1. BAI Learning & Development: The CFPB’s New Ability-to-Repay and Qualified Mortgage Rules John ReVeal Bryan Cave LLP Barry Hester Bryan Cave LLP

2. 2 Final rules issued this month: – Ability to Repay and Qualified Mortgages – Loan Originator Compensation – Escrow Requirements for Higher-Priced Mortgages – Expansion of HOEPA Coverage and Counseling Requirements – Appraisal Requirements for Higher-Risk Mortgages – Appraisal Disclosures under ECOA – Mortgage Servicing Standards Pending mortgage rules expected to be finalized in 2013: – TILA-RESPA Integrated Disclosures – Small Creditor Balloon Payment Qualified Mortgages Overview

3. 3 Dodd-Frank Act’s Title XIV Title XIV rules deadline: January 21, 2013 (or else) and effective no more than 12 months after issuance Title X, including TILA-RESPA integration CFPB’s November 23, 2012, notice of delayed implementation June 2013 (higher-priced loan escrow requirements; single-premium credit insurance; and mandatory arbitration/waiver prohibitions) and January 2014 Effective Dates

4. 4 Background Existing Regulation Z prohibits making “high cost” (Section 32) or “higher- priced” (Section 35) mortgage loans without regard to the consumer’s ability to repay the loan. DFA expansion: ability-to-repay requirement for almost all consumer credit transactions secured by a dwelling and to provide for a presumption of compliance for “qualified mortgages.” Mortgage Ability to Repay and Qualified Mortgages

5. 5 Background The rules will apply to consumer credit transactions secured by a dwelling, whether or not the primary dwelling (“covered transactions”). Excluded are HELOCs and mortgages secured by a time share. The following are also excluded from the ATR rule, but not the rules governing prepayment penalties: – Reverse mortgages; – Bridge loans with initial terms of 12 months or less; – Loans with initial terms of 12 months or less to finance the initial construction of a dwelling; and – The construction phase of 12 months or less of a construction-to-permanent loan. Mortgage Ability to Repay and Qualified Mortgages

6. 6 6 (or 7) ways to comply with the new ability to repay requirements: 1. Satisfy the general ATR standards. 2.Refinance a “non-standard mortgage” into a “standard mortgage.” 3.Originate a qualified mortgage that is not a higher-priced mortgage as defined by the new rules (safe harbor). 4.Originate a qualified mortgage that is a higher-priced mortgage (only rebuttable presumption of compliance). 5.For a limited time (possibly until January 10, 2021), originate an interim type of qualified mortgage. 6.Originate a balloon-payment qualified mortgage if you are a qualifying creditor. 7.Proposed rules could provide additional relieve for small creditors that hold loans in portfolio. Mortgage Ability to Repay and Qualified Mortgages

7. 7 So what do the final ATR rules require? – Reasonable and good faith determination that the consumer has a reasonable ability to repay the loan. The creditor must consider and verify the following 8 items: – Current or reasonably expected income or assets, excluding house value (and any real property attached to the dwelling); – If the creditor relies on income from the consumer’s employment, the consumer’s current employment status; – Monthly payment for the covered transaction calculated as provided in the rule; – Monthly payment for any other covered transaction or HELOC made to the borrower at or before consummation of the covered transaction or, if after consummation, would cover closing costs of the first loan (if the creditor knows or should know about it) (a “simultaneous loan”); – Monthly payment for the mortgage-related obligations (taxes, insurance, homeowners/coop assessments, lease payments); – Current debt obligations, alimony and child support; – Monthly debt-to-income or residual income (the rules do NOT require a specific DTI ratio for the ATR tests); and – Credit history. Mortgage Ability to Repay and Qualified Mortgages

8. 8 These 8 ATR items must be verified with reasonably reliable third- party records. – Income may be verified with IRS tax-return transcripts. Income and assets may be verified with tax returns, W-2s, payroll statements, financial institution records, records from an employer, records from a government agency showing income from benefits, receipts from the consumer’s use of check cashing services, and receipts from the use of a funds transfer service. – Employment can be verified orally (through the employer) if the creditor prepares a record of the information obtained. Mortgage Ability to Repay and Qualified Mortgages

