Temporary Mortgage LoanMortgage loan ( temporary)
Modifications contain special interpretations of the term "registered mortgage lender" and the term "non-governmental mortgage lender". In particular, the changes clarify an "out-of-state mortgage lender" as a person incorporated in the Nationwide Mortgage Licensing System who currently possesses a current mortgage lender licence that has been granted under the laws of another state or court in the state.
The Act also changes the demarcation of "registered mortgage lender" to require that such a mortgage lender must be valid as a mortgage lender for at least one year before the application for admission under the Act, and must be recorded with an employers custodian. It revises the type of charges that private mortgage creditors may levy in connection with the granting, handling and closure of a mortgage loan:
i) Claim Entitlement Rate; ii) Origin ation Rate; iii) Lock-in Rate; iv) Provisioning Rate; v) Warehousing Rate; vi) Cash Points; and vii) Dues required to refund to the Creditor the third party service rates, such as Expert and Loan Reporting Rates. These changes also introduce a different set of levies that a mortgage intermediary can levy in relation to the brokerage of a mortgage loan.
Essential: the ultimate "ability to pay back / qualifying mortgage" of the CFPB.
The Financial Protection Bureau (the "CFPB") adopted on 10 January 2013 definitive regulations (the "Ability-to-Repay Rules")1 to amend Regulation Z under the Truth in Lending Act ("TILA") to enforce the repayment obligation for housing credits and protection against liabilities for qualifying mortgage and certain other forms of protection for consumers under Articles 1411, 1412 and 1414 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act").
Rules on reparability contained in a publication of more than 800 pages are definitive but will not enter into force for another year (10 January 2014). CFPB also published an extra 184-page "concurrent proposal" with possible changes to the rules on repayment ability covering certain topics, such as exceptions for certain state and municipal residential construction financing agents, non-profit lenders and residential property stabilisation programmes, an extra defined qualifying mortgage for certain credits granted and maintained in the portfolios by small lenders such as joint stock and cooperative societies, and the incorporation of the lender's remuneration into the points and feeing.
Despite the forthcoming changes and the delay in entry into force, the rules on the capacity to pay back will have an important impact on the private mortgage credit industry and will need considerable effort before they can be implemented. In general, the capability rules demand that a'creditor does not grant a [residential mortgage] loan .... unless the lender determines in good faith at or before consumption that the customer has a reasonably good capacity to pay back the loan in accordance with his conditions.
" In addition, the Ability-to-Repay Rules offer a secure haven for mortgage lending that both meets the definitions of "qualified mortgage" and is not a "higher-priced" mortgage. Highpriced mortgage credits, which are qualifying mortgage types, are only eligible for a refutable assumption that the creditor meets the repayment obligation. Eligibility rules for repayment also forbid early repayment fees for retail mortgage credit, except in certain cases.
This alert summarizes some of the key characteristics of the Ability-to-Repay Rule from the point of view of the Securitisation Sector. However, we have not tried to fully explain the policy and to avoid the use of certain specific terminology (e.g. "covered transactions"). To fully understand the Ability to Repay Rules, we would like to point to the CFPB Approval, which contains an explanatory note on the CFPB's Ability to Repay Rule processes, the text of the Ability-to-Repay Rules and Appendix Q (the Standard for the Determination of Monthly Revenue and Liabilities) amending Regulation Z, and the official interpretations of the CFPB's Ability-to-Repay Rule.
Exactly what kind of deals are subject to the Ability to Repay rules? Moreover, for inverted mortgage and certain categories of temporary "bridge" loan or construction-to-permanent loan, only the provision on advance payment penalty applies.
In the interests of clarity, we shall describe these operations as "mortgage loans" in the further course of this alert. According to the Ability-to-Repay rules, it is immaterial whether the mortgage establishes a first pledge or a subordinated pledge on the pledged object in question or whether the pledged object is the main domicile or an investement of the borrowing party.
Which general conditions apply to a redemption provision? A lender is required by the Ability-to-Repay rule to determine in good faith whether a mortgage credit lender has the capacity of a customer to pay back a mortgage on the basis of the following general mortgage credit criteria: Ongoing or reasonably anticipated incomes or wealth (with the exception of the home and land secured by the mortgage loan); job situation if the borrower's incomes are used to determine the borrower's repayability; projected mortgage loan liability per month according to the "ability to repay" rule;
Installment of payments for a concurrent loan from the Mortgagor if the Mortgagor knows or has reasons to assume a concurrent loan; Installment of payments for mortgage liabilities such as property duties, insurances and similar levies; Short-term debts, liabilities, maintenance and children's allowance; Loan histories. Creditors must check the technical information on which they rely to determine their solvency against relatively robust data from third parties, such as copy of declarations, W-2s, salary slips, government or government revenue or entitlement notes and various other resources.
