Dodd Frank Act: Mortgage Rules

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1 Dodd Frank Act: Mortgage Rules Karen M. Neeley 2012, Cox Smith Matthews Incorporated 1

2 Save the date! The following is a summary of the CFPB rules implementing Dodd Frank Act mortgage requirements. The IBAT Lending Compliance Summit will review these issues in more depth. Mark your calendars for August 15-16! 2012, Cox Smith Matthews Incorporated 2

3 Mortgage Reform and Anti-Predatory Lending Act CFPB has issued essential rules. DFA made effective date January 21, 2013 UNLESS rules were adopted prior to that date. DFA can only adopt rules IF it has a director in place. Director Cordray s appointment is in question due to issues relating to recess appointment. So, the following material is subject to change! 2012, Cox Smith Matthews Incorporated 3

4 Rules effective June 1, 2013 Mandatory pre-dispute arbitration is prohibited in mortgages secured by dwelling and HELOC. Financing single premium credit insurance on mortgage secured by dwelling is prohibited. Monthly premium credit insurance is okay. Escrow requirement for HPML is extended from one year to five. Exemption for rural and underserved areas as narrowly defined in the rule 2012, Cox Smith Matthews Incorporated 4

5 HOEPA Changes Effective date: January 10, 2014 Scope expanded to all types of mortgage loans secured by principal dwelling (including HEL and HELOC) Exemptions for loans to finance initial construction, loans originated by Housing Finance Agencies and USDA Rural Housing Service Direct Loan Program 2012, Cox Smith Matthews Incorporated 5

6 HOEPA Coverage Tests First lien: more than APOR + 6.5% First lien, manufactured housing and less than $50K: APOR + 8.5% Junior liens: more than APOR + 8.5% Points & fees exceed 5% of total transaction; loan below $20K, lesser of 8% or $1,000 Prepayment penalty more than 36 months after closing or that exceed 2% of amount prepaid 2012, Cox Smith Matthews Incorporated 6

7 Restrictions on Loan Terms No balloons unless due to seasonal or irregular income of borrower, part of short-term bridge loan, or lender operates in rural or underserved areas No prepayment penalties Can t finance points and fees Late fees restricted to 4% of past due payment Fees for payoff statements are restricted Fees for loan mod or deferral are banned 2012, Cox Smith Matthews Incorporated 7

8 More Restrictions Creditor must assess consumers ability to repay for HELOCs (rule already required for closed end) Can t recommend or encourage consumer to default on a loan to be refinanced by a high-cost mortgage Proof of counseling required before making loan Certified or approved counselor 2012, Cox Smith Matthews Incorporated 8

9 Homeownership Counseling List of approved counselors must be provided to consumers w/in 3 business days after applying for any mortgage loan List of counselors from CFPB or HUD First-time borrower must receive counseling before a loan that includes negative amortization is made. Recommendation: Don t do negative am! 2012, Cox Smith Matthews Incorporated 9

10 Appraisal Rules Effective January 18, 2014 HPML only permitted if written appraisal from certified or licensed appraiser is received and appraiser conducts physical property visit of the interior of the property. Notice to applicant including: Purpose of appraisal Applicant will receive copy Creditor may charge for appraisal Applicant may choose to have separate appraisal at own expense. 2012, Cox Smith Matthews Incorporated 10

11 Appraisal Rules for Flipped Properties HPML lender must obtain second written appraisal at no cost to borrower for certain flipped properties Required when: Seller acquired home w/in 180 days before consumer s purchase agreement Price exceeds seller s price by 10% (w/in 90 days) or 20% (w/in 91 and 180 days earlier) 2012, Cox Smith Matthews Incorporated 11

12 Exemptions from HPML Appraisal Rules Reverse mortgages Loans for initial construction of dwelling Temporary bridge loans (12 months or less) Loans secured by new manufactured home Transactions secured by mobile home, boat or trailer HELOC 2012, Cox Smith Matthews Incorporated 12

13 Appraisal Notice: First Lien Dwelling Loans Effective January 18, 2014 Notice to applicants w/in 3 business days of right to receive copy of appraisals Automatically provide copies upon completion or 3 business days before consummation/account opening Applicants can waive timing but must be given copy at or prior to consummation or not later than 30 days after creditor decides against transaction No fee for the copy, but can charge for the cost of the appraisal! 2012, Cox Smith Matthews Incorporated 13

