8/01/2016

Mortgage Loans 101


Creditors have the incentive to originate and fund prime loans and other lower-priced loans that are qualified mortgages because, in doing so, creditors are conclusively presumed to have met legal requirements for determining a borrower’s ability to repay a mortgage (12 C.F.R. §1026.43(e)(1)).  In order to secure the protection from liability that these safe harbor qualified mortgages offer, many creditors began 2014 with lending programs that focused on the origination of these loans.  Even though the Qualified Mortgage Rule also offers a rebuttable presumption of compliance to creditors that make higher-priced qualified mortgages, many chose to reduce lending risks by limiting their originations to those for safe harbor qualified mortgages.  

In January 2014, when new lending regulations became effective, transactions for conventional mortgages were separated into two types:  those for qualified mortgages and those for non-qualified mortgages. The underwriting requirements for qualified mortgages are found in the Qualified Mortgage Rule (QM Rule), and those for non-qualified mortgages are found in the Ability to Repay Rule (ATR Rule).  The ultimate purpose of both Rules is to ensure that creditors base their lending decisions on “a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms” (15 U.S.C. §1639c(a)).  The Consumer Financial Protection Bureau (CFPB) wrote the Qualified Mortgage and Ability to Repay Rules, and is responsible for implementation and enforcement of both.
Depository lenders have additional incentives to limit their originations to those for qualified mortgages because liability limitations for these loans and the reduced likelihood of default on qualified mortgages enables them to reduce the amount of cash reserves that they must maintain to cover future and unanticipated liability and losses. Module 1 is built around a fictitious lending transaction that illustrates the steps that loan originators must take to comply with regulations for the origination of qualified mortgages, and that shows how the origination of a qualified mortgage can benefit both creditors and consumers.
The downside of limiting originations to those for qualified mortgages was that many creditworthy consumers fell just short of meeting the underwriting requirements for these loans, and creditors were turning away their business.  Furthermore, by restricting lending programs to those for safe harbor qualified mortgages, creditors were even turning away consumers who were eligible for qualified mortgages but who had credit blemishes that limited their loan options to higher-priced mortgages.  By the fall of 2014, some creditors began to expand their lending programs to include the origination of higher-priced qualified mortgages and non-qualified mortgages.  
·         First- and subordinate-lien loans
·         Loans secured by non-owner-occupied residences (i.e. second homes and investment properties), as well as loans secured by a borrower’s principal residence
·         Refinances
·         Closed-end home equity loans
The only transactions that are not subject to these requirements are open-end home equity plans, reverse mortgages, bridge loans with terms of 12 months or less, construction loans, and loans made by a housing finance agency (12 C.F.R. §1026.43(a)).
Requirements for a 20% down payment for home purchase transactions have typified lending programs since the 2007 crash.  With the exception of a new product for first-time homebuyers that is discussed in Module 2, Fannie Mae and Freddie Mac will not purchase a loan unless the borrower: 
·         Has made a down payment in an amount that represents 20% of the purchase price, or
·         Has made a smaller down payment and purchased private mortgage insurance
  • A maximum debt-to-income ratio of 43%, calculated in accordance with the guidelines found in Appendix Q
  • Verification of Sam and Anna’s income and assets
  • Calculation of regular and substantially equal periodic payments using:
    • The maximum interest rate that may apply during the loan’s first five years (measured from the date that the first periodic payment is due), and
    • Periodic payments that will repay either (1) the outstanding principal balance over the remaining term of the loan after the interest rate adjusts to the maximum rate applicable during the loan’s first five years, or (2) the loan amount over the loan term

(12 C.F.R. §1026.43(e)(2))
Rule categorically excludes from the definition of a qualified mortgage include:
·         Payment-option loans, or any other type of negative amortization loan with a payment program that allows borrowers to pay less interest than the amount that is due with each periodic payment
·         Interest-only loans that allow borrowers to defer payments on the principal loan balance
·         Balloon payment mortgages, unless the loan is made by a small creditor serving a rural or undeserved area (assume that XYZ Bank does not meet these criteria)

(12 C.F.R. §1026.43(e)(2)(i))
qualified mortgage may include a balloon payment if it is made by a small creditor in a rural or underserved area and the creditor holds the loan in its portfolio for at least three years after consummation or sells it to another small creditor. These qualified mortgages must have:
·         Substantially equal regular payments that do not result in negative amortization
·         A loan term that does not exceed 30 years
·         Points and fees that do not exceed 3% of the loan amount, or other applicable caps
The underwriting for balloon payment qualified mortgages must include:
·         Analysis of the consumer’s debt-to-income ratio or residual income
·         Analysis of the consumer’s ability to make monthly mortgage payments (except for the balloon payment) and mortgage-related obligations based on:
o    Substantially equal amortizing payments
o    A fixed rate of interest, and
o    A loan term of five years or longer
(12 C.F.R. §1026.43(f)(1)(iv))
The debt-to-income ratio used to determine eligibility for a balloon payment qualified mortgage is not as strict as the analysis used to determine eligibility for a qualified mortgage without a balloon payment.  There is no maximum debt-to-income ratio for balloon payment qualified mortgages and no residual income threshold that loan applicants must satisfy. The regulations expressly state that the debt-to-income ratio for balloon payment qualified mortgages should be completed without regard to the standards in Appendix Q (12 C.F.R. §1026.43(f)(1)(i)).    Therefore, these loans give mortgage lenders some additional flexibility when determining a consumer’s eligibility for a home loan.  
Balloon payment mortgages offer borrowers the opportunity to work with a lender that is not trying to originate loans that meet the requirements set by an investor that will purchase the mortgages.  For example, a small creditor that holds loans in its portfolio can set its own requirements for down payments and private mortgage insurance since it is not selling the loan to an investor such as Fannie Mae or Freddie Mac.  The small creditor has the freedom to decide how much or how little risk it is willing to assume with a particular consumer
A small creditor is defined as one that:
·         Made more than 50% of its first-lien closed-end mortgages in rural or underserved areas during any of the three preceding calendar years
·         Originated no more than 500 first-lien mortgages during the preceding calendar year (including originations by affiliates), and
·         Had total assets of less than $2 billion at the end of the preceding calendar year

