I'm going to have to recant my opinion on the comments from 226.35(a)(3). This is my fault for not first verifying the comments in the pre-amble which states the following:

Construction-only loans. Section
226.35 excludes a construction-only
loan, defined as a loan solely for the
purpose of financing the initial
construction of a dwelling, consistent
with the definition of a ‘‘residential
mortgage transaction’’ in § 226.2(a)(24).
A construction-only loan does not
include the permanent financing that
replaces a construction loan.
Construction-only loans do not appear
to present the same risk of consumer
abuse as other loans the proposal would
cover. The permanent financing, or a
new home-secured loan following
construction, would be covered by
proposed § 226.35 depending on its
APR. Applying § 226.35 to construction only
loans, which generally have higher
interest rates than the permanent
financing, could hinder some borrowers’
access to construction financing without
meaningfully enhancing consumer
protection. . . .

Const/perm loans would not be exempt.

I apologize for any inconvenience my previous answer caused.

It's ok, Dan. Thanks

New questions:
1. If the APR changes after the rate lock date due to the addition of a finance charge fee, I believe you have to recalculate to determine it the loan is now a HPML. Correct? If so, whate APOR date do you use to compare, the first rate lock date or the date where the APR increased due to the new fee? This may be a stupid question, but at this point my head is spinning,

2. We are allowed to use tax returns to verify income. Can we use copies of self-prepared tax returns? I would think that this is contrary to the requirement to have third party verification. How are you handling this?

1. I would say you use your initial info. You aren't change the rate, you are amending a fee.

2. I believe we order directly through the IRS, you may want to check into that service.

Dan...thanks! I'm up to my eyeballs in examiners right now and that const/perm was blowing my mind and I've had no time to follow back up until now!

Iblu - regarding the income verification of tax returns:

We are now using the 4506T document to obtain tax return transcripts (from the IRS) which verify the self prepared or other prepared returns. The transcripts are a line by line summary of the return which can be a great fraud prevention tool in addition to providing the necessary validation. Some lenders are just using the 4506T transcripts and do not even ask for the original returns.

Many companies provide assistance with 4506T transcripts including some major credit providers. If you need more detail, send me a message.
Regards

So, on our ARM's on which we do not offer a discount, just the index plus margin, we can underwrite with that and be compliant, and do not need to figure a possible rate in year seven based on worst case scenario rate increases, and still be considered compliant??

Thanks for your responses. I don't want to create extra steps for our underwriters, but I agree that a copy of the tax return directly from the applicant is unacceptable if the return is self-prepared. I will make sure our procedures include using the 4506T to obtain the transcript.

Again, trying to lessen the workload...would you agree that a copy of the signed tax return is okay if prepared by a third party. Do you agree?

Can someone point me to any training materials for the 10-1-09 changes? I am looking for something for the lenders. They have been keeping up, but I want something that really goes over the 10-1 bullets. Sort of a "these are effective now" because it is so hard to remember what was 7-30, 10-1 or 1-1!!!

I have run across power points posted to BOL occassionally, but I can never find them when I need them. Or, if you have something you are willing to share, that's great too.

***I should know the answer to this question alert***

Are the 10/1 changes for application recieved after 10/1, or closing after 10/1???

JJ, I believe that it applies to applications received after 10-1 and any loan closed after 1-1 (regardless of application date).

Good, that is what I was thinking as well.

Thoughts?? It almost seems to simple that they would allow this

JJ,

I was under the impression you still need to underwrite based on what the rate could be in 7 years. You just assume no change in the index.

Now writing that and reading what I wrote, if there is no discount in rate, and your index doesn't change, then I think what you say is correct.

Also, I have not seen too much discussion on this with the new advertising rules, and like to dicuss what is meant by Clear and Conspicuous.

Generally, we put rate and APR out there, and then in the mouseprint, all of the required disclosures.

Am I reading too much into C&C and thinking that perhaps this will no longer fly and that my terms disclosure might have to be as as large are the rate, and basically, right with the rate going forward??

Thoughts...

Think??

ugh...

