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1 2013 Financial Institutions Forum

2 Compliance Update Session Two by Annette Evans, CPA, CRCM and Martha Gallardo, CPA

3 Agenda ECOA Valuations Rule Higher-Priced Mortgage Loans (HPML) Appraisal Rule Loan Originator Rule Mortgage Servicing Rules Regulation E Things to Watch 212

4 ECOA Valuations Rule In 2010, the Dodd-Frank Act amended the Equal Credit Opportunity Act to provide guarantees that applicants receive certain information about their home value estimates. The Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity (Regulation B) Rule ECOA Valuations Rule Amends Regulation B (Equal Credit Opportunity Act ECOA) Final rule issued 1/18/2013 Effective date 1/18/

5 ECOA Valuations Rule Copies of Appraisals Main Requirement - 12 CFR (a)(1) A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier. 214

6 ECOA Valuations Rule Coverage Coverage Closed-end and open-end loans secured by a first lien on a dwelling Including: Loans for business or consumer purposes Loss-mitigation transactions (e.g. loan modifications, short-sales), if they are covered by Regulation B Loans secured by mobile or manufactured homes Reverse mortgages Time-share loans if they are covered under Regulation B 215

7 ECOA Valuations Rule Compliance To comply with the ECOA Valuations Rule, the creditor must: Notify a consumer in writing, within 3 business days of receipt of the consumer s application, of the right to receive a copy of all written appraisals developed in connection with the application For applications that were not originally to be secured by a first lien on a dwelling, if it is later determined it will be secured by a first lien on a dwelling, the creditor has 3 business days after the change is determined to have occurred Deliver copies of appraisals promptly upon completion, or 3 business days prior to: Consummation, for closed end loans; or Account opening, for open-end loans, whichever is earlier 216

8 ECOA Valuations Rule Compliance (Continued) To comply with the ECOA Valuations Rule, the creditor must: Not charge the applicant for copies of any appraisal or written valuation provided Can, however, charge a reasonable fee to reimburse the cost of the appraisal or other valuations unless otherwise prohibited Deliver copies of appraisals at, or prior to, consummation or account opening, for applicants who waive the right to receive the copies at least 3 business days before consummation or account opening 217

9 ECOA Valuations Rule Business Day No definition under this rule for business day for purposes of timing of the consumer notice or providing copies For loans also covered by the HPML Appraisal Rule, Regulation Z defines business day as when The creditor s offices are open to the public for carrying on substantially all its business functions For other loans, CFPB guide recommends to use own reasonable definition which may include counting Saturdays as for Regulation Z 218

10 ECOA Valuations Rule Disclosure and Denials Disclosure notice Sample Notification Form C-9, Appendix C to Regulation B Withdrawn, denied or incomplete applications Still have to provide applicant a copy of appraisal and other written valuation promptly upon completion. If applicant waived that deadline, 30 days after it is determined transaction will not close. 219

11 HPML Appraisal Rule In 2010, the Truth In Lending Act (TILA) was amended by the Dodd-Frank Act to require rules for appraisals on principal residences securing higher-priced mortgage loans. The Higher-Priced Mortgage Loans (HPML) Appraisal Rule Interagency: CFPB, FRB, FDIC, FHFA, NCUA, OCC Amends Regulation Z (Truth in Lending Act TILA) Final rule issued 1/18/2013 Effective date 1/18/

12 HPML Appraisal Rule Written Appraisal Main Requirement 12 CFR (c)(3)(i) A creditor shall not extend a higher-priced mortgage loan to a consumer without obtaining, prior to consummation, a written appraisal of the property to be mortgaged. The appraisal must be performed by a certified or licensed appraiser who conducts a physical visit of the interior of the property that will secure the transaction. 221

13 HPML Appraisal Rule Coverage Coverage Higher-priced mortgage loans not otherwise exempt under the rule Higher-Priced Mortgage Loan Definition 12 CFR (a)(1) First-lien or subordinate-lien closed-end loans secured by the consumer s principal dwelling, in which the annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) at the time the APR is set: By 1.5 or more percentage points, for a loan secured by a first lien that is not a jumbo loan By 2.5 or more percentage points, for a loan secured by a first lien jumbo loan By 3.5 or more percentage points, for a loan secured by a subordinate lien 222