9. 9 Calculating monthly loan payment for ATR purposes: – Use the greater of the fully indexed rate or any introductory rate, and – Monthly, fully amortizing payments that are substantially equal. Special calculation rules apply to balloon payment, interest-only and negative amortization loans. Special rules also apply to the debt-to-income/residual income determinations, but no specific DTI ratio (43% or otherwise) is required to comply with the ATR rules. Mortgage Ability to Repay and Qualified Mortgages

10. 10 Final rules and the presumption of compliance for QMs: “Safe harbor” for QMs that are not “higher priced.” Rebuttable presumption for QMs that are “higher priced.” – The rebuttable presumption essentially turns on whether the consumer’s residual income or assets after all payments and debt obligations is sufficient to meet living expenses, including material non-debt obligations that the creditor knew about. Mortgage Ability to Repay and Qualified Mortgages

11. 11 So What is a Qualified Mortgage? – A covered transaction; – Regular periodic payments that are substantially equal (except for ARMs or step- rate loans) that do not: result in an increase in principal, allow the borrower to defer repayment of principal (e.g., interest-only or partially amortizing loans), except for balloon-payment QMs, or result in a balloon payment, except for balloon-payment QMs ; – 30 year term or less; and – Total points and fees that do not exceed the permitted percentage of the total loan amount. Mortgage Ability to Repay and Qualified Mortgages

12. 12 Definition of Qualified Mortgage (continued) Interim Rule. The final rule provides significant relief through an interim definition of qualified mortgage that should be easier to satisfy. The interim rule will apply until as long as January 10, 2021. All of the above requirements would still apply, but the following will not so long as the loan is eligible to be purchased, guaranteed or insured (as applicable) by Fannie Mae, Freddie Mac, HUD (under the National Housing Act), the VA or Department of Agriculture, or the Rural Housing Service. Mortgage Ability to Repay and Qualified Mortgages

13. 13 Definition of Qualified Mortgage (continued) – Underwritten taking into account the monthly payment for mortgage-related obligations (such as taxes, insurance or homeowners’ association fees) using – the maximum interest rate that could apply during the first 5 years (assuming the rate increases as quickly as possible) and periodic payments of principal and interest that will repay either (i) the outstanding principal over the remaining loan term once that maximum rate is reached or (ii) the loan amount as stated in the note over the loan term. – A qualified mortgage (other than the interim QM) will also have its own ATR requirement. The creditor must consider and verify: The borrower’s current or reasonably expected income or assets other than the value of the dwelling (including any attached real property); and The borrower’s current debt obligations, alimony and child support. Mortgage Ability to Repay and Qualified Mortgages

14. 14 Definition of Qualified Mortgage (continued) – To be a qualified mortgage (other than the interim QM), the ratio of the consumer’s total monthly debt to total monthly income cannot exceed 43%. – This determination must be made using the consumer’s monthly payment on the covered transaction (including mortgage-related obligations) and any simultaneous loan. Mortgage Ability to Repay and Qualified Mortgages

15. 15 Definition of Qualified Mortgage (continued) – Points and Fees Test. The loan can be a QM only if it has total points and fees that do not exceed the permitted percentage of the total loan amount. This applies also to the interim QM. – Maximum points and fees are: – 3% of the total loan amount for loans of $100,000 or more; – $3,000 for loans of $60,000 or more but less than $100,000; – 5% for loans of $20,000 or more but less than $60,000; – $1,000 for loans of $12,500 or more but less than $20,000; and – 8% of total loan amount for smaller loans. Mortgage Ability to Repay and Qualified Mortgages

16. 16 Total points and fees for a QM includes, among other things: – The maximum prepayment penalty that may be charged, and – The total prepayment penalty actually incurred if the consumer refinances with the same holder of the loan, a servicer acting on behalf of the holder, or an affiliate of either. One useful correction made in the final rule: the definition of prepayment penalty now excludes (i) a waived, bona fide third-party charges that the creditor imposes for prepaying within 36 months and (ii) interest charged consistent with the monthly interest accrual amortization method for loans insured by the FHA and consummated before January 15, 2015. Mortgage Ability to Repay and Qualified Mortgages

