What is the scope of the ability-to-repay rule and how will you develop policies & procedures t
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 is for commercial or business purpose loans...we want to look specifically at the rules for rental properties held for investment purposes - will those be exempt?
As you know, the scope of the ability-to-repay regulations will be important to understand (and to make sure your employees understand) - what loans are exempt from ATR? What loans aren't? What will you do in close cases?
The ATR rule applies to "any consumer credit transaction that is secured by a dwelling[.]" Here are some loans that are exempt from ATR:
Temporary or "bridge" loans with terms of 12 months or less
All non-consumer loans (even if secured by borrower's residence), e.g. loans for commercial, business, or agricultural purposes
Loans to purchase or renovate rental property held for investment purposes
Loans secured by a consumer's interest in a timeshare Extensions of credit by a Housing Finance Agency such as MassHousing
Home equity lines of credit (but not home equity loans)
Please allow us to discuss commercial loans in greater depth. The distinction between commercial and consumer loans can be difficult to determine in close cases and what the regulator considers for "commercial" or "business" purposes is in no way affected by how the bank defines those terms.
Be careful to have clear policies in writing to distinguish between consumer loans (subject to ATR) and commercial/business loans ... and be sure your loan origination staff is trained on this information. And please make sure your definition matches the regulatory definition!
There are some very particular rules on the consumer v. commercial / business topic for rental properties held for investment purposes that we'd like to point out--it depends on whether they are non-owner occupied or owner occupied.
Non-Owner Occupied
The simple rule here is that such non-owner occupied dwellings are considered business loans and thus exempt. Official Interpretation to 12 CFR § 1026.3(a).4.[1] "Non-owner occupied" means the borrower lives in the home for less than 14 days per year--if the borrower stays there for a month in the summer, this bright-line rule no longer protects you.
Owner Occupied
A different rule applies for owner-occupied rental property and the purpose of the loan becomes important--is it to purchase the property or to improve/maintain the property? For loans to purchase the property, it is considered a business loan if it contains more than 2 housing units. For loans for improvement/maintenance, the loan is considered a business loan if it contains more than 4 housing units. Note that even if the property doesn't meet the unit requirements under either rule, the loan could still be classified as business purpose based on consideration of numerous factors explained in Official Interpretation 12 CFR § 1026.3(a).3.
Has anyone heard the story of Electrolux's marketing campaign? So the story goes, a team of Scandinavian advertisers (all English speakers, but no Americans) put together an advertisement for their vacuums that had an unintended effect on U.S. consumers. Specifically, the ad said, "Nothing sucks like an Electrolux." Moral of the story? Sometimes you need to reach out for help...then you can focus on your own unique abilities. Normally, a skilled mechanic won't spend his workday researching legal issues to write his own will, just like the mechanic's lawyer won't spend the day trying (and failing) to fix his own brakes.
Have some free time next Wednesday or Thursday? Our President, John Spillane, is delivering a speech on quality control to the Eastern Massachusetts Compliance Network on Wednesday, and I'll be speaking to the Small New England Credit Grantors about taking advantage of the small creditor portfolio QM.
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**These are our opinions. We're not authorized, or willing, to express those of others.**