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					“Qualified Mortgage”
          and

“Qualified Residential
     Mortgage”
       proposals
Proposed Ability to Repay Requirement and
Minimum Mortgage Underwriting Standards
   Truth-in-Lending (Regulation Z) proposal
       Comment was due July 22, 2011
       Rule will be finalized by the CFPB
   Addresses requirements from Dodd-Frank
    sections 1411, 1412, and 1414
       Would require creditors to make a reasonable and
        good faith determination of a consumer’s
        reasonable ability to repay a mortgage loan before
        making the loan
                                                        2
Proposed Ability to Repay Requirement and
Minimum Mortgage Underwriting Standards
   Addresses requirements from Dodd-Frank
    sections 1411, 1412, and 1414
       Would replace the “repayment ability”
        requirements of 226.34 regarding high priced
        (section 32) mortgage loans and 226.35, the
        “higher priced mortgage loan” section
       Adds new section 226.43 to establish minimum
        standards for a consumer credit dwelling secured
        loan transaction
                                                       3
Proposed Ability to Repay Requirement and
Minimum Mortgage Underwriting Standards
   Does not apply to HELOCs, timeshare plans, reverse
    mortgages, or temporary loans with a term of 12
    months or less such as bridge or construction loan
   Limits prepayment penalties to prime, fixed rate
    “qualified mortgages” on a declining scale over the
    first three years
   Expands record retention requirements for dwelling
    secured consumer loans from two to three years after
    consummation
   Prohibits evasion by structuring the loan through
    open-end credit                                   4
Proposed Ability to Repay Requirement:
    Four proposed options for compliance
     General ability to repay standard
     Qualified mortgage
     Qualified mortgage with balloon payment
     Refinancing a “non-standard mortgage” into
       a “standard mortgage”


                                              5
Proposed Ability to Repay Requirement:
Option 1 (General Ability to Repay Standard)
    Considering and verifying the following eight
     underwriting factors:
     Income or assets (other than the value of the
       dwelling that will secure the loan);
         Must be verified using third party records like:
             IRS tax return transcript or copies of tax returns
             W-2 or similar form
             Payroll statements
             Government benefit records
             Records from the consumer’s employer
                                                                   6
             Financial institution records
Proposed Ability to Repay Requirement:
Option 1 (General Ability to Repay Standard)
     Current employment status;
         If relying on employment income to repay
         May verify orally but document that verification
     Monthly fully amortizing mortgage payment
      amounts that are substantially equal;
         Use the fully indexed rate for an ARM
         Special rules for loans with a balloon payment, interest-
          only payments, and negative amortization possibilities
             A higher-priced balloon loan must consider the balloon payment
              if the loan is on less than a five year term (cannot consider
              likelihood of refinancing)
                                                                        7
Proposed Ability to Repay Requirement:
Option 1 (General Ability to Repay Standard)
     Simultaneous mortgage payment amounts;
         Also using fully amortizing substantially equal
          payments; fully indexed rate for an ARM; and/or
          the special rules for special loan features
         Include each consumer credit transaction secured
          by a dwelling, such as a home equity line
     Current debt obligations;
     Debt-to-income ratio or residual income
      amount;                                          8
Proposed Ability to Repay Requirement:
Option 1 (General Ability to Ability Standard)
     Mortgage related obligations payment
      amount;
         Property taxes
         Mortgage related insurance premiums
         Homeowners association or condominium fees
         Ground rent or leasehold payments
         Special assessments
     Credit history
                                                   9
Proposed Ability to Repay Requirement:
Option 2 (Qualified Mortgage; Alternative 1)
    Provides for a safe harbor if you make a
     “Qualified Mortgage” under Alternative 1
     No negative amortization
     No interest-only payments
     No balloon payment
     Term does not exceed 30 years
     Income or assets relied upon are considered
       and verified
                                               10
Proposed Ability to Repay Requirement:
Option 2 (Qualified Mortgage; Alternative 1)
      Total points and fees generally do not
       exceed 3% of the total loan amount for
       $75,000 loans or greater with a sliding
       higher percentage for lower loan amounts
          May exclude up to two points from the total
           points and fees if the interest rate before the
           discount does not exceed the average prime
           offer rate by more than 1%
          May exclude one point if the interest rate before
           discount does not exceed by more than 2%      11
Proposed Ability to Repay Requirement:
Option 2 (Qualified Mortgage; Alternative 1)
      Points and fees include:
          Finance charges (except interest and government
           insurance program premiums)
          Compensation to the loan originator
          Real estate related fees (title, deeds, appraisal, etc.)
           unless the charge is reasonable, creditor receives no
           compensation in connection with the charge and the
           charge is not paid to an affiliate of the creditor
          Credit life insurance or similar premiums
          The maximum prepayment penalty
          The total prepayment penalty if refinanced by the          12

           current creditor, servicer, or an affiliate of either
Proposed Ability to Repay Requirement:
Option 2 (Qualified Mortgage; Alternative 1)
      Underwriting based on the maximum
       interest rate that may apply during the first
       five years
      Underwriting using a payment schedule that
       fully amortizes the loan over the loan term
      Underwriting considers mortgage related
       obligations like taxes and insurance

