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8/3/2019 RC11Jaworski.Workshop2
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Robert M. Jaworski, Partner
Reed Smith, LLP
MBA Regulatory Compliance ConferenceRenaissance Washington DC Downtown
HotelWashington, D.C.
September 25, 2011
WORKSHOP 2:QUICK GUIDE TO TILA
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TILA/Regulation Z
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Outline
Purpose: To ensure meaningful disclosure of creditterms so consumers can better shop for credit and use itwisely
Key Definitions Disclosure Requirements Right of Rescission Advertising Restrictions HOEPA Loans (Section 32 Mortgages) Higher-Priced Mortgage Loans Servicing Requirements Loan Originator Compensation Rules Notification of Sale or Transfer of Mortgage Loan Valuation Independence Rules
Public and private remedies
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Key Definitions
Consumer Credit Transaction
Finance Charge
APR
Amount Financed
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Disclosure RequirementsGeneral
Closed-end
Early TIL
Final TIL
ARM Program Disclosure + CHARM Booklet
Open-end
HELOC Plan disclosure + What You Should Know
About Home Equity Lines of Credit Disclosure before first advance
Periodic Statement
Model Forms and Clauses
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Disclosure RequirementsRate and Payment Summary
Required by Mortgage Disclosure Improvement Act of2008 (MDIA)
Mandatory compliance January 30th 2011
Scope: Closed end; secured by property or a dwelling
Timeshare plans not covered
Replaces payment schedule
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Disclosure RequirementsRate and Payment Summary
FORMAT:
Minimum 10 point font No unrelated information
Not more than 5 vertical columns
Model forms in Appendix to Regulation Z
Must be in the form of a table, with headings
substantially similar to model clauses Rearrangement of the model forms, except for limitedpermitted changes, may cost creditors protection fromcivil liability
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Disclosure RequirementsRate and Payment Summary
FIXED RATE MODEL CLAUSE
H-4(E)Rate & Monthly Payment
Interest Rate _____%
Principal + Interest Payment $_____
Est. Taxes + Insurance (Escrow)* [Includes [Private] MortgageInsurance]
$_____
Total Est. Monthly Payment $_____
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Disclosure RequirementsRate and Payment Summary
ESCROW TAXES AND INSURANCE: MORTGAGEINSURANCE
Mortgage insurance premiums are included in escrowdisclosure
Credit insurance excluded
Mortgage insurance premiums included until the datecreditor must automatically terminate mortgage
insurance Escrow disclosure includes mortgage insurance even
if there is no escrow account established for thetransaction
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Disclosure RequirementsRate and Payment Summary
MORTGAGE WITH NEGATIVE AMORTIZATION MODELCLAUSE - H-4(G)
[This loan offers you several monthly payment options. The table below shows
you what your payments would be under two of these options if the interest ratereached its maximum of ___% in the (period) of this loan.][All payments shown in the table include $___ for estimated taxes and insurance[(escrow)].
(Date)
[((period)
[intro])]
[(Date) (1st
adjustment)][(Date) (2nd
adjustment)](Date) +every
(period)after
Maximum Interest Rate _____%[(intro rate)]
[_____%] [_____%] _____%(max. ever)
Full Payment Option
Monthly payments coverall principal and interest
$_____ [$_____] [$_____] $_____
Minimum Payment
OptionInitial monthly paymentscover no principal andonly some interest andincrease your loanamount.
$_____ [$_____] [$_____] $_____
You will borrow an additional $_____ by (date) if you make only minimumpayments on this loan.
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Disclosure RequirementsRate and Payment Summary
FIXED RATE: INTEREST-ONLY
MODEL CLAUSE H-4(H)INTRODUCTORY
Rate & Monthly Payment
(for first ____ years)
MAXIMUM EVER
(as early as ___)
Interest Rate _____% _____%
Principal Payment $_____ $_____
Interest Payment $_____ $_____
Est. Taxes + Insurance (Escrow) $_____ $_____
Total Est. Monthly Payment $_____ $_____
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Disclosure RequirementsRate and Payment Summary
TEASER RATE MODEL CLAUSE H-4(I) - place below the table:
Period in sequence means in the second year or similar phrase
Introductory Rate NoticeYou have a discounted introductory rate of
__________% that ends after (period). In the (period insequence), even if market rates do not change, this rate
will increase to _____%.
