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From A to Regulation Z: Breaking Down the New Mortgage Rules

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By Andrea Stritzke

Screen Shot 2013-08-15 at 4.16.59 PMWhen the Consumer Financial Protection Bureau (CFPB) issued nine rules in ten days in January of this year, those of us in the regulatory business knew that keeping it all straight would be nothing less than chaotic. Indeed, the more we learned about the rules, the more confusing they became.

It might be difficult for any credit union to move forward implementing its compliance strategy without the benefit of a layman’s breakdown of the new information. Credit union leaders who are charged with understanding the scope of some of the new rules amending Regulation Z as well as the exemptions for the rules that may apply to their cooperative, can use what follows as a starting point in their review.

It’s important to understand how Regulation Z defines a dwelling before you begin studying the specific provisions of each rule. The new rules define a dwelling as a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home and trailer, if it is used as a residence.” The Official Staff Interpretations go on to indicate that a vacation home or second home may be a dwelling unless the rule specifies a principal dwelling.

Let’s begin our breakdown with one rule that has a very broad scope and that will impact many credit unions: The Ability to Repay/Qualified Mortgage rule.

Ability to Repay/Qualified Mortgage

The ability to repay rule (also known as the qualified mortgage or QM rule) requires lenders to determine that a consumer has the ability to repay a covered transaction at the time of consummation.

The rule applies to closed-end, consumer loans secured by a dwelling. However, the following transactions are excluded from the rule:

  • Timeshares
  • Reverse mortgages
  • Temporary or bridge loans with terms of 12 months or less
  • The construction phase of a construction-to-permanent loan

Because the rule applies to closed-end loans, it excludes open-end home equity lines of credit. Additionally, the rule applies to consumer loans (personal, family or household purpose), so it excludes business loans or investment loans. The rule does not specify that it applies to a principal residence, so it may apply to a first lien or subordinate lien loan secured by a dwelling, which may include a mobile home, boat, recreational vehicle, condominium or vacation home if used as a residence (and is not a business or investment-purpose loan).

Higher-priced mortgages are a bit more complicated, with two additional rules applying.

Escrow and Appraisal Rules for Higher-Priced Mortgages

Screen Shot 2013-08-15 at 4.18.09 PMThe escrow rule under Regulation Z covers a higher-priced mortgage loan secured by a first lien on a principal dwelling and extends the required escrow period for these transactions.

A higher-priced mortgage is a closed-end consumer credit transaction secured by a consumer’s principal dwelling where the annual percentage rate (APR) exceeds the average prime offer rate (APOR) by 1.5 percentage points for a first lien; 2.5 percentage points for a first lien jumbo mortgage; and 3.5 percentage points for a subordinate lien. However, the escrow rule does not apply to subordinate lien mortgages.

The following transactions are excluded from the rule:

  • Reverse mortgages
  • Temporary or bridge loans with terms of 12 months or less
  • The construction phase of a construction-to-permanent loan

Because the rule only covers closed-end loans, open-end home equity lines of credit are excluded from the rule. A dwelling may include condominiums, manufactured homes, boats or trailers if used as a principal dwelling. The rule also provides an exception for some creditors, specifically those that meet all of the requirements below:

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