Qualified Mortgages

With the publication of its Qualified Mortgage Rule (QM Rule) in January 2013, the CFPB established qualified mortgage standards for conventional mortgages.  Eleven months later, HUD finalized a rule for FHA qualified mortgages.  In the preamble to its rule, HUD stated that all Title II loans and other FHA loan products should be defined as qualified mortgages.  HUD based this statement on the fact that FHA loans do not include risky features such as negative amortization, and on its longstanding guidelines that have “…always required lenders to determine a borrower’s ability to repay a mortgage…” (78 Fed. Reg. 238, p. 75215). The CFPB and HUD rules for qualified mortgages both became effective in January 2014.

 HUD’s rule for FHA qualified mortgages must begin with a discussion of the CFPB’s Qualified Mortgage Rule because the rules are interrelated. Both rules are intended to give lenders the incentive to base 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)). Standards for determining repayment ability are set forth in the CFPB’s Ability to Repay Rule (ATR Rule), and HUD has incorporated these standards into its rule.

Even though it maintained that FHA loans were already in compliance with the general requirements for qualified mortgages, HUD issued a rule that more closely aligns its standards with those established by the CFPB. The HUD rule incorporates definitions, points and fees limitations, and standards for determining repayment ability that are found in the QM Rule (24 C.F.R. §201.7).
The CFPB’s QM Rule offers lenders a presumption of compliance with the ATR Rule when they make loans that meet particular product feature prerequisites and underwriting requirements. The product feature prerequisites for conventional qualified mortgages are:

• A loan term that does not exceed 30 years
• Points and fees that do not exceed 3% of the total loan amount
• No periodic payments that increase the principal balance (i.e. no negative amortization)
• No interest-only loans or other products that permit the deferral of payments of principal
• No balloon payments (with some exceptions)

The underwriting requirements for conventional qualified mortgages include:

• A maximum debt-to-income ratio of 43%
• Verification of the borrower’s income and assets
• Calculation of regular and substantially equal periodic payments that will repay the mortgage by the end of the loan term
• Qualified mortgages may have either a conclusive or rebuttable presumption of compliance with the ATR Rule.  Those that have a conclusive presumption of compliance are known as “safe harbor qualified mortgages.” These are mortgages that are not higher-priced mortgage loans.  If a loan is a higher-priced mortgage, it is subject to a rebuttable presumption of compliance.
• After completion of its rule making process to define FHA qualified mortgages, HUD finalized a rule that extends a conclusive presumption of compliance and safe harbor qualified mortgage status to any Title II FHA-insured single-family mortgage that meets the points and fees limitations of the CFPB’s QM Rule and that has an APR that does not exceed the average prime offer rate by more than the sum of the Annual MIP plus 1.15 percentage points for a first-lien transaction.
  The HUD rule extends a rebuttable presumption of compliance to FHA-insured single-family mortgages that:
  
  • Meet the points and fees limitations established under the CFPB’s QM Rule, and
  • Have an APR that exceeds the average prime offer rate by more than the sum of the MIP plus 1.15 percentage points
  • HUD has adopted the CFPB’s definition of “points and fees” that is found in Regulation Z, which defines the term to include:
    
  • Compensation paid by a consumer or by a creditor to a mortgage loan originator
  • Most items included in the finance charge
  • Real estate-related fees that are not reasonable, those for which the creditor receives compensation, or those that are paid to an affiliate of the creditor
  • Premiums paid at or prior to consummation for optional credit insurance products or insurance that names the creditor as the beneficiary
  • The maximum prepayment penalties that may be charged under the loan terms (note, however, that FHA loans may not legally include prepayment penalties)
  • HUD has stated that it will no longer insure single-family homes that have points and fees that exceed the CFPB’s limit for qualified mortgages (24 C.F.R. §203.19(b)(1)). As a result of this rule, single-family mortgages insured under Title II of the National Housing Act may not exceed the following amounts, which are adjusted annually for inflation:
    
  • 3% of the total loan amount for a loan of $100,000 or more
  • $3,000 for a loan of $60,000 or more but less than $100,000
  • 5% of the total loan amount for a loan of $20,000 or more but less than $60,000
  • $1,000 for a loan of $12,500 or more but less than $20,000
  • 8% of the total loan amount for a loan of less than $12,500
  • higher-priced mortgage loan, which is defined as a loan with an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) for a comparable transaction by 1.5 or more percentage points for a first-lien covered transaction 
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Mortgage Fraud

FREDDIE MAC NEW RULE AS TO SELLER CONTRIBUTIONS DUE TO FRAUD AND RISING PRICES

Penalties for violation of the Federal False Statements Act, which prohibits false statements to the government (including lending institutions), may include up to five years in prison, fines, or both. 18 U.S.C. §1014 prohibits the use of false statements on a loan application and the overvaluation of property in order to influence decisions made by a lending institution, and violations may result in imprisonment for up to 30 years, fines of up to $1 million, or both.  Loan originators can remind loan applicants of the gravity of providing false information by giving them a copy of the FBI’s Mortgage Fraud Warning. An Occupancy Certificate gives loan applicants the option to state whether the property securing a loan will be a primary residence, a second home that the applicant will occasionally occupy, or an investment property that the applicant will not occupy.

