Banking Law Bulletin
CFPB Announces Final Ability to Repay Rule (Effective January 2014): On January 11, 2013, the Consumer Financial Protection Bureau ("CFPB") announced the final rule to implement laws requiring mortgage lenders to consider a consumer's ability to repay a home loan before extending them credit. CFPB also issued, at the same time, a proposal, seeking comment, on whether to make changes in the final rule for certain community based lenders and others. While space does not permit a full iteration of the final rule or the proposal, certain key provisions can be stated. (The rule and the proposal can be found at CFPB's website at http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/.
First, the final rules cover the entire mortgage market and not just sub-prime loans.
Second, in making the ability to repay determination, creditors will have to consider at least eight underwriting factors including a borrower's current income or assets, current/recent employment status, the monthly proposed loan payment, etc., all using reasonably reliable third party records to verify the information obtained. The rule provides guidance as to the application of these factors.
Third, the rule provides a safe harbor (creating a presumption that the loan satisfies the ability to repay requirement) if the loan is a "qualified mortgage". The general criteria for a "qualified mortgage" are (with some limited exceptions) as follows: cannot be a loan with negative amortization, interest only payments, a balloon payment, a term of more than thirty (30) years, have points or fees greater than three percent (3%) of the total loan or, after taking into account the monthly mortgage payment, result in the borrower having a total debt to income ratio of greater than forty-three percent (43%).
Finally, the proposal seeks comments on the creation of a new category of "qualified mortgages" that would apply to small creditors including most community banks. The additional classifications of qualified mortgages would include a safe harbor even if the customer could not meet the less than forty-three percent (43%) debt to income ratio test.
Avoidance of "Fiscal Clift", Includes Retention of Tax Benefits for "Short Sales". Most of the media attention on Congress "avoiding" the "Fiscal Clift" earlier this month focused on changes in income, dividend and capital gains tax rates. Under the radar was the extension of tax benefits on forgiveness of home loan indebtedness which helps many homeowners with "underwater" loans. More specifically, the new tax law includes a one (1) year extension on the exclusion from gross income of "discharge of qualified principal indebtedness". This provision facilitates short sales by allowing sellers to avoid the associated tax hit which might otherwise occur for debt discharged by a bank in connection with the sale. For instance, if a short sale nets $150,000 which the bank accepts in full discharge of a $200,000 home loan, the borrower would normally be taxed on the $50,000 forgiven. However, under the law, as extended, the $50,000 will continue not to be taxed at all. This extension should encourage banks to promote short sales knowing that debtors will not face substantial tax burdens for debt forgiven when the net proceeds are less than the debt discharged.
TAG Program Ends. The Transaction Account Guarantee (TAG) program which provided unlimited deposit insurance coverage on most non-interest bearing transaction accounts expired on December 31, 2012. The FDIC originated this unlimited coverage as a temporary rule in the wake of the 2008 financial crisis. It was later codified in the Dodd Frank Act with a sunset date of December 31, 2012. Despite some congressional efforts to extend TAG, 2012 passed without this program being extended. This leaves businesses and government customers uninsured for non-interest bearing demand deposit accounts above $250,000.
PRACTICE TIP: To mitigate against losing these deposits, banks should encourage customers to shift these uninsured deposits into repurchase agreements or to invest the funds through CDARS.
Recent Illinois Legislation
As 2013 begins, a handful of important new laws affecting banking in Illinois go into effect. A brief summary:
PRACTICE TIP: In anticipation of this change, begin now to use the name that appears on an individual's driver's license.
PRACTICE TIP: Exercise caution when making a loan to a military serviceman and be aware, generally, of these rights.
PRACTICE TIP: Trust portfolios should be reviewed and "decanting" of irrevocable trusts considered as appropriate.
PRACTICE TIP: This change in the law should result in grantors/settlors increasing their use of "Trust Advisors" without increasing their fiduciaries risk.
PRACTICE TIP: Should facilitate a Bank's due diligence in complying with Section 19 of the Federal Deposit Insurance Act (See below).
PRACTICE TIP: It is still advisable to describe the note in a mortgage as follows: "Promissory Note dated _____ in the principal amount of $______, with interest, maturing on _____."
PRACTICE TIP: If your bank issues derivatives, you may want to review the interpretive letter on IDFPR's website. In such letter, IDFPR states that Section 5(11) of IBA incorporates derivative transactions in the context of lending limits with cross reference to, and incorporation of, applicable provision of federal law. By this means, IDFPR concludes that state banks are able to continue to engage in derivative transactions.
Interesting Recent Case(s)
PRATICE TIP: When you terminate a UCC, make sure you mean it. There is no going back. In short, you're SOL.
A person found guilty of knowingly violating Section 19 of the Federal Deposit Insurance Act, which prohibits a financial institution from hiring, without the prior written consent of the FDIC, any person convicted of any criminal offense involving dishonesty, breach of trust or money laundering can be sentenced to up to 30 years in jail. Even scarier, the law covers even hiring a consultant.
A financially savvy but busy businessman walks by a bank that offers "24 hour banking". He does not go in - he doesn't have that much time.
PRACTICE TIP: Remember not all banking services appeal to all potential customers.
The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters. For more information regarding any of the foregoing items, please contact any member of our banking practice group: Dennis W. Gorman (firstname.lastname@example.org), William G. Keller, Jr. (email@example.com), James A. Rapp (firstname.lastname@example.org), William M. McCleery, Jr. (email@example.com), Ted M. Niemann (firstname.lastname@example.org), Michael A. Bickhaus (email@example.com) or Andrew K. Cashman (firstname.lastname@example.org), at (217) 223-3030 or visit us on the web at www.srnm.com. We invite and welcome all questions and comments.
Schmiedeskamp Robertson Neu & Mitchell LLP
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