Rules under Dodd-Frank Act - Bcac

Report
Rules under Dodd-Frank Act
TODD PROUT – CONNECTICUT DOB
MARCH 6, 2014
Topics
 Remittance Rule
 Derivative Lending Limits
 Loan Originator Compensation
 Ability to Repay
 Qualified Mortgages
 Temporary Government Patch – QM
Remittance Rule
REMITTANCE RULE
 Generally requires that the remittance transfer
provider disclose appropriate contact information for
the remittance transfer provider, its State regulator,
and the Bureau.
 Appropriate contact information includes the name,
telephone number, and web site of these entities, so
that senders would have multiple options for
addressing any issues that may arise with respect to
a remittance transfer provider.
REMITTANCE RULE
Contact Information
Connecticut Department of Banking
Government Relations and Consumer Affairs
260 Constitution Plaza
Hartford, CT 06103-1800
Telephone #860-240-8299 or Toll-free #1-800-831-7225
Website link to the Complaint Form:
http://www.ct.gov/dob/cwp/view.asp?a=2235&q=297974
&dobNAV_GID=1659
REMITTANCE RULE
Examination Procedures
 Ensure steps were taken to implement the contact
information requirements.
Derivative Lending Limits
DERIVATIVE LENDING LIMITS
 The Commissioner’s Guidance follows the OCC rule
and a CSBS Model Rule was also used to guide this
and other state’s in developing their guidance.
 The lending limits final rule provides a number of
alternative methods for calculating credit exposure
arising from derivatives transactions.
DERIVATIVE LENDING LIMITS
 Unless required to use a specific method by the
appropriate federal banking agency for safety and
soundness reasons, a bank may choose which of
these methods it will use.
 Our final rule clarifies that the Commissioner may,
at his discretion, permit a bank to use a specific
method to calculate credit exposure, and that this
method may apply to all or specific transactions if it
is determined that such method is consistent with
the safety and soundness of the bank.
DERIVATIVE LENDING LIMITS
Definitions
 Derivative transaction - any transaction that is a
contract, agreement, swap, warrant, note, or option
that is based, in whole or in part, on the value of, any
interest in, or any quantitative measure or the
occurrence of any event relating to, one or more
commodities, securities, currencies, interest or other
rates, indices, or other assets.
DERIVATIVE LENDING LIMITS
Definitions
 Credit derivative - a financial contract executed
under standard industry credit derivative
documentation that allows one party (the protection
purchaser) to transfer the credit risk of one or more
exposures (reference exposure) to another party (the
protection provider).
DERIVATIVE LENDING LIMITS
Three Methods
1. Model Method
2. Conversion Factor Matrix Method
3. Current Exposure Method
Key Concepts
 Current Credit Exposure – Mark-to-Market
 Potential Future Exposure – Model or Table
DERIVATIVE LENDING LIMITS
Model Method
 While this methodology is intended to improve the
accuracy of the calculation of a bank’s credit
exposures, use by community banks is expected to be
limited due to the cost of developing and supporting
an internal model.
 Model Method Credit Exposure = Current Credit
Exposure (CCE) + Potential Future (Credit)
Exposure (PFE)
DERIVATIVE LENDING LIMITS
Model Method
 Regulator-approved internal model to calculate
credit exposure arising from derivatives.


Approved in writing by the appropriate federal banking agency
for purposes of Section 32(d) of the advanced approaches
capital rules
or any other appropriate model the use of which for lending
limits purposes has been approved in writing by the
appropriate federal banking agency
DERIVATIVE LENDING LIMITS
Model Method
 Under the Model Method, current credit exposure equals
the greater of the mark-to-market value of the derivative
and zero.
 The final rule clarifies that if a bank makes a substantive
revision to a model after receiving the appropriate
federal banking agency’s approval, the use of the revised
model must be approved by the agency before it may be
used for purposes of calculating lending limits. The OCC
also declined to allow the use of a model on a provisional
basis pending its approval.
DERIVATIVE LENDING LIMITS
Conversion Factor Matrix Method
 While probably not an option for banks with
significant derivative positions, it is the easiest to
apply and manage.
 Likely method for banks with limited derivative
positions.
DERIVATIVE LENDING LIMITS
Conversion Factor Matrix Method
 Credit Exposure = Notional Amount x Conversion
Factor (look-up table)
 Credit exposure will equal and remain fixed at the
PFE of a derivative transaction.
DERIVATIVE LENDING LIMITS
Conversion Factor Matrix Method
 Similar to the Current Exposure Method, except that
the exposure amount remains fixed.
 This is achieved by removing the current credit
exposure component (which is based on the
derivative transaction’s mark-to-market value) of the
Current Exposure Method formula, which can
fluctuate over time, and by adjusting the values in
the conversion factor matrix to reflect the absence of
the current credit exposure component.
DERIVATIVE LENDING LIMITS
Interest Rate
Foreign exchange
rate and gold
Equity
1 year or less
.015
.015
.20
Other
(includes
commodities and
precious metals
except gold)
.06
Over 1 to 3 years
.03
.03
.20
.18
Over 3 to 5 years
.06
.06
.20
.30
Over 5 to 10 years
.12
.12
.20
.60
Over 10 years.
.30
.30
.20
1.0
Original maturity
DERIVATIVE LENDING LIMITS
Current Exposure Method
 Balance between Model Method and Conversion
Factor Matrix Method
 For a single derivative transaction that is not subject
to a qualifying master netting agreement:

