ComplianceOnline PPT Format Adjustable Rate Mortgage (ARM) Rule 04052016

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Adjustable Rate Mortgage (ARM) Rule

This Training is Brought to you by ComplianceOnline.

Presenter: Craig M. Taggart

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Instructor Profile: Craig Taggart has almost a decade of experience in the fields of mergers and acquisitions and

business financing. Mr. Taggart works strategically with his clients to achieve the highest value for their business within the capital markets. His experience with BCC Capital Partners in the M&A industry has greatly contributed to his understanding of transaction structure, strategic

placement of buyers, and the attainment of maximum market value for his clients. He has represented and sold many businesses in a number of different industries and has significant experience working with companies in: continuing education, transportation, software and professional services. Mr. Taggart is currently working in the clean energy sector that covers multiple initiatives within M&A and corporate development.

He is a certified merger and acquisition advisor, accredited valuation analyst as well as an active member of Alliance of Mergers and Acquisition, and The National Association of Certified Valuators and Analysts (NACVA). Mr. Taggart has been a certified fraud examiner since 2011 and has owned an investigative franchise business, which focused on fraud based cases involving insurance, asset searches, surveillance, witness statements

He earned his MBA from the San Diego State University specializing in financial management. Mr. Taggart graduated from the California State University Northridge with a bachelor’s degree majoring in organizational psychology.


Areas Covered in the Webinar: • Resources regarding the various indices that may

be used for ARM lending • Checklists to ensure that all ARM documents are

complete • Employee training log • Quiz you can administer to measure staff

learning and a separate answer key • Fair Debt Collection Practices Act (FDCPA) rules • ARM (Adjustable Rate Mortgage) change

notification requirements3


Agenda

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The initial focus will be on the April 1, 2016, small creditor and rural and underserved changes that will force many institutions to walk away from balloon loans and consider ARMs instead. The second and longer portion will focus on ARM compliance requirements (which are not changing on April 1). However, for many institutions, the ARM rules will become much more important on that date. The original promotional text for this webinar is below, and discusses these subjects in a little more detail. Do you know how to complete an ARM loan? If you don’t, will you have to learn? Both of these questions will be answered during this webinar. Recently the CFPB has changed the definition of “rural and underserved” yet again. As part of that change, many financial institutions that have been able to do balloon loans will not be able to as of April 1, 2016. The first portion of the webinar will discuss this issue – which financial institutions can do balloons, and which will have to walk away from them on April 1, 2016. The second portion (and the majority of the presentation) will be devoted to the management and compliance requirements of ARM loans. While they have a reputation of being cumbersome, proper management of the process makes ARM loans much less trouble than their reputation indicates. The presentation will provide the tools and knowledge needed to make ARM loans a reality in your institution.


Please mention below what would be the key learning objectives of the Topic What is the definition of “rural and underserved” now?

How does that impact your institution? What should be considered when establishing an ARM program? What documents are needed to make an ARM program work? Ongoing management of an ARM program

Please mention below the Areas will be covered during the Session: (Should have more than 6 bullet points):

TAKE-AWAY TOOLKIT o Resources regarding the various indices that may be used for ARM lending o Checklists to ensure that all ARM documents are complete o Employee training log o Quiz you can administer to measure staff learning and a separate answer key

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Adjustable-Rate Mortgages An “adjustable-rate mortgage” is a loan program with a variable interest rate that can change

throughout the life of the loan. It differs from a fixed-rate mortgage, as the rate may move both up or down depending on the direction of the index it is associated with.

All adjustable-rate mortgage programs come with a pre-set margin that does not change, and are tied to a major mortgage index such as the Libor, COFI, or MTA. Some banks and mortgage lenders will allow you to choose an index, while many rely on just one of the major indices for the majority of their loan products.

How an Adjustable-Rate Mortgage Works

Initial rate: 5.25% Margin: 2.25 (won’t change) Index: 4.75 (can go up and down) Caps: 6/2/6

Typically, an adjustable-rate mortgage will offer an initial rate, or teaser rate, for a certain period of time, whether it’s the first year, three years, five years, or longer. After that initial period ends, the ARM will adjust to its fully-indexed rate, which is the margin plus index.