(12 C.F.R. §1026.43(f)(1)(vi))
The CFPB publishes and annually updates a list of rural and underserved counties. The list is available on the CFPB website.
A balloon payment qualified mortgage will lose its qualified mortgage status if the small creditor sells or transfers the loan within three years of consummation to an entity other than another small creditor. The loan may retain its qualified mortgage status if the sale of the mortgage is made pursuant to a capital restoration plan or pursuant to a merger or acquisition.
The Qualified Mortgage Rule applies to conventional mortgages; however, when Congress adopted the Dodd-Frank Act and included a directive for the creation of the Qualified Mortgage Rule, it did not fail to address non-conventional mortgages.  The law includes provisions directing the Department of Housing and Urban Development (HUD) and the Department of Veterans Affairs (VA) to “prescribe rules defining the types of loans they insure, guarantee, or administer…that are qualified mortgages” (15 U.S.C. §1639c(b)(3)(B)(ii)).  In December 2013, HUD published its final rule for Federal Housing Administration (FHA) qualified mortgages, and in April 2014, the VA issued its rule for qualified mortgages.
HUD’s rule for qualified mortgages became effective on January 10, 2014. This was the same day that creditors were required to begin originating loans in compliance with the CFPB’s Qualified Mortgage Rule. There are two important points to understand about HUD’s Qualified Mortgage Rule:
·         Single-family FHA loans are qualified mortgages, and
·         There is no firm debt-to-income ratio for FHA qualified mortgages
Mortgages for single-family homes that are insured under Title II of the National Housing Act must meet the points and fees limitations established under the CFPB’s Qualified Mortgage Rule. Therefore, the 3% cap on points and fees that applies in most transactions is also applicable to FHA mortgages. HUD has put significant pressure on FHA lenders to meet the points and fees cap for qualified mortgages by refusing to insure mortgages that exceed these points and fees limitations.
HUD’s rule for qualified mortgages does not include a firm limitation for loan applicants’ debt-to-income ratios.  In its proposed rule for FHA qualified mortgages, HUD explained that it was not planning to adopt the CFPB’s 43% debt-to-income ratio because doing so would result in “a lower share of safe harbor qualified mortgages for FHA and would negatively affect borrowers with greater than 43 percent total monthly debt-to-income ratios” (78 FR 59898).  HUD found support for this position from those who commented on the proposed rule, and its final rule gives creditors flexibility that is not available under the Qualified Mortgage Rule for conventional mortgages.
HUD Qualified Mortgage Rule states that a Title II single-family mortgage is a safe harbor qualified mortgage if it has an APR that does not exceed the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium and 1.15 percentage points for a first-lien mortgage (24 C.F.R. §203.19(b)(3)(ii)).  
Rule extends a rebuttable presumption of compliance to FHA single-family mortgages that have an APR that exceeds the average prime offer rate by more than the sum of the annual mortgage insurance premium and 1.15 percentage points (24 C.F.R. §203.19(b)(2)(i)). In order to rebut a presumption of compliance with ability to repay requirements, the regulations require proof that:
·         The points and fees for the loan exceed those allowed for a qualified mortgage, or
·         Even though the mortgage has been endorsed for insurance under the National Housing Act, the lender failed to make a reasonable and good faith determination of the borrower’s repayment ability by failing to consider his/her income, assets, and creditworthiness, as required by HUD regulations
(24 C.F.R. §203.19(b)(2)(ii))
In addition to offering more flexible guidelines for debt-to-income ratios, FHA loans are available to consumers with lower credit scores and less cash for down payments. With insurance in place to cover losses that may result from a default, FHA lenders are willing to consider applications from consumers with lower credit scores, and FHA loans are available to borrowers who can make a down payment of as little as 3.5% of the purchase price.  FHA loans are, therefore, a good alternative product for creditworthy consumers who cannot meet the 43% debt-to-income ratio for conventional qualified mortgages or the higher down payment requirements that conventional lenders expect borrowers to meet.  In other respects, the underwriting for conventional loans and FHA loans is similar, with requirements in place for verification of income and assets and for a thorough assessment of repayment ability.
To qualify for a VA-guaranteed loan, a veteran must meet:
·         A debt-to-income ratio of 41%, and
·         A residual income analysis
·         residual income analysis allows a lender to determine “whether the veteran’s monthly residual income will be adequate to meet living expenses after estimated monthly shelter expenses have been paid and other monthly obligations have been met” (38 C.F.R. §36.4340(e)). VA lenders have some flexibility in applying these standards as long as they can justify their decisions. For example, if a veteran’s debt-to-income ratio does not exceed 41% but the veteran does not satisfy the residual income analysis, a lender may approve the loan “with justification.”
·         On the basis of the similarities between underwriting requirements for VA-guaranteed loans and qualified mortgages under the Qualified Mortgage Rule, and due to the fact that differences between the two lending programs represent the VA’s mission to serve veterans, the VA has determined that VA- guaranteed loans that are made in compliance with the VA lending standards are safe harbor qualified mortgages (38 C.F.R. §36.4300(b)(2)). Direct loans to Native American veterans are also safe harbor qualified mortgages.
·         Appendix Q to Regulation Z provides additional guidance regarding the verification of employment and income.  The guidelines in Appendix Q are very helpful when a loan applicant like Sam has an employment record showing that he has not been in his current position for two years.  According to Appendix Q, Lori was required to “verify the consumer’s employment for the most recent past two full years” (Appendix Q §I.A.2.a.).  
employment verification may be oral, verification of the amount of income must be written, and records used for this purpose may include:
·         A tax return transcript issued by the IRS
·         An IRS W-2 form
·         Payroll statements
·         Financial institution records
·         Employer records
·         Records from a federal, state, or local governmental entity stating the consumer’s income from benefits or entitlements
·         Receipts from a check cashing service
·         Receipts from a funds transfer service
(12 C.F.R. §1026.43(c)(4))
employment verification may be oral, verification of the amount of income must be written, and records used for this purpose may include:
·         A tax return transcript issued by the IRS
·         An IRS W-2 form
·         Payroll statements
·         Financial institution records
·         Employer records
·         Records from a federal, state, or local governmental entity stating the consumer’s income from benefits or entitlements
·         Receipts from a check cashing service
·         Receipts from a funds transfer service
(12 C.F.R. §1026.43(c)(4))
·         The five-year limitation for determining the impact of rate changes for qualified mortgages and the unlimited time period for determining the impact of rate changes for non-qualified mortgages, and
·         The ability to take periodic rate caps into consideration for transactions involving qualified mortgages and the inability to do so when the transaction is one for a non-qualified mortgage
In the Preamble to the Qualified Mortgage Rule, the CFPB uses the following example to illustrate the impact of an underwriting analysis that is limited to the first five years of a loan term:
“The qualified mortgage underwriting rules ignore any adjustment in interest rate that may occur after the first five years; thus, for example, for an ARM with an initial adjustment period of seven years, the interest rate used for the qualified mortgage calculation will be the initial interest rate.”
(78 FR 6479)
the interest rate for a 5/1 ARM does not change until 61 months after the first regular periodic payment is due, a creditor may limit its payment calculations to those based on the initial interest rate.  However, if the rate increases during the initial 60-month period, the creditor must base payment calculations on that amount.   For example, in the scenario, if the interest rate does not change until 61 months after the first loan payment is due, XYZ Bank has no legal obligation to determine whether these borrowers would have the ability to make payments that are calculated at a higher interest rate at the beginning of year six of the loan.
must be determined using:
·         Standards established in Appendix Q, and
·         The consumer’s monthly payments on:
o    The mortgage that is the subject of the transaction (the “covered transaction”)
o    Mortgage-related obligations, including property taxes, homeowners’ insurance, homeowners’ association fees, mortgage insurance, and
o    Any simultaneous loans that the creditor knows or has reason to know will be made
(12 C.F.R. §1026.43(e)(2)(vi))
A simultaneous loan is another covered transaction that is secured by the same dwelling and made to the same consumer (12 C.F.R. §1026.43(b)(12)).
·         Monthly housing expenses: This term is not defined, but since the Appendix addresses mortgage-related obligations separately, monthly housing expenses presumably include costs such as those for principal and interest, property taxes, homeowners’ insurance, mortgage insurance, and condo association fees.
·         Recurring charges lasting 10 months or more: These charges may include payments on installment contracts, child support, and alimony.
·         Debts lasting less than 10 months: These debts must be included if they affect the consumer’s ability to pay the mortgage during the months immediately after closing, especially if the consumer will have limited or no cash assets after closing.
·         Revolving charge accounts: Monthly payments on revolving charge accounts and other open-ended accounts must be included in the debt-to-income computation, even if they are likely to be paid off within 10 months or less. Note, however, that if a consumer has an outstanding balance on a revolving account, but no specific minimum monthly payment, the payment must be calculated as the greater of 5% of the balance or $10.
·         Projected obligations due within 12 months of closing: These may include student loans or balloon payment debts, and they must be included by the creditor as anticipated monthly obligations during the underwriting analysis. However, if a consumer can produce written evidence that the debt will be deferred to a period outside the 12-month timeframe, the creditor does not have to include the debt in the debt-to-income analysis.

Interestingly, the 43% debt-to-income ratio for conventional mortgages was adapted from FHA guidelines. However, when HUD wrote its rule for qualified mortgages, it decided to use the 43% ratio as a guideline, and not as a rule.  HUD decided against adopting the CFPB’s debt-to-income ratio requirement so as to “remain consistent with HUD’s mission with respect to underserved borrowers.”[1]  As a result of this decision, FHA loans are a sound product choice for a creditworthy consumer whose debt-to-income ratio is greater than 43%.  FHA loans also meet lending guidelines for creditors who restrict their originations to those for qualified mortgages, because rulemaking by HUD has established that FHA loans are qualified mortgages.


