Miscellaneous Questions From 2/20-12/14 CMG

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    Question from Vicki to Everyone: Is a construction – perm loan (one settlement) not eligible as a QM because the term is the construction period PLUS 30 years?
    Question from Cheryl Nakashige to Everyone:
    What about construction-perm loans that go over the 30-year term since the construction only period will be included? Is this a QM loan?

    Answer from Robin Cooper to Vicki and Cheryl: It is my understanding that if the construction phase of a construction-perm. loan is 12 months or less it can be treated as two separate transactions, meaning your construction phase would be exempt and your permanent phase would need to meet the QM requirements including the requirement not to exceed 30 years.

    Question from Steve to Everyone: For retirement income, must you obtain a statement from the former employer to determine that such income may continue for at least 3 years

    Answer from Jack Holzknecht to Steve: Appendix Q allows a creditor to consider retirement income if it will continue for at least the first three years of the loan. The amount and continuation of the income must be verified with a third party, such as the employer or retirement plan administrator. Appendix Q is required under the general qualified mortgage rules contained in Section 1026.43(e)(2). If a different method of verifying the ability-to-repay is used, income is verified using the creditor standards, rather than the requirements of Appendix Q.

    Question from Steve to Everyone: Appendix Q speaks to verification of retirement income using tax returns, etc, but does not discuss continuance of such income like the discussion of social security benefits does.

    Answer from Jack Holzknecht to Steve: Section Q-I-B-10 states, ” If any retirement income, such as employer pensions or 401(k)’s, will cease within the first full three years of the mortgage loan, such income may not be used in qualifying. ”

    Question from FNB Bank to Everyone: We intend to qualify under the small servicer QM exemption so App Q won’t apply to us. We underwrite self employed borrowers with analysis of their cash flow coverage ratio. Assuming that management won’t budge on this, can I hang my hat on the fact that this calculation also considers residual income (albeit stated as an annual amount). Do I need to plea with them to state it as a monthly amount if they won’t budge?

    Answer from Jack Holzknecht to FNB Bank: Cash flow analysis is an outstanding underwriting tool. There is no problem with underwriting using a cash flow coverage ratio in addition to either a monthly debt-to-income ratio (DTI) or a monthly residual income calculation, but the requirements of Section 1026.43(e)(5)(i) (Small Creditor Portfolio Loans) require you to use either a DTI ratio or a residual income calculation. You must have established standards for either one or both of these calculations. If the borrower meets your cash flow coverage requirement but fails to meet either your debt-to-income or residual income standard you would have a problem.

    You do not need to plead with them, simply explain that federal law does not allow a loan under the SCPL option, or most of the other ATR options, without an acceptable monthly DTI ratio or acceptable monthly residual income. Your management may be stubborn, but I doubt they are stupid. They can do what they want to do, but must also consider the DTI or residual income.

    Question from FNB Bank to Everyone: We’re going to be expected to document the information for consummated loans; is there any concern that there will be an expectation that we will document income (paystubs, etc) on denied applications? In other words, do I need to instruct lenders to request paystubs at application as opposed to after conditional approval?

    Answer from Jack Holzknecht to FNB Bank: Great question. There is no need to request paycheck stubs at application. Section 1026.43 requires you to verify the consumer’s ability-to-repay at or before consummation. If you deny the loan before income is verified, then retention of income information is not required

    Requiring verification of income at application is actually a problem in certain situations. For transactions subject to § 1026.19(e), (f), or (g) of this part, an application consists of the submission of the consumer’s name, the consumer’s income, the consumer’s social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought. You must request income in order to have an application, but you cannot require verification of the income as a condition of starting the countdown to delivery of the early disclosures.

    Question from Harlan to Everyone: If on a 5-year ARM you wanted to underwrite the highest payment say on the 7th year payment could you?

    Answer from Jack Holzknecht to Harlan: Each of the seven ability to repay options stipulate how to calculate the payment amount used to verify the consumer’s ability to repay. You must use the method for the option selected for a particular loan. Use of more conservative underwriting standards shouldn’t be a problem as long as the standards of Section 1026.43 are met.

    Question from Evie Dehmey to Everyone: But what do you use for the HELOC payment in calculating DTI and ATR? Highest payment in the first 5 years?

    Answer from Jack Holzknecht to Evie: The guidance on this calculation is sketchy. Following is an example that I believe is consistent with the presumption of compliance in the Section 1026.34(a)(4)(iii). The presumption of compliance requires the creditor to determine the consumer’s repayment ability taking into account current obligations and mortgage-related obligations as defined in paragraph (a)(4)(i) of this section, and using the largest required minimum periodic payment based on the following assumptions:
    (1) The consumer borrows the full credit line at account opening with no additional extensions of credit;
    (2) The consumer makes only required minimum periodic payments during the draw period and any repayment period;
    (3) If the annual percentage rate may increase during the plan, the maximum annual percentage rate that is included in the contract, as required by § 1026.30, applies to the plan at account opening and will apply during the draw period and any repayment period.

    • Current obligations (defined as another credit obligation of which the creditor has knowledge undertaken prior to or at account opening and secured by the same dwelling that secures the high-cost mortgage transaction) consists of a $200,000, 30-year fixed rate mortgage, with a 5% rate and a monthly payment of $1,073.64.
    • Mortgage-related obligations (taxes and insurance) of $129.17 per month.
    • $50,000 HELOC with a maximum rate of 18%, a five-year draw period and a 10-year repayment period.
    o The minimum payment during the draw period, consisting of interest only, is $750.
    o The minimum payment during the repayment period, consisting of 5% of the outstanding balance plus accrued interest, is $3,250.

    Result: The HELOC must be underwritten using a maximum minimum payment of $4,452.81, based on the current obligations, the mortgage-related obligations and the maximum minimum payment during the repayment period.

    Question from Private: Regarding the addition to the procedures to Reg X, does that 60 day window still apply if the error was investigated and resolved in less time? i.e. if no error was found and that conclusion was determined within 2 days, does the 60 day rule still apply? Likewise if there was an error but it was resolved within 2 days, does the 60 day rule still apply?

    Answer from Jack Holzknecht to Private: Regulation X contains no exceptions to the 60-day period during which an adverse report cannot be made to a credit reporting agency.


    With regards to the question about HELOCs, is the question in the context of a simultaneous loan (for calculating DTI and ATR)?

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