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To figure out what your fully-indexed interest rate will be each month with an adjustable-rate mortgage, simply add the margin to the associated index. You’ll be able to look up the current index price on the web or in the newspaper, and the margin you agreed to, which is usually found within your loan documents. You’ll also have to factor in payment caps to see when and how often your adjustable-rate mortgage actually adjusts.

Based on the two figures above, your fully-indexed rate would be 7.00%. It is equally important to note both the index and margin when selecting a mortgage program from your bank or mortgage broker. Many consumers overlook the margin, or simply don’t even realize it’s an active component of the adjustable-rate mortgage.

But as you can see, it plays a major role in the pricing of an ARM. Margins can vary by over 1% from lender to lender, so it can certainly affect you mortgage payment in a major way.


Adjustable-Rate Mortgage Interest Rate Caps

Adjustable-rate mortgages also carry adjustment caps, which limit the amount of rate change that can occur in certain time periods. There are three types of caps to take note of:

Initial: The amount the rate can change at the time of the first adjustment. In the examples above, it would be the initial change after the first 5 years of the loan.

Periodic: The amount the rate can change during each period, which in this case of a 5/6 ARM is every six months, or just once a year for a 5/1 ARM.

Lifetime: The amount the rate can change during the life of loan. So throughout the full 30 years, it can’t exceed this amount, or drop below this amount.

Typically, you might see caps structured like 6/2/6. This means the rate can change a full 6% once it initially becomes an adjustable-rate mortgage, or 2% periodically, and 6% total throughout the life of the loan. And remember, the caps allow the interest rate to go both up and down. So if the market is improving, your adjustable-rate mortgage can go down!

However, many lenders put in interest rate floors that often coincide with the initial rate, meaning your rate will never go below its start rate.

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Hybrid Adjustable-Rate Mortgages

Nowadays, most adjustable-rate home loans are hybrids, meaning they carry an initial fixed period followed by an adjustable period. They are also usually based on a 30-year amortization, meaning they last 30 years like fixed mortgages and are paid off similarly.

For example, you may see mortgage programs advertised like a 5/25 ARM or 3/27 ARM, just to name a couple. A 5/25 ARM means it is a 30-year mortgage, with the first five years fixed, and the remaining 25 years adjustable. Same goes for the 3/27, except only the first three years are fixed, and the remaining 27 years are adjustable.

You may also see programs such as a 5/6 ARM, which means the interest rate is fixed for the first five years, variable for the remaining 25 years, and will adjust every six months. If you see a 5/1 ARM, it is exactly the same as the 5/6 ARM, except it changes only once a year after the five-year fixed period.

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Types of Adjustable-Rate Mortgages

There are many different types of adjustable-rate mortgages, ranging from one-month ARMs to 10-year ARMs. Obviously this represents quite a range of risk, so be careful when comparing different loan products.

1-month ARM: First adjustment after one month, then adjusts monthly 6-month ARM: First adjustment after six months, then adjusts every six months 1-year ARM: First adjustment after one year, then adjusts annually 3/1 ARM: First adjustment after three years, then adjusts annually 5/1 ARM: First adjustment after five years, then adjusts annually 5/5 ARM: First adjustment after five years, then adjusts every five years 5/6 ARM: First adjustment after five years, then adjusts every six months 7/1 ARM: First adjustment after seven years, then adjusts annually 10/1 ARM: First adjustment after 10 years, then adjusts annually 15/15 ARM: First and only adjustment after 15 years

As you can see, an ARM can give you as long as 10 years of fixed-rate payments, or as little as one month.

Note that there are other types of ARMs out there, and they may be advertised differently. For example, you might see a 2/28 ARM, or a 3/27 ARM, which are fixed for two and three years, respectively, before becoming adjustable.

