NAFCU Compliance Blog

Our Blog Has Moved!

As part of our website upgrade, NAFCU's Compliance Blog will no longer be posted via Typepad. Here's the new blog location:

https://www.nafcu.org/compliance-blog

You can find both old and new blogs on our website. 

Thanks for reading!

 

Deconstructing the QM Safe Harbor in Construction to Permanent Loans; CFPB Mortgage Servicing Guide Updates

By: Reginald Watson, Regulatory Compliance Counsel

Greetings Compliance Friends!

It has been a few years since the CFPB's implementation of the ability to repay requirements and qualified mortgage safe harbor, yet many credit unions still find the points and fees calculations confusing, particularly the scale of the exemption for construction loans in the context of a hybrid construction to permanent loan.  As a reminder, Regulation Z now requires credit unions to consider a consumer's ability to repay a residential mortgage loan and these requirements are set out in section 1026.43(c).

Loans that meet the standard of a qualified mortgage under sections 1026.43(e) or (f) are given a presumption that the borrower has the ability to repay. The calculation of all applicable points and fees are an aspect of determining whether a transaction is a qualified mortgage and therefore, whether the transaction is presumed to meet the “ability-to-repay” requirements of section 1026.43(c). The procedures for counting points and fees are the same as those provided in the high cost mortgage rule found in section 1026.32(b)(1). The credit union is required to establish a member's ability to repay for only those residential mortgage loans which are covered by the scope of section 1026.43(a), which contains a specific exemption for "a construction phase of 12 months or less of a construction-to-permanent loan." 12 C.F.R. §1026.43(a)(3)(iii). If a loan is outside the scope of section 1026.43(a), then there is no regulatory requirement to establish a consumer's ability to repay under section 1026.43 or calculate the points and fees.

So, how do we account for the points and fees calculation when the credit union is financing the permanent loan in addition to the construction phase? 

The commentary to Regulation Z seems to give us two options: for purposes of the qualified mortgage rule, the credit union may treat the construction phase and the permanent phase as one single transaction, or as two separate transactions.  Either way, the credit union would be required to follow the procedures under section 1026.32(b)(1) to calculate the points and fees for all applicable charges for both the construction phase and the life of the loan. However, it is not entirely clear how to allocate fees between the construction and permanent phase of a loan – but the preamble to the ATR/QM rule indicates that the ability to treat these kinds of loans as either one or two transactions draws upon section 1026.17(c)(6)(ii)-5. The preamble also referred back to section 1026.17(c)(6)(ii) in other areas, so while not entirely clear, it seems this rule may be helpful guidance generally.  The staff commentary to section 1026.17(c)(6)(ii)-5 seems to suggest that when separating the transactions, the points and fees may be allocated as the credit union sees fit:

5. Allocation of costs.When a creditor uses the special rule in §1026.17(c)(6) to disclose credit extensions as multiple transactions, fees and charges must be allocated for purposes of calculating disclosures. In the case of a construction-permanent loan that a creditor chooses to disclose as multiple transactions, the creditor must allocate to the construction transaction finance charges under §1026.4 and points and fees under §1026.32(b)(1) that would not be imposed but for the construction financing. For example, inspection and handling fees for the staged disbursement of construction loan proceeds must be included in the disclosures for the construction phase and may not be included in the disclosures for the permanent phase. If a creditor charges separate amounts for finance charges under §1026.4 and points and fees under §1026.32(b)(1) for the construction phase and the permanent phase, such amounts must be allocated to the phase for which they are charged. If a creditor charges an origination fee for construction financing only but charges a greater origination fee for construction-permanent financing, the difference between the two fees must be allocated to the permanent phase. All other finance charges under §1026.4 and points and fees under §1026.32(b)(1) must be allocated to the permanent financing. Fees and charges that are not used to compute the finance charge under §1026.4 or points and fees under §1026.32(b)(1) may be allocated between the transactions in any manner the creditor chooses. For example, a reasonable appraisal fee paid to an independent, third-party appraiser may be allocated in any manner the creditor chooses because it would be excluded from the finance charge pursuant to §1026.4(c)(7) and excluded from points and fees pursuant to §1026.32(b)(1)(iii).

Thus, it seems that the credit union may make a risk-based business decision when allocating points and fees for purposes of the qualified mortgage safe harbor for the permanent financing phase of the loan. Appendix D to Reg Z provides specific guidance on how to make the actual calculations when these loans are treated as separate transactions in Part I or as a single transaction in Part II.

***

CFPB Issues Update to Small Entity Compliance Guide

On March 29, 2018, CFPB updated the Mortgage Servicing Small Entity Compliance Guide (version 3.1) to incorporate recent amendments to the 2016 Mortgage Servicing Rules. As you may recall, we discussed these amendments in a previous NAFCU blogpost. Check out this link for our other blogs on the 2016 Mortgage Servicing Rules. CFPB also recently created a mortgage servicing coverage chart that credit unions may find helpful.