17. 17 For QM purposes, the following may be excluded when calculating total points and fees: – Interest and certain guaranty or insurance premiums; – Any bona fide third party charge not retained by the creditor, loan originator, or an affiliate of either, unless it is included as a guaranty/insurance premium or is a non-excluded 1026.4(c)(7) charge; – Up to 2 bona fide discount points paid by the consumer, provided that the interest rate before the discount does not exceed the average prime offer rate (APOR) by more than 1%; or – If not an excluded discount point above, up to 1 bona fide discount point paid by the consumer provided that the interest rate before the discount does not exceed the APOR by more than 2%. Mortgage Ability to Repay and Qualified Mortgages

18. 18 Balloon-Payment Qualified Mortgages – The main limitation is that the loan cannot be subject to a commitment to be acquired by another person who does not satisfy the rural/underserved and small size creditor rules. These are the same limits that apply to the initial creditor. – The creditor has some ATR requirements, but more limited than for a standard QM: Determine that the consumer can make all scheduled payments, including for mortgage-related obligations but excluding the balloon payment, from the consumer’s reasonably expected income or assets other than the dwelling; and Consider the consumer’s monthly DTI and verify the debt obligations and income in the same way as under the general ATR standard except with adjustments in how the payment on the covered transaction would be calculated. Mortgage Ability to Repay and Qualified Mortgages

19. 19 Balloon-Payment Qualified Mortgages (continued) – The loan terms must provide for scheduled payments that are substantially equal calculated on an amortization schedule that does not exceed 30 years, a fixed interest rate, and a loan term of 5 years or longer. – The creditor and its affiliates also must meet certain standards: During the preceding calendar year, the creditor extended more than 50 percent of its total covered transactions secured by a first lien, on properties that are located in counties designated either “rural” or “underserved” by the Bureau; During the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions secured by a first lien; and As of the end of the preceding calendar year, the creditor had total assets of less than $2 billion. – The loan must satisfy the total points and fees tests for a standard qualified mortgage, but the 43% DTI limit would not apply. Mortgage Ability to Repay and Qualified Mortgages

20. 20 Prepayment Penalty Limitations – A covered transaction may not include any prepayment penalty unless it is otherwise allowed by law and the transaction: Has a fixed APR; Is a qualified mortgage (including an interim QM and balloon-payment QM); and Is not a higher-priced mortgage loan. – Even if the loan satisfies these standards, prepayment penalties are limited: No penalty after 3 years; Limited to 2% of the balance prepaid for the first 2 years; and Limited to 1% in the third year. Mortgage Ability to Repay and Qualified Mortgages

21. 21 Prepayment Penalty Limitations (continued) – If you offer a covered transaction with a prepayment penalty, you must also offer a covered transaction without one. The alternate loan must meet a number of conditions, including an APR that does not increase and total points and fees that do not exceed the permitted percentage for QMs. If the loan is offered through a broker, the lender must offer the broker the alternative loan too. – Remember, prepayment penalties are included in the total points and fees calculation. This will make it harder to charge fees and still make qualified mortgages. Mortgage Ability to Repay and Qualified Mortgages

22. 22 Proposed Relief for Small Creditors The CFPB has proposed rules that create a new category of qualified mortgages for loans held on portfolio by small creditors. Would not be limited to lenders that operate predominantly in rural or underserved areas, but would use the same general size thresholds as the rural balloon-payment rules. These loans also would not be subject to the 43% DTI requirement. And the proposal would increase the threshold separating “prime” and “non- prime” qualified mortgagees for purposes of the ATR safe harbor to 3.5% over APOR (rather than 1.5%) for first-lien covered transactions made by these small creditors. Mortgage Ability to Repay and Qualified Mortgages

23. 23 The DFA codified and built upon pre-existing Reg Z prohibitions on: – Compensation based on “any of the transaction’s terms or conditions” other than the loan amount (even when paid directly by the consumer) – Dual compensation The DFA also prohibits any person from requiring consumers to pay any upfront discount points, origination points, or fees where the originator is being paid transaction-specific compensation by any person other than the consumer Qualification and identifier requirements No mandatory arbitration or single-premium credit insurance Loan Originator Compensation

