Be sure to JOIN US for our webinar, “Ability to Repay, QM, High-Cost & Higher-Priced Mortgage Loans”.
ATR, QM, HCM, HPML…do all these acronyms make your head spin? Do you have trouble remembering which loans are covered by each of these requirements? This webinar is going to walk you through the ins and outs of each one and get you on the right track. So don’t miss it!
Jerod explains which types of loans are covered by Regulation Z’s Ability to Pay rule in the video.
Transcript:
It starts with coverage. What we're looking for as far as loans that fall into this category, is the ability to repay, it's consumer purpose, so personal family household purposes.
They've got to be closed in and they've got to be dwelling secured.
Now just an important note, it does not have to be the primary dwelling for the borrower. It can be any dwelling, a vacation home, or rental home, whatever. It's just got to be consumer purpose and closed in. If that's the case, the loan will be subject to the prudent underwriting red tape that we're going to go through here in the last portion of our program.
It's also important to understand that there are several types of loans that don't fall into the ability to repay coverage bucket. For example, loan modifications. That's an important loophole that was purposefully built into the rule. Okay, you can circumvent legally these ability to repay requirements for loan modifications. Now you're going to want to make sure they're applied consistently so that you don't get yourself in trouble with fair lending. That you do modifications for some, but not for others.
Home equity lines, they're not subject to this rule, open-end credit. And then look closely at construction and then other types of temporary financing or bridge loan financing. Make note of the bold information in both C and D, that 12 months or less. If you structure a loan out of the gates, that's construction, some other type of temporary financing, or some sort of bridge financing, and you structure it out of the gates at more than 12 months, it's going to be subject to the ability to pay requirements. Now, why do you care? Because those loans are typically structured with a balloon feature and the build to repay rules in short, state that you have to use the largest principle on interest payment in the first five years.
Well, what's going to be the largest principle on interest payment if you have a loan that includes a balloon feature? It's going to be the balloon feature because these are short-term loans. So 12 months or less gets you an exemption. Over 12 months, you likely are going to have some difficulties with your debt-to-income ratios. They're going to be super high because of the use of that balloon feature. And we don't know how a court or an attorney's going to look at that in the event that you have a borrower someday that won't repay or can't repay.