[1] HUD. “Qualified Mortgage Definition for HUD Insured and Guaranteed Singe Family Mortgages.”  30 Sept. 2013. https://www.federalregister.gov/articles/2013/09/30/2013-23472/qualified-mortgage-definition-for-hud-insured-and-guaranteed-single-family-mortgages
points and fees for any FHA qualified mortgage cannot exceed 3% of the total loan amount
following amounts are the base figures included in the Qualified Mortgage Rule:
·         For a loan amount greater than or equal to $100,000: 3% of the total loan amount
·         For a loan amount greater than or equal to $60,000 but less than $100,000: $3,000
·         For a loan amount greater than or equal to $20,000 but less than $60,000: 5% of the total loan amount
·         For a loan amount greater than or equal to $12,500 but less than $20,000: $1,000
·         For a loan amount less than $12,500: 8% of the total loan amount
(12 C.F.R. §1026.43(e)(3))
This tiered approach seems confusing because the caps in some tiers are expressed as a percentage and the caps in others are expressed as a dollar amount. In the Preamble to the Rule, the CFPB explains that the use of percentage and flat dollar limits was adopted to avoid “anomalous results at tier margins” (78 FR 6531).
With “points and fees” defined to include all compensation paid directly or indirectly to these entities and individuals, the term appears to have very broad coverage. However, the regulations create exceptions, which include:
·         Compensation that a consumer pays to a mortgage broker, which is already included in the finance charge: The regulations exclude any compensation that a consumer pays to a mortgage broker because the law already requires the inclusion of this amount in the finance charge (12 C.F.R. §1026.32(b)(1)(ii)(A)).
·         Compensation paid by mortgage brokers to their loan originators: If compensation is paid by a mortgage broker to a loan originator that is an employee of the mortgage broker, this compensation is not added to the points and fees (12 C.F.R. §1026.32(b)(1)(ii)(B)).
·         Compensation paid by creditors to their loan officers: Due to the complex arrangements for loan officer compensation and the difficulties involved in tracking this compensation to a particular transaction, the CFPB decided to exclude from points and fees the compensation paid by creditors to their loan officer employees. Therefore, a bank such as the fictitious XYZ Bank does not have to identify the exact amount that it pays a loan officer for a particular transaction (12 C.F.R. §1026.32(b)(1)(ii)(C)).
·         Compensation paid by a retailer of manufactured homes to its employees: If a retail seller of manufactured homes qualifies as a loan originator, the compensation that a consumer pays to the retailer for loan origination activities is included in the points and fees calculation. However, compensation that a retailer pays to its employees is not included (12 C.F.R. §1026.32(b)(1)(ii)(D)).