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Agenda

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Why Should You Attend:Adjustable-rate mortgages, one of the main culprits of the housing crisis, are back in vogue. But banks say this time is different.Financial groups are sweetening terms to entice customers to take out these loans, known as ARMs, whose rates can jump after a few years. Some ARMs are cheaper, when compared with fixed-rate mortgages, than they have been in more than a decade. The tactics are reminiscent of the period before the 2008 crisis, when ARMs exploded in popularity as banks and mortgage brokers touted their low initial rates to consumers. Now, though, financial executives say they are focusing on borrowers with strong credit who are using the loans to take out large "jumbo" mortgages—and not so-called subprime borrowers, who used the loans to stretch their buying power as far as it could go. ARMs comprised 31% of mortgages in the $417,001-to-$1 million range that were originated during the fourth quarter of 2013, according to data prepared for The Wall Street Journal by Black Knight Financial Services, formerly Lender Processing Services, a mortgage-data and services company. That is up from 22% a year earlier and the largest proportion since the third quarter of 2008.After a year adjusting to new rules issued by the Consumer Financial Protection Bureau, some in the mortgage industry are still not up to code, the CFPB's latest supervision report found. The bureau’s eighth edition of supervisory highlights covers activities between January 2015 and April 2015, and resulted in remediation of $11.6 million to more than 80,000 consumers. We are extremely concerned that one year after the CFPB’s mortgage servicing rules went into effect we are still finding runarounds and illegal dual-tracking,” said CFPB Director Richard Cordray.“Consumers deserve to be treated with honesty and integrity, and our rules require that servicers give borrowers a fair process when they try to save their homes. The CFPB will continue to stand beside consumers to make sure mortgage servicers are following the law,” Cordray added.Under the Dodd-Frank Act, the CFPB has authority to supervise banks and credit unions with more than $10 billion in assets and certain nonbanks. The CFPB’s last report resulted in remediation of $19.4 million to more than 92,000 consumers, along with six mortgage origination violations.


Why Choose an Adjustable-Rate Mortgage?

Most homeowners get into adjustable-rate mortgages for the lower initial payment, and then usually refinance the loan when the fixed period ends. At that time, the interest rate becomes variable, or adjustable, and the homeowner would likely refinance into another ARM, something fixed, or sell the home outright.

Some homeowners may also choose an adjustable-rate mortgage if the home is simply a short-term investment, or if they don’t plan on owning the home for more than five years.

For the record, a home equity line of credit (HELOC) is also considered an adjustable-rate mortgage because it’s tied to prime, and that can change whenever the federal funds rate changes.

But keep in mind that all adjustable-rate mortgages carry risk as the monthly payments can change, sometimes sharply if the timing isn’t right.

All that said, make an interest rate plan before you purchase a property. Decide what you want to do with the home in the next five years, and from there, you’ll be able to decide if an adjustable-rate mortgage is right for you.

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I. Summary of the Final Rule In January 2013, the Bureau issued several final rules concerning mortgage markets in the United States (2013 Title XIV Final Rules), pursuant to the Dodd-Frank Wall Street Reform 2 and Consumer Protection Act (Dodd-Frank Act), Public Law 111-203, 124 Stat. 1376 (2010).1

The Bureau has clarified and revised those rules over the past two years. The purpose of those updates was to address important questions raised by industry, consumer groups, or other stakeholders. The Bureau also indicated that it would revisit the Bureau’s regulatory definitions of small creditor and rural and underserved areas, promulgated in those rules and related amendments, through study and possibly through additional rulemaking. To that end, on January 29, 2015, the Bureau proposed several amendments to its 2013 Title XIV Final Rules to revise Regulation Z provisions and official interpretations relating to escrow requirements for higher-priced mortgage loans under the Bureau’s January 2013 Escrows Final Rule and ability-to-repay/qualified mortgage requirements under the Bureau’s January 2013 ATR Final Rule and May 2013 ATR Final Rule. The Bureau’s proposal would also affect requirements under the Bureau’s 2013 HOEPA Final Rule.2 The proposed rule was published in the Federal Register on February 11, 2015.