In particular, no-doc mortgages will not be able to meet the repayment obligations. Furthermore, specific provisions exist for ballon loan, pure interest loan and redemption loan. 1, Mortgage credit analysis for mortgage insurance of single-to-four piece mortgage loan, with corresponding changes. While the details in Annex Q indicate that this is a careless person's pitfall, the CFPB considers that these guidance contains clear, well-established benchmarks for the determination of whether a loan is a qualifying mortgage and finds that the methodology is compatible with the provisions for provisioning set out in the Dodd-Frank Act.
It is important that the eligibility criteria do not require that a borrower make minimal prepayments or that lenders take into account the creditworthiness of the borrower when assessing its eligibility for repayment. Naturally, a lender's subscription policy may contain one or both of these conditions. Furthermore, more relaxing regulations govern refinancing from a floating interest mortgage, a pure interest mortgage or a negative amortization mortgage to a "standard mortgage" with a "significantly" lowerayment.
Instead of determining an option for repayment, the lender must check whether the new standardised mortgage can avoid failure once the mortgage has been funded. Are there clear line clauses in the Ability-to-Repay provisions for the delimitation of repayability? As the CFPB states in its official interpretations, the Ability-to-Repay Principles do not contain extensive norms on how to underwrite, and lenders are free to choose how much revenue is needed to assist a particular lending activity.
Rather, it depends on the technical insurance standard used by the lender, the facts and conditions of the particular lending and the way in which the technical insurance standard is used for those facts and conditions, whether a particular provision of the capacity to redeem is appropriate and has been made in good faith. 2. Exactly what is a "qualified mortgage"?
There are three kinds of "qualified mortgages" under the Ability-to-Repay rules. "According to the general definitions, a "qualified mortgage" is a mortgage loan: This provides for periodical recurring montly instalments which are essentially the same (but exclude bad amortisation loan, interest-free loan and ballon loan) with a maturity not exceeding 30 years;
The sum of points and charges to be paid in relation to the execution of the lending operation shall not be in excess of certain thresholds (3 per cent of the aggregate amount of the loan in the case of mortgages of USD 100,000 or more and different thresholds in the case of smaller loans) for which the Mortgagor has a combined or backend debt-to-repay relationship (calculated in accordance with the Ability-to-Repay Rules) not exceeding 43 per cent.
Temporary rules. Given the fragility of the mortgage and loan market and the need to guarantee the access to loans for a wide range of users, CFPB has also provided for a temporary class of qualifying mortgage loans which fulfil the first three repayment criteria mentioned above and can be bought or secured either by Fannie Mae or Freddie Mac, while this unit is operating under the supervision or administration of the Bundesanstalt für Wohnungswesen, which is covered by EU insurance.
The temporary qualifying mortgage class expires when these mortgage lenders adopt their own qualifying mortgage regulations or, in the case of Fannie Mae or Freddie Mac, end their conservatories or bankruptcies. However, this temporary class of qualifying mortgage will run until 10 January 2021. Of course, the transitional regime would not cover mortgage credit with capital in surplus to the amount authorised for sale or guaranteed by the agency (so-called 'jumbo' credit).
Ballon payments qualifying mortgage. Although the general rules exclude ballon credit, the Ability-to-Repay Rules apply a specific arrangement under the Dodd-Frank Act to qualify certain ballon credits as qualifying mortgage when they originate from small holders of credit in predominantly countryside or under-served areas and are retained in the portfolios. Ballon payments mortgage must have a maturity of at least five years, have a guaranteed interest period, comply with certain fundamental actuarial requirements and, although the lender must take into account the indebtedness metrics, they are not covered by the general 43 per cent requirements.
In order to be regarded as a balloon-payable mortgage, a lender must have at least 50 per cent of its first-line mortgage in either country or under-served areas (as determined annually by the CFPB), less than $2 billion in asset values, and no more than 500 first-line mortgage per year (together with its affiliates).
Bondholders typically have to keep qualifying ballon mortgage loans on their portfolio for three years to obtain their "qualifying mortgage" rating. How does it help to open a "qualified mortgage" according to the Ability to Repay Rules? It is assumed that a mortgage loan that meets the criteria of a "qualified mortgage" meets the repayment obligation of the Ability-to-Repay rules.
