CUNA s SUMMARY OF THE CFPB s MORTGAGE LENDING RULES Spring 2013

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1 MANDATORY ESCROW ACCOUNTS Effective: June 1, 2013 REGULATION Requires escrow accounts be maintained for five years (rather than the current one year) for higher-priced mortgage loans. A higher-priced mortgage means a closed- end loan secured by a principal dwelling with an APR that exceeds the average prime offer rate by 1.5 or more percentage points for principal amounts that do not exceed Freddie Mac limits; by 2.5 or more percentage points for principal amounts that exceed Freddie Mac limits; by 3.5 or more percentage points for loans secured by subordinate liens. TYPES OF COVERED LOANS Higher-priced mortgages secured by a first lien on a principal dwelling. Dwelling includes not only residential structures on real property, but also structures that are classified as personal property under State law, ie: manufactured homes, boats, and trailers. [Official Interpretation (b)-1] CUs under $2 billion in size,that have extended more than 50% of covered mortgages in rural or underserved areas in the preceding year, originating 500 or fewer first-lien mortgages in the preceding year, and generally does not maintain escrow accounts Reverse mortgages A loan secured by shares in a co-op Financing the initial construction of a dwelling A temporary or bridge loan of twelve months or less ABILITY-TO-REPAY (Reg Z) Effective: Jan. 10, 2014 Requires the credit union to obtain and verify 8 specific pieces of financial information about the applicant has to be to determine that the borrower can repay the loan over the long term. A credit union will be presumed to have complied if it makes a qualified mortgage (QM) which requires: No excessive upfront points and fees (more than 3% of the loan amount); no toxic provisions (such as interestonly, negative amortization, or a maturity longer than 30 years); generally no balloon payment (with but exception for most credit unions in rural areas); and generally not more than a 43%debt-to-income ratio (but a transitional period for loans meeting certain government affordability standards). QMs for high-priced loans * (typically for consumers with insufficient or weak credit history) allow a borrower later to challenge if the lender properly assessed his ability to repay the loan (a rebuttable assumption of compliance). QMs for lower-priced loans cannot be successfully challenged for compliance with the ability-to-repay rules, providing a compliance safe harbor. A QM that is not a higher-priced mortgage loan (as defined in Regulation Z Section (a)), may only charge a prepayment penalty if certain limitations apply. For example, a prepayment penalty must not apply after the three year period following consummation and the penalty must not exceed two percent of the outstanding loan amount during the first two years following consummation and must not exceed one percent if incurred during the third year following consummation. The rule will treat certain balloon-payment mortgage loans as Qualified Mortgages if they are originated and held in portfolio for at least three years by small creditors with $2 billion or less in assets, operating predominately in rural or underserved areas by originating at least 50 percent of their firstlien mortgages in rural or underserved areas, and originate no more than The Rule applies to all consumer-purpose, closed-end mortgage loans secured by a dwelling, including home-purchase loans, refinances and home equity loans---whether firstlien or subordinate-lien. The Rule does not apply to: home equity lines of credit (HELOCs), mortgages secured by an interest in a timeshare plan reverse mortgages; temporary or bridge loans with a term of 12 months or less; construction loans of 12 months or less; business-purpose loans; or loan modifications NOTE: The ability to repay requirements for high-cost home equity lines of credit (HELOCs) is found in Reg. Z Section from the High-Cost Mortgage and Homeownership Counseling Reg. Z Final rule. 1