Compensation that a creditor pays to a mortgage broker is the form of loan originator compensation that is added to the points and fees calculation. By requiring the addition of mortgage broker compensation that is paid by a creditor to the points and fees calculation, the Qualified Mortgage Rule discourages mortgage brokers from accepting additional compensation from a consumer. If compensation from two sources (dual compensation) is added to the points and fees calculation, the loan is far more likely to trigger the 3% points and fees limitation, and the transaction will not result in the origination of a qualified mortgage.
Although the scenario’s $1,440 origination fee did not make its way into the points and fees calculation as compensation paid to a loan originator, it was included in the finance charge, which is added to the points and fees calculation as discussed next.
Points and fees include items that are included in the finance charge, and a look at the definition of “finance charge” is necessary to identify these items. The term “finance charge” is defined as the cost of consumer credit as a dollar amount (12 C.F.R. §1026.4(a)). Therefore, many charges associated with a mortgage make their way into the points and fees calculation as a finance charge.
Finance charges for a mortgage loan that are included in the points and fees calculation include:
Charges by creditors: Points and fees include charges that consumers directly or indirectly pay and that creditors directly or indirectly impose as an incident to, or a condition of, the extension of credit (12 C.F.R. §1026.4(a)(1)). For example, XYZ Bank’s $1,440 origination fee is imposed as a condition that Sam and Anna must meet in order to secure a mortgage.
Charges by third parties: Charges by any party other than the creditor are included in the finance charge, which is included in the calculation of points and fees if the creditor:
·         Requires the use of a particular third-party settlement service provider, or
·         Retains a portion of the third-party charge, or the fee is paid to an affiliate of the creditor
(12 C.F.R. §1026.4(a)(1))
Most third-party charges include real estate-related fees such as fees for appraisals, investigations, credit report fees, and flood hazard determination.
prepayment penalties are prohibited unless:
·         The qualified mortgage has a fixed interest rate
·         The qualified mortgage is not a higher-priced mortgage loan, and
·         The creditor offers the consumer a comparable alternate loan without a prepayment penalty
(12 C.F.R. §1026.43(g))
When prepayment penalties are allowed, they must not exceed the following percentages of the outstanding loan balance that the consumer prepays:
·         2% for prepayments made during the first two years following consummation
·         1% for prepayments made during the third year following consummation
·         0% for prepayments made three years after consummation
(12 C.F.R. §1026.43(g)(2))
alternate mortgage without a prepayment penalty must have:
·         The same “type of interest rate” as the mortgage that includes a prepayment penalty provision
·         The same loan term as the term for the mortgage that includes a prepayment penalty provision
·         A payment schedule that does not result in negative amortization or include a balloon payment
·         Points and fees that do not exceed the caps for a qualified mortgage
The creditor must also offer the alternate mortgage on the basis of a good faith belief that the consumer likely qualifies, based on the information known to the creditor at the time the transaction is offered (12 C.F.R. §1026.43(g)(3)(v)).
Premiums for optional insurance products such as credit life and credit disability insurance are excluded from the calculation of points and fees if each of the following requirements is met:
·         The creditor discloses in writing that it does not require the insurance coverage
·         The premium for the initial insurance term is disclosed in writing
·         If the insurance term is shorter than the loan term, this fact is disclosed in writing
·         The consumer signs or initials an affirmative written request for the insurance after receiving the disclosures
(12 C.F.R. §1026.4(d)(1))
Borrowers may achieve price adjustments for their mortgages with the use of discount points. Borrowers may use discount points to buy down the interest rate that a lender charges them for a mortgage, and the price for one point is typically 1% of the total loan amount. For example, if a borrower’s loan amount is $100,000, the purchase of a discount point would cost $1,000.
Discount points benefit borrowers by enabling them to lower the interest rate for the full term of the loan. For this reason, the purchase of discount points is sometimes referred to as a “permanent buydown.” Another benefit of discount points is that they are tax deductible. Discount points benefit lenders by enabling them to earn upfront cash on a mortgage transaction. The definition of points and fees excludes up to two bona fide discount points paid by the consumer in connection with a transaction (12 C.F.R. §1026.32(b)(1)(i)(E)).
The rule that creates an exclusion for third-party charges conflicts with the rule that requires creditors to include real estate-related fees in the points and fees calculation. How can one section of the regulations (12 C.F.R. §1026.32(b)(1)(iii)) include these charges in the calculation of points and fees while another excludes them? The Official Interpretations address the confusion, stating, “If a charge is required to be included in points and fees under §1026.32(b)(1)(iii), it may not be excluded under §1026.32(b)(1)(i)(D), even if the criteria for exclusion in §1026.32(b)(1)(i)(D) are satisfied” (Official Interpretations, §32(b)(1)(i)(D)-3). The Official Interpretations are essentially stating that the rule for including real estate-related fees in the points and fees calculation trumps the rule that excludes bona fide third-party charges from the calculation.
Qualified Mortgage Rule, the loan is not precluded from being a qualified mortgage if the following conditions are met:
·         The loan meets the underwriting requirements and product feature prerequisites for a qualified mortgage
·         The creditor or the assignee pays the consumer the sum of:
o    The amount by which the transaction’s total points and fees exceeds the applicable limit, and
o    Interest on the dollar amount paid to the consumer – the interest must be calculated using the contract interest rate applicable during the period from consummation until the payment is made to the consumer
·         Payment to the consumer is made within 210 days after consummation of the loan, and before any of the following events occur:
o    The consumer files an action related to the mortgage
o    The consumer sends written notice to the creditor, assignee, or servicer stating that the points and fees exceed the applicable caps
o    The consumer becomes 60 days past due on his/her mortgage payments
·         The creditor or assignee maintains and follows policies and procedures for post-consummation review of points and fess, and has a policy of making the required payments to consumers when inadvertent points and fees overages are discovered
(12 C.F.R. §1026.43(e)(3)(iii))
cure provisions are only available for transactions consummated on or after November 3, 2014, which was the effective date of the provisions. The provisions for curing inadvertent overages of points and fees are not permanent.  The regulations include a January 10, 2021 sunset provision
temporary definition of a “qualified mortgage” are covered transactions with all of the following characteristics:
·         The mortgage has all of the product features of a qualified mortgage
·         The mortgage has a loan term of no more than 30 years
·         The points and fees for the mortgage do not exceed the 3% cap for mortgages of $100,000 or more, or the caps established for smaller loans
Qualified mortgage products do not include:
·         Payment-option loans
·         Interest-only loans
·         Balloon payment mortgages, except for those made by small creditors in rural areas
Balloon payment qualified mortgages must:
·         Be held in the small creditor’s portfolio for three years
·         Meet the points and fees limitations for qualified mortgages
·         Not exceed a 30-year loan term, and
·         Not include a negative amortization feature
Small creditors must consider the consumer’s debt-to-income ratio, but loans are not subject to the maximum debt-to-income ratio of 43%.
Small creditors must verify a consumer’s ability to make monthly mortgage payments (excluding the balloon payment), and payments of mortgage-related obligations must be based on:
·         Substantially equal payments
·         A fixed interest rate
·         A loan term of five years or more
Only small creditors may originate balloon payment qualified mortgages, and they must:
·         Make more than 50% of their first-lien closed-end mortgages in rural or underserved areas during any of the three preceding calendar years
·         Originate (with their affiliates) no more than 500 first-lien mortgages during the preceding calendar year
·         Have total assets of less than $2 billion
Qualified Mortgage Rule allows creditors to conduct higher-priced covered transactions, which it defines as a closed-end transaction secured by a dwelling that has an annual percentage rate (APR) that exceeds the average prime offer rate by:
·         1.5 percentage points for transactions involving first-lien loans
·         3.5 percentage points for transactions involving subordinate-lien loans[1]
Qualified mortgages include transactions for higher-priced mortgage loans, which are closed-end transactions secured by a dwelling and that have an APR exceeding the average prime offer rate by:
·         1.5 percentage points for transactions involving first-lien loans
·         3.5 percentage points for transactions involving subordinate-lien loans
These transactions offer creditors the protection of a rebuttable presumption of compliance with ability to repay requirements.
In successful actions for violations of the Ability to Repay Rule, consumers may recover:
·         Actual damages
·         Finance charges
·         Statutory damages of $400 to $4,000
·         Court costs and attorneys’ fees
The three-year statute of limitations for filing an action is measured from the date the violation occurred.
A consumer may assert an ability to repay violation during a foreclosure action and no statute of limitation applies.
Enforcement relief may not be available when the loan sold to an investor shows that the transaction involved:
·         Misrepresentations, misstatements, and omissions
·         Data inaccuracies related to underwriting and appraisals
·         Unacceptable mortgage products, and
·         The lender’s failure to comply with the law
No enforcement relief is available for misrepresentations, misstatements, and omissions when the misrepresentations involve:
·         Three or more loans delivered to Fannie Mae or Freddie Mac by the same lender
·         A common pattern or activity
·         A common party
·         “Significant” misrepresentations, misstatements, or omissions
Transactions involving fraud are always subject to repurchase.
No enforcement relief is available for data inaccuracies that involve:
·         Five or more loans
·         Data that differs from information in the lender’s loan file
·         “Significant” data inaccuracies
Misrepresentations and data inaccuracies are “significant” if the loan would not be eligible for sale to Fannie Mae or Freddie Mac without the misrepresentations or inaccuracies, or would have been eligible for purchase under different terms.
No enforcement relief is available for mortgage products that are ineligible for purchase by Fannie Mae or Freddie Mac, and these include:
  • Interest-only loans
  • Graduated payment mortgages
  • Stated-income loans
  • No-doc loans
  • Mortgages with a negative amortization feature
  • Construction mortgages (except for construction-to-permanent)
  • Daily simple interest mortgages
  • Mortgages with prepayment penalties
  • Reverse mortgages
  • Balloon payment mortgages
  • Subordinate-lien mortgages
No enforcement relief is available for loans involving violations of the law that:
·         Impair the ability of Fannie Mae, Freddie Mac, or a loan servicer to enforce the note
·         Result in assignee liability for Fannie Mae or Freddie Mac
·         Involve violations of:
o    Regulations of the Treasury Department’s Office of Foreign Assets Control
o    The Fair Housing Act
o    The Equal Credit Opportunity Act’s prohibitions against discrimination
o    Federal and state laws against unfair, deceptive, or abusive acts or practices
o    The Securities and Exchange Act
The GSEs will not issue repurchase requests for violations of the Ability to Repay Rule unless a court or a regulator has determined that the creditor failed to comply with the Ability to Repay Rule when originating the loan.
Non-qualified mortgages are those that do not meet the product feature prerequisites of a qualified mortgage.
Regulations for the origination of non-qualified mortgages are found in the Ability to Repay Rule, and they require:
·         Verification of income and assets with reasonably reliable third-party records
·         Employment verification
·         Calculation of the monthly mortgage payment, including payment on any simultaneous loan
·         Calculating the consumer’s other debt obligations, alimony, and child support
·         Calculating the consumer’s debt-to-income ratio or residual income
Payment calculations for non-qualified mortgages are based on:
·         The loan’s fully indexed rate using:
o    The index established in the lending agreement
o    The margin set by the creditor
·         Fully amortizing payments that are substantially equal
The lender may not consider the impact of periodic interest rate caps.
In November 2014, Fannie Mae and Freddie Mac announced that they will purchase loans with a:
·         97% LTV, and
·         3% down payment
These loans for home purchases are available to:
·         First-time home buyers (consumers who have not had an ownership interest in a home during the past three years)
·         Consumers purchasing a primary residence
·         Consumers who secure private mortgage insurance
·         Consumers with a minimum credit score of 620
Requisite loan terms include:
·         Fixed interest rate
·         Loan terms that do not exceed 30 years
Fannie Mae and Freddie Mac will also purchase 97% cash-out refinances if the borrower’s existing loan is owned by Fannie Mae or Freddie Mac.
Current insurance requirements for FHA loans are:
  • 1.75% of the loan amount for upfront mortgage insurance premiums
  • .85% of the total loan amount for annual mortgage insurance premiums
Two years after enacting ECOA, Congress amended the law to expand its protected classes to include minorities, the elderly, and consumers who receive public assistance income. Today, ECOA and its implementing regulations prohibit creditors from making a credit decision based on a loan applicant’s:
·         Race
·         Color
·         Religion
·         National origin
·         Sex
·         Marital status
·         Age, as long as the loan applicant is old enough to enter a contract
·         Potential to have or raise children
·         Receipt of income from a public assistance program
·         Exercise of the loan applicant’s rights under the Consumer Credit Protection Act
(12 C.F.R. §§1002.2(z); 1002.4(a))
In addition to its general prohibition against discrimination, ECOA prohibits inquiries about:
  • Race
  • Color
  • Religion
  • National origin
  • Sex
  • A spouse or a former spouse
  • Marital status
  • Birth control, plans for having children, or ability to have children
  • Alimony or child support
  • HMDA inquiries: inquiries regarding race, ethnicity, sex, age, and marital status are permitted for the purposes of complying with the Home Mortgage Disclosure Act (HMDA), which requires data collection in order to monitor and ensure compliance with fair lending laws.
  • Inquiries for special credit: creditors may obtain information about an applicant’s race, ethnicity, religion, sex, or other protected characteristics in order to determine the applicant’s eligibility for special-purpose credit, such as a credit assistance program offered by a not-for-profit organization, or for a federal or state program to assist the economically disadvantaged.
  • Request for title designation: an application may ask for designation of a title, such as Mr., Ms., Miss, or Mrs., as long as there is a statement on the form indicating that designation of a title is optional.
  • Inquiries about a spouse:requests for information about a spouse are permitted when:
    • The spouse is allowed to access the credit
    • The spouse has contractual obligations related to the extension of credit
    • The applicant is relying on the income of the spouse as a basis for repayment
    • The applicant lives in a community property state
    • The applicant is relying on alimony or child support to secure the loan
  • Inquiries about marital status: when a credit application is for secured credit, such as a mortgage, a creditor may inquire about the applicant’s marital status, using only the terms married, separated, or unmarried (which includes those who are single, divorced, or widowed).
  • Inquiries about dependents: though creditors are prohibited from asking questions about birth control, childbearing, and childrearing, they are permitted to ask a loan applicant about the number of his or her dependents and their ages, and about financial obligations for dependents.
  • Inquiries about immigration status: creditors are permitted to ask a loan applicant for information on his or her permanent status or immigration status.
(12 C.F.R. §1002.5)
·         If a creditor takes adverse action on a loan application due to information provided on a credit report from a consumer reporting agency, the creditor must include a loan applicant’s credit score and related information, such as a description of the factors that had an adverse impact on the applicant’s credit score.  This requirement is imposed by the federal Fair Credit Reporting Act (FCRA), but the regulations allow creditors to satisfy the requirements of ECOA and FCRA in a single notice.  Sample forms for meeting the adverse action notice requirement are found in Appendix C of Regulation B.  
Violations of ECOA are also subject to civil actions by individuals and class action groups that have allegedly been victims of discrimination during credit transactions, including transactions for mortgage loans.
ECOA authorizes actual and punitive damages. While actual damages are intended to compensate a consumer for losses resulting from violations of the law, punitive damages are intended to discourage creditors from committing future violations. Punitive damages are limited to:
·         $10,000 for individual actions
·         The lesser of $500,000 or 1% of a creditor’s net worth in class actions
(12 C.F.R. §1002.16(b))
In response to the civil unrest and racial tensions of the 1960s, President Lyndon Johnson established the National Advisory Commission on Civil Disorders, also known as the Kerner Commission.  The Kerner Commission issued a report stating that segregation and inequality were the causes of the nation’s civil disorders, and that “…both open and covert racial discrimination prevented black families from obtaining better housing and moving to integrated communities.”[1]  Discriminatory practices were carried out by real estate professionals, who steered minorities towards segregated neighborhoods, and by mortgage professionals and lenders, who used race instead of creditworthiness as the determining factor when deciding whether to approve or deny an application for a home loan.