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Disclosure RequirementsRate and Payment Summary
BALLOON MODEL CLAUSE H-4(J) place below table:
Balloon payment = more than twice the regular periodic payment
Disclosure: Outside and below the table, unless coincides withinterest rate adjustment or a scheduled payment increase
Final Balloon Payment due (date):$______________.
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Disclosure RequirementsRate and Payment Summary
NO REFINANCE GUARANTEE Model Clause H-4(K) Clause
inserted on TILA forms
There is no guarantee that you will be able to refinance to
lower your rate and payments.
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Right of Rescission
Loans subject to rescission
Notice of Right to Cancel
Delayed Disbursement
Expiration
Effect of rescission
Waiver
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Advertising Restrictions
Closed-end
Simple interest rate/APR
Trigger terms Requirement to disclose additional info about
rate/payment with equal prominence and in closeproximity to advertised rate/payment
Prohibited practices
HELOCs
Warning that balloon payment can result from payingminimum payment
Additional disclosures for promotional rates/payments
No misleading claims of tax deductibility
No references to HELOCs as free money
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HOEPA Loans (Section 32 Mortgages)
Loans secured by principal dwelling; not purchasemoney, reverse or open-end
Must meet APR Test or Points and Fees test
3-day cooling off disclosure
Notice to assignees
Numerous restrictions and limitations
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Higher-Priced Mortgage Loans
Loan secured by principal dwelling; not bridge loan,reverse mortgage or HELOC
APR in excess of average prime offer rate (APOR) +1.5/3.5 (first/subordinate liens)
Restrictions and limitations
Verified ability to repay
Mandatory escrows for taxes and insurance for atleast 12 months
Limited ability to charge prepayment penalties
(PPPs)
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Servicing Requirements
Applies to loans secured by a borrowers principaldwelling
No pyramiding of late fees
Requirement to credit payments on date of receipt
Requirement to provide payoff quotes within reasonabletime
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LO Comp RuleScope
Does not implement similar provision in Dodd-Frank(CFPB will revise as necessary to implement Dodd-Frank
provision)
Does not apply to HELOCs or timeshare loans
Defines loan originator as including mortgage brokerage
companies and their loan officer employees + loan officeremployees of lenders who fund their own loans, but not thelenders themselves
Mandatory Compliance DateApril 6, 2011
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LO Comp RuleThree Main Prohibitions
No comp may be paid to a LO based on loan term or condition (or
other factor that serve as a proxy for loan term or condition), exceptamount of loan
No comp may be paid to a LO by both the consumer and a partyother than the consumer for same loan
No improper steering by an LO (obtaining loan that providesgreater comp to LO unless loan is in the consumers interest) safe harbor if LO presents consumer with loan options fromsignificant number of creditors with which LO regularly doesbusiness (preferably 3), including
Loan with lowest interest rate Loan with lowest interest rate but which does not allow for neg.
am., prepayment fee, interest-only payments, balloon payment
within first 7 years, demand feature or shared equity/sharedappreciation feature Loan with lowest origination fees/discount points
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LO Comp RuleUnacceptable/Acceptable Comp Under Prohibition #1
Unacceptable
Comp based on the loan interest rate, APR, LTV ratio or theexistence of a prepayment penalty
Comp based on a factor that is a proxy for a loan term orcondition; e.g., consumers credit score or DTI ratio
Acceptable
LOs overall loan volume Long-term performance of LOs loans; Hourly Rate or Salary or flat fee per loan (fixed in advance) LO pull-through rate Loans to existing v. new customers Quality of LOs files (accuracy and completeness) LOs fixed overhead costs
Comp based on amount of loan Percentage of loan amount with fixed maximum and/or
minimum amount per loan
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LO Comp RuleIssues
Comp based on profitability/revenue?
Different comp for different loan programs FHA/VA or
CRA or jumbo v. conventional; portfolio v. non-portfolio; in-house v. brokered, purchase v. refinance?
Borrower-pay mortgage broker comp/payment to LO?
LO agreement to credit portion of LO comp to consumer toseal the deal/Point Banks?
Loans made through different channels (bank supplies leadsv. LOs get their own leads)?
Loans made by different subsidiaries/affiliates?
Comp to managers who do/do not originate?
