Topic: Ability-to-Repay (ATR) and Qualified Mortgages (QM)
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Can our bank charge prepayment penalties on all types of commercial loans? If allowed, can we include a demand clause as well? Are there any interest rate limits? Is any collateral prohibited?
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Commercial Loan Prepayment Penalties and Demand Clauses Yes, we believe you may charge prepayment penalties on all types of commercial loans. Regulation Z and the Illinois High Risk Home Loan Act impose restrictions on prepayment penalties for certain consumer loans, but these restrictions do not apply to commercial transactions. Similarly, we believe that you may…
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The Illinois High Risk Home Loan Act states that certain bona fide discount points can be excluded from the points and fees calculation when determining whether a loan meets the definition of “high risk home loan,” provided that any interest rate reduction purchased with the discount points is “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” What does this phrase mean?
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The High Risk Home Loan Act does not elaborate on the meaning of “reasonably consistent with established industry norms and practices for secondary mortgage market transactions.” However, the phrase is used in Regulation Z’s Official Interpretations, which do provide further guidance on the meaning of this term. Regulation Z’s Official Interpretations state that to satisfy…
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Does a mobile home loan need to comply with Regulation Z’s higher-priced mortgage loan (HPML) and ability-to-repay (ATR) requirements even if the mobile home is not affixed to land? If yes, how do we show compliance? Our mobile home loan is secured by only a promissory note with title and is not secured by a mortgage.
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Yes, we believe that a loan secured by a mobile home used as a residence must comply with Regulation Z’s HPML escrow and ATR requirements, even if not affixed to land. However, we do not believe a loan secured by a mobile home needs to comply with Regulation Z’s HPML appraisal requirements. Under Regulation Z,…
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Can we waive a bona fide third-party fee on a home equity loan (that is not a line of credit) and then recoup the fee if the borrower pays off the loan in thirty-six months or less? Is this something we would indicate in the note? We do not believe this would be a prepayment penalty. However, when Regulation Z states that “[a] creditor must not offer a consumer a covered transaction with a prepayment penalty unless the creditor also offers the consumer an alternative covered transaction without a prepayment penalty” — what does that mean? Would an alternative covered transaction be the same loan product with a higher price?
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We believe you may recoup bona fide third-party charges that were waived at consummation if the borrower repays the loan within thirty-six months — provided such terms are included in your note — and this recoupment would not be a prepayment penalty. Additionally, if you were to impose a prepayment penalty, we believe you would…
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After a HELOC has matured, can we extend the customer a temporary closed-end loan for a period of twelve months or less, and then modify the temporary loan into a longer-term balloon loan (typically for a term of 3–5 years), thus avoiding the requirement of an ability-to-repay (ATR) analysis?
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While it may be possible to avoid Regulation Z’s ability-to-repay (ATR) requirements when making an initial temporary (“bridge”) loan and subsequently modifying it with a term longer than twelve months, we recommend proceeding with caution. The modification of the bridge loan into a balloon loan must be structured carefully to not be considered a “refinancing,”…
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Can you modify credit from open-end to closed-end without it being considered a refinance, which would trigger an ability-to-repay (ATR) analysis? When a HELOC has matured, we extend a one-year renewal and provide closed-end disclosures, after which we modify the HELOC into a closed-end balloon loan, without new disclosures. If the HELOC has not yet matured, we extend a renewal (either one year or multiple years with a balloon payment) and do not provide new disclosures. However, in either case, we do not perform an ATR analysis. Is this correct?
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No, we do not believe a HELOC can be converted after maturity into a closed-end loan as a modification; such a conversion would be considered a refinancing and require an ATR analysis. However, we do believe a HELOC can be converted to a closed-end loan prior to maturity as a modification, which would not trigger…
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Are we correct that for rural banks, the threshold for higher-priced mortgage loans is the average prime offer rate (APOR) plus 3.5%, as long as we keep the loans in portfolio?
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Yes, there is a special higher-priced mortgage loan (HPML) threshold for “small creditors,” but only for purposes of the Qualified Mortgage (QM) rule. For QM rule purposes, there is a special definition of “higher-priced,” which sets a threshold of 3.5% over the APOR for first-lien QM loans — provided that the QM lender qualifies as…
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We understand that when a loan is subject to Regulation Z’s ability to repay requirements, Regulation C requires us to report either the total loan costs or the total points and fees for HMDA purposes. If we report the total loan costs, how do we report the total points and fees? Do we report “0” or “NA” or leave it blank?
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In our view, if you determine under Regulation C that you should report the total loan costs for a particular loan, then you should enter “Not Applicable” or “NA” for the total points and fees. The FFIEC Guide to HMDA Reporting indicates that when the ability-to-repay requirements apply and closing disclosures were provided — in…
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We have a number of balloon loans that will be maturing soon. Can we extend the maturity dates, increase the interest rates and switch from fixed interest rates to variable interest rates without triggering a refinancing (requiring new disclosures, new notes, etc.)? Also, would we have to redo the ability-to-repay analysis for each balloon loan?
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If you are adding a variable rate feature, you will have to treat these transactions as refinancings, requiring all new disclosures under Regulation Z. A refinancing is a transaction in which an existing obligation is satisfied and replaced by a new obligation, and several Illinois courts have clarified what it means to “satisfy and replace”…
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We make fewer than fifty closed-end, first-lien residential mortgage loans per year, which we keep in our portfolio, and we have under $2 billion in assets. Can we make “small creditor” qualified mortgages (QMs)? Also, are QMs required to have a loan-to-value (LTV) ratio under 80%? Our previous compliance officer said this was a requirement.
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Since your bank has less than $2 billion in assets, and it originates and sells less than 2,000 residential mortgages in each previous calendar year, the bank meets the definition of a “small creditor” under Regulation Z. Generally, QMs are subject to a number of requirements, including a maximum 43% debt-to-income (DTI) ratio. However, as…