24. 24 The Final Rule implements these DFA provisions in these notable ways: 1)By amending the meaning of the term “loan originator” and adding “individual loan originator” and “loan originator organization” 2)By clarifying what is a “proxy” for a loan term 3)By exempting all persons from the DFA restriction on the payment of upfront discount points or origination fees where transaction-specific compensation is paid by any person other than the consumer (i.e., no “zero-zero” alternative requirement) 4)By providing express exceptions for compensation through qualified, profit-sharing and related plans Loan Originator Compensation

25. 25 The final rule amends “loan originator” to include a person that 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. – For purposes of the loan originator qualification requirements, the definition will include all creditors that engage in LO activities (creditors are otherwise included only if they do not finance the transaction with their own funds as from a warehouse line or deposits). – Added clarification that a loan originator includes any person who in expectation of compensation represents to the public, through advertising or other means, that such person would perform the services covered by the definition of loan originator. “Individual loan originator” and “loan originator organization” definitions figure into the Bureau’s exception for commission-based payments to individual LOs, harmonizing the dual compensation ban with the new complete ban on term-based compensation. Loan Originator Compensation

26. 26 Proposal: a “proxy” for a factor that is not itself a term of the loan but – (1) substantially correlates with the term(s) of the transaction and – (2) the loan originator can directly or indirectly add, drop, or change the factor when originating the transaction. Final rule retains this framework, as revised: – (1) “consistently varies with a term over a significant number of transactions” instead of “substantially correlates”; – (2) “has the ability” instead of “can”; – (3) adding definitions for what exactly is a “term of a transaction”; and – (4) including refinements to the examples of prohibited and permitted compensation methods implicating this proxy analysis. Loan Originator Compensation

27. 27 Under the CFPB’s proposed rule, when a lender pays loan originator compensation, the lender could not impose any discount points or origination points or fees unless the lender makes available to the consumer a comparable, alternative loan with no upfront discount points, origination points, or origination fees that are retained by the lender, broker, or an affiliate of either (a “zero-zero alternative”). Loan Originator Compensation

28. 28 This proposed rule was better than the DFA rule, which would have prohibited all such fees when retained by the lender, broker or their respective affiliates. – Points and fees could be charged so long as the lender offers a comparable, alternative loan. – The requirement to offer an alternative loan would not apply if the consumer is unlikely to qualify for the zero-zero alternative. The CFPB sought comment on whether the final rule should require that any discount points provide a bona fide reduction in the interest rate compared with the transaction without points and fees. Final rule: all persons exempt from the corresponding DFA prohibition (for now) as long as the originator does not receive any compensation directly from the consumer. Loan Originator Compensation

29. 29 New exceptions for profit-sharing and related plans (cf. CFPB Bulletin 2012-2): – (1) contributions to or benefits under a defined tax-advantaged contribution or benefit plan; and – (2) bonuses or other payments under a profit-sharing plan or contributions to some other non-qualified plan This compensation must be based on aggregate, not individual, variance with loan terms. Theory of “attenuation” from steering incentives. The latter of these two was proposed as available under a “revenue test” (e.g., mortgage business not more than 50 percent of total revenues). In the final rule, this became a “total compensation test” (such payments cannot exceed 10 percent of the individual originator’s compensation). This exception is separately available under a new 10-consummated-loan per year “de minimis” rule (up from a proposed 5). Loan Originator Compensation

30. 30 The DFA imposes new escrow requirements for higher-priced mortgage loans, and the CFPB has finalized its corresponding rule: Maintenance of escrow accounts for five years, not just one Adjustment to the threshold rate for jumbo loan escrow obligations Expansion of the condo unit exemption Higher-priced mortgage loan: a loan where the APR exceeds the average market rate by 1.5% for 1st-lien loans or 3.5% for subordinate liens Exemption: small, low-volume creditors ($2 billion / 500 originations) in rural or underserved markets intending at consummation to hold the loan in portfolio or sell it to an investor that also qualifies for the exemption Final Rule: Escrows for Higher-Priced Mortgage Loans