NCUA Legal Opinions: Still Good?; New in March

Written by Pamela Yu, Special Counsel for Compliance and Research

NAFCU's Compliance Team is often asked if a particular NCUA legal opinion is still valid guidance or how to determine if an opinion has been superseded.  NCUA's website, on its Rules and Regulations page, describes the parameters and limitations of the staff opinions and interpretive letters:

As a public service, and in an effort to help credit unions, lawyers, and others having an interest in the law applicable to federally insured credit unions better understand the statutes and regulations administered by the National Credit Union Administration, the NCUA publishes certain of staff's legal opinions and interpretive letters issued since 1991. The NCUA has not attempted to identify or publish all, or even most, letters on a particular subject prior to that year, and there may be other letters that have not been selected for publication. Similarly, the NCUA generally does not review opinions or letters once they have been published for the purpose of flagging or removing those that may have become outdated, superseded or discredited, or that may have been revised, modified, revoked or suspended.  Further, the letters' conclusions may be limited to specific facts stated in the letters and do not necessarily apply to circumstances involving different or additional facts.  The NCUA's Office of General Counsel is available to assist the public in determining whether a particular interpretation or opinion remains correct.  You can contact the Office of General Counsel at [email protected] or 703-518-6540.​ 

Compliance professionals may want to note that the interpretations selected by the agency as published opinions are just a limited collection of the agency's interpretations on the statutes and regulations within its jurisdiction; there are internal agency interpretive letters and memoranda that are not made available to the public.  Also, public opinions available online go back only as far as 1991.  The interpretations are also fact-specific so a credit union should be careful in extending a letter's conclusion to its own facts and circumstances.  If in doubt about an opinion's applicability, credit unions should contact NCUA's Office of General Counsel (OGC) for assistance in determining whether it may rely on a particular opinion.

NCUA issued two new legal opinions in the month of March.  The new opinions are summarized below.

 NCUA Opinion 17-1219: Field of Membership (FOM)

 On March 9, 2018, NCUA issued an opinion on associational common bonds.  In response to a question about whether a federal credit union chartered to serve Anabaptists and Mennonites could also serve "individuals who share a core doctrinal belief and set of practices with those communities," NCUA's OGC concluded that those sharing the same core doctrinal belief "have a significant and meaningful affinity with other members of the Anabaptist tradition," and could thus also be served by the credit union.  The opinion noted that such an FOM is a valid associational common.

In 2015, NCUA finalized a final rule that permits federal credit unions seeking to add associations to their fields of membership to apply for streamlined automatic NCUA approval of 12 categories of associations, such as religious organizations, including churches or groups of related churches.  Under the rule, which became effective July 5, 2015, NCUA provides automatic approval of such associations, allowing for the federal credit union to receive an immediate electronic confirmation of the approved application. 

NCUA Opinion 17-1219 interpreted this rule to conclude that those individuals who share a core doctrinal belief of Anabaptism to "live simply, practice mutual aid with the church, uphold economic justice, and give generously and cheerfully" share a valid associational common bond under NCUA's chartering and field of membership rules.

NCUA Opinion 18-0133: Loan Participations

 In another opinion, dated March 22, 2018, NCUA opined that certain requirements of its loan participation rule, 12 C.F.R. §701.22, apply "throughout the life of the loan."  NCUA Opinion 18-0133 clarifies several aspects of the loan participation rule, including:

• Each participated loan must be identified and treated independently. For example, a loan participation agreement must identify each participated loan, enumerate servicing responsibilities for that loan, and include disclosure requirements regarding the ongoing financial condition of that loan, the borrower, and the servicer.
• Where a participation agreement involves multiple loans, the documentation for identifying each participated loan can be consist of an addendum or schedule for identifying each loan and each participant’s interest in that loan.
• A loan participation represents an interest in a single loan, throughout the life of a participated loan. This includes servicing.  Thus, a servicer cannot deduct a servicing fee related to a nonperforming loan participation from the principal and interest received from a performing loan participation, even when many loan participations are sold to the same purchasing credit union.
• Credit unions are not precluded from engaging in servicing practices for administering multiple loan participations efficiently. For example, netting payments across multiple performing loans would be permissible, assuming proper accounting of each loan’s individual status and the netting is consistent with the loan participation agreement.

***

Monthly Research Survey: Help Us Help You!

NAFCU's Economic and Research Team conducts monthly surveys of NAFCU member credit unions in order to compile meaningful data reports that you can use to benchmark against your geographic and asset level peers. These survey results are also critical to NAFCU's advocacy efforts on your behalf to federal agencies, such as NCUA, CFPB and the Federal Reserve. Your participation helps us help you!

Tomorrow is the last day to share your voice on the topic of ADA Website Litigation. We rely on your survey responses for our industry analysis and legislative advocacy efforts on behalf of all credit unions.

NAFCU members can participate in this month's Economic and CU Monitor survey with one of the options below:

• Online survey
• PDF file (please return by email to [email protected])

Submission Deadline: April 3, 2018