2 500 first-lien mortgages annually. These loans will only be QMs if they have a term of at least five years; have a fixed interest rate; and meet certain basic underwriting standards; debt-to-income ratios must be considered but are not subject to the 43 percent general requirement. A balloon payment QM must provide for regular periodic payments that do not result in an increase of the principal balance; must have a loan term that does not exceed 30 years; must have total points and fees that do not exceed specified thresholds and must satisfy the consideration and verification requirements with respect to the borrower s current or reasonably expected income or assets and current debt obligations. The CFPB will designate a list of rural and underserved counties each year. CFPB is considering whether to include another category of qualified mortgages which would cover certain loans originated by credit unions with $2 billion or less in assets, originate 500 or fewer first-lien transactions annually that are held in portfolio for at least three years (all requirements other than the 43% DTI would have to be met) action on this proposal is expected during the spring. HOEPA RESTRICTIONS Effective: Jan. 10, 2014 Expands the definition of high-cost mortgage to include: any consumer credit transaction secured by the consumer s principal dwelling, in which the APR is above the average prime offer rate by more than 6.5 percentage points for first-liens, or by more than 8.5% for a subordinate lien or for a firstlien where the dwelling is personal property and the loan is less than $50,000. High-cost also includes mortgage loans where points and fees exceed 5% of the total transaction amount, or for loans less than $20,000, the lesser of 8% of the total transaction amount or $1,000. And finally, a high-cost mortgage includes one where the loan document allows the creditor to charge or collect a prepayment penalty more than 36 months after transaction closing or permits such fees to exceed, in aggregate, more than 2% of the amount prepaid. High-cost mortgage loans secured by a consumer s principal dwelling. May include purchase-money mortgages, refinances, closed-end home-equity loans, and open-end credit plans,( i.e. home equity lines of credit or HELOCs) Reverse mortgages Financing the initial construction of a dwelling Loans originated and financed by Housing Finance Agencies Loans originated through the U.S. Dept. of Agriculture Rural Housing Service section 502 Direct Loan Program Includes consumer protections addressing: balloon payments, prepayment penalties, financing points and fees, late fees, payoff statement fees, loan modification fees, payment deferral fees, ability to repay for HELOCs, encouraging default on a refinance, and home ownership counseling confirmation. List of Home Ownership Counseling Organizations (Reg X ) Effective: Jan. 10, 2014 Within 3 business days after receiving a loan application, or sufficient Reg X applies to all federally related mortgage loans, which include: any loan secured by a first or subordinate lien on residential real property (including a refinancing) on a one to four family residence, and is made by a lender that is insured, guaranteed or assisted in any way by a federal agency or is intended to be sold to Freddie Mac, Fannie Mae or Ginnie 2

3 information to complete an application, lenders must provide a written list of homeownership counseling organizations to the applicant.. The list must be current (within 30 days) and obtained from the CFPB s website or data made available by the CFPB or HUD to comply with this requirement. This list can be provided with other mortgage loan disclosures. Mae. Temporary financing, i.e. construction loan Reverse mortgages Loans secured by a timeshare Preloan Counseling (Reg Z) Effective: Jan 10, 2014 Prohibits making a high-cost loan unless the lender receives written certification that the borrower has obtained counseling on the advisability of the mortgage from an approved counselor. Negative Amortization Counseling (Reg Z) Effective Jan 10, 2014 Prohibits making a loan to a first-time borrower that may result in negative amortization unless the lender receives written certification that the borrower has obtained counseling on the advisability of the mortgage from an approved counselor. High-cost mortgage loans secured by a consumer s principal dwelling. May include purchase-money mortgages, refinances, closed-end home-equity loans, and open-end credit plans,( i.e. home equity lines of credit or HELOCs) Reverse mortgages Financing the initial construction of a dwelling Loans originated and financed by Housing Finance Agencies Loans originated through the U.S. Dept. of Agriculture Rural Housing Service section 502 Direct Loan Programs Closed-end transaction secured by a dwelling Reverse mortgages Loans secured by a timeshare APPRAISALS (Reg B) Effective: Jan. 18, 2014 Loans secured by a first lien on a dwelling, e.g., closed end mortgage loans. The revisions to Regulation B require creditors to notify applicants in writing within 3 business days of receiving an application that copies of appraisals will be provided to them; and provide to applicants free copies of all appraisals and other written valuations developed in connection with an application for a loan to be secured by a first lien on a dwelling. The same appraisal notice can be used to satisfy both this rule and the Reg Z appraisal rule for higher-priced mortgage loans (see below) in transactions where both rules apply. 3