31. 31 The DFA expanded HOEPA’s scope by including purchase money loans and HELOCs, lowering the cost thresholds, adding a new prepayment penalty threshold, and revising the APR, finance charge, and points and fees calculations. It also enacted counseling requirements under both HOEPA and RESPA. High cost home loans now include any consumer credit transaction secured by the consumer’s principal dwelling (other than a reverse mortgage) in which: The APR exceeds the average prime offer rate for a comparable transaction (APOR) by (a) more than 6.5% for a first mortgage on the consumer’s principal dwelling or by 8.5% if the dwelling is personal property and the total transaction amount is less than $50,000) or (b) 8.5% for subordinate mortgages; The total point and fees payable, other than bona fide third-party charges not retained by the originator, creditor or affiliates, exceed (a) for loans of $20,000 or more, 5% of the total loan amount or (b) for smaller loans, the lesser of 8% of the total loan amount or $1,000 (with an inflation adjustment); or The transaction provides for prepayment fees that (a) may be imposed more than 36 months after the loan is closed or account is opened or (b) exceed, in total, more than 2% of the amount prepaid. Final Rule: HOEPA Coverage and Counseling

32. 32 “Transaction coverage rate” (TCR) substitute for APR scrapped (this could have offset the effect of the new “all in” finance charge definition for the integrated disclosures). The TCR would be nearly identical to the APR, but would only include charges retained by the creditor, mortgage broker, or an affiliate of either. As an alternative to the proposed TCR, the CFPB proposed to retain the current APR approach, which would cause more loans to be covered in light of the expanded definition of finance charge. Consistent with the DFA, the proposed rules would require that the HOEPA threshold for an adjustable rate mortgage be based on the maximum possible interest rate. Dodd-Frank lowered the APR thresholds of 8% over Treasury for first-lien loans and 10% over for subordinate-lien loans, to 6.5% over the APOR for most first lien loans and 8.5% over APOR for subordinate liens. “No” Bureau discretion over these changes. To be a qualified mortgage or qualified residential mortgage, the points and fees may not exceed 3% of the total loan amount. For most mortgage loans, the HOEPA rules set a points and fees threshold of only 5% of the total loan amount – so there would not be a large gap between a QM/QRM and a HOEPA loan. Final Rule: HOEPA Coverage and Counseling

33. 33 The DFA imposes new appraisal requirements for higher-risk mortgage loans: A written appraisal from a certified or licensed appraiser who conducts an actual physical visit of the property; An additional appraisal if the purpose of the loan is to finance the purchase or acquisition of a property from a seller within 180 days of the purchase or acquisition by that seller at a price that was lower than the current sale price; and Providing a copy of the appraisal to the applicant at least 3 business days prior to closing; Substitution of “high-priced mortgage” loan for DFA “higher-risk mortgage” The rule exempts qualified mortgages as well as reverse mortgages and loans secured by manufactured homes. Implemented in conjunction with broader ECOA appraisal disclosure requirements Final Rule: Appraisals for Higher-Risk Mortgage Loans

34. 34 – Enhanced periodic statement including sample forms* – Advance ARM adjustment notices – Restrictions on and disclosures for force-placed insurance – Error resolution and information request requirements* – Policies, procedures, and recordkeeping requirements* – Loss mitigation procedures, including a prohibition on dual tracking Delinquency counseling and “early intervention” notices required after two consecutive missed payments, including “continuity of contact” and loss mitigation options outline* Live contact by the 36 th day after a missed payment* Five-day turnaround on & acknowledgment of loss mitigation applications* Foreclosure initiation prohibited until a borrower is more than 120 days delinquent If complete loss mit app is made more than 37 days pre-foreclosure: consideration for all available mitigation options is required (if 90 days pre-foreclosure, appeal rights)* Foreclosure initiation prohibited if any loss mitigation applications are pending* Foreclosure proceedings prohibited if borrower is performing under a loss mit agr. *Small servicers exempt from these requirements; “small servicers” are those that, together with affiliates, service 5,000 or fewer mortgages, all of which the servicer or its affiliates originated or own. (CFPB: 98% of insured banks and credit unions under $2 billion in asset size.) UPDATED: The small servicer determination is made as of January 1 for the remainder of the calendar year, although a servicer that crosses the 5,000-loan threshold will have six months after crossing it, or until the following January 1 (whichever is later) to comply with the previously exempted requirements. Final Rule: Mortgage Servicing Standards

35. Q&A

36. Thank You John ReVeal (DC) john.reveal@bryancave.com 202-508-6395 Barry Hester (Atlanta) barry.hester@bryancave.com 404-572-6711 www.bankbryancave.com

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38. Thank you