14 Mortgage Origination Rules: Transaction Coverage and Exemptions 1 Transaction Type Ability-to-Repay (Reg Z)² HOEPA (Reg Z) Pre-loan counseling list (Reg X, per HOEPA Rule) Escrows (Reg Z) Appraisals (Reg Z) Valuations (Reg B) Purchase mortgages, refinancings, home equity loans HELOCs Manufactured housing Loans Covered if secured by a dwelling [ (a)] Exempt [ (a)(1)] Covered [ (a)] Covered if secured by principal dwelling [ (a)] Covered [ (a)] Covered [ (a)] Covered [ (a)] Covered [ (b)] Covered [ (a)] Covered if secured by first lien on principal dwelling and exceed certain rate thresholds [ (b)] Exempt [ (a)] Covered if secured by first lien on principal dwelling and exceed certain rate thresholds [ (b)] Covered if non-qm and not otherwise exempt [ (a)- (c))] Exempt [ (a)] Subject to limited exemptions [ (c)(2)(ii) and (iii)] Covered if secured by first lien on a dwelling [ (a)] Covered if secured by first lien on a dwelling [ (a)] Covered if secured by first lien on a dwelling [ (a)] Construction Loans (Initial Construction) Exempt [ (a)(3)(ii)-(iii)] Exempt [ (b)(2)] Exempt to the extent not federally related mortgage loans [ (a)] Exempt [ (b)(2)(i)(B)] Exempt [ (c)(2)(iv)] Covered if secured by first lien on a dwelling [ (a)] Loans Made by Small Creditors Predominantly Serving Rural or Underserved Areas Bridge Loans (12 months or less) QM balloon loans permitted if other criteria met 2 [ (f)] Exempt [ (a)(3)(ii)] Exempt from balloon prohibition if other criteria met [ (d)(1)(i)(C)] Exempt from balloon prohibition [ (d)(1)] Covered [ (a)] Exempt to the extent not federally related mortgage loans [ (a)] Exempt from escrow requirement if other criteria met [ (b)(2)(iii)-(v)] Exempt [ (b)(2)(i)(C)] Covered [ (a)] Exempt [ (c)(2)(v)] Covered if secured by first lien on a dwelling [ (a)] Covered if secured by first lien on a dwelling [ (a)] Timeshares Exempt [ (a)(2)] Exempt to the extent not principal dwellings [ (a)] Exempt [ (c)(2)] Exempt to the extent not principal dwellings [ (a)] Exempt to the extent not principal dwellings [ (a)] Covered if secured by first lien on a dwelling [ (a)] Reverse Mortgages Subject to Exempt [ (a)(3)] Exempt [ (a)(2)(i)] Exempt [ (c)(1)] Exempt [ (b)(2)(i)(D)] Exempt [ (c)(2)(vi)] Covered if secured by first lien on a dwelling [ (a)] 1

15 Mortgage Origination Rules: Transaction Coverage and Exemptions 1 Published August 6, Note: This chart only contains information concerning general coverage and exemption of the above-referenced loan products for the Bureau s 2013 Ability to-repay, HOEPA, Escrows, Appraisals, and Valuations Final Rules (also note that the cited sections of the regulations apply after the applicable effective dates). It does not contain information regarding the Loan Originator Compensation or Servicing Final Rules and does not discuss all exemptions and exclusions under the Title XIV Rules. This chart is intended only to act as a quick reference and not as a substitute for the rules. Always consult the regulation text and official commentary concerning coverage or exemption of the above or any other mortgage products for any of the above-referenced rules. 2 On June 12, 2013, the Bureau published a final rule amending the Ability-to-Repay Rule (78 FR 35430). Among other things, the final rule adopted (e)(6), which provides a two-year transition period during which small creditors as defined by (e)(5) can originate balloon-payment qualified mortgages even if they do not operate predominantly in rural or underserved areas. The final rule also created exemptions from the Ability-to-Repay requirements for extensions of credit made by community-focused creditors with certain designations and by certain nonprofits, as well as for credit extended pursuant to a program administered by a housing finance agency or pursuant to an Emergency Economic Stability Act program. 2

16 HPML Appraisal Rule Exemptions Coverage Exemptions 12 CFR (c)(2) Qualified mortgages, as defined in Regulation Z 12 CFR (e) Reverse mortgages Bridge loans (12 months or less and intended for acquiring a new principal dwelling) Loans for initial construction of a dwelling (not limited to loans of 12 months or less) Loans secured by manufactured homes Loans secured by boats, trailers, and mobile homes 223

17 HPML Appraisal Rule Compliance When the creditor originates a covered HPML, it must: Disclose to consumers, within 3 business days of receipt of the consumers applications, their right to a free copy of any appraisal the creditor orders, and their right to hire their own appraiser at their own expense for their own use Obtain a written appraisal performed by a certified or licensed appraiser in conformity with USPAP and FIRREA Have the appraiser visit the interior or the property and provide a written report Give consumers free copies of the appraisal reports obtained no later than 3 business days before consummation Additional requirements when it is a flip 224

18 HPML Appraisal Rule Safe Harbor Safe Harbor - 12 CFR (c)(3)(ii) Rule includes safe harbor protection The rule is considered satisfied when the creditor: Orders the appraiser to perform the appraisal in conformity with USPAP and FIRREA (and any implementing regulations) Verifies through the National Register that the appraiser was a certified or licensed appraiser in the property state as of the date the appraisal is signed Confirms that nine elements are addressed in written appraisal (Appendix N to Part 1026) Has no actual knowledge contrary to facts or certifications contained in appraisal 225

19 HPML Appraisal Rule Flips Additional appraisal for flips 12 CFR (c)(4)(ii)-(iv) Additional appraisal required when HPML is used to buy a property that is being resold within days of its acquisition by the seller, if: The price on the consumer s purchase agreement exceeds the seller s acquisition price by more than 10 percent, if the seller acquired property in the past 90 days; or The price on the consumer s purchase agreement exceeds the seller s acquisition price by more than 20 percent, if the seller acquired property in the past 91 to 180 days; Must be from different certified or licensed appraiser Both appraisals must meet requirements 226

20 HPML Appraisal Rule Flips (Continued) No charge for additional appraisal Additional appraisal must analyze Difference in original sales price and the subsequent sales price Changes in market conditions Property improvements the seller made Cannot use appraisal from the seller s acquisition to satisfy requirement Certain exemptions apply 227

21 HPML Appraisal Rule Overlap with Reg B For first lien HPMLs that are covered by the HPML Appraisal Rule, the disclosure requirements overlap with the ECOA Valuations Rule The disclosure under the ECOA Valuations Rule satisfy the HPML Appraisal Rule requirements