Credit Exposure = Current credit exposure + PFE
DERIVATIVE LENDING LIMITS
Current Exposure Method
 For multiple derivative transactions subject to a
qualifying master netting agreement:

Credit Exposure = Net current credit exposure + Adjusted sum
of PFE amounts
 The Current Exposure Method (“CEM”), when
combined with the Collateral Haircut Approach,
allows a bank to take into account the credit riskmitigating benefits of collateral.
DERIVATIVE LENDING LIMITS
2014 Examination Procedures
 Ensure management has considered the derivatives
lending limits and established a method for
measurement.
Loan Originator Compensation
LOAN ORIGINATOR COMPENSATION
Standard
 Regulation Z prohibits certain practices relating to
payments made to compensate mortgage brokers
and other loan originators.
 The goal of the amendments is to protect consumers
in the mortgage market from unfair practices
involving compensation paid to loan originators.
LOAN ORIGINATOR COMPENSATION
Applicability
 The prohibitions related to mortgage originator
compensation and steering apply to closed-end
consumer loans secured by a dwelling or real
property that includes a dwelling.
 The rule does not apply to open-end home equity
lines of credit (HELOCs) or time-share transactions.
It also does not apply to loans secured by real
property if the property does not include a dwelling.
LOAN ORIGINATOR COMPENSATION
Exceptions
 There are compensation exceptions for


(1) certain deferred compensation plans and
(2) certain non-deferred profit-based compensation plans.
LOAN ORIGINATOR COMPENSATION
Definition of Loan Originator
 The term “loan originator” means a person who, in
expectation of direct or indirect compensation or
other monetary gain or for direct or indirect
compensation or other monetary gain, performs any
of the following activities:

Takes an application, offers, arranges, assists a consumer in
obtaining or applying to obtain, negotiates, or otherwise
obtains or makes an extension of consumer credit for another
person; or
LOAN ORIGINATOR COMPENSATION
Definition of Loan Originator


Through advertising or other means of communication
represents to the public that such person can or will perform
any of these activities.
The term “loan originator” includes an employee, agent, or
contractor of the creditor or loan originator organization if the
employee, agent, or contractor meets this definition.
LOAN ORIGINATOR COMPENSATION
Individual loan originator
A natural person who meets the definition of “loan
originator.”
Loan originator organization
Any loan originator that is not an individual loan
originator. A loan originator organization would
include banks, thrifts, finance companies, credit
unions and mortgage brokers.
LOAN ORIGINATOR COMPENSATION
Prohibited Practices
 Compensation based on the terms of a transaction
 Dual compensation
 Steering
LOAN ORIGINATOR COMPENSATION
2014 Examination Procedures
 Discuss process for identifying loan originators and
communicating restrictions to other employees that
interact with customers.
 Discuss the structure of loan originator
compensation including salary, commissions,
bonuses, awards and incentives.
 Discuss any controls or reviews to ensure compliance
with compensation restrictions.
Ability-to-Repay
ABILITY-TO-REPAY
Applicability
 Closed-end consumer purpose loans that are secured
by a dwelling, including refinances and closed-ended
home equity loans.
 Determined at or before consummation.
ABILITY-TO-REPAY
Exceptions
 HELOCS
 Mortgages secured by a timeshare
 Reverse mortgages
 Temporary or “bridge” loans
 Construction portion of construction-to-perm loan if
less than 12 months
 Business purpose
 Modification unless it constitutes a refinance
ABILITY-TO-REPAY
Standard - Loan must meet 8 factors:
1. Current or reasonably expected income or assets – no
need to consider excess
2. Current employment status –
full/part/seasonal/irregular/military/self
3. Monthly payment on transaction – complicated test
with additional subtests for I/O, N/A