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Specifically, the final rule makes the following changes with regard to the definitions of small creditor and rural and underserved areas as currently provided in the Bureau’s mortgage rules:3 • Raises the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien, to 2,000 such originations (referred to in this rule as “extensions of covered transactions”), and excludes originated loans held in portfolio by the creditor and its affiliates from that limit. The final rule also establishes a grace period from calendar year to calendar year to allow a creditor that exceeded the origination limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year.


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Includes in the calculation of the $2 billion asset limit for small-creditor status the assets of the creditor’s affiliates that regularly extended covered transactions. The final rule also adds a grace period to the annual asset limit, to allow a creditor that exceeded the asset limit in the preceding calendar year to operate, in certain circumstances, as a small creditor with respect to transactions with applications received before April 1 of the current calendar year. • Adjusts the time period used in determining whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year. As with the origination and asset limits for small creditor status, the final rule adds a grace period to allow a creditor that fails to meet this threshold in the preceding calendar year, to continue operating, in certain circumstances, as if it had met this threshold with respect to transactions with applications received before April 1 of the current calendar year.


Adjusts the time period used in determining whether a creditor is operating predominantly in rural or underserved areas from any of the three preceding calendar years to the preceding calendar year. As with the origination and asset limits for small creditor status, the final rule adds a grace period to allow a creditor that fails to meet this threshold in the preceding calendar year, to continue operating, in certain circumstances, as if it had met this threshold with respect to transactions with applications received before April 1 of the current calendar year. • Amends the current exemption under § 1026.35(b)(2)(iii)(D)(1) provided to small creditors that operate predominantly in rural or underserved areas from the requirement for the establishment of escrow accounts for higher-priced mortgage loans. The final rule ensures that creditors who established escrow accounts solely to comply with the current rule will be eligible for the exemption if they meet the expanded definitions of small creditors operating predominantly in rural or underserved areas under the final rule.

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Expands the definition of “rural” by adding census blocks that are not in an urban area as defined by the U.S. Census Bureau (Census Bureau) to the current county-based definition. • Conforms the definition of “underserved” to the proposals discussed above. The substance of the “underserved” definition is not changed. • Adds two new safe harbor provisions related to the rural or underserved definition for creditors that rely on automated tools provided: (1) on the Bureau’s website to allow creditors to determine whether properties are located in rural or underserved areas, or (2) on the Census Bureau’s website to assess whether a particular property is located in an urban area according to the Census Bureau’s definition. The final rule maintains the current safe harbor for lists of rural and underserved counties provided by the Bureau, with technical changes. The final rule also adds commentary clarifying the circumstances under which U.S. territories will be included on the lists.

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Extends the current two-year transition period, which allows certain small creditors to make balloon-payment qualified mortgages (§ 1026.43(e)(6)) and balloon-payment high cost mortgages (§ 1026.32(d)(1)(ii)(C)), regardless of whether they operate predominantly in rural or underserved areas. The transition period will include covered transactions for which the application was received before April 1, 2016, rather than covered transactions consummated on or before January 10, 2016.

In addition to the changes discussed above to the definitions of small creditor and rural and underserved areas, this final rule is also making a technical correction to the commentary to

§ 1026.36(a). This non-substantive change is discussed in the section-by-section analysis of the supplementary information section below.

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In response to an unprecedented cycle of expansion and contraction in the mortgage market that sparked the most severe U.S. recession since the Great Depression, Congress passed the Dodd-Frank Act, which was signed into law on July 21, 2010. In the Dodd-Frank Act, Congress established the Bureau and generally consolidated the rulemaking authority for Federal 6 consumer financial laws, including the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act, in the Bureau.4 At the same time, Congress significantly amended the statutory requirements governing mortgage practices, with the intent to restrict the practices that contributed to and exacerbated the crisis.5 Under the statute, most of these new requirements would have taken effect automatically on January 21, 2013 if the Bureau had not issued implementing regulations by that date.6 To avoid uncertainty and potential disruption in the national mortgage market at a time of economic vulnerability, the Bureau issued several final rules (the 2013 Title XIV Final Rules) in a span of less than two weeks in January 2013 to implement these new statutory provisions and provide for an orderly transition. These final rules include the January 2013 ATR Final Rule, the January 2013 Escrows Final Rule, the 2013 HOEPA Final Rule, and the January 2013 Interagency Appraisals Final Rule. Most of the mortgage rules released in January 2013 became effective on January 10,

2014.

