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July
28, 2009
Joint Advisory Ruling #117
Re: The Conforming Law and its effect on
previous Joint Advisory Rulings and the Tangible Net
Benefit and Ability to Pay Rule
Dear [ ]
Due to the recent
passage of LD 1439 (now Public Law 362), "An Act To Conform State Mortgage
Laws with Federal Laws," significant changes have been made to
The
guidance in this advisory ruling is effective as of June 11, 2009, except that
the new rate thresholds, using the "average prime offer rate" as
determined by reference to 12 CFR 226.35(a) (found in the definition of
"rate spread home loan" in section 8-103(1-A)(V) of the conforming
law) become effective on October 1, 2009.
AR # 110 - Request for Guidance
regarding "odd days'" or "per diem" interest
Conclusion reached by the
Bureaus in AR # 110: "Per
diem" or "odd days'" interest is not to be included when
calculating "points and fees" as that term is defined in 9-A
8-103(1-A)(U).
Analysis: The definition of "points and fees" was repealed and replaced by a new definition in "An Act to Conform State Mortgage Laws with Federal laws." The new law references only one section of Reg Z, 226.32(b)(1), without referencing 226.4, and also includes prepayment fees and penalties. AR # 110 references the language found in section 226.32 and also references the Official Staff Commentary relating to section 226.32 that interest including per diem interest paid at closing is not a 'point or fee' for section 226.32 purposes. Therefore, the conclusion reached by the Bureaus that "per diem" or odd days’ interest is not to be included when calculating "points and fees" remains unchanged.
Letter to
Re: The Conforming Law and its effect previous Joint Advisory
Rulings and Tangible Net Benefit and
Ability to Pay Rule
July 28, 2009
Page Two
AR # 111 - Exclusion of HELOCs from
definition of "subprime loan"
Conclusion reached by
the Bureaus in AR # 111: HELOCs are not
subject to the "ability to pay" underwriting requirement of 9-A M.R.S.A. section 8-103(1-A)(BB) and section
8-206-D(1)(G) except to the extent a HELOC is a Simultaneous Second-Lien Loan
as defined in the "Interagency Guidance on Nontraditional Mortgage Product
Risks" or meets the criteria of a high-rate, high-fee mortgage under s.
8-103(1-A)(V).
Analysis: "An Act to Conform State Mortgage Laws
with Federal Laws" repeals the term "subprime mortgage loan" and
creates a new term, "higher-priced mortgage loan." As with a “subprime mortgage loan” a “higher
priced mortgage loan” means either a residential mortgage loan that is a
“nontraditional mortgage” as described
in the Interagency Guidance on Nontraditional Mortgage Product Risks or a “rate
spread home loan.” Loans that fit the
definition are subject to additional consumer protection provisions, including
ability-to-pay analysis.
On October 1, 2009 a
component of the definition of “higher priced mortgage loan” will change such
that “rate spread home loans” will be comprised of “high rate, high fee” loans
and loans falling under the new federal definition of “higher priced mortgage loans” as set forth
in 12 C.F.R. 226.35(a). The Bureaus note that, while the new federal definition
of "higher-priced mortgage loans" contemplates loans secured by first
and subordinate liens, HELOCs are specifically excluded from the "higher-priced
mortgage loans" definition.
Because HELOCs are
specifically excluded from the new federal definition of "higher-priced
mortgage loans" and HELOCs are expressly excluded from the definition of
“nontraditional mortgage,” certain HELOCs will continue to be exempt from the
requirement to perform ability-to-pay analysis.
The Bureaus conclude that HELOCs should not be included in Maine’s
definition of "higher-priced mortgage loan" except to the extent that
a HELOC is a Simultaneous Second-Lien Loan as defined in the Interagency
Guidance on Nontraditional Mortgage Product Risks, or meets the criteria of a
high-rate, high-fee mortgage.
Note: Certain
Simultaneous Second-Lien Loans known as "convenience" HELOCs are
excluded from the definition of "nontraditional mortgage" if they
meet the requirements set forth in AR # 116.
As set forth in the "Interagency Guidance for Nontraditional
Mortgage Product Risks," a "nontraditional mortgage" is a
mortgage containing an interest or principal deferral attribute.
AR # 112 - Computation of "Total
Loan Amount"
Conclusion reached by
the Bureaus in AR # 112: Assuming the
loan documents do not contradict this characterization, loan proceeds are
applied first to the transaction being financed, second to any points and fees,
third to any excludable costs and fourth to cash out to the borrower.
Letter to
Re: The Conforming Law and its effect previous Joint Advisory
Rulings and Tangible Net Benefit and
Ability to Pay Rule
July 28, 2009
Page Three
Analysis: The definition of "total loan
amount" in the new law remains unaltered.
Although the definition of "total loan amount" references
"points and fees," a term which has been altered by the new law,
there is no basis for altering the order of allocation of loan proceeds as set
forth in AR # 112. The order of
allocation set forth in AR # 112 remains unchanged.
Bureaus' Joint Rule:
Guidelines for Determining Reasonable Tangible Net Benefit and Ability
to Pay -- the "Ability to Pay"
provisions of the Joint Rule
Analysis of
"ability to pay" provisions of the joint rule: The joint rule's "ability to pay"
section was based upon a provision in "An Act to Protect Maine Homeowners from Predatory
Lending" passed in 2007, that has since been amended twice by the Maine
Legislature. Most recently, the
"ability to pay" provisions in Maine law have been repealed and
replaced in "An Act To Conform
State Mortgage Laws with Federal Laws," in which the new "ability to
repay" provisions are modeled after federal language. This new federal language is different than
the original "ability to pay" language in previous
AR # 113:
"Ability to Pay" under the Bureau's Joint Rule: Guidelines for Determining Reasonable,
Tangible Net Benefit and Ability to Pay
Conclusion reached by
the Bureaus in AR # 113: The joint
rule's "ability to pay" section requires a creditor to consider both
secured and unsecured debt payment in calculating ability to pay, but permits
that creditor to rely on reported monthly payments to other creditors. The Bureaus will not require creditors to
attempt to "fully index" payments that may be due to other creditors
in the future.