[1] Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Supreme Court of the United States No. 13-1371. June 25, 2015. Page 6.

·         The statute of limitations for an individual to file a claim for a violation of ECOA is five years from the date on which the alleged violation occurred.  ECOA claims filed by the Attorney General and administrative actions initiated by governmental agencies are also subject to a five-year statute of limitations.  Often, an individual may have no idea that he or she has experienced discrimination or discouragement.  The law gives these individuals another opportunity to file a private action; this opportunity arises when a federal agency or the DOJ brings an enforcement action.  When individuals learn, as a result of these actions, that they have a potential claim, they have one year to file suit.  This one-year period is measured from the date on which the administrative agency or the Attorney General filed an enforcement action (15 U.S.C. §1691E(f)).   

[1] For transactions involving small creditor portfolio loans and balloon payment qualified mortgages, the threshold is 3.5 percentage points above the average prime offer rate.
in proving that a creditor failed to make a reasonable and good faith effort to determine his/her repayment ability, the creditor is liable for damages, payable to the borrower. Furthermore, if the creditor sold the loan to Fannie Mae or Freddie Mac or to a private investor, it may face additional legal challenges. It is a creditor’s interest in avoiding this liability that makes the origination of safe harbor qualified mortgages desirable, and that motivates creditors to establish more cautious lending standards for rebuttable presumption qualified mortgages.
If a borrower prevails in a civil claim filed against a creditor for violations of the Ability to Repay Rule, the borrower may recover:
·         Actual damages sustained by the consumer
·         All finance charges and fees paid by the consumer
·         Statutory damages, which are no less than $400 and no more than $4,000 for individual actions
·         Court costs and attorneys’ fees
(15 U.S.C. §1640(a))
statute of limitations for filing an action for violations of the Ability to Repay Rule is three years.  This three-year period is measured from the date of the occurrence of the violation
no statute of limitations when a borrower challenges a creditor’s compliance with the Ability to Repay Rule during a foreclosure proceeding.  Therefore, at any time that a borrower faces foreclosure, the lender’s violations of the Ability to Repay Rule may be raised as a defense. However, this is an incomplete defense that is unlikely to stop foreclosure proceedings because the law states that asserting a violation of the Ability to Repay Rule is “…a defense by recoupment or set off…” and limits the damages that a homeowner may recover (12 U.S.C. §1640(k)(1), (2)). Recoupment is defined as the defendant’s right to have a deduction from the amount of the plaintiff’s damages, for the reason that the plaintiff has not complied with the obligations arising under the same contract. In other words, a homeowner may be legally entitled to a reduction in the debt owed to a lender if the lender failed to uphold its obligations during the transaction for a mortgage.
of the Ability to Repay Rule are raised as a defense in a foreclosure action that is brought more than three years after consummation, damages are limited to those that the homeowner could have recovered by filing an action within the three-year statute of limitations period.  These damages may include finance charges paid by the borrower, up to $4,000 in statutory damages, the costs of bringing the action, and attorney’s fees (12 U.S.C. §1640(k)(2)(B)).  The CFPB has estimated how much a borrower could recoup from a lender by defending a foreclosure action with claims that the lender did not properly assess repayment ability. Once again, assuming that a borrower has an average loan balance of $210,000, an interest rate of 7%, and fees of $3,150, he/she could potentially recover $44,100 in interest, $4,000 in statutory damages, and $3,150 in fees, for a total recovery of $51,250 (78 FR 6567).  This sounds like a significant reduction of mortgage debt, but unless a foreclosure action occurs at a point during the life of a loan when the principal balance has been reduced substantially, the law’s three-year cap on damages means that a homeowner is not likely to secure a debt reduction that is substantial enough to save his/her home. racial discrimination that was practiced prior to the adoption of the Fair Housing Act was the practice of redlining. This unethical practice involved the designation of neighborhoods whose residents were regarded as “unsafe” credit risks on the basis of their race. Mortgage and real estate professionals would refuse to work with individuals who lived in these neighborhoods, thereby excluding countless creditworthy Americans from the housing market. The goals that Congress hoped to achieve through its adoption of the Fair Housing Act were to:
·         Prohibit discriminatory mortgage lending practices, such as redlining
·         Prohibit discriminatory practices when selling or renting homes
·         Promote fair housing throughout the United States
With regard to transactions for mortgages, the Fair Housing Act generally prohibits mortgage professionals from discriminating against loan applicants by basing loan availability and loan terms on race, color, religion, sex, handicap, familial status, or national origin (42 U.S.C. §3605(a)).
Fair Housing Act protects individuals who fall within one of the protected classes established under the law. Like ECOA, the Fair Housing Act has been amended since its original enactment to add more protected classes. One of the first amendments took place in 1974, adding sex as a protected class with the goal of ending ongoing discrimination against women who were applying for mortgage credit. Currently, the protected classes include:
·         Race
·         Color
·         Religion
·         Sex
·         Familial status
·         National origin
·         Handicap (including handicap related to recovering substance abusers and persons with HIV)
(42 U.S.C. §3604 and 24 C.F.R. §100.110)
When HUD receives a complaint, it must notify the aggrieved person and the respondent of their rights. HUD must serve a notice of the complaint on the respondent within ten days of its receipt, and the respondent then has ten days to file an answer (24 C.F.R. §§103.202; 103.203). HUD’s notice to an aggrieved person must state that he or she has the right to pursue a civil action in a federal court and that the statute of limitations for filing a lawsuit is two years. This two-year period is measured from the date on which the discriminatory practice occurred or, in the case of ongoing violations, ceases to occur (24 C.F.R. §103.100(a)).
The statute of limitations for pursuing an administrative action is one year after the alleged violation has occurred or ceased to occur. If an aggrieved person has been subject to more than one discriminatory act or practice, he or she must file a complaint “…within one year of the last act of discrimination” (24 C.F.R. §103.35).
If an aggrieved party decides to pursue an administrative action, HUD will initiate an investigation. HUD must attempt to complete its investigation within 100 days of the filing of a complaint of discrimination (24 C.F.R. §103.225). The purposes of an investigation are to:
·         Obtain information related to the complaint
·         Document the respondent’s policies and practices, and
·         Obtain enough factual data to determine if there is reasonable cause to believe that a discriminatory housing practice has occurred
an aggrieved party decides to pursue an administrative action, HUD will initiate an investigation. HUD must attempt to complete its investigation within 100 days of the filing of a complaint of discrimination (24 C.F.R. §103.225). The purposes of an investigation are to:
·         Obtain information related to the complaint
·         Document the respondent’s policies and practices, and
·         Obtain enough factual data to determine if there is reasonable cause to believe that a discriminatory housing practice has occurred
Investigations continue until HUD determines whether there is reasonable cause to believe that discrimination has occurred, or until the parties enter a written conciliation agreement. After a complaint is filed, HUD has a statutory obligation to pursue conciliation “…to the extent feasible…” (42 U.S.C. §3610(b)(1)). The law defines “conciliation” as “…the attempted resolution of issues raised by a complaint…” (42 U.S.C. §3602(l)). The goals of a conciliation agreement include:
·         Securing relief for the aggrieved persons, such as monetary and/or injunctive relief to eliminate discriminatory practices
·         Obtaining assurance that the respondent will eliminate any discriminatory practices, and
·         Vindicating the public interest through provisions that require the respondent to participate in remedial activities, reporting requirements, and monitoring requirements
(24 C.F.R. §§130.310; 103.315; 103.320)
Extensive HUD regulations determine the procedures that parties will follow to resolve a dispute through an administrative hearing, and these rules cover both the pre-hearing and hearing processes.  If a hearing is completed, HUD’s administrative law judge must issue an initial decision within 60 days of the end of the hearing.  The decision will become final within 30 days after it is issued.
If an administrative law judge finds that a discriminatory housing practice has occurred or is about to occur, he or she can order the respondent to pay damages to the aggrieved person, issue other relief, such as injunctive relief, and impose civil penalties. HUD regulations authorize civil penalties of up to:
·         $16,000, if no prior administrative or civil hearings resulted in a finding that the respondent(s) violated federal, state, or local fair lending laws
·         $42,500, if administrative or civil hearings conducted within the preceding five years resulted in a finding that the respondent(s) committed one other violation of federal, state, or local fair lending laws
·         $70,000, if administrative or civil hearings conducted within the preceding seven years resulted in a finding that the respondent(s) committed two or more violations of federal, state, or local fair lending laws
·         The DOJ also has authority to initiate its own enforcement action when the Attorney General finds “reasonable cause” to believe that an individual or entity is engaging in a “pattern or practice of discrimination, or the denial of rights under the Fair Housing Act raises “an issue of general public importance” (42 U.S.C. §3614(a)).  On its website, the DOJ explains that a pattern or practice of discrimination exists when evidence shows that “…the discriminatory actions were the defendant’s regular practice, rather than an isolated instance.” When an issue is one of general public importance, the DOJ “…can bring suit even when a discriminatory act has occurred only once…”[1]    
Like other parties bringing actions for violations of the Fair Housing Act, the DOJ must file its claims within the applicable statute of limitations.  The law imposes an 18-month statute of limitations on actions brought by the Attorney General and the DOJ (42 U.S.C. §3614(a)). The 18-month period begins to run on the date that a discriminatory act or practice occurs or on the date that an ongoing violation ceases to occur.  In addition to the Fair Housing Act’s express prohibitions against discriminatory housing practices, a long line of cases holds that the law also prohibits practices that have an unintended discriminatory effect.  TDHCA v. ICP was one of several recent cases that challenged this interpretation of the law, but it was the only case that the United States Supreme Court heard and decided; other cases entered settlement agreements before a trial could take place.  The Court’s June 2015 decision relied on previous lower court cases, consideration of congressional intent, and an interpretation of statutory language to hold that the law permits disparate impact claims – or, as HUD calls them, discriminatory effects claims.  In this case, a nonprofit organization known as the Inclusive Communities Project sued the Texas Department of Housing and Community Affairs, claiming that the TDHCA allocated too many low-income housing tax credits to developments in minority neighborhoods and denied credits to developments within Caucasian neighborhoods. ICP claimed that this resulted in the concentration of low-income housing in minority neighborhoods, thereby perpetuating poverty and segregation in clear violation of the Fair Housing Act.[1]