Fraud for profit is also referred to as “industry insider fraud” because it:

1. Involves the use of inside information that consumers have obtained from their loan originators to obtain a fraudulent mortgage loan
2. Only impacts participants in the mortgage industry and does not affect consumers
3. Is directed towards industry insiders, such as appraisers and loan originators
4. X Is carried out by industry insiders, such as appraisers and loan originators

Correct. “Fraud for profit” or “industry insider fraud” involves the use of inflated appraisals, falsified loan documents, stolen identities, fictitious loan applicants, and other illegal tactics to secure loan funds that the loan applicant has no intention of repaying.  In many cases, fraud for profit involves the conspiratorial efforts of industry insiders including mortgage loan originators, mortgage brokers, underwriters, loan processors, real estate agents, appraisers, and attorneys.

Cash-out purchase fraud is a scheme that Freddie Mac has cited as an emerging trend. [1]  These schemes involve the extension of an offer to purchase a home for an amount that is in excess of the list price.  Using an inflated appraisal, the borrower who is perpetrating the fraud obtains a mortgage for more than the home is worth.  After the closing takes place and the seller receives funds from the lender, he/she pays the fraudulent borrower the difference between the list price of the home and the amount shown on the mortgage.

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[1] Freddie Mac. “Emerging Fraud Trends: Illegal Property Flipping With Cash-Out Purchases.” http://www.freddiemac.com/singlefamily/preventfraud/flipping.ht

Builder bailout schemes are also carried out by establishing shell companies that purchase new homes at inflated prices, or by attracting investors with fraudulent incentives, which may include promises to provide free property management services or to absorb any negative cash flow for some period of time. After the closing takes place, these promises are not honored.
Red flags for builder bailout schemes include:

• Appraisals that solely rely on other homes in the same development for comparables
• Strong sales in a development while the surrounding market is slow
• Special incentives for home buyers and investors
• An unclear source of funds for down payments
• Affiliated parties in the transaction

HOEPA High Cost Mortgage Rules

The Home Ownership and Equity Protection Act (15 U.S.C. §1639, et seq.) regulates the origination of high-cost mortgages, which are loan options for subprime borrowers who are unable to qualify for mortgages in the prime market. Generally, subprime borrowers are those with blemished credit or without an established credit history. Since loans to subprime borrowers represent a greater default risk, lenders charge more for them. The additional earnings from higher lending fees and interest rates are intended to make up for the losses that lenders will experience if a subprime borrower is not able to maintain loan payments.

The CFPB is responsible for the implementation and enforcement of HOEPA.  HOEPA was adopted as an amendment to the Truth-in-Lending Act (TILA) and its implementing regulations, like the other TILA regulations, are known as Regulation Z

• Is secured by the borrower’s principal dwelling, and
• Meets at least one of the following thresholds:

• An APR threshold, which differs for first-lien and subordinate-lien mortgages
• A points and fees threshold, or
• A prepayment penalty threshold
• types of transactions that are subject to HOEPA today include:
  
  • Conventional loans
  • Non-conventional loans, including FHA loans and VA loans
  • Mortgages to purchase or construct a principal dwelling
  • Refinances secured by a principal dwelling, and
  • Open-end and closed-end home equity loans secured by a principal dwelling
  HOEPA does not apply to reverse mortgages, bridge loans that are used to finance the initial construction of a dwelling, and loans originated by a housing finance agency when the housing finance agency is the creditor. Although HOEPA covers FHA and VA loans, it does not apply to loans originated through the Department of Agriculture’s Rural Development Section 502 Direct Loan Program.
• 
  
• average prime offer rate is an annual percentage rate that reflects the average interest rates, loan fees, and loan terms for mortgages offered to well-qualified borrowers. The APOR is found online on the FFIEC website. Using the APOR as a benchmark, HOEPA’s APR threshold is triggered if:
  