                                                 13
Proposed Ability to Repay Requirement:
Option 2 (Qualified Mortgage: Alternative 2)
    Alternative two presumes compliance and
     includes all the criteria from “alternative one”
     plus consideration and verification of:
     Consumer’s employment status
     Monthly payment for any simultaneous
       mortgage
     Consumer’s current debt obligations
     Monthly debt-to-income ratio or residual
       income (no standard proposed)
     Consumer’s credit history
                                                   14
Proposed Ability to Repay Requirement:
Option 3 (Qualified Mortgage with Balloon)
   Making a “qualified mortgage” with a balloon
    payment
       Loan term must be five years or more
       Payments must be calculated using an
        amortization period that does not exceed 30 years
       Payments must include all mortgage related
        obligations


                                                       15
Proposed Ability to Repay Requirement:
Option 3 (Qualified Mortgage with Balloon)
   Creditor must have made more than 50% of its
    covered loans the previous year in “rural” or
    “underserved” areas
   Probable aggregate dollar amount or
    transaction number limits to meet this
    exception
   Creditors must not sell or assign covered
    balloon payment loans
                                              16
Proposed Ability to Repay Requirement:
Option 4 (Refinancing Non-Standard Mortgage)
   Current mortgage holder or servicer
    refinances a “non-standard mortgage” with
    risky features into a more stable “standard”
    mortgage
   A “non-standard mortgage” has:
       An adjustable rate with an introductory fixed
        interest rate for a limited number of years;
       Negative amortization; or
       Interest-only payments                          17
Proposed Ability to Repay Requirement:
Option 4 (Refinancing Non-Standard Mortgage)
    The “standard” mortgage must:
     Offer a lower monthly payment than the
       existing non-standard mortgage loan
     Have limited loan fees and points
     Not have a negative amortization feature
     Not have a interest-only payment feature
     Not have a balloon payment feature

                                                 18
Proposed Ability to Repay Requirement:
Option 4 (Refinancing Non-Standard Mortgage)
    The “standard” mortgage must:
     Consider and verify seven underwriting
       factors
           Excludes a consumer’s income or assets in
            order to preserve streamline loans
       Underwrite based on the maximum interest
        rate that can apply in the first five years
           Interest rate must be fixed for first five years
       Loan term cannot exceed 40 years                       19
Proposed Credit Risk Retention
(Regulation RR)
       Securitizer of asset-backed securities must retain not
        less than 5% of the credit risk of the assets
        collateralizing the asset-backed securities
       From Dodd-Frank section 941(b)
       Comment was due by August 1, 2011
       Exemptions
         Government guaranteed securitizations and assets
         Mortgages sold to Fannie Mae and Freddie Mac as long as
          they are in conservatorship
         Qualified residential mortgage                       20
Proposed Credit Risk Retention
(Regulation RR)
      Different than a “Qualified Mortgage” under the
       Regulation Z ability-to-repay proposal
      “Qualified Residential Mortgage” standards:
       Closed-end loan