Though it was not directly challenged in the case, the Supreme Court’s ruling has implications for HUD’s Discriminatory Effects Rule.  HUD adopted this rule in 2013, stating that “This regulation is needed to formalize HUD’s long-held interpretation of the availability of ‘discriminatory effects’ liability under the Fair Housing Act…” (78 FR 11460).  HUD further explained that despite the 40 years of case law that upheld the disparate impact theory, inconsistent applications in different jurisdictions were creating uncertainty.  In order to bring clarity to the theory’s application, HUD used its rulemaking authority to articulate the correct methodology for determining liability in discriminatory effects claims. Equal Credit Opportunity Act (ECOA) was enacted in 1974 to ensure that women would have equal access to credit.  The Act was established to end discriminatory practices of basing lending decisions on sex.  The Act applies to creditors, defined as individuals or entities that regularly extend credit or arrange for the extension of credit.  A “creditor,” as defined by ECOA’s Regulation B, includes mortgage professionals.  The law has been amended several times since its enactment, and now prohibits creditors from making decisions based on race, color, religion, national origin, sex, marital status, age, childbearing status, receipt of income from public assistance, or exercise of rights under the Consumer Credit Protection Act. The Equal Credit Opportunity Act is enforced by the CFPB. ECOA, as well as civil actions by individuals and class action groups.  Penalties for individual actions can result in fines up to $10,000, and class actions can result in fines up to the lesser of $500,000 or 1% of the creditor’s net worth. Fair Housing Act was enacted in 1968 to address issues of racial discrimination in housing. A major concern was the practice of redlining, in which specific neighborhoods were considered to be unsafe credit risks on the basis of the race of the residents.  The Fair Housing Act prohibits discriminating against loan applicants based on race, color, religion, sex, handicap, familial status, or national origin.  The Fair Housing Act is enforced by HUD.  It applies to residential real estate transactions.  Like ECOA, the Fair Housing Act encourages covered entities to test for instances of discriminatory practices. The CFPB uses a “risk-based prioritization process” to determine how to allocate its resources for fair lending supervision and enforcement in order to offer protection to consumers. In the April 2015 Fair Lending Report, the CFPB states that its supervisory and enforcement efforts in the mortgage lending industry include:
·         ECOA enforcement
·         HMDA data integrity
·         Identification of unfair and illegal lending practices, such as redlining and discriminatory underwriting and loan pricing
Even before the Supreme Court ruled on the disparate impact theory and affirmed the need to protect potential defendants against abusive claims of disparate impact, members of Congress recognized that courts and regulators could be inundated with these claims.  On June 3, 2015, just three weeks before the Supreme Court released its decision in TDHCA v. ICP, Congress passed an amendment to an appropriations bill that set the annual budget for the DOJ.  This amendment states, “None of the funds made available in this act may be used by the Department of Justice to enforce the Fair Housing Act in a manner that relies upon an allegation of liability under 24 C.F.R. 100.500 [HUD’s Discriminatory Effects Rule]” (H. Amdt. 768 to H.R. 4660).  HUD overstepped its boundaries when it wrote the Discriminatory Effects Rule, because this rule is not based on express language found in the Fair Housing Act.  Similarly, ECOA lacks any provisions that expressly permit disparate impact claims; however, Regulation B incorporates the disparate impact theory with a simple statement that “…Congress intended an ‘effects test’ concept…” (12 C.F.R. §1002.6(a)).  RESPA includes two prohibitions that are intended to discourage unnecessarily high settlement charges.
These are:
·         The prohibition against payment for referrals: Section 8(a) of RESPA (now incorporated into the U.S. Code in §2607(a)) prohibits settlement service providers from paying or accepting fees for business referrals.
The prohibition against fee splitting: Section 8(b) of RESPA (now incorporated into the U.S. Code in §2607(b)) prohibits the charging and splitting of unearned fees between settlement service providers for services not actually performed. this revision to the law, Congress:
·         Defined an affiliated business arrangement: Congress added a provision to RESPA that defines an “affiliated business arrangement” as one in which a settlement service provider has an affiliate relationship or an ownership interest of more than 1% in another business that provides settlement services (12 U.S.C. §2601(7)(A)).
·         Permitted referrals between affiliates: Congress adopted language allowing referrals between service providers when the individual or entity that makes the referral provides a written disclosure of the affiliate relationship that exists between the two parties. In order for the disclosure to comply with the law, it must state that the consumer is not required to use any particular provider of settlement services (12 U.S.C. §2607(c)(4)(B)). The disclosure must also include an estimate of the amounts generally charged by the settlement service provider to which the consumer is referred.
·         Limited the financial benefits of making a referral: In its revisions that permit referrals, Congress prohibited the payment and receipt of referral fees, but allows the return of an ownership interest or franchise relationship. The return of an ownership interest does not include payments that vary based on the number of referrals made or on an ownership interest that is adjusted to reflect the number of referrals made (12 C.F.R. §1024.15(b)(3)(ii)).
Appendix D to Regulation X includes the following model form for making an affiliated business arrangement disclosure: TILA is intended to ensure that borrowers receive accurate and reliable disclosures of the cost of settlement services. Formerly addressed in RESPA, recent changes to federal lending laws saw those provisions removed, and updated requirements added as new provisions of TILA Loan Estimate are considered to be made “in good faith” if:
·         The actual cost does not exceed the amount originally disclosed in the Loan Estimate, or
·         The aggregate amount of closing costs and recording fees does not exceed the amounts disclosed on the Loan Estimate by more than 10%, and:
o    The fees for third-party services are not paid to the creditor or to an affiliate of the creditor, and
o    The creditor permits the consumer to shop for settlement services
a revised estimate is allowed for any one of the following reasons:
  • Changed circumstances: if changed circumstances cause the estimated charges to increase or cause the aggregate amount of the estimated charges to increase by more than 10%, the creditor may issue a revised estimate. The regulations describe a “changed circumstance” as specific events or inaccuracies, such as:
    • Extraordinary or unexpected events that are beyond the control of the parties to the transaction
    • Information relied on by the creditor that was inaccurate or that changed after the information was provided to the consumer
    • New information
  • Change in eligibility: a change in circumstances impacts the loan applicant’s creditworthiness or the value of the property securing the loan
  • Consumer-requested revisions: the consumer requests a change that relates to the loan terms or to the settlement
  • Delays caused by consumers: a loan applicant waits more than ten business days after the creditor has provided a Loan Estimate to indicate his or her interest in proceeding with the transaction
  • Delays related to construction loans: in these types of transactions, a revised disclosure is allowed if a creditor “reasonably expects” more than 60 days to pass before settlement, and clearly and conspicuously states in the Loan Estimate that it may issue a revised disclosure
Creditors have a 10% tolerance for discrepancies between estimated and actual closing costs if consumers do not pay the creditor or one of its affiliates for settlement services and if they are allowed to shop for settlement services. TILA is a consumer protection law, legislators and regulators regard any efforts to circumvent its goals as serious offenses. The law makes willful and knowing violations of TILA a criminal act, subjecting violators to penalties of up to $5,000 and/or one year of imprisonment. The $5,000 penalty can add up to a large sum, since penalties accrue for multiple violations. Criminal violations include willfully and knowingly:
·         Failing to give required disclosures to consumers
·         Consistently understating the APR
·         Failing to comply with other TILA requirements
·         Errors in the origination of high-cost mortgages: if a creditor fails to meet HOEPA’s special requirements for making a high-cost mortgage, no violation of the law occurs if the creditor receives notification of the error or discovers it within 30 days after consummation and responds by extending appropriate and reasonable restitution to the borrower, making adjustments to the loan to comply with the law, or changing the terms of the loan so that it is no longer a high-cost mortgage.  Relief is also available for an unintentional violation or a bona fide error if the creditor responds by making restitution and adjusting the loan within 60 days of discovering or receiving notification of the error (12 C.F.R. §1026.31(h)(2)). Errors in the calculation of points and fees for qualified mortgages: in most transactions for qualified mortgages, points and fees cannot legally exceed 3% of the total loan amount.  Until January 10, 2021, a mortgage does not lose its status as a qualified mortgage if the creditor discovers after consummation that the points and fees for the transaction exceeded 3% and the creditor has policies and procedures in place for the post-consummation review for points and fees Information on the cost of credit and on the estimated and actual closing costs, as required by TILA and Regulation Z
·         Information on affiliated relationships between service providers, as required by RESPA and Regulation X
·         Warnings regarding the risks associated with particular lending transactions, as required by HOEPA, TILA, and Regulation Z
·         Notice of the legal prohibition against the use of discriminatory lending practices, as required by ECOA and Regulation B
·         Real Estate Settlement Procedures Act (RESPA) had initial primary objectives of preventing lenders and settlement service providers from overcharging consumers.  Its two major concerns involve unethical referrals and fee splitting.  RESPA prohibits exchanging unearned fees, kickbacks, or things of value for referrals of business.  It also prohibits sham affiliated business arrangements, which involve the use of shell businesses created to allow unlawful collection of referral fees.  