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Who Will Benefit: • staff members who are currently working with ARM loans • anybody working to establish an ARM program • lending management • loan operations • compliance officers • lenders • Professionals participating in ARM lending • Bank and financial institution auditors • Controllers and corporate managers • Forensic and management accountants, accounts payable and

financial analysts • Governance, risk management and compliance officers

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The Bureau has issued additional corrections, revisions, and clarifications to the provisions adopted by the Bureau in the 2013 Title XIV Final Rules and the May 2013 ATR Final Rule over the past two years. This final rule concerns additional revisions to the 2013 Title XIV Final Rules related to provisions regarding small creditors and rural and underserved areas. III. Summary of the Rulemaking Process On January 29, 2015, the Bureau issued, and on February 11, 2015, published in the Federal Register, its proposed rule entitled “Amendments Relating to Small Creditors and Rural or Underserved Areas Under the Truth in Lending Act (Regulation Z).”9 The comment period closed on March 30, 2015. In response to the proposal, the Bureau received 90 comments from consumer groups, members of Congress, creditors, industry trade associations, and others. As discussed in more detail below, the Bureau has considered these comments in adopting this

final rule.

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Instead of using the introductory rate in their calculations, lenders will be required to consider the loan's "fully-indexed rate." This is defined as the margin the lender has on that loan plus the index the loan is pegged to.

For instance, an ARM with a 225-basis-point (2.25-percentage-point) margin that's pegged to the one-year LIBOR, currently at 0.84%, would have a fully-indexed rate of 3.09%. The lender will have to make sure the borrower has the ability to make the loan's monthly payments at this rate, even if the initial rate they're offered is lower than that.

While many lenders already use the fully-indexed rate to approve borrowers, it isn't a standard used throughout the industry.

For borrowers, the new rule could make it harder to qualify for ARMs since all lenders will be using rates that are higher than the initial rate available on this loan. Experts say it could lead to fewer ARM originations once the rule is implemented.

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For borrowers the new rule could make it harder to qualify for ARMs since all lenders will be using rates that are higher than the initial rate available on this loan. Experts say it could lead to fewer ARM originations once the rule is implemented.

The changes come at a time when ARMs are popular with many borrowers. Roughly $138 billion in ARMs were originated during the first nine months of 2012, slightly below the same period a year prior, but up 29% since they hit an annual low in 2009, according to Inside Mortgage Finance, a trade publication. Borrowers have been signing up for these loans because their initial rates are lower than fixed mortgage rates. Lenders, in particular those who’ve held these loans on their books, have been more eager to offer them because they stand to profit once rates do rise: at that point, they’ll be getting bigger interest payments from ARM borrowers.

Given the risk of rising rates, some industry analysts say the CFPB’s rule doesn’t go far enough. The fully-indexed rate is not the highest rate an ARM borrower can incur. In fact, the lifetime cap on an ARM can be much higher. Consider a 5/1 ARM. During the sixth year of this loan, the maximum amount the rate can increase by is up to five percentage points. So, a 5/1 ARM doled out with a 2.67% rate could rise to a maximum of 7.67%. Each year after that the rate can move by two percentage points, though it cannot surpass 7.67%. Ignoring this cap is “absolutely a concern,” says Keith Gumbinger, a vice president at HSH.com.

Experts say it’s possible that borrowers who are getting ARMs now could hit those limits after their loan adjusts. With rates expected to pick up at some point, borrowers in ARMs could be stuck with much larger monthly payments if they can’t sell their home or refinance. “It could happen now more than in the past because we’re starting out with rates that are incredibly low,” says Stu Feldstein, president at SMR Research, which tracks mortgage data.

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THANK YOU FOR YOUR ATTENTION

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ComplianceOnline PPT Format Adjustable Rate Mortgage (ARM) Rule 04052016

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