       Term cannot exceed 30 years

       Purchase or refinance purpose only

       Secured by a first lien on a principal dwelling

       Written application in file with borrower
         certification as to its accuracy
                                                      21
Proposed Credit Risk Retention
(Regulation RR)
      “Qualified Residential Mortgage” standards:
       Credit history verified within 90 days prior to
         loan closing:
             Not currently 30-days past due on any debt;
             No 60-day past due payments on any debt within the
              previous 24 months; and
             No bankruptcies, judgments, personal property
              repossessions, foreclosures, deed-in-lieu of
              foreclosure or short sales within the previous 36
              months
         No negative amortization, deferred payments,
          or prepayment penalties                            22
Proposed Credit Risk Retention
(Regulation RR)
      “Qualified Residential Mortgage” standards:
       Rate increases cannot exceed 2% in any 12-
         month period or 6% over life of loan
       Points and fees cannot exceed 3% of the loan
         amount
       20% down payment requirement for purchase
         transactions
            Funds must come solely from borrower and cannot
             be borrowed or come from a person with an interest
             in the property
                                                             23
Proposed Credit Risk Retention
(Regulation RR)
      “Qualified Residential Mortgage” standards:
       Maximum LTVs
             80% for purchase loans
             75% for refinance loans
             70% for cash-out refinance
         Appraisal cannot be more than 90 days old
         Mortgage cannot be assumable
         Servicing requirements to commit to loss
          mitigation such as attempts to modify rather
          than foreclose considering net present values   24
Proposed Credit Risk Retention
(Regulation RR)
      “Qualified Residential Mortgage” standards:
       Verified and documented income with
         maximum front-end debt-to-income ratio of
         28% and back-end 36%
            Standards proposed for acceptable verification and
             documentation
            Payments calculated at the maximum rate during the
             first five years after the date the first regular
             periodic payment will be due
            Fully amortizing payment schedule
            Include taxes, insurance, HOA dues, etc.          25
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial loans
             Verified and documented borrower financial condition as
              of the two most recently completed fiscal years and
              periods since then
             Analyze ability to service debt during next two years
                  Liabilities ratio 50% or less;
                  Leverage ratio 3.0 or less; and
                  DSC ratio of 1.5 or greater
                                                                  26
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial loans
             Loan covenants require at least quarterly financial
              statement submission
             Loan covenants require insurance, lien perfection,
              payment of taxes, maintaining physical condition,
              etc.
             Loan payments based on fully amortizing term that
              does not exceed five years
                                                               27
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial loans
             Repayment expected from revenue from business
              operations
             Loan funded within six months prior to securitizing
              transaction
             Payments based on full amortization, no deferred
              payments, and first payment must be made within 45
              days of origination
                                                              28
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial real estate loans
             Secured by a first lien
             Verified and documented borrower financial
              condition
             Written appraisal not more than six months old
             Conducted environmental risk assessment

                                                               29
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial real estate loans
             Analyze ability to service debt during next two years by
              determining a DSC ratio of 1.5 or greater
             Loan covenants require at least quarterly financial
              statement submission
             Loan covenants require insurance, lien perfection,
              payment of taxes, maintaining physical condition, etc.

                                                                    30
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Commercial real estate loans
             Monthly loan payments based on fully amortizing term
              that does not exceed 20 years and no deferred payments
             Any maturity cannot occur prior to 10 years following
              origination
             CLTV ratio less than 65% or 60% if appraisal uses low
              capitalization rate
             No interest reserves
                                                                  31
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Auto loans
             Verified and documented borrower’s credit history
              within 30 days prior to origination
                 Not currently 30-days past due on any debt;
                 No 60-day past due payments on any debt within the
                  previous 24 months; and
                 No bankruptcies, judgments, personal property
                  repossessions, foreclosures, deed-in-lieu of
                  foreclosure or short sales within the previous 36
                  months                                            32
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting
      standards for other assets
         Auto loans
             Verified and documented income with a maximum
              debt-to-income ratio of 36%
             Down payment from borrower’s personal funds and
              trade-in allowance equal to the sum of:
                 Full cost of vehicle title, tax, and registration fees;
                 Dealer imposed fees; and
                 20% of the vehicle purchase price
                                                                        33
Proposed Credit Risk Retention
(Regulation RR)
     Securitizations that meet underwriting standards
      for other assets
         Auto loans
             Originator or subsequent holder of the loan must hold
              physical possession of the title until loan is repaid
             For new vehicles, loan maturity date cannot exceed 5
              years
             For older vehicles, the term of the loan plus the
              difference between the current model year and the
              vehicle’s model year cannot exceed 5 years
             Payments based on full amortization, no deferred
              payments, and first payment must be made within 45
              days of origination
                                                                      34
Proposed Credit Risk Retention
(Regulation RR)
     Proposes various permissible methods to retain
      risk amounts, including:
         Vertical – At closing of securitization transaction –
          sponsor retains at least 5% of each class of ABS
          interests in the issuing entity
         Horizontal – At closing of securitization transaction –
          sponsor retains residual interest (or via a cash reserve
          account) in an amount equal to at least 5% of the par
          value of all ABS interests in the issuing entity


                                                                 35
Proposed Credit Risk Retention
(Regulation RR)
     Sponsors utilizing either the vertical or horizontal
      risk retention approach may offset the amount of
      its risk retention requirement by allocating the risk
      to the loan originator in a proportional ratio
      provided that the loan originator contributed at
      least 20% of the underlying assets in the pool




                                                        36

				
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