CMG Questions from 1/23 and 1/24/14

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    1. From FNB Bank to Everyone: We would like to clarify something about QM – and the small creditor exception. Are we correct in our understanding that temporary loans cannot be QMs under the small creditor exception (because they’re interest only) and when we look at the appraisal rules, since they’re not construction or bridge they can be subject to HPML appraisal rules under Reg Z. Hope that makes sense…
    Answer: You are correct an interest only loan cannot be a QM. But temporary or “bridge” loans with a term of 12 months or less are exempt from the ability to repay rules. So you may be able to make the loan and not have to worry about ATR.

    Both initial construction loans and “bridge” loans with a maturity of 12 months or less if the purpose is in connection with the acquisition of a dwelling are exempt from the HPML appraisal rules.

    2. From FNB Bank to Everyone: Are there potential fair lending issues if you do not consider someone’s income?
    Answer: Apparently this question arose from our discussion that if one joint applicant’s income is sufficient, then you do not have to consider the other applicant’s income. Remember we are only considering one income, but the loan is going to be approved. If we only considered one income and we were denying the loan that would have been made had we considered both incomes you might have a problem.

    The following question expands on this discussion.

    3. From Carol Stone to Everyone: I think there’s an exception in the idea that you don’t have to look into the income of all borrowers if one seems sufficient. For situations where one borrower is self-employed – how can you not get financial info from that business owner to verify that at least there’s no losses to deduct from the other spouse’s income. Because self-employed business ventures may actually be running at a loss, I think that information would always need to be verified and considered – don’t you?
    Answer: You raise an interesting point, but I am not sure it is problem. A lot depends on the business structure. I could be employed at a company I own. I get a salary, but the company loses money. The loss at the company may ultimately cause the company to fail and I would be out of a job. But the loss does not affect my wife’s income.

    4. From Xxxx (privately): How do we treat student loan payments that are in deferment?
    Answer: Appendix Q states, ” Debt payments, such as a student loan or balloon-payment note scheduled to begin or come due within 12 months of the mortgage loan closing, must be included by the creditor as anticipated monthly obligations during the underwriting analysis.”

    Secondary Market Guidance states, ” Deferred installment debts, such as deferred student loans, must be included as part of the borrower’s recurring monthly debt obligations. If the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations.

    Exception: For a student loan, in lieu of obtaining copies of payment letters or forbearance agreements, the lender can calculate a monthly payment using no less than 2% of the outstanding balance as the borrower’s recurring monthly debt obligation. However, if any documentation is provided by the borrower or obtained by the lender that indicates the actual monthly payment, that figure must be used in qualifying the borrower.

    5. From Xxxx (privately): How do we treat balances on American Express cards?
    Answer: Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower’s recurring monthly debt obligations. These tradelines include credit cards, department store charge cards, and personal lines of credit. Equity lines of credit secured by real estate should be included in the housing expense.

    If the credit report does not show a required minimum payment amount and there is no supplemental documentation to support a payment of less than 5%, the lender must use 5% of the outstanding balance as the borrower’s recurring monthly debt obligation.

    6. From Xxxxxx (privately): Could you clarify for me on HELOCs, what interest rate we should use to determine if the HELOC is high cost. Ours is an index plus a margin with a floor and ceiling. No discount. When does using the maximum rate/ceiling come into play if ever?
    Answer: A HELOC is a high-cost mortgage loan if the HELOC is consumer credit secured by the borrower’s principal dwelling and the account has a high rate, high fees or a significant prepayment penalty. The transaction has a high rate test when the annual percentage rate applicable to the transaction will exceed the average prime offer rate for a comparable transaction by more than:
    • 6.5 percentage points for a first-lien transaction, other than as described on the next line;
    • 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or
    • 8.5 percentage points for a subordinate-lien transaction.

    In determining if the consumer has the ability to repay a high-cost HELOC that has a variable-rate you use the maximum annual percentage rate that is included in the contract.

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