1. Lending in a Financial Reform World
Greg Scagliotti Area Sales Manager
Wells Fargo Home Mortgage
April 29th, 2014

2. Financial Reform It’s the law.
— Affects every customer who applies for credit, uses a bank or buys insurance
— Zero discretion: you don’t get to choose what rules to follow or not follow
— Mortgage rules apply to all home-loan lenders
Financial Reform … the rules were passed by Congress in 2010 as part of the Dodd-Frank Act. Let me be very clear, Financial Reform is federal law; it’s not credit policy.
It affects every consumers who uses a bank and applies for a mortgage. Following the law is not optional. You don’t get to choose which Financial Reform rules you follow and the rules you won’t.
Financial Reform affects every mortgage lender … retail, correspondent and brokers, and it’s bringing changes that will reshape the financial services industry.
Getting Financial Reform right matters. In the simplest of terms … we have to show that we work to the highest standards and follow processes that do right by our customers.
At Wells Fargo, all applications for Retail Mortgage transactions taken on or after Dec. 7, 2013 are subject to the rules.

3. Ability to Repay/Qualified Mortgage
Basic directive: before closing a loan, make a reasonable
and good faith determination that the customer can repay
the debt.
At Wells Fargo, applies to loan applications taken on or after Dec. 7, 2013
Lenders have no latitude to adjust or waive documentation requirements. Documentation guidelines must be followed exactly.
Beginning in January 2014, all mortgage lenders are required to assess and document a borrower’s ability to repay his or her loan. The final rule specifies certain requirements for meeting Ability to Repay on all mortgage and home equity loans. Every mortgage and home equity loan secured by a dwelling must meet these ability-to-repay requirements.
At Wells Fargo, we already consider a consumer’s ability to repay . Under the new regulations, all lenders will be held to the same common and specific standards. Team members must review a consumer’s financial status and verify information using reasonably reliable third-party records. At a minimum, we will use eight underwriting standards in the assessment of a borrower’s ability to repay his or her loan.
Lenders will be presumed to have complied with the Ability-to-Repay rule if the loan meets the criteria of a Qualified Mortgage
It’s important to note: lenders have no latitude to adjust or waive documentation requirements. If a loan is conditioned for two months of bank statements and the customer only wants to provide one month, we can’t satisfy the conditions on the loan. We must the additional documentation or we can’t originate the loan.
At Wells Fargo, the rule applies for all credit applications taken on or after Dec. 7, 2013.

4. Ability to Repay A highlight of the new rules includes an ability-to-
repay standard:
Borrowers must provide—lenders must verify
information documenting that the borrower
can afford the loan they are receiving.
Before a loan can be approved, borrowers must prove they have sufficient assets or income to repay their mortgage or home equity loan
Documentation MUST be retained in the loan file to show ability to repay was validated
Wells Fargo will primarily originate qualified mortgages to document our compliance with the ability-to-repay requirements. A reasonable , good-faith ability-to-repay evaluation must include these eight underwriting criteria:
Current or reasonable expected income or assets that the customer will use to repay the loan
Current employment status
Credit history
Monthly mortgage payment-calculated using the fully-indexed rate and the monthly, fully amortizing payment
Monthly payments on simultaneous loans associated with the property
Monthly payments for other mortgage-related obligations, such as property taxes
Other debt obligations, alimony and child-support
Monthly debt payment, including he mortgage, compared to monthly income—the debt-to-income ratio or DTI.
Because we’re required to verify information that shows a borrower can afford the
loan they are receiving, we are expected to fully document his or her ability to replay.

5. Ability to Repay
A reasonable , good-faith ability-to-repay evaluation must include these eight underwriting criteria:
Current or reasonable expected income or assets that the customer will use to repay the loan
Current employment status
Credit history
Monthly mortgage payment-calculated using the fully-indexed rate and the monthly, fully amortizing payment
Monthly payments on simultaneous loans associated with the property
Monthly payments for other mortgage-related obligations, such as property taxes
Other debt obligations, alimony and child-support
Monthly debt payment, including he mortgage, compared to monthly income—the debt-to-income ratio or DTI.
Because we’re required to verify information that shows a borrower can afford the loan they are receiving, we are expected to fully document his or her ability to replay.

6. Qualified Mortgage Defined
Product feature restrictions
Loans with terms greater than 30 years
Balloon loans and negative amortization loans
Interest-only loans
If an ARM, must use the maximum rate that’s applicable for the first five years in assessing income ratios
Underwriting requirements
Permanent method: Total DTI ratio is less than or equal to 43 percent as defined by Appendix Q of the final rule
Temporary alternative: Loan meets requirements of—and eligible to be purchased, guaranteed or insured by (1) GSEs or (2) HUD, Dept. of Veterans Affairs, Department of Agriculture or Rural Housing Service
Documentation: Full documentation is required and based on existing FHA full-doc requirements
Only loans meeting specific product, documentation, points/fees and underwriting requirements can be classified as Qualified Mortgages, including
No term longer than 30 years
No balloon payments
No principal amount increases, such as negative amortization
No interest-only loans
If the loan is an ARM, we must use the maximum rate applicable for the first five years.
Qualified Mortgages can’t have excessive upfront points and fees. Compensation paid to loan originators is included in the points and fees cap.
Underwriting requirements
The easiest way to explain this is that the 43% DTI applies to non-conforming loans, CDMP, HUD 184 and Home Equity. If a DTI exceeds 43% on loans that fall into these categories (non-conforming, CDMP, HUD184 and Home Equity), the loan is not considered a QM transaction. It is non-QM.
For agency loans (FHA, VA, Conventional Conforming, USDA), it is business as usual. Continue to follow our normal Credit Policy guidelines.
The following comments help with the actual bullets on the slide
To be a qualified mortgage, the borrower’s debt-to-income can’t exceed 43 percent. This aspect of the QM rule is intended to prevent consumers from taking on mortgage debt they can’t afford.
For a temporary, transitional period ending in January 2021, loans that don’t have a 43 percent debt-to-income ratio, but meet government affordability or other standards such as being eligible for purchase by Fannie Mae or Freddie Mac will also be considered Qualified Mortgages. VA, FHA, Rural Housing Service and other government-insured loans are subject to the QM rules unless they issue their own QM definition as prescribed in the statute.
These consistent standards should ensure that the financial reform concepts are applied uniformly across the industry and help assure sustainable homeownership.