S
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Requirement of Notification of Sale or Transfer ofMortgage Loan
Helping Families Save Their Homes Act of 2009
Applies only to loans secured by borrowers principaldwelling
New owner must send Notice of Transfer within 30 days(unless it transfers loan before then)
Notice must specify
Contact info for new owner Date of transfer How to reach agent for new owner Where transfer of ownership recorded Other relevant information
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Valuation Independence RulesUse of Coercion
Prohibits:
Directly or indirectly causing or attempting to cause avaluation to be based on anything other than theindependent judgment of the person performing thevaluation
Use of coercion, extortion, bribery, intimidation,compensation, or collusion to influence the person
performing the valuation
Material misrepresentations as to the value of theproperty by the person performing the valuation
Falsifying or materially altering the valuation report
Note: It does not matter that the action was not intendedto influence the valuation, or that the person refusedthe attempt the mere conduct is a violation.
V l i I d d R l
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Valuation Independence RulesUse of Coercion
Examples of prohibited conduct:
Withholding or threatening to withhold paymentbecause the valuation does not come in at a certainamount
Implying that the willingness of the lender to retain the
person for future engagements depends on theamount of the current valuation Come in at $X, oryoull be dropped from our preferred vendor list.
Conditioning payment for the valuation on the loanactually closing
V l i I d d R l
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Valuation Independence RulesUse of Coercion
Examples of permissible activities: Asking the preparer to consider additional and
appropriate property information, including othercomparable properties
Asking the preparer to provide further detail,substantiation, or explanation for the valuation
Asking the preparer to correct errors in the valuation
Obtaining multiple valuations on the same property to
obtain the most reliable valuation a SecondOpinion
Withholding payment for breach of contract orsubstandard performance.
Note: The key is that the request must be consistent
with prudent banking practices and not an attempt toget the preparer to change the outcome of thevaluation improperly.
Valuation Independence Rules
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Valuation Independence RulesConflicts of Interests
Person who prepares valuations, or performs valuationmanagement functions may not have a direct or indirectinterest, financial or otherwise, in the property or thetransaction.
Valuation management functions =
recruiting, selecting or retaining person to prepare valuation
contracting with or employing person to prepare valuation managing or overseeing process of preparing valuations
(e.g., receiving orders for and receiving valuations;submitting completed valuations to, and collecting fees from,creditors and underwriters; and compensating persons whoprepare valuations
reviewing or verifying the work of person who prepares
valuation
V l ti I d d R l
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Valuation Independence RulesConflicts of Interests
Presumption of compliance if compensation of preparer nottied to valuation coming in at specific amount AND
For institutions > $250 million (past 2 years):
Person performing the valuation or valuation managementfunction not part of the loan production function.
No person in loan production function directly or indirectlyinvolved in selecting, retaining, recommending, orinfluencing the selection of the person preparing thevaluation or involved in the valuation management function
OR
For institutions $250 million (past 2 years):
Creditor requires that any of its employees, officers ordirectors who orders, performs, or reviews valuation notparticipate in decision to approve, decline or set terms ofloan
V l ti I d d R l
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Valuation Independence RulesProhibition on Extension of Credit
Where creditor knows that a violation of the coercion orconflicts provisions has occurred, credit may not beextended unless creditor documents that it has actedwith reasonable diligence to determine what thevaluation does not materially misstate or misrepresentthe value of the property.
A material misstatement is a misstatement that wouldaffect credit decision.
Valuation Independence Rules
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Valuation Independence RulesPayment at Customary and Reasonable Rate
Creditor and its agents must compensate fee appraiser atcustomary and reasonable rate in the relevant geographic
market
Compliance presumed if:
Rate is reasonably related to recent rates paid forcomparable services in relevant geographic market, takinginto account type of property, scope of work, time required,appraisers qualifications, experience and professionalrecord, and quality of work, and creditor does not engage inanticompetitive conduct
Rate is based on (i) objective third-party information, e.g.,fee schedules, studies and surveys prepared byindependent 3rd parties (govt, academia, research firms)which exclude fees paid to appraisals ordered by AMCs, or
(ii) recent rates paid to a representative sample of providersin relevant geographic area.