4 APPRAISALS (Reg Z Inter-agency Rule) Effective: Jan. 18, 2014 Creditors may originate a higher priced mortgage loan (HPML)* only if they obtain a written appraisal; the appraisal is performed by a certified or licensed appraiser; and the appraiser conducts a physical property visit of the interior of the property. Creditors must also provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used. In addition, the rule requires a HPML creditor to obtain a second written appraisal at no cost to the borrower in connection with certain flipped properties. MORTGAGE SERVICING Effective: Jan. 10, 2014 NOTE: (E) denotes an exemption for credit unions that are the creditor or assignee that currently own the mortgage loans or the mortgage servicing rights and that service 5,000 or fewer mortgage loans. However, if a credit union servicing 5,000 or fewer mortgage loans uses a subservicer that services more than 5,000 mortgages, the subservicer has to comply with all the requirements and the credit union has the ultimate liability to make sure the subservicer complies. Reg Z changes: Periodic Statement Requirements: Until now, only open-end loans have required periodic statements. CFPB has expanded this requirement to cover most closed-end mortgage loans, unless the lender provides a coupon book that contains very extensive information specified in the regulation. Small servicers are exempt. (E) Interest rate adjustment notices for ARMs: The new regulation amends the format and content of rate adjustment disclosures and requires earlier disclosures, such as 7-8 months before the first payment is due after the initial rate adjustment. Lenders, assignees and servicers must also provide a notice between 2-4 months before payment at a new level is due when a rate adjustment causes the payment to change. All servicers are subject to this requirement. Higher-priced mortgage loans * Qualified mortgages (QM) Reverse mortgages Loans for initial construction Bridge loans for 12 months or less Loans secured by newly manufactured homes Loans secured by a mobile home, boat or trailer The rules have different scopes with respect to the types of mortgage loans covered. Reg Z Periodic Statement Requirement and ARM disclosure requirements: Only apply to closed-end mortgage loans (first-lien and subordinate-lien loans), does not apply to HELOCs, Construction loans and Business Purpose loans Crediting of payments and providing payoff statements: Apply to both closed-end mortgage loans (first-lien and subordinate-lien loans) and HELOCs Reg X (RESPA) Applies to federally-related mortgage loans that are closed-end mortgage loans (first-lien and subordinate-lien loans) Does not apply to loans on property of 25 acres or more, business-purpose loans, temporary financing, loans secured by vacant land or HELOCs. Prompt crediting of mortgage payments providing payoff balance statements: : All servicers will have to assure that they promptly credit payments from borrowers, generally on the day of receipt, and the regulation dictates how partial payments are to be handled. Also servicers will be required to send an accurate payoff balance to a borrower within seven business days after receipt of a written request from the borrower. 4

5 Reg X changes: Forced-placed insurance (restricted E): Requires detailed notice requirements before forced-placed insurance may be added to the mortgage loan after a credit union has received notice that a borrower has failed to maintain hazard insurance on the property. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance coverage and a 2 nd notice must be sent no earlier than 30 days after the 1 st notice. Where an escrow account exists, the servicer must continue the borrower s homeowner insurance, rather than force-place insurance, even if funds must be advanced to the escrow account to do so. There is a restricted exemption for small servicers from the requirement when an escrow account exists, as long as any force-placed insurance purchased by the small servicer is less expensive than the amount of any disbursement the servicer would have made to maintain hazard insurance coverage. Error resolution and information requests: All servicers are required to follow specific procedures and deadlines for responding to written complaints of error or information requests. Servicers must acknowledge receipt of the complaints or requests within five days. Servicers are then required to either, provide written notification of the corrected error, provide the requested information, or provide written notification explaining that no error occurred or why the information is not available within 30 to 45 days. Servicing policies and procedures (E): Large servicers are required to establish policies and procedures to meet the objective of the new rules, such as providing accurate and timely information to borrowers, evaluating loss mitigation applications and facilitating the transfer of information during servicing transfers. Also, servicers are required to retain records relating to mortgage loans for one year after the mortgage loan is discharged or servicing is transferred. Certain documents must be maintained in a manner so that they can be compiled into a servicing file within 5 days. Early intervention with delinquent borrowers (E): Large servicers must make a good faith effort to establish live contact with borrowers by the 36th day of their delinquency and promptly inform them of available loss mitigation options. Servicers must provide a written notice with loss mitigation information by the 45th day of the borrower s delinquency. Continuity of contact for delinquent borrowers (E): Large servicers must assign personnel to a delinquent borrower by the time the borrower receives an early intervention notice, or by the 45th day of the borrower s delinquency. The personnel should be accessible by phone to assist the borrower with loss mitigation options and applications. It is left to the servicer s discretion to determine how to assign staff to comply with this requirement. Reasonable policies and procedures must be established to meet this requirement. 5

