The Consumer Financial Protection Bureau’s ability-to-repay and qualified-mortgage rules are in effect, and they apply to all closed-end consumer credit transactions that are secured by a dwelling of one to four units. When the examiners next come to your bank, they will want to see how you’re complying with the new residential mortgage rule. To prove compliance, you may want to pursue a three-step strategy:
1. Policies and procedures manuals – In updating your manuals for compliance purposes, you should show how your bank does the following:
* Elicits a loan proposal: make sure that the manual includes the three items of information relied upon in the underwriting, including verification of employment income, status of employment, and consumer debt obligations.
* Analyzes the risk: Demonstrate that you have considered the eight underwriting factors in evaluating the consumer’s ability to repay.
* Structures the loan to control the risk: Show how the loan structure (pricing, term/amortization, and debt service coverage) fits into one of the four categories of qualified mortgages.
2. Compliance checklist – For each loan, you may want to generate a checklist or spreadsheet showing how you 1) elicited the three required items of information, 2) considered the eight underwriting factors, and 3) fit the loan structure into one of the four categories of qualified mortgage. You may need this checklist for examiners and also for borrowers (if they should interpose a defense in your foreclosure actions).
3. Presentation during the examination – When dealing with examiners, follow a strategy of show and tell – not hide and seek. Consider a formal presentation outlining how your manuals have been revised to comply with the rule – and how each loan complies with the ability-to-repay requirement and the qualified-mortgage safe harbor.
The above is based on an excerpt from The RMA Journal, June 2014 article “Complying with the New Residential Mortgage Rule” by William Warren Smith, Jr., adjunct assistant professor at New York University, School of Continuing Education. You can read the article in its entirety here.
