method for measurement.
Loan Originator Compensation
LOAN ORIGINATOR COMPENSATION Standard Regulation Z prohibits certain practices relating to payments made to compensate mortgage brokers and other loan originators. The goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators.
LOAN ORIGINATOR COMPENSATION Applicability The prohibitions related to mortgage originator compensation and steering apply to closed-end consumer loans secured by a dwelling or real property that includes a dwelling. The rule does not apply to open-end home equity lines of credit (HELOCs) or time-share transactions. It also does not apply to loans secured by real property if the property does not include a dwelling.
LOAN ORIGINATOR COMPENSATION Exceptions There are compensation exceptions for (1) certain deferred compensation plans and (2) certain non-deferred profit-based compensation plans.
LOAN ORIGINATOR COMPENSATION Definition of Loan Originator The term “loan originator” means a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: Takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or
LOAN ORIGINATOR COMPENSATION Definition of Loan Originator Through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term “loan originator” includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition.
LOAN ORIGINATOR COMPENSATION Individual loan originator A natural person who meets the definition of “loan originator.” Loan originator organization Any loan originator that is not an individual loan originator. A loan originator organization would include banks, thrifts, finance companies, credit unions and mortgage brokers.
LOAN ORIGINATOR COMPENSATION Prohibited Practices Compensation based on the terms of a transaction Dual compensation Steering
LOAN ORIGINATOR COMPENSATION 2014 Examination Procedures Discuss process for identifying loan originators and communicating restrictions to other employees that interact with customers. Discuss the structure of loan originator compensation including salary, commissions, bonuses, awards and incentives. Discuss any controls or reviews to ensure compliance with compensation restrictions.
ABILITY-TO-REPAY Applicability Closed-end consumer purpose loans that are secured by a dwelling, including refinances and closed-ended home equity loans. Determined at or before consummation.
ABILITY-TO-REPAY Exceptions HELOCS Mortgages secured by a timeshare Reverse mortgages Temporary or “bridge” loans Construction portion of construction-to-perm loan if less than 12 months Business purpose Modification unless it constitutes a refinance
ABILITY-TO-REPAY Standard - Loan must meet 8 factors: 1. Current or reasonably expected income or assets – no need to consider excess 2. Current employment status – full/part/seasonal/irregular/military/self 3. Monthly payment on transaction – complicated test with additional subtests for I/O, N/A Max in 5 years for prime-rate loans Max payment in payment schedule including balloon payment for higher-priced 4. Monthly payment on simultaneous loans – must consider HELOCs made at the same time
ABILITY-TO-REPAY Standard - Loan must meet 8 factors: 5. Monthly payment on mortgage related obligations – taxes, insurance, fees 6. Current debt obligations, alimony and child support – consumer loans, other mortgages 7. Monthly DTI or residual income – no defined ratio as with Qualified Mortgage 8. Consumer’s credit history – no credit score requirement, do not need to consider secondary Must use reliable third-party records
QUALIFIED MORTGAGE Temporary Government Patch Standard Qualified Mortgage Safe Harbor Qualified Mortgage Small Creditor Qualified Mortgage Small Creditor Rural/Underserved Qualified Mort.
QUALIFIED MORTGAGE Temporary Government Patch At consummation, loan must be eligible for: Purchase or guarantee by the GSEs, while under conservatorship of the FHFA Insurance or guarantee by the FHA, VA, USDA or RHS Meet the first 3 requirements of the standard QM Prohibitions of negative-am, interest-only, balloon features Maximum term of 30 years Point and fee restrictions
QUALIFIED MORTGAGE Temporary Government Patch - Phase out When GSEs issue own guidance or conservatorship ends No later than January 10, 2021
QUALIFIED MORTGAGE Standard QM - Six factors 1. Regular periodic payments – no I/O, balloon, negative am 2. Maximum 30 year-term 3. 3% points and fees cap – bona fide discount points excluded 4. Sound underwriting 5. Verification of income and debt 6. 43% back-end DTI Provides rebuttable presumption
QUALIFIED MORTGAGE Safe Harbor QM Meets all of the requirements of a QM (including temp) plus has an APR that is less than: 3.5% above APOR for small creditor QMs Less than $2 Billion and under 500 loans All subordinated loans 1.5% above APOR first lien QMs except small creditor Provides irrebuttable presumption
QUALIFIED MORTGAGE Small Creditor Portfolio Loans Kept in portfolio at least three years Small Creditor Less than $2 billion in assets adjusted for inflation Originates no more than 500 closed-end first lien ‘covered transactions’ a year, along with their affiliates
QUALIFIED MORTGAGE Small Creditor Qualified Mortgage 1. Regular periodic payments – no I/O, balloon, negative amortization 2. Maximum 30 year-term 3. 3% points and fees cap – bona fide discount points excluded 4. Must be underwritten in the same way as a standard QM 5. Must consider DTI or residual income a. No specific DTI limit
QUALIFIED MORTGAGE Small Creditor Rural/Underserved Qualified Mortgage Exception to allow balloon-payment mortgages to be considered qualified mortgages Must be originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. Rural and underserved test does not have to be met until January10, 2016
QUALIFIED MORTGAGE Small Creditor Rural/Underserved Qualified Mortgage Maintains QM status if creditor transfers the loan to another creditor that meets the requirements to be a small rural lender, or when the loan is transferred due to a capital restoration plan, bankruptcy, or state or federal governmental agency order, or if the mortgage is transferred pursuant to a merger or acquisition of the creditor.
QUALIFIED MORTGAGE Small Creditor Rural/Underserved Qualified Mortgage Criteria to meet test: Prohibitions on negative-amortization and interest-only features; 30 year maximum amortization Term of at 5 years minimum, 30 year maximum. 3% cap on points-and-fees.
QUALIFIED MORTGAGE Small Creditor Rural/Underserved Qualified Mortgage Fixed interest rate. QM underwriting standards based on regular monthly payment without balloon Debt-to-income ratios must be considered and verified. 43 percent threshold for QMs under the general definition does not apply. Verify the consumer’s current or reasonably expected income or assets and current debt obligations, alimony, and child support, but without regard to the standards in Appendix Q.
QUALIFIED MORTGAGE 2014 Examination Procedures Review the number and dollar amount of loan originations to determine if the bank is a small creditor – documentation purposes. Review process for determining Ability-to-Repay. Determine if the bank originates Qualified Mortgages (QMs). If bank is originating QMs, determine if one of the patches is used. Review the documentation process for QMs. Review analysis and documentation procedures for Safe Harbor QMs
Legislative Package – Raised Bills Closing notice for Loan Production Offices HB5353 Application fee increases HB5353 New fee for bank name change HB5353 Clarifies ATM with video capability is ATM (not a branch) HB5353 Make mortgage servicers a regulated activity HB5352 Regulations are under review as part of Governor’s Bill. Out-of-State Banks and Public Deposits