Mortgage Origination Consumer Protections

Question 1

Reg Z: Special Mortgage Rules

What types of loans are covered under the ATR-QM rule? Why is a QM significant?

Answer 1

ATR-QM = CLOSED-END CONSUMER TRANSACTIONS SECURED BY A MEMBER’S DWELLING

› Home purchases
› Refinancings
› Closed-end home equity loans
› Loans secured by a first lien or subordinate lien on a dwelling
› Loans for vacation homes
› Loans secured by a one-to-four-unit residence, condominium, cooperative, mobile home or manufactured home

The QM designation is valuable because it creates a legal protection for the credit union regarding the ability-to-repay requirement. The strength of that legal protection depends on whether the loan is considered a “higher-priced covered transaction.”

Question 2

Reg Z: Special Mortgage Rules

What is a reasonable source to verify a consumer’s ability to repay?

Answer 2

Verified with W-2s, tax returns, payroll receipts, financial institution records or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets.

Question 3

Reg Z: Special Mortgage Rules

What factors must the credit union consider under the ATR rule when underwriting mortgage loans?

Answer 3

1. Current or reasonably expected income or assets on which the consumer will rely to repay the loan
2. Current employment status
3. The monthly payment on the covered transaction
4. The monthly payment on any simultaneous loan secured by the same property
5. The monthly payment for mortgage-related obligations (property taxes, insurance, HOA)
6. Current debt obligations, alimony and child support
7. The monthly debt-to-income ratio or residual income
8. Credit history

Question 4

Reg Z: Special Mortgage Rules

What are the types of qualified mortgages and what features make each QM different?

Answer 4

1. General Definition QMs
• No “toxic terms”
−Negative amortization;
−Interest‐only payments;
−Balloon‐payments;
−Term longer than 30 years; or
−Excessive “points and fees”
• CU must consider and verify income and debt
• Debt‐to‐Income (DTI) cannot exceed 43 percent

2. Temporary Definition/GSE patch QMs
   • Must be eligible for purchase by Fannie/Freddie or insured or guaranteed by FHA, VA, USDA or RHS
   • No negative amortization, interest-only payments, balloon payments, term longer than 30 years, excessive points and fees
   • No Debt‐to‐Income (DTI) restriction
   − Must meet secondary market guidelines
   − Do not need to actually sell the loan – the rule says eligible for purchase
   • Set to expire, pending rulemaking to amend the current
   General QM definition
3. Small Creditor Portfolio QMs
   • Asset & origination thresholds – prior year:
   − Total assets < $2.23 billion
   − Originated 2,000 or fewer first liens
   • No negative amortization, interest-only payments, balloon payments, term longer than 30 years, excessive points and fees
   • CU must consider and verify income/asset – must consider DTI – but no 43% cap
   • Loan must be held in CU’s portfolio – if sold within the first 3 years, lose QM status
4. Balloon Payment QMs
   • General rule is that a balloon payment is a “toxic term”
   • There is a carve out for some small creditors
   − Total assets < $2.23 billion; Originated 2,000 or fewer first liens
   − Only applies to small creditors that operate in rural or
   underserved areas
   − To qualify, a credit union must meet small creditor test and rural or underserved test

Rural/underserved: Bureau maintains a database, must make at least one first lien covered loan in such an area

Question 5

Reg Z: Special Mortgage Rules

What are the record retention requirements for the ATR/QM rule?

Answer 5

Regulation Z requires that credit unions retain records of evidence of compliance with the ability-to-repay and qualified mortgage provisions for 3 years

Question 6

Reg Z: Special Mortgage Rules

What features can disqualify a mortgage from being a general definition QM?

Answer 6

› Negative amortization. This feature may allow the principal PRINCIPAL BALANCE INCREASE during the life of the loan.
› Interest-only payments. If the loan allows the PRINCIPAL PAYMENT DEFERRED, it is not a general definition QM.
› Balloon payments. If a balloon payment is due at the end of the loan, it is not a general definition QM, though it may be a balloon payment QM.

Question 7

Reg Z: Special Mortgage Rules

What kinds of products does the loan originator compensation rule apply to?

Answer 7

Applies to CLOSED-END mortgage transactions secured by the consumer’s principal dwelling, excluding time shares.

Question 8

Reg Z: Special Mortgage Rules

In what ways does Regulation Z limit a loan originator’s compensation? What is permitted and what is prohibited?

Answer 8

The provision:
› Prohibits being based on the TRANSACTION TERMS or a proxy for a transaction term
› Prohibits being DUAL compensated by both the consumer and another person, such as a credit union

PERMITTED
› Contributions to or benefits under certain designated tax-advantaged retirement plans
› BONUSES and other types of NON-DEFERRED PROFITS-BASED compensation:
- Originated 10 or fewer mortgage transactions during the preceding 12 months
- Does not exceed 10% of the individual loan originator’s total compensation

Question 9

Reg Z: Special Mortgage Rules

What disclosures are required under the loan originator rule and on what documents?

Answer 9

Nationwide Mortgage Licensing System and Registry
(NMLSR) identification number must be included on the
following documents:
› Loan Estimate
› Closing Disclosure
› Credit application
› Note or loan contract
› Security instruments