Valuation Independence Rules
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Valuation Independence RulesMandatory Reporting of Violations
Applies to all covered persons (creditors and other settlementservice providers)
Applies when covered person reasonably believes appraiser hascommitted a material violation (one likely to significantly affectthe property valuation) of Uniform Standards of ProfessionalAppraisal Practice or ethical or professional requirements imposedby federal or state law
Requires covered person to notify appropriate state appraisercertifying/licensing agency of suspected violation withinreasonable period of time after determining reasonable basisexists to believe violation has occurred
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Public and private remedies
Administrative enforcement by CFPB or principal federal bank regulator (for banks
under $10 billion in assets)
by means of an Order to Make an Adjustment
Private right of action Actual damages Statutory damages
Individual actions: $200-$2,000 (open-end); $400-$4,000 (closed-end)
Class actions: $500,000 or 1% creditors net worth,whichever is less
Enhanced damages for material violations of section 129(HOEPA and HPML loans) = sum of all finance charges
Court costs + attorneys fees General assignee liability only for violations apparent on
the face of the disclosure statement
1 year limitation period to commence suit
Criminal enforcement up to $5,000 and/or 1 year imprisonment
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Dodd-Frank Amendments to TILA
Outline
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Outline
New definitions
Anti-steering provisions
Ability to repay requirements
New defenses to foreclosure
Limitations on PPPs
Other limitations
Increased penalties/time to sue
New disclosures
HOEPA Changes
FRB Ability to Repay Proposal
New definitions
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New definitions
Residential mortgage loan = Closed-end, dwelling-securedconsumer credit transaction
Qualified mortgage (QM) = residential mortgage loan
no negative amortization/balloon payment
verified income and assets
underwritten using fully-amortizing payment schedule,including applicable taxes, insurance and assessments
points and fees 3% total loan amount complies with DTI ratios established by FRB
Mortgage originator somewhat broader than SAFE Act butexcludes servicers
Servicer same as in RESPA
Anti steering provisions (New section 129B)
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Anti-steering provisions (New section 129B)
Prohibited steering =
Mortgage originator comp. based on loan terms (otherthan loan amount), e.g., YSPs
Payment of mortgage originator comp. by bothborrower and another person
Steering consumers to loans For which they lack reasonable ability to repay
That have predatory characteristics
That are not QMs when they qualify for a QM
Engaging in abusive or unfair lending practices thatpromote disparities [based on] race, ethnicity, gender,or age.
Ability to repay requirements (New section
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Ability to repay requirements (New section129C)
Creditors must make reasonable and good faith
determination, based on verified and documentedinformation, that, at time of closing, consumer hasreasonable ability to repay loan according to its terms(using fully-amortizing payment schedule and taking intoaccount all applicable taxes, insurance and assessments)
Rebuttable presumption/safe harbor - ability to repay aQM
New defenses to foreclosure
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New defenses to foreclosure
For violations of section 129B or 129C
As a defense by recoupment or set off
Any time during life of loan
Limitations on PPPs
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Limitations on PPPs
PPPs permitted only if:
Loan is a QM
Loan APR APOR + 1.5 (1st lien conforming)/2.5 (1st
lien jumbo)/3.5 (2nd lien) percentage points
Penalty 3%, 2% or 1% of outstanding balance whenrepaid, respectively, during first, second or third yearsof loan term
No penalty after 3 years
Creditor offers loan without PPP
Other limitations
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Other limitations
Residential mortgage loans and HELOCS
No financing of single premium credit insurance
No mandatory arbitration clauses
No payment schedules that permit negative amortization
No refinancing that result in borrower losing anti-deficiencyprotections, without notice before closing
No loans that are not QMs to 1st time homebuyers withoutcounseling
Increased penalties/time to sue
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Increased penalties/time to sue
Class action damages limit raised from $500,000 to $1million
Enhanced section 129 damages for violations of anti-steering and ability to repay provisions
Private right of action for violation of anti-steering
provision by loan originators/capped at actual damages or3 times originators total comp., whichever is higher
Time to sue for violations of sections 129, 129B and 129Cincreased from 1 year to 3 years
New disclosures
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New disclosures
6-month prior notice of interest rate adjustments onfixed/adjustable rate hybrid ARMs secured by borrowersprincipal residence
Additional closed-end disclosures
Monthly statements for all residential mortgage loans(other than fixed-rate loans where equivalent info is oncoupon books)
HOEPA Changes
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HOEPA Changes
Changes name to high cost loans (HCLs)
Expands definition
includes open-end and purchase money loans changes index (from yield on Treasury securities to
APOR) and lowers APR threshold (from 8/10 to6.5/8.5 percentage points over the applicable index)
lowers points and fees threshold from 8% to 5% of
total loan amount expands list of points and fees
adds new category = loans with PPPs payable after 6months or more than 2% of amount prepaid
Prohibits, among other things, balloon payments and latefees > 4%
Creates cure provisions
FRB Ability-to-Repay Proposal
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FRB Ability to Repay Proposal
Before making a covered transaction (dwelling-secured
consumer-purpose loan - not a HELOC, timeshare loan,reverse mortgage or bridge loan), creditor must makereasonable and good faith determination that consumerhas reasonable ability, at time of consummation, to repayloan according to its terms, including any mortgage-related obligations.
