1. 1 Our Expertise and Commitment – Driving your Success An Introduction to CFPB “ATR/QM” Mortgages March 7, 2014 Offices in Boston, New York and Northern VA

2. 2 Table of Contents Background General Requirements of a Qualified Mortgage (QM) Types of QMs Underwriting Requirements for Ability To Repay (ATR) Higher-Priced QM Mortgages and Prepayment Penalty Limits Advantages of ATR/QM Mortgages Impacts/Disadvantages of ATR/QM Mortgages

3. 3 Background The Consumer Financial Protection Bureau (CFPB) was established to protect consumers from risky lending practices Created by The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) Result of the financial crisis of 2007/2008 Consolidates most Federal consumer financial protection authority in one place CFPB created new rules to provide mortgage applicants/borrowers with additional rights and protection from harmful practices New rules also created new type of mortgage – “Qualified Mortgage” or “QM” Designed to be safer and easier to understand Also established minimum standards lenders must use to determine that consumers have the ability to repay the mortgages they are extended – “Ability to Repay” or “ATR” “ATR/QM” rules are effective as of January 10, 2014

4. 4 General Requirements of a Qualified Mortgage (QM) The general requirements of a QM are as follows: No negative amortization No interest only payments No balloons Maximum loan term of 30 years or less 43% or less Debt-to-Income (DTI) Ratio Limit on points and fees of 3% or less (for mortgages > $100,000) Limit on prepayment penalties Any loan that meets these requirements is a QM First or subordinate lien In addition, any loan that meets these requirements and is eligible for purchase, guarantee, or insurance by GSE, VA, FHA, or USDA is a QM, regardless of DTI Lenders may originate other mortgages that are not QM, using sound underwriting practices, but do not receive the same “protections.”

5. 5 Types of QMs There are four (4) types of QMs: 1.General – meets the requirements above 2.Temporary QM Definition – Eligible for purchase or guarantee by GSE (Approve/Eligible from DU or LP). Meets the requirements above; exempt from DTI Ratio Limit. Exemption until GSEs exit FHFA conservatorship or for seven (7) years, whichever comes first. 3.Small Creditor – “Small” creditors have additional flexibility with employment, credit history, and DTI 4.Balloon Payment QM – Two year exemption for all “small” creditors to originate balloon mortgages (until January 10, 2016); after that date, only “small” creditors in rural areas may originate balloons What is a “Small” Creditor? Assets below $2 billion at the end of the last calendar year No more than 500 first-lien, closed-end residential mortgages that are subject to the ATR requirements in the preceding calendar year Must retain loans in portfolio

6. 6 Underwriting Requirements for Ability To Repay (ATR) There are eight (8) factors to consider to determine the borrower’s ability to repay (ATR): 1.Current income or assets to repay the loan 2.Current employment status 3.Monthly mortgage payment – higher of current or fully-indexed rate 4.Monthly payment on 2 nd or any other loans to secure property 5.Monthly T&I, HOA, and/or ground rent 6.Debt, alimony, child support 7.Monthly DTI or residual income vs. Gross Monthly Income 8.Credit History Must retain evidence of compliance with ATM/QR for minimum of three (3) years CFPB ATR/QM rule presumes that lenders that originate Qualified Mortgages (QMs) have complied with the ATR requirements

7. 7 Higher-Priced QM Mortgages and Prepayment Penalty Limits A QM Mortgage is “Higher-Priced” for the following reasons: First lien APR is > 1.5 % over Average Prime Offer Rate (APOR), or Subordinate-lien mortgage is > 3.5 % over Average Prime Offer Rate (APOR) Rate spread calculators are available at http://www.ffiec.gov/ratespread/http://www.ffiec.gov/ratespread/ Prepayment penalties are permitted only with the following conditions: The loan has a fixed interest rate The loan is a QM and the transaction is not “higher-priced” Prepayment penalties may not apply more than three (3) years after closing Penalty cannot exceed 2% of the outstanding loan balance within the first two years and 1% of the outstanding loan balance during the third year Lenders also must offer borrowers an alternative loan that does not include a prepayment penalty

8. 8 Advantages of ATR/QM Mortgages Advantages of ATR/QM Mortgages for Borrowers Protection from risky mortgages Protection from high costs Increased price competition for prime QM borrowers Clarity on what is a “safe” mortgage Advantages of ATR/QM Mortgages for Lenders “Safe Harbor” – No consumer recourse for non-higher-priced QMs Rebuttal presumption – consumer must prove that “higher-priced” QM violated ATR rule (in which case, it was not a QM) CFPB ATR/QM rule presumes that lenders that originate Qualified Mortgages (QMs) have complied with the ATR requirements More predictable, less costly servicing for prime QMs Potentially lower default rates

9. 9 Impacts/Disadvantages of ATR/QM Mortgages Impact on mortgage loan originations, sales, servicing and securitizations: Reduced credit availability and higher borrowing costs to cover the costs of compliance Reduction in mortgage options – elimination of “no doc,” “stated income,” etc. Increased price competition for prime QM borrowers Increased costs for new origination processes, compliance controls, and training Increased foreclosure costs due to increased consumer protections Increased repurchase and indemnity requests Increased servicer expenses Impact on consumers Reduced credit availability Potentially higher borrowing rates Reduction in mortgage options Limit on credit availability (especially for consumers with higher DTI) Increased documentation requests

10. 10 Questions? Please feel free to contact me for additional questions or comments. Frank Pilk fpilk@actualizeconsulting.com (571) 239- 3373