Analysis: The Bureaus note that, according to the
Official Staff Commentary to the new federal "ability to repay"
provisions in Regulation Z, upon which our new state’s law is based, a credit
report may be used to verify an obligation that a borrower has listed on an
application. The Official Staff
Commentary notes that a credit report may not reflect an obligation that a
borrower has listed on an application and that, "the creditor is
responsible for considering such an obligation, but the creditor is not
required to independently verify the obligation." Although the "ability to pay"
provision of the joint rule, upon which AR # 113 delineates, is no longer
effective, creditors may continue to rely upon the conclusion reached by the
Bureaus in AR # 113 to the extent that a creditor is required to consider both
secured and unsecured debt in calculating repayment ability and may rely on
reported monthly payments to other creditors.
However, creditors will only be afforded the "presumption of
compliance" if the underwriting procedures specified in federal Regulation
226.34(a)(4)(iii) are
Letter to
Re: The Conforming Law and its effect previous Joint Advisory
Rulings and Tangible Net Benefit and
Ability to Pay Rule
July 28, 2009
Page Four
followed. The Bureaus will continue to look to federal
guidance for interpreting the new "ability to repay" provisions now
in
Bureaus' Joint Rule:
Guidelines for Determining Reasonable Tangible Net Benefit and Ability
to Pay -- the "Tangible Net Benefit" provisions of the Joint Rule,
and AR # 114
Background: As mandated by "An Act to Protect Maine
Homeowners from Predatory Lending," enacted in 2007, the Bureaus
promulgated a joint rule in late December 2007 providing guidance for
determining whether or not a borrower receives a "tangible net
benefit." In "An Act Relating
to Mortgage Lending and Credit Availability," enacted as emergency
legislation in early January 2008, the prohibition against "flipping"
was narrowed to apply only to instances when a creditor extends a subprime
mortgage loan to a borrower. On January 17, 2008, the Bureaus accordingly
issued AR # 114 clarifying the "tangible net benefit" provision of
their joint rule applies only when making subprime mortgage loans, and also
attached a revised "tangible net benefit form" incorporating
revisions to the form to reflect this change.
Analysis: Following passage of "An Act To Conform
State Mortgage Laws with Federal Laws," the prohibition against
"flipping" still exists.
However, because the definition of "subprime mortgage loan"
has been repealed and replaced by "higher priced mortgage loan," the
tangible net benefit analysis in the joint rule now applies when a creditor
makes a "higher-priced mortgage loan." Thus, the tangible net benefit provisions of
the joint rule, AR # 114, and the tangible net benefit form should now all be
read substituting "higher-priced mortgage loan" for "subprime
mortgage loan."
AR # 115 - Treatment of
Construction-to-Permanent Loans
Conclusion reached by
the Bureaus in AR # 115: Construction-to-permanent
mortgage loans may be residential mortgage loans but are not subprime mortgage
loans. However, this conclusion applies
only in those cases in which: (a) the
only "subprime" attribute of the "construction phase" of such
loans is the payment of interest only during this phase; and (b) there are no
"subprime" attributes to the “permanent phase" of these loans.
Analysis: In coming to their conclusion in AR # 115,
the Bureaus determined that construction-to-permanent loans were not
contemplated in the "Interagency Guidance on Nontraditional Mortgage
Product Risks." Like the old
definition of "subprime mortgage loan," the new definition of
"higher priced mortgage loan" includes "nontraditional mortgages" defined by reference to the
Interagency Guidance. Therefore, the
conclusion reached by the Bureaus that construction-to-permanent loans are not
subprime mortgage loans, provided that the only "subprime" (or now,
"higher priced") attribute of these loans is the payment of interest
only during the construction phase,
remains unchanged with respect to higher-priced mortgage loans.
Letter to
Re: The Conforming Law and its effect previous Joint Advisory
Rulings and Tangible Net Benefit and
Ability to Pay Rule
July 28, 2009
Page Five
AR # 116 -
"Convenience HELOCs
Conclusion reached by the Bureaus in AR # 116: Those "convenience" HELOCs that
permit deferral of payment of principal or interest should not be treated as
"simultaneous second-lien loans" under the Interagency Guidance and,
therefore, will not be considered "subprime mortgage loans" under
Analysis: In coming to their
conclusion in AR # 116, the Bureaus determined that the "Interagency
Guidance on Nontraditional Mortgage Product Risks" is primarily concerned
with those simultaneous second-lien loans that significantly reduce owner
equity and increase credit risk. The
Bureaus further recognized that, if reasonable equity levels exist and the
"convenience" HELOC is not used toward the down payment or to avoid
payment of private mortgage insurance, then these types of loans lack the
negative qualities that the Interagency Guidance seeks to address.
The Bureaus remain of the view that, if
the conditions set forth above are met, then these types of loans should not be
treated as "simultaneous second-lien loans" under the Interagency
Guidance and, therefore, will not be considered a "higher-priced mortgage
loan." The conclusion reached by
the Bureaus in AR # 116 remains unchanged, except that it should be read
substituting "higher priced mortgage loan" for "subprime
mortgage loan."
Sincerely, Sincerely,
/s/Lloyd P. LaFountain
III______________ /s/ William N. Lund________________
Lloyd
P. LaFountain III, Superintendent William
N. Lund, Superintendent
Bureau of Financial Institutions Bureau of Consumer Credit Protection