Creditors (and their assignees) of a qualifying mortgage that is not a "higher-priced" mortgage have the advantage of a secure harbour or a final statement that the lender has met the repayment terms. Where the qualifying mortgage loan is a "more expensive" mortgage loan, it is assumed that the lender and its assignors have fulfilled the repayment obligation.
Under the Capability Rules, a "higher-priced" mortgage loan has an interest annually that is 1.5 per cent or more higher than the median bid price for a similar mortgage loan for a first loan or 3. 5% or more for a subordinated mortgage loan. In conclusion, it is assumed that the lenders of qualifying mortgage-backed securities under the secure harbour procedure have granted the credit in accordance with the repayment terms of the Ability-to-Repay Rules.
However, a refutable assumption of adherence may be rebutted by a lender by demonstrating that the lender has not reasonably determined, in good faith, the lender's capacity to pay back the mortgage loan at the conclusion of the loan operation. Official interpretations show the CFPB's opinion that a borrowing party could refute the assumption by demonstrating that, at the point of borrowing, on the basis of the information available to the lender, the'borrower's incomes, liabilities, alimony payments and children's allowance' are present,
Every month the debtor would be left with "insufficient remaining earnings or property" (with the exception of the value of the pledged property) to cover the cost of life (including all recurrent and substantial unindebted liabilities of the debtor, such as nutrition, clothes, petrol and healthcare).
The official interpretations, however, also state that the longer a debtor proves its effective capacity to pay back a mortgage loan without amendment or restatement or after an interest margin revision, the less likely it is that the debtor will be able to refute the assumption. Since many of the necessary elements for a proper mortgage assessment are de facto fragile, the safety harbour and the refutable assumption may offer less security to the creditor and his agent than would initially appear to be the case, as lenders may always question adherence to one or more of these elements.
Specifically, a debtor may question the qualifying mortgage loan as a defence against enforcement at any point during the term of the loan. In addition, the safeguards provided by the safety harbour and the refutable acceptance of qualifying mortgage loans shall be limited to exposures related to the borrower's repayment capacity and shall not prejudice other entitlements of the lender.
The creditor must keep proof of adherence to the eligibility criteria for repayment for a three-year follow-up to the conclusion of the relevant lending operation. A longer storage time would be more conservative in order to meet any future challenge in determining recoverability. Is there any specific sanction or remedy for infringements of the defensive measures?
Dodd-Frank Act provides specific legal redress for breaches of TILA's repayment obligation (§ 129C(a)). Borrowers who sue a lender for non-compliance with the repayment obligations in a timely manner may, in respect of TILA's real loss, other legal losses, legal expenses and TILA's attorneys' fee, claim specific legal compensation in the amount of all financial changes and charges made by the lender (unless the lender proves that the non-compliance is immaterial).
The TILA (as modified by the Dodd-Frank Act) also provides that a debtor may claim a breach of repayment obligations "in defence of a refund or set-off" if a lender or its authorised representative or representative commences enforcement. Rules on the eligibility for repayment also contain restrictions on the use of advance payment sanctions.
Mortgage loans cannot contain a early repayment fee unless the early repayment fee is otherwise legally permissible, the loan has a set interest payment, the mortgage loan is a qualifying mortgage and the operation is not a "higher-priced loan" under Regulation Z (not to be mixed up with a "higher-priced" qualifying mortgage).
Furthermore, advance payment fines may not be imposed more than three years after the drawdown of the loan and may not exeed 2 per cent of the amount of the loan due within the first two years and 1 per cent of the amount of the loan due in the third year. Bondholders must also provide the borrower with an alternate loan that does not contain a repayment fee in accordance with the eligibility rules.
What impact will the ability rules for repayment of mortgage loans have on the granting, sale, operation and securitisation of mortgage loans? While it is still too early to say it, the rules on the ability to repay loans can reduce loan access and lead to higher loan charges to meet the cost of complying with the rules, although CFPB has tried to meet the needs of the borrower and creditor (and their beneficiaries).
Certain kinds of housing credit, such as no-doc credits, will no longer be available. Borrower's capacity to take new defensive measures against foreclosures on defaulting mortgage lending may also result in higher sealing off charges, longer enforcement periods (although this may be less likely for experienced mortgages) and higher seriousness of credit loss.
At all events, bondholders and assigns must thoroughly review the ability to repay policy and apply guidelines and practices that guarantee adherence to the policy and correct designation of eligible mortgage loans.