• The transaction is one for a first-lien mortgage and the APR is more than 6.5 percentage points above the APOR for a comparable transaction
• The transaction is one for a subordinate-lien mortgage and the APR is more than 8.5 percentage points above the APOR for a comparable transaction
• The points and fees threshold for high-cost mortgages varies based on the amount of the loan, and adjustments to this amount are made annually, based on the Consumer Price Index. Effective January 1, 2017, this threshold is triggered if the points and fees for a transaction exceed:
  
• 5% of the total loan amount for loans of $20,579 or more, or
• The lesser of 8% of the total loan amount or $1,029 for loans of less than $20,579
• prepayment penalty threshold for high-cost mortgages is triggered if:
  
• The loan includes a prepayment penalty provision that is in force for more than 36 months after consummation, or
• The loan permits prepayment penalties that exceed 2% of the amount prepaid
• Which of the following is not one of the thresholds used to identify a high-cost loan under HOEPA?
1. Finance charge
2. Points and fees
3. APR
4. Prepayment penalty  

HOEPA and its implementing regulations include several disclosure requirements that are intended to alert consumers of the risks associated with high-cost mortgages. Loan originators must provide applicants with the following disclosure:

You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.

(12 C.F.R. §1026.32(c)(1))
This disclosure is due at least three business days prior to the consummation of a mortgage (15 U.S.C. §1639(b)(1)). The purpose of providing the disclosure prior to closing is to give loan applicants a three-day waiting period to consider whether it is best to proceed with the transaction. A borrower can waive the waiting period if he/she has determined that the extension of credit is immediately necessary to remedy a bona fide personal emergency (12 C.F.R.§1026.31(c)(1)(iii)).

 HOEPA include the following, which are intended to warn potential borrowers of specific loan terms that make high-cost mortgages a riskier and more expensive loan product:

• APR disclosure: creditors must disclose the annual percentage rate. For high-cost mortgages, the APR is typically higher than it would be for a prime loan (12 C.F.R. §1026.32(c)(2)).
• Notice of balloon payment: when balloon payments are not prohibited (e.g., they may be allowed for seasonal employees and in transactions for bridge loans), the lending agreement must state the existence of a balloon payment. The disclosure must also state the amount of the balloon payment (12 C.F.R. §1026.32(c)(3)).
• Notice regarding regular payments: for closed-end loans, creditors must disclose the amount of periodic payments based on the amount borrowed (12 C.F.R. §1026.32(c)(3)).
• Variable-rate disclosure: if the mortgage has an adjustable rate, the disclosure must include a statement that the monthly payment may increase, showing the maximum monthly payment, based on the maximum interest rate that may be required over the term of the loan (12 C.F.R. §1026.32(c)(4)).
• Amount borrowed: in transactions for closed-end loans, there must be a statement of the total amount borrowed, as shown on the face amount of the promissory note. This disclosure is accurate if it is no more than $100 above or below the amount that must be disclosed 
•  Notice to Assignee, which alerts assignees (those to whom a mortgage is assigned) and purchasers of mortgages that a loan is subject to HOEPA.  

What is the purpose of the Notice to Assignee required under HOEPA?

It alerts assignees and purchasers of mortgages that a loan is subject to HOEPA

It discloses the amount of periodic payments based on the amount borrowe

It alerts consumers of the risks associated with high-cost mortgage

It discloses the fact that the monthly payment may increase  

Under HOEPA, it is prohibited for a lender to:

Charge a late fee of 2% of the amount past due when a borrower submits a payment 25 days late

X Increase the interest rate if a borrower defaults on a payment

Make a variable-rate loan

Assess a borrower’s ability to repay a loan using reasonably reliable third-party records  

The statute of limitations for bringing an action for a violation of HOEPA is three years. This three-year period is measured from the date of the occurrence of a violation (15 U.S.C. §1640(e)).
In a successful action for violations of HOEPA, the civil liability provisions of TILA determine the damages that the plaintiff may recover. In individual actions, penalties may include:

• Actual damages
• A minimum recovery of $200 and a maximum of $2,000 for open-end loans
• A minimum recovery of $400 and a maximum of $4,000 for closed-end loans, and
• All finance charges and fees paid by the consumer
• 
  
• Which of the following requirements only applies to transactions for high-cost mortgages?
  1. X Requiring a borrower to complete pre-loan counseling
  2. Evaluating a borrower’s ability to repay a mortgage
  3. Verifying income, assets, and employment with reliable third-party documentation
  4. Completing underwriting for closed-end loans in compliance with the Ability to Repay Rule
  Correct. Pre-loan counseling is a requirement that only applies to high-cost mortgage loan transactions   One of the objectives of HOEPA is to address:
1. Discriminating against members of a protected class
2. Limiting credit opportunities for women
3. Reverse redlining
4. Identity theft  

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