Just Jay and DD Regs. If your ARM rate is fully indexed at the time of consummation then you don't have to do any additional computations to see what the rate would be in 7 years.

A fully indexed rate's payment stream at the time of consummation will look like:

### X $$$.

You use the payment shown as it is the highest "scheduled" payment within the first 7 years.

And then, if discounted, you then simply use what a fully indexed rate at consummation would look like for your calcs, and still not worst case scenario, correct?

A discounted rate will (or should if your software is compliant) show the payment streams and when the loan will reach the fully indexed rate taking into account any rate caps at each adjustment. If you take the highest scheduled payment disclosed in the payment streams then you should be compliant.

From pages 44612 and 44613 of the 7/30/08 release.

iv. Variable-rate loan with discount for five
years. A loan in an amount of $100,000 has
a 30-year term. The loan agreement provides
for a fixed interest rate of 7.0 percent for an
initial period of 5 years. Accordingly, the
payment scheduled for the first 5 years is
$665. The agreement provides that, after 5
years, the interest rate will adjust each year
based on a specified index and margin. As of
consummation, the sum of the index value
and margin (the fully-indexed rate) is 8.0
percent. Accordingly, the payment scheduled
for the remaining 25 years is $727. The
creditor will retain the presumption of
compliance if it assesses repayment ability
based on the payment of $727.

v. Variable-rate loan with discount for
seven years. A loan in an amount of $100,000
has a 30-year term. The loan agreement
provides for a fixed interest rate of 7.125
percent for an initial period of 7 years.
Accordingly, the payment scheduled for the
first 7 years is $674. After 7 years, the
agreement provides that the interest rate will
adjust each year based on a specified index
and margin. As of consummation, the sum of
the index value and margin (the fullyindexed
rate) is 8.0 percent. Accordingly, the
payment scheduled for the remaining years is
$725. The creditor will retain the
presumption of compliance if it assesses
repayment ability based on the payment of
$674.

vi. Step-rate loan. A loan in an amount of
$100,000 has a 30-year term. The agreement
provides that the interest rate will be 5
percent for two years, 6 percent for three
years, and 7 percent thereafter. Accordingly,
the payment amounts are $537 for two years,
$597 for three years, and $654 thereafter. To
retain the presumption of compliance, the
creditor must assess repayment ability based
on the payment of $654.

Okay, rehashing the under 7 year balloon restriction. The commentary for 34(a)(4)(iii) states...
"A creditor is presumed to have complied with Sec. 226.34(a)(4) if the creditor follows the three underwriting procedures specified in paragraph 34(a)(4)(iii) for verifying repayment ability, determining the payment obligation, and measuring the relationship of obligations to income. The procedures for verifying repayment ability are required under paragraph 34(a)(4)(ii); the other procedures are not required but, if followed along with the required procedures, create a presumption that the creditor has complied with Sec. 226.34(a)(4)"

So if we decide to continue issuing balloons shorter than 7 years that exceed the HPML and we can demonstrate the borrower has the ability to make the normal payments not the balloon, then we will not be in violation of Reg.Z just increase our liability in a civil suit. Yeah or Nay?

edited to add commentary section and the beginning of the commentary

That's my opinion too FWIW......but I'd like to see an agreement from "the gurus."

Iblu - the fact a tax return is presented and shows a third party name as preparer does not mean it is valid. While I suspect you would not be criticized for not being in HPML compliance if that is what you did, it is a best practice to have the 4506T as a fraud prevention tool.

Swiggles - I am not a GURU but I agree with you. Just my opinion, as a lender if we underwrite to the highest payment level in the first 7 yrs AND can show the borrower can easily afford the highest payment stream, then we should be okay.

Note to regulators: If you don't want us to offer shorter term ARM products or balloons, just come out and tell us!!!!!!!!!! Don't mask it in double talk!

Good Gosh, I wish we had a summary of the conclusions in this thread.

But then I wish I had more time......



and a million bucks!

LOLOL SMQ! Thanks for adding a laugh to this not-so-laughable subject. Ah, what we all could do with a million bucks.....

Bump

Retire!

Sorry, back to business now.