Four ways to meet ability-to-repay requirement:
1. General ability-to-repay standard
2. Originate a qualified mortgage
3. Originate a balloon payment qualified mortgage
4. Refinance a non-standard mortgage with a standardmortgage
FRB Ability-to-Repay Proposal
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y p y pGeneral ability-to-repay standard
Must consider and verify
Income or assets relied upon Current employment status
Monthly payment on the covered transaction
Using greater of fully-indexed rate or introductoryrate, and monthly, fully-amortizing, substantiallyequal payments
Special rules for balloon, interest-only andneg.am loans
Monthly payment on any simultaneous mortgage
Monthly payment for mortgage-related obligations
Current debt obligations
Monthly DTI ratio or residual income Credit history
FRB Ability-to-Repay Proposal
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y p y pQualified Mortgage (one option)
Safe harbor
No negative amortization No interest-only payments No balloon payment No loan term in excess of 30 years Total points and fees 3% total loan amount Income or assets relied upon are considered and
verified Underwriting must be
based on maximum interest rate that may applyduring 1st 5 years
using fully amortizing payment schedule over loanterm
taking into account any mortgage-relatedobligations
FRB Ability-to-Repay Proposal
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y p y pQualified Mortgage (second option)
Rebuttable presumption of compliance
Must meet same criteria as for safe harbor
Must consider and verify
consumers employment status
monthly payment for any simultaneous mortgage
consumers current debt obligations
monthly DTI ratio or residual income
consumers credit history
FRB Ability-to-Repay Proposal
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Balloon-Payment Qualified Mortgage
Only for creditors who operate predominantly in rural orunderserved areas
Loan term must be 5 years
Must comply with requirements for a qualified mortgage
Must underwrite based on the scheduled payment (exceptfor the balloon payment)
FRB Ability-to-Repay ProposalR fi i f N St d d M t ith St d d M t
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Refinancing of Non-Standard Mortgage with Standard Mortgage
Non-Standard Mortgage = covered transaction that is
an ARM with an introductory rate that is fixed forat least 1 year
a loan that permits one or more interest-onlypayments
a loan (other than a reverse mortgage) thatprovides for a minimum periodic payment thatcovers only a portion of the accrued interest,resulting in negative amortization
FRB Ability-to-Repay Proposal
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y p y pRefinancing of Non-Standard Mortgage with Standard Mortgage
Standard Mortgage = covered transaction
that provides for regular periodic payments that donot cause principal to increase or allow consumer todefer payment of principal or result in a balloonpayment
for which total points and fees 3% of total loanamount
for which term 40 years
for which interest fixed for at least 5 years for which proceeds used solely to pay off outstandingbalance on the non-standard loan plus closing costsrequired to be disclosed under RESPA
FRB Ability-to-Repay Proposal
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Refinancing of Non-Standard Mortgage with Standard Mortgage
Creditor of standard mortgage must be holder or servicerof non-standard mortgage
Monthly payment for standard mortgage must be
materially lower than monthly payment for non-standardmortgage
Creditor receives consumers written application forstandard mortgage before non-standard mortgagerecasts, i.e.
end-date of introductory fixed rate on ARM loan
end-date of period when interest-only paymentspermitted end-date of period when negative-amortizing
payments permitted
No more than one 30-day late payment on non-standardmortgage during preceding 24 months
No 30-day late payments on non-standard mortgageduring preceding 6 months
FRB Ability-to-Repay Proposal
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Prepayment Penalty Restrictions
Prepayment penalty permitted if:
otherwise permitted by law
loan APR cannot increase after consummation
loan is a qualified mortgage
loan is not a higher-priced mortgage loan
only for prepayment made within first 3 years of loanterm
it does not exceed 3%, 2% or 1% of outstandingbalance when incurred during 1st, 2nd or 3rd year,respectively, of loan term
creditor (or broker, by agreement with creditor) offersconsumer a similar loan that does not have aprepayment penalty and for which the consumer likely
qualifies
FRB Ability-to-Repay Proposal
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Record-keeping
Must retain records evidencing compliance withability-to-repay requirement and prepayment penaltyrestrictions for at least 3 years followingconsummation of the transaction
Questions?
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Contact Information
Robert M. Jaworski, Partner
Princeton Forrestal Village
136 Main Street, Suite 250
Princeton, NJ 08540
Tel: +1 609 520 6003
Email: [email protected]