Compliance Blog

Posted by Sarah Loats

This amendment to section 226.34 strengthens the requirement to verify repayment ability for "section 32" mortgage loans (it does not apply to temporary or bridge loans that do not extend beyond 12 months). What are Section 32 loans? These are the traditional HOEPA high-cost loans. They are referred to as section 32 loans because the definition of and requirements for these loans are found in section 226.32 of Reg Z.

The new rule provides that a credit union may not extend a Section 32 loan to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.

• Current obligations include other loans, that the credit union has knowledge of, that are entered into at or around the same time as the current transaction and are secured by the same dwelling (i.e., piggy-back loans).
•  Mortgage related obligations include property taxes, premiums for mortgage-related insurance, and similar expenses such as homeowners/condo dues.

Repayment Ability

The credit union must verify the amounts of income/assets that you rely on by IRS W-2 forms, tax returns, payroll receipts, financial institution records, or other documents that provide reasonable reliable evidence. The credit union must also verify the consumer's current obligations, and this can be done by reviewing a credit report.

There is a get-out-of-jail-free card of sorts - if the credit union didn't verify income and assets, it will not be considered in violation of this provision if it can demonstrate that the income and assets it relied upon were not materially greater than the consumer's actual income and assets. Here's an example from the Staff Commentary:

"For example, if a creditor determines a consumer's repayment ability by relying on the consumer's annual income of $40,000 but fails to obtain documentation of that amount before extending the credit, the creditor will not have violated this section if the creditor later obtains evidence that would satisfy Sec. 226.34(a)(4)(ii)(A), such as tax return information, showing that the creditor could have documented, at the time the loan was consummated, that the consumer had an annual income not materially less than $40,000."

Presumption of Compliance

A credit union is presumed to comply with these requirements if it verifies the consumer's repayment ability as mentioned above, determines the consumer's repayment ability using the largest payment of principal and interest scheduled in the first 7 years of the loan, taking into account current obligations and mortage-related obligations, and assesses the consumer's repayment ability taking into account at least one of the following:

1. the ratio of total debt obligations to income; or 
2. the income the consumer will have after paying debt obligations.

Notwithstanding the above, there is no presumption of compliance for loans where the regular periodic payments for the first 7 years would cause the princpal balance to increase, or the term of the loan is less than 7 years and the regular periodic payments do not fully amortize the outstanding principal balance.

I know I go on and on about the Staff Commentary (I really am a fan), but again, the Fed provides great tidbits in there, including examples of how to determine the maximum scheduled payment in the first 7 years of the loan.

Tomorrow is Section 226.35, which incorporates these rules for higher-priced mortgage loans.