·         An administrative law judge may impose separate penalties when a hearing results in a finding that there is more than one “…separate and distinct discriminatory housing practice…” (24 C.F.R. §180.671(e)).
·         When a claim of discrimination under the Fair Housing Act is resolved through an administrative hearing, HUD has the authority to subpoena witnesses and documents. A person that willfully fails to respond to a subpoena may be subject to a criminal penalty of up to $100,000, imprisonment for up to one year, or both. These criminal penalties also apply if a person willfully makes a false statement in any report or document that HUD subpoenas; willfully fails to produce accurate reports, documents, or other records; or willfully mutilates or alters documentary evidence (42 U.S.C. §3611(c)).
HUD’s rule states that a practice has a discriminatory effect when it “actually or predictably” impacts a group of people differently than another group and “…perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin” (24 C.F.R. §100.500(a)). The rule also states that Fair Housing Act violations may occur even if a practice is not motivated by an intent to discriminate (24 C.F.R. §100.500). challenged act or practice caused, or predictably will cause, a discriminatory effect (24 C.F.R. §100.500(c)(1)).  In its preamble to the rule, HUD explains that successful establishment of a claim requires a showing that “…members of a protected class are disproportionately burdened by the challenged actions, or that the practice has a segregative effect” (78 FR 11468). Statistics are often relied on to show the causal link between an act or practice and its discriminatory consequences.  However, the Supreme Court’s decision in TDHCA v. ICP held that statistics alone are not enough.  The Court stated that claimants must satisfy “a robust causality requirement” to prevail in a claim based on discriminatory effects. Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the S.A.F.E. Act) defines a “nontraditional mortgage product” as “any mortgage product other than a 30-year fixed rate mortgage” (12 U.S.C. §5102(7)).  With this language, the S.A.F.E. Act created a legal definition of the difference between traditional and nontraditional mortgage lending.  Of course, this was not the first time that statutory or regulatory language has separated lending transactions into different categories.  Mortgage lending is divided into the origination of conventional and non-conventional mortgages, conforming and non-conforming loans, and fixed- and adjustable-rate mortgages (ARMs).  The most recent division of mortgage transactions into categories occurred with the division between qualified and non-qualified mortgages.  Congress made this distinction in 2010 when it adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act).
·         the Ability to Repay Rule is found in Regulation Z. The Ability to Repay Rule, which is found in 12 C.F.R. §1026.43(c), establishes the underwriting standards for non-qualified mortgages, and
·         The Qualified Mortgage Rule, which is found in 12 C.F.R. §1026.43(e), establishes the underwriting standards for qualified mortgages
Ability to Repay Rule applies to most residential mortgage transactions, including those that are secured by a subordinate lien and those that are secured by homes that are not owner-occupied, such as vacation homes or rental properties. The only loans that are excluded from coverage are those for:
·         Open-end home equity loans, such as a home equity line of credit (HELOC)
·         Reverse mortgages
·         Bridge loans with terms of 12 months or less
·         A mortgage secured by a borrower’s interest in a timeshare plan
·         Loans made by a Housing Finance Agency
(12 C.F.R. §1026.43(a))
This type of loan requires calculation of payments based on the higher of the introductory rate or the fully-indexed rate, with substantially equal monthly payments that will pay off the loan by the end of its term when recast.
A.    Non-qualified mortgage loan
B.    Qualified mortgage loan
C.    Balloon payment qualified mortgage loan
D.   Negative amortization non-qualified mortgage loan
Analysis of repayment ability for a non-qualified mortgage is required to include:
A.    Both the consumer’s monthly debt-to-income ratio and the consumer’s residual income
B.    Either the consumer’s monthly debt-to-income ratio or the consumer’s residual income
C.    The consumer’s residual income
D.   The consumer’s monthly debt-to-income ratio
The Ability to Repay Rule defines “monthly residual income” as:
A.    The remaining income after subtracting the consumer’s total monthly income from the consumer’s total annual income
B.    The remaining income after subtracting the consumer’s total monthly debt obligations from the total monthly income
C.    The remaining obligations after subtracting the monthly mortgage payment from the consumer’s total monthly debt obligations
D.   The remaining income after subtracting the monthly mortgage payment from the consumer’s total monthly income
Underwriting requirements for non-qualified mortgages include:
A.    Assessment of a consumer’s ability to pay off the loan by the end of the loan term
B.    A minimum loan-to-value ratio
C.    Minimum credit scores
D.   Assessment of a consumer’s ability to make payments due before the loan is recast
Recordkeeping is also a separate legal requirement with which creditors must comply.   Regulation Z specifies
Which of the following correctly describes recordkeeping requirements under the ATR Rule?
A.    Records showing compliance with the repayment ability provisions must be kept until the loan is paid off
B.    The ATR Rule does not establish recordkeeping requirements
C.    Records showing compliance with repayment ability provisions must be kept for at least three years after consummation
D.   Records showing compliance with repayment ability provisions must be kept for at least five years after consummation
Which of the following statements most accurately describes the types of home loans that are non-qualified mortgages?
A.    Only those loans where points and fees do not exceed 3% of the loan amount, the loan term does not exceed 30 years, and the borrower’s debt-to-income ratio does not exceed 43%
B.    Any loan that is missing all of the product feature prerequisites and has at least one of the prohibited terms for qualified mortgages
C.    Any loan that is missing one or more of the product feature prerequisites or QM underwriting requirements, or that includes a term that is prohibited for qualified mortgages
D.   Any mortgage loan other than a 30-year fixed-rate loan
The debt-to-income ratio for non-qualified mortgages is:
A.    36%
B.    43%
C.    Not defined by rule, but subject to a creditor’s discretion
D.   Not relevant in transactions for non-qualified mortgages