6 Loss mitigation procedures( partial E): There are extensive requirements if a borrower applies to the servicer for consideration of a loss mitigation option, such as acknowledging receipt within five days, informing the borrower if information is missing, providing a written decision and reasons if denied, and providing an appeals process. The rule restricts a servicer from simultaneously evaluating a borrower for a loan modification while pursuing foreclosure on the property. Small servicers are exempt from many of the procedural requirements, but cannot initiate the foreclosure process unless a borrower is more than 120 days delinquent or proceed to a foreclosure judgment or sale if the borrower is following the terms of a loan mitigation agreement. MORTGAGE ORIGINATOR COMPENSATION (Reg Z) Effective: Generally Jan. 10, 2014, but prohibition on mandatory arbitration and financing credit insurance effective June 1, 2013 Prohibits mandatory arbitration for disputes in connection with a closed-end consumer lending transaction secured by a dwelling or a HELOC secured by the consumer s principal dwelling Prohibits the financing of any premiums or fees for credit insurance (such as credit life or disability) in any closed-end lending transaction secured by a dwelling or a HELOC secured by the consumer s principal dwelling (but allows credit insurance to be paid monthly). Codifies prohibitions on basing MLO compensation on any of the mortgage loans terms or conditions or proxy for any loan term or condition. Continues to allow payment of upfront points and fees (but CFPB will study consumer choices). Expands SAFE compliance to include documentation that MLO employees meet character, fitness and criminal background standards similar to mortgage brokers licensing requirements; are suitably trained for their MLO activities; and provide their assigned unique identifiers on loan documents. Extends record-keeping requirements regarding loan originator compensation from two to three years. Generally applicable to closed-end consumer lending transactions secured by a dwelling. However, provisions regarding mandatory arbitration and financing of premiums apply to both a closed-end consumer loan transaction secured by a dwelling and a HELOC secured by the consumer s principal dwelling A loan originator is 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 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. TILA-RESPA MORTGAGE LOAN INTEGRATION (Regs Z and X) Proposed mid-2012, not yet finalized (will replace the current good faith estimate and closing disclosures with new requirements). The CFPB is designing new forms to replace RESPA s GFE and TILA s early disclosures and RESPA s closing documents with a new loan estimate and closing disclosure. The CFPB expects to issue a final TILA-RESPA Mortgage Loan Integration Rule in September 2013 with an effective date likely in late The Bureau has also proposed a number of related changes including a new definition of application. Regulation X Section (b) defines application as the This Rule applies to most closed-end mortgage loans including first-lien and subordinatelien mortgage loans. Construction-only loans and vacant-land loans as well as 25-acre loans are subject to the proposed integrated disclosure and booklet requirements. The Rule does not apply to reverse mortgages; HELOCs; chattel-dwelling loans such as loans secured by a mobile home or by a dwelling that is not attached to real property. submission of a borrower s financial information including the borrower s name, 6

7 monthly income, social security number, the property address, an estimate of the value of the property, the mortgage loan amount, and any other information deemed necessary by the loan originator. The CFPB is concerned that the last element--- any other information deemed necessary may permit creditors to delay providing consumers with the Loan Estimate. Therefore, the Bureau is proposing to remove this last element from the definition of application under Regulation X. The Bureau believes that creditors should be able to collect whatever information is necessary provided the creditor collects the additional information prior to or at the same time as it collects the first six pieces of information so that the Loan Estimate is not delayed. The Bureau is also proposing to define the term application under Regulation Z Section (a)(3) to include the first six pieces of information without the seventh piece--- and any other information deemed necessary by the loan originator. Another important change in the proposed rule is a more inclusive definition of finance charge similar to what the Fed proposed in its 2009 Closed-End Proposal. The new definition would apply to closed-end loans secured by real property or a dwelling. Instead of the some fees in, some fees out approach currently in Regulation Z, the proposal would continue to exclude fees or charges paid in comparable cash transactions, late fees and delinquency or default charges, fees for exceeding a credit limit, seller s points, amounts required to be paid into escrow accounts if the amounts would not otherwise be included in the finance charge, and premiums for property and liability insurance if certain conditions are met. The proposal would include in the finance charge any fees charged by closing agents including fees of other third parties hired by closing agents to perform particular services; fees for title examination, abstract of title, title insurance, property survey; fees for preparing loan-related documents such as deeds, mortgages and reconveyance or settlement documents; notary and credit-report fees; property appraisal fees including fees related to pest-infestation or flood-hazard determinations. The proposal would treat a disclosed finance charge as accurate if it does not vary from the actual finance charge by more than $100 or is greater than the amount required to be disclosed. DEFINITIONS: * Higher-priced mortgage loan : Closed-end consumer credit transactions secured by a principal dwelling that have an APR that exceeds the average prime offer rate (APOR) for a comparable transaction as of the date the interest rate is set by one of the following thresholds: 1.5% for non-jumbo mortgage loans, 2.5% for loans over the jumbo limit, or 3.5% above comparative rates for junior liens. ** High-Cost mortgage loan : The current definition of a high-cost mortgage loan (Reg. Z ) is a consumer credit transaction that is secured by the consumer's principal dwelling, and in which the APR at consummation will exceed by more than 8 percentage points for first-lien loans, or by more than 10 percentage points for subordinate-lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor. High-cost also includes mortgage loans where the total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount, or $625 for calendar year This section does 7

8 not apply to the following: A residential mortgage transaction; a reverse mortgage transaction subject to ; or a HELOC. The current APR and fee triggers for high-cost mortgages will be changed by the CFPB s High-Cost Mortgage and Homeownership amendments to Regulation Z, which will become effective on January 10,

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