14 MLO Compensation Effective date: January 10, 2014 Reg Z already prohibits comp based on term of transaction Term = interest rate or steering to affiliated title company Can t base comp on proxy for term of transaction Can t reduce comp due to pricing concession 2012, Cox Smith Matthews Incorporated 14

15 More MLO rules Can t be based on profitability Exception for qualified retirement plans Exception for plans that don t exceed 10% of total compensation Prohibition on dual comp consumer and creditor Exception for brokers to pay employees commissions if not based on loan terms DFA prohibition on consumer payment of upfront points & fees was waived. Study to follow! 2012, Cox Smith Matthews Incorporated 15

16 MLO Qualifications and ID Requirements Comply with SAFE Mortgage Act If officers not licensed (just registered), must : Apply character, fitness & criminal background standards similar to SAFE Act licensing requirements Credit report and admin findings (post 1/14/14) Provide training NMLSR unique identifier & name required on loan docs: credit app, note, and deed of trust 2012, Cox Smith Matthews Incorporated 16

17 Mortgage Servicing Rules Effective January 10, 2014 Exemption for small servicers: Service 5,000 or fewer Service only in-portfolio loans Most community banks should be exempt really! 2012, Cox Smith Matthews Incorporated 17

18 Mortgage Servicing Requirements Periodic billing statements prescribed ARM adjustment notices 210 and 240 days before adjustment plus notice 60 to 120 days before new payment Prompt payment crediting and payoff statements Force-placed insurance requirements Similar to Texas Finance Code ch. 307 but must wait 45 days before charging 2012, Cox Smith Matthews Incorporated 18

19 More Servicing Requirements Error resolution and info requests: specific address identified to borrowers Acknowledge w/in 5 days; correct or investigate and report w/in 30 to 45 days. Establish servicing policies and procedures Delinquent borrower: early intervention and contact Loss mitigation procedures 2012, Cox Smith Matthews Incorporated 19

20 Qualified Mortgage Criteria Effective date January 10, 2014 No negative amortization Can defer repayment of principal except for certain balloon notes Income and financial resources must be verified Comply with DTI ratios required by regs Total points and fees can t exceed 3% of total loan Term doesn t exceed 30 years (certain exceptions) Underwriting criteria 2012, Cox Smith Matthews Incorporated 20

21 Underwriting Criteria Monthly payments calculated on highest payment in first 5 years of loan Consumer have a total ( back-end ) DTI less than or equal to 43% Appendix Q provides standards for determining monthly debt and income 2012, Cox Smith Matthews Incorporated 21

22 Rural Balloon-Payment QM Eligible loans must have term of at least 5 years, fixed interest rate, meet basic underwriting standards; DTI considered but NOT subject to 43% criteria Rural and underserved counties will be designated by CFPB each year. Lender must have less than $2B in assets and originate no more than 500 first lien mortgages/year. Hold in-portfolio at least 3 years 2012, Cox Smith Matthews Incorporated 22

23 Repayment Ability No particular underwriting model, but must consider eight factors: Current or reasonably expected income, assets Current employment status Monthly payment on covered transaction Monthly payment on any simultaneous loan Monthly payment for mortgage related obligations Current debt obligations, alimony and child support Monthly DTI ratio or residual income Credit history 2012, Cox Smith Matthews Incorporated 23

24 Prepayment Penalties Prohibited on non-qualified Loans Phase out for Qualified Loans 1 st year 3% 2 nd year 2% 3 rd year 1% 4 th year and beyond no prepayment penalty Must offer option with no prepayment penalty 2012, Cox Smith Matthews Incorporated 24

25 Qualified Mortgage Safe Harbor? If not HPML and QM satisfied, safe harbor Defense against assertion of inability to repay as foreclosure defense Rebuttable presumption for HPML 2012, Cox Smith Matthews Incorporated 25

26 Risk Retention--QRM Banks selling loans must keep some skin in the game Retain 5% UNLESS mortgage is qualified one. SEC will issue rules. Not out yet. 2012, Cox Smith Matthews Incorporated 26

27 CFPB Implementation Plan Will coordinate with other federal regulators Publish plain-language guides Publish updates to official interpretations Publish readiness guides Educate consumers 2012, Cox Smith Matthews Incorporated 27

28 Questions? 2012, Cox Smith Matthews Incorporated 28

29 Karen M. Neeley Cox Smith Matthews Incorporated Financial Institutions Practice Group , Cox Smith Matthews Incorporated 29

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