Will your organization take advantage of the exemption from Ability-to-Repay rules for refinances in
As you know, the new mortgage regulations greatly increase the risk (both likelihood and magnitude) of noncompliance. Originating qualified mortgages is the most obvious way to limit such risk, but QM is very narrowly defined and a "QM only" policy will undoubtedly result in less business. Therefore, it will be important to take advantage of any and all viable alternatives to mitigate risk. One exemption from the ability-to-repay rules involves refinancing non-standard mortgages... but we here at Spillane Consulting Associates want to take a look at this from another angle. Please allow us to explain!
12 CFR 1026.43(d) provides an exemption from the ability-to-repay ("ATR") requirements when a creditor refinances a "non-standard" mortgage into a "standard" mortgage. If a creditor falls under this exemption, the creditor avoids the ATR requirements (along with the liability risk).
Any exemption to the ATR rules may seem very attractive, but it is important to know this exemption only applies if all the following requirements are met:
the new ("standard") mortgage loan has a fixed interest rate for at least the first 5 years
the creditor is already the current holder of the non-standard mortgage the new monthly payment is "materially lower"
the consumer's application is received no later than 2 months after the non-standard mortgage has recast
the borrower is generally up-to-date on his or her mortgage payments (more precise requirements apply)
Yet another requirement is especially problematic. In addition to the above requirements, this exemption only applies if "{t}he creditor has considered whether the standard mortgage likely will prevent a default by the consumer on the non-standard mortgage once the loan is recast."
A couple of notes on this additional requirement:
First, note that it does not say the creditor must actually "determine" that it is likely to prevent default. That helps, right? Well, despite the way the rule is written, ask yourselves whether regulators will approve of you determining that refinances will not prevent default yet applying the exemption anyway.
We doubt your response, "well, all I had to do was consider it," will be sufficient. Even if a court eventually took your side of this debate, could the regulators instead just challenge this as an unfair, deceptive, or abusive practice?
Second, note the squishiness of the word "likely." It is easy to argue both sides of an argument over whether something is likely. Remember that similarly slippery words--"good faith" and "reasonable"--are what makes the ATR rule so dangerous and hard to defend in the first place. If a court or regulator disagrees over whether default was "likely", aren't you forced back into ATR land? This goes back to the first note, maybe simply considering this will be sufficient ....
So this leads us to the question, is this exemption worth the hassle? It only applies in limited circumstances--for borrowers who are up-to-date on payments who will get a much lower payment and where you already hold the loan. It appears difficult to trust that you've correctly fit within the exception (i,e. "likely" to prevent default). And it appears the consequence of mistakenly relying on the exemption is simply to be forced back into ATR territory without having attempted to comply with ATR--not a good situation.
Maybe the value in this exception is to not rely on it entirely but both to comply with ATR and meet the requirements for this exemption, in those rare cases where it will apply without much additional effort. For example, if you're refinancing a borrower into a mortgage under circumstances where all the other requirements are met (materially lower payment, etc.), then you might as well document that you considered whether refinancing was likely to prevent a default. What could it hurt? In that way, you might build in an extra layer of protection.
But at what cost is this extra layer of protection? We recommend looking at the costs and benefits of this .... it's possible the costs of training and policy & procedure development outweigh any benefits. All in all, this appears to be a very limited exemption from the ATR rules.
Remember! Whatever your decision, if you're taking advantage of this exemption, or any other that takes you away from the general ATR requirements, you will want to document that decision--be sure you can prove that ATR does not apply. Other examples include for business loans and modifications (where ATR does not apply). The consumer vs. business and modification vs. refinance distinctions can be fuzzy in close cases ... be sure to have written policies in place to define the terms, identify how to proceed, and to document these decisions.
As you work through these changes to the mortgage industry, try to keep an open mind. A good leader is humble enough to listen to others and doesn't always need to be the smartest in the room. Don't assume you always know best, as did Wallace Shawn's character (Vizzini, Sicilian criminal mastermind) in The Princess Bride--
Vizzini: You fell victim to one of the classic blunders-the most famous of which is, "Never get involved in a land war in Asia"-but only slightly less well-known is this: "Never go against a Sicilian when death is on the line"! Ha ha ha ha ha ha ha! Ha ha ha ha ha ha!
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**These are our opinions. We're not authorized, or willing, to express those of others.**