TODD PROUT – CONNECTICUT DOB MARCH 6, 2014 Rules under Dodd-Frank Act.

TODD PROUT – CONNECTICUT DOBMARCH 6 , 2014

Rules under Dodd-Frank Act

Topics

Remittance RuleDerivative Lending LimitsLoan Originator CompensationAbility to RepayQualified MortgagesTemporary 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 InformationConnecticut Department of BankingGovernment Relations and Consumer Affairs260 Constitution PlazaHartford, 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

http://www.ct.gov/dob/cwp/view.asp?a=2235&q=297974&dobNAV_GID=1659

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.


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.


DefinitionsDerivative 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.


DefinitionsCredit 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).


Three Methods1. Model Method 2. Conversion Factor Matrix Method3. Current Exposure Method

Key ConceptsCurrent Credit Exposure – Mark-to-MarketPotential Future Exposure – Model or Table


Model MethodWhile 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)


Model MethodRegulator-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


Model MethodUnder 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.


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.


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.


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.


Original maturity Interest RateForeign exchange

rate and goldEquity

Other(includes

commodities and precious metals

except gold)1 year or less .015 .015 .20 .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


Current Exposure Method Balance between Model Method and

Conversion Factor Matrix MethodFor a single derivative transaction that is not

subject to a qualifying master netting agreement: Credit Exposure = Current credit exposure + PFE


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 risk-mitigating benefits of collateral.


2014 Examination ProceduresEnsure management has considered the

derivatives lending limits and established a method for measurement.

Loan Originator Compensation

LOAN ORIGINATOR COMPENSATION

StandardRegulation 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.


ApplicabilityThe 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.


ExceptionsThere are compensation exceptions for

(1) certain deferred compensation plans and (2) certain non-deferred profit-based compensation

plans.


Definition of Loan OriginatorThe 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


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.


Individual loan originator A natural person who meets the definition of

“loan originator.” Loan originator organizationAny loan originator that is not an individual

loan originator. A loan originator organization would include banks, thrifts, finance companies, credit unions and mortgage brokers.


Prohibited PracticesCompensation based on the terms of a

transactionDual compensationSteering


2014 Examination ProceduresDiscuss 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

ApplicabilityClosed-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

ExceptionsHELOCSMortgages secured by a timeshareReverse mortgagesTemporary or “bridge” loansConstruction portion of construction-to-perm

loan if less than 12 monthsBusiness purposeModification 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 excess2. Current employment status –

full/part/seasonal/irregular/military/self3. Monthly payment on transaction – complicated

test with additional subtests for I/O, N/A Max in 5 years for prime-rate loans Max payment in payment schedule including balloon

payment for higher-priced

4. 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, fees6. Current debt obligations, alimony and child

support – consumer loans, other mortgages7. Monthly DTI or residual income – no defined

ratio as with Qualified Mortgage8. 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 PatchStandard Qualified MortgageSafe Harbor Qualified MortgageSmall Creditor Qualified MortgageSmall Creditor Rural/Underserved Qualified

Mort.

QUALIFIED MORTGAGE

Temporary Government PatchAt 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 RHSMeet 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 outWhen GSEs issue own guidance or

conservatorship endsNo later than January 10, 2021

QUALIFIED MORTGAGE

Standard QM - Six factors1. Regular periodic payments – no I/O,

balloon, negative am2. Maximum 30 year-term3. 3% points and fees cap – bona fide discount

points excluded4. Sound underwriting5. Verification of income and debt6. 43% back-end DTIProvides rebuttable presumption

QUALIFIED MORTGAGE

Safe Harbor QMMeets 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 LoansKept in portfolio at least three yearsSmall 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 Mortgage1. Regular periodic payments – no I/O, balloon,

negative amortization2. Maximum 30 year-term3. 3% points and fees cap – bona fide discount

points excluded4. Must be underwritten in the same way as a

standard QM5. Must consider DTI or residual income

a. No specific DTI limit

QUALIFIED MORTGAGE

Small Creditor Rural/Underserved Qualified MortgageException 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 MortgageMaintains 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 MortgageCriteria 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 HB5353New fee for bank name change HB5353Clarifies ATM with video capability is ATM

(not a branch) HB5353Make mortgage servicers a regulated activity

HB5352Regulations are under review as part of

Governor’s Bill. Out-of-State Banks and Public Deposits

Questions?

Todd Prout – 860.240.8184 – [email protected]

mailto:[email protected]

TODD PROUT – CONNECTICUT DOB MARCH 6, 2014 Rules under Dodd-Frank Act.

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Transcript of TODD PROUT – CONNECTICUT DOB MARCH 6, 2014 Rules under Dodd-Frank Act.