The underwriting standards for non-qualified mortgages are found in:
A.    The Qualified Mortgage Rule
B.    The Ability to Repay Rule
C.    The Qualified Residential Mortgage Rule
D.   The Integrated Mortgage Disclosure Rule
When a borrower has an ARM, the “recast” of the loan occurs when:
A.    The rate resets and periodic payments are no longer based on the introductory interest rate
B.    The borrower refinances the loan to secure a fixed interest rate
C.    The borrower refinances the loan with another ARM at a lower interest rate
D.   The borrower refinances a non-qualified ARM with a qualified ARM

Creditors must consider all but which of the following factors when evaluating a consumer’s ability to repay a non-qualified mortgage?
A.    The equity in the dwelling that will secure the mortgage
B.    Monthly payments on the mortgage

C.    Debt obligations, including alimony and child support
D.   Mortgage-related obligations, such as taxes and insurance

The presumption of compliance that creditors gain when making a qualified mortgage is a presumption that they have complied with the provisions of:
A.    The Dodd-Frank Act and the QM Rule
B.    Federal fair lending laws
C.    The ATR Rule
D.   All mortgage lending laws

When a creditor makes a mortgage that is a _________, and the loan satisfies the requirements for a qualified mortgage, the creditor gains a rebuttable presumption of compliance.
A.    Reverse mortgage
B.    Open-end home equity loan
C.    Prime loan
D.   Higher-priced mortgage
A major factor in avoiding liability with regard to the origination of non-qualified mortgages is:
A.    Extending non-qualified mortgages only to borrowers who meet certain demographic criteria
B.    Exclusively originating non-qualified mortgages
C.    Ensuring compliance with the Ability to Repay Rule
D.   Limiting non-qualified mortgage availability to borrowers with a debt-to-income ratio below 43% and loan terms that do not exceed 30 years
In October 2014, the Federal Housing Finance Agency sought to encourage more lending activity by clarifying:
A.    The criteria that Fannie Mae and Freddie Mac will use for identifying the types of mortgages that are not suitable for securitization
B.    The circumstances in which Fannie Mae or Freddie Mac will require creditors to repurchase mortgages
C.    The underwriting requirements for subprime loans
D.   The underwriting requirements for qualified mortgages
When the prudential regulators issued the Interagency Statement on Supervisory Approach for Qualified and Non-Qualified Mortgage Loans, they stated that institutions should continue to comply with applicable laws and regulations, and should apply appropriate portfolio and risk management practices. They also stated that:
A.    Creditors should limit their lending to transactions for qualified mortgages
B.    Mortgages will not be subject to safety-and-soundness criticism based solely on their status as qualified or non-qualified mortgages
C.    Creditors will be subject to greater scrutiny by examiners if they limit their originations to those for qualified mortgages
D.   Non-qualified mortgages will be subject to greater safety-and-soundness criticism than qualified mortgages
Some creditors have voiced concern that failure to originate both qualified and non-qualified mortgages may cause them to face issues in compliance with which federal fair lending law?
A.    The S.A.F.E. Act
B.    The Equal Credit Opportunity Act
C.    The Truth-in-Lending Act
D.   The Community Reinvestment Act
_______________ refers to lending policies that are neutral on their face but that unintentionally violate the fair lending rights of protected classes.
A.    Non-qualified lending
B.    Redlining
C.    Disparate impact
D.   Reverse redlining
VA loans made in compliance with VA lending standards are:
A.    Safe harbor qualified mortgages
B.    Non-qualified mortgages
C.    Only qualified mortgages if they are Direct Loans
D.   Not qualified mortgages
E.    For a loan amount greater than or equal to $100,000: 3% of the total loan amount
F.     For a loan amount greater than or equal to $60,000 but less than $100,000: $3,000 
G.   For a loan amount greater than or equal to $20,000 but less than $60,000: 5% of the total loan amount
H.   For a loan amount greater than or equal to $12,500 but less than $20,000: $1,000 
I.       For a loan amount less than $12,500: 8% of the total loan amount
mortgage is a safe harbor qualified mortgage if it has an annual percentage rate that “does not exceed the average prime offer rate for a comparable mortgage, as of the date the interest rate is set, by more than the combined annual mortgage insurance premium and 1.15 percentage points for a first-lien mortgage” (24 C.F.R. §203.19(b)(3)(ii)). 
A mortgage that is FHA-insured and has an APR that exceeds the average prime offer rate by 1.15 percentage points has:
A.    Violated the ATR Rule
B.    A rebuttable presumption of compliance
C.    A conclusive presumption of compliance
D.   No presumption of compliance
The CFPB has stated that _______________ should not be taken into account when determining the fully-indexed rate for a non-qualified mortgage.
A.    The margin
B.    Repayment ability
C.    The index
D.   Periodic rate caps
Making safe harbor qualified mortgages offers a ____________________________ with the ATR Rule, which can protect the creditor if a consumer attempts to use “failure to consider repayment ability” as a defense against ______________ .
A.    Rebuttable presumption of compliance; fair lending violations
B.    Conclusive presumption of compliance; foreclosure
C.    Conclusive presumption of compliance; fair lending violations
D.   Rebuttable presumption of compliance; foreclosure
If a non-qualified mortgage loan includes negative amortization, the creditor is required to give the borrower a statement disclosing all of the following, except:
A.    An explanation that negative amortization will cause the loan balance to increase
B.    A listing of the benefits of accepting a negative amortization loan
C.    A description of negative amortization
D.   Confirmation that the loan has terms that will or may allow negative amortization
The VA has stated that Direct Loans are ____________________ and are protected by a __________________.
A.    Safe harbor qualified mortgages; conclusive presumption of compliance
B.    Non-qualified mortgages; rebuttable presumption of compliance
C.    Safe harbor qualified mortgages; rebuttable presumption of compliance
D.   Non-qualified mortgages; conclusive presumption of compliance
The Interagency Statement released to coincide with the implementation of the Ability to Repay Rule and the Qualified Mortgage Rule states that origination of qualified and non-qualified mortgages should include consideration of all of the following, except:
A.    The loan-to-value ratios involved in the transaction
B.    The terms of the loan
C.    The age, sex, and race of the borrower
D.   Risk management practices and Guidances issued by federal regulators
The __________________ of any state has the authority to bring an action for enforcement of Ability to Repay Rule requirements.
A.    Attorney General
B.    Consumer Financial Protection Bureau
C.    NMLS
D.   Secretary of State
Lending practices that exclude origination of ____________________ may result in increased cases of ________________.
A.    Non-qualified mortgages; foreclosure
B.    Qualified mortgages; disparate impact
C.    Non-qualified mortgages; disparate impact
D.   Qualified mortgages; foreclosure
A non-qualified mortgage that is a _______________________ will require additional disclosures under the Home Ownership and Equity Protection Act.
A.    Reverse mortgage
B.    HELOC
C.    High-cost mortgage
D.   Fixed-rate loan
The Federal Housing Finance Agency has worked to revise its Representation and Warranty Framework in order to meet which of the following goals?
A.    Encouraging borrowers to seek mortgage loan products other than 30-year fixed-rate loans
B.    Encouraging creditor participation in the non-qualified mortgage market and expanding consumer access to mortgage credit
C.    Making qualified mortgages available to more borrowers
D.   Ensuring that creditors offer both qualified and non-qualified mortgages and that only the most qualified borrowers have access to mortgage credit
HUD has stated that the FHA will no longer insure single-family loans that exceed the _________ limitation established under the Qualified Mortgage Rule.
A.    Loan term
B.    Debt-to-income ratio
C.    Loan-to-value ratio
D.   Points and fees

Which of the following types of loans meets the S.A.F.E. Mortgage Licensing Act’s definition of a traditional mortgage product?
A.    A qualified ARM
B.    A non-qualified fixed-rate mortgage with a 30-year loan term
C.    A non-qualified fully-amortizing ARM
D.   A qualified fixed-rate mortgage with a 15-year loan term
A ________ is defined under the Finance Lenders Law as any person that is engaged in the business of making consumer loans or commercial loans.
A.    Mortgage loan originator
B.    Lender
C.    Finance lender
D.   Broker



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