4.
Max in 5 years for prime-rate loans
Max payment in payment schedule including balloon payment
for higher-priced
Monthly payment on simultaneous loans – must
consider HELOCs made at the same time
ABILITY-TO-REPAY
Standard - Loan must meet 8 factors:
5. Monthly payment on mortgage related obligations
– taxes, insurance, fees
6. Current debt obligations, alimony and child
support – consumer loans, other mortgages
7. Monthly DTI or residual income – no defined ratio
as with Qualified Mortgage
8. Consumer’s credit history – no credit score
requirement, do not need to consider secondary
Must use reliable third-party records
Qualified Mortgages
QUALIFIED MORTGAGE
 Temporary Government Patch
 Standard Qualified Mortgage
 Safe Harbor Qualified Mortgage
 Small Creditor Qualified Mortgage
 Small Creditor Rural/Underserved Qualified Mort.
QUALIFIED MORTGAGE
Temporary Government Patch
At consummation, loan must be eligible for:


Purchase or guarantee by the GSEs, while under
conservatorship of the FHFA
Insurance or guarantee by the FHA, VA, USDA or RHS
 Meet the first 3 requirements of the standard QM
 Prohibitions of negative-am, interest-only, balloon features
 Maximum term of 30 years
 Point and fee restrictions
QUALIFIED MORTGAGE
Temporary Government Patch - Phase out
 When GSEs issue own guidance or conservatorship
ends
 No later than January 10, 2021
QUALIFIED MORTGAGE
Standard QM - Six factors
1. Regular periodic payments – no I/O, balloon,
negative am
2. Maximum 30 year-term
3. 3% points and fees cap – bona fide discount points
excluded
4. Sound underwriting
5. Verification of income and debt
6. 43% back-end DTI
Provides rebuttable presumption
QUALIFIED MORTGAGE
Safe Harbor QM
 Meets all of the requirements of a QM (including
temp) plus has an APR that is less than:
 3.5% above APOR for small creditor QMs


Less than $2 Billion and under 500 loans
All subordinated loans
 1.5% above APOR first lien QMs except small
creditor
 Provides irrebuttable presumption
QUALIFIED MORTGAGE
Small Creditor Portfolio Loans
 Kept in portfolio at least three years
 Small Creditor


Less than $2 billion in assets adjusted for inflation
Originates no more than 500 closed-end first lien ‘covered
transactions’ a year, along with their affiliates
QUALIFIED MORTGAGE
Small Creditor Qualified Mortgage
1. Regular periodic payments – no I/O, balloon,
negative amortization
2. Maximum 30 year-term
3. 3% points and fees cap – bona fide discount points
excluded
4. Must be underwritten in the same way as a
standard QM
5. Must consider DTI or residual income
a.
No specific DTI limit
QUALIFIED MORTGAGE
Small Creditor Rural/Underserved Qualified Mortgage
 Exception to allow balloon-payment mortgages to
be considered qualified mortgages
 Must be originated and held in portfolio by small
creditors operating predominantly in rural or
underserved areas.

Rural and underserved test does not have to be met until
January10, 2016
QUALIFIED MORTGAGE
Small Creditor Rural/Underserved Qualified Mortgage
 Maintains QM status if creditor transfers the loan
to another creditor that meets the requirements to
be a small rural lender, or when the loan is
transferred due to a capital restoration plan,
bankruptcy, or state or federal governmental
agency order, or if the mortgage is transferred
pursuant to a merger or acquisition of the creditor.
QUALIFIED MORTGAGE
Small Creditor Rural/Underserved Qualified Mortgage
 Criteria to meet test:
 Prohibitions on negative-amortization and interest-only
features;

30 year maximum amortization
Term of at 5 years minimum, 30 year maximum.
 3% cap on points-and-fees.

QUALIFIED MORTGAGE
Small Creditor Rural/Underserved Qualified Mortgage
Fixed interest rate.
 QM underwriting standards based on regular monthly
payment without balloon
 Debt-to-income ratios must be considered and verified.



43 percent threshold for QMs under the general definition does
not apply.
Verify the consumer’s current or reasonably expected
income or assets and current debt obligations, alimony,
and child support, but without regard to the standards in
Appendix Q.
QUALIFIED MORTGAGE
2014 Examination Procedures






Review the number and dollar amount of loan originations to
determine if the bank is a small creditor – documentation purposes.
Review process for determining Ability-to-Repay.
Determine if the bank originates Qualified Mortgages (QMs).
If bank is originating QMs, determine if one of the patches is used.
Review the documentation process for QMs.
Review analysis and documentation procedures for Safe Harbor QMs
Legislative Package – Raised Bills
 Closing notice for Loan Production Offices HB5353
 Application fee increases HB5353
 New fee for bank name change HB5353
 Clarifies ATM with video capability is ATM (not a
branch) HB5353
 Make mortgage servicers a regulated activity
HB5352
 Regulations are under review as part of Governor’s
Bill. Out-of-State Banks and Public Deposits
Questions?
Todd Prout – 860.240.8184 – todd.prout@ct.gov

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