Topic: Ability-to-Repay (ATR) and Qualified Mortgages (QM)
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A customer applied to refinance her mortgage. She told us that she filed for bankruptcy in 2009. Before her bankruptcy, she had a second mortgage on her home. The customer does not remember what happened with her second mortgage following her bankruptcy, but she is not currently making any payments on it, and no second mortgage appears on her credit report. Consequently, we think this debt may have been discharged in the bankruptcy. However, we did obtain a financing statement from the second mortgage lender, which states that there is an outstanding loan in the amount of $28,000 secured by a lien on the property (again, she is not making any payments on this loan, and it does not appear in the credit report). We plan to consider the lien as part of our underwriting, but can we also consider the $28,000 debt?
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Generally speaking, a lender may consider that a debt was discharged in bankruptcy when underwriting a new loan, provided the debt was discharged within the time period in which it is allowed to appear on a credit report. A consumer’s bankruptcy information — including certain details about discharged debts — may appear on a credit…
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We currently charge a document preparation fee for our qualified mortgages and consider this our loan fee. The fee is the greater of .75% of the loan amount or $600. Our auditor told us we should classify this as an origination fee instead. If we classify this as an origination fee, can we charge a $600 flat fee for loans under $80,000?
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Whether you can charge a flat $600 origination fee on a qualified mortgage under $80,000 will depend on the underlying loan amount and the total amount of other points and fees that you are imposing on the loan. Regulation Z limits the points and fees that may be assessed for a qualified mortgage based on…
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We had an application for a mortgage loan from an applicant whose income does not qualify under the qualified mortgage (QM) standards. His mother’s income would qualify by itself. Can we add the mother as a guarantor, even though she won’t be living in the home securing the loan?
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If the mother signs the loan as a guarantor, you would not be able to consider her income for purposes of a QM or ability-to-repay analysis. Under Regulation Z, a guarantor is not a “consumer,” and consequently her income and assets would not enter the QM or ability-to-repay analysis. If the mother instead signs the…
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Do we need to check a borrower’s credit report when we extend their existing loan? Or is this a requirement only for new loans and refinancings?
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We are not aware of any express requirement to review a consumer’s credit report when modifying an existing loan to extend its terms, but whether reviewing a credit report would be appropriate for a specific loan can depend on many factors, ranging from safety and soundness considerations to consumer protection considerations (the latter is discussed…
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Our bank qualifies as a small creditor. We have one branch located in a Metropolitan Statistical Area (MSA), and all other branches are in rural or underserved areas, where we do the majority of our lending. Do we qualify as operating in a rural or underserved area for purposes of the qualified mortgage (QM) rule? For example, could we make an ARM loan that qualifies as a QM if the borrower’s debt-to-income ratio is 44%? We would hold the loan in portfolio, and it would not include any nontraditional characteristics (such as a balloon payment or interest-only payments).
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Yes, we believe that your bank qualifies as a small, rural lender. The CFPB recently amended Regulation Z to establish that a small creditor just needs to originate one covered transaction in a rural or underserved area to qualify for the special provisions in Regulation Z for small, rural lenders. Because your bank is a…
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If we are underwriting a loan for renewal, and assuming that we are performing an ability-to-repay analysis, we collect the past two years’ tax returns. However, two of our borrowers have different income in 2016 than they did in past years’ one borrower is no longer employed and will be relying on social security income, and another borrower has a new job with higher income. In both cases, should we consider the current year’s income as part of the ability-to-repay and underwriting analysis? If so, in the future, do we have to consider the current year’s income for every ability-to-repay analysis?
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Yes, in both cases you should consider the current year’s income as part of the ability-to-repay and underwriting analysis. Creditors generally are required to make reasonable and good faith determinations of consumers' ability to repay a loan based on eight factors, including current income and employment status. So long as a creditor considers those factors,…
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We’re a small, rural community bank. Do our balloon loans that have an annual percentage rate (APR) of less than 3.5% above the average prime offer rate (APOR) constitute qualified mortgages that qualify for the safe harbor under the ability-to-repay rules?
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Yes, small, rural creditors can originate a qualified mortgage with a balloon-payment feature, and these loans are deemed to comply with Regulation Z’s ability-to-repay requirements as long as the loans have an APR of less than 3.5% over APOR for a comparable transaction. However, a loan that is 3.5% or more above APOR constitutes a…
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We have a mortgage loan that was signed by a husband and wife, with a third co-signer who was the father of one of the spouses. The father did not sign the mortgage or title; he signed only the note. We recently discovered that the father died about three years ago. Can we remove his name from the note without modifying or refinancing the loan?
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Yes, we believe that you can remove the co-borrower from the loan in this situation without modifying or refinancing the loan, provided there are no provisions in the loan agreement that might raise other issues. The CFPB addressed a similar question regarding the addition to a loan of a borrower’s successor-in-interest, such as a surviving…
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We qualify as a small creditor under the Qualified Mortgage (QM) rules, but we are not located in a “rural or underserved area.” We do make portfolio balloon loans that qualify for the small creditor balloon QM exemption, but that expires on April 1st of this year. After that date, can we continue to make balloon mortgages? Do you recommend not offering balloon loans and instead offering adjustable rate mortgages?
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We believe you may continue offering balloon loans that pass an ability-to-repay (ATR) analysis. However, your balloon loans will not qualify as QMs after April 1, 2016, unless you qualify for the “rural or underserved” exception to the QM requirements (which may be subject to change, as discussed below). As you suggested, an ARM loan…
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If we did not verify income and employment in accordance with the ATR rule, what are the repercussions or penalties?
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If a lender does not verify the borrower’s income or employment status “at or before” consummation of the loan, the lender has violated the Truth in Lending Act. If the lender or a subsequent purchaser of the mortgage loans files a foreclosure action, the borrower may assert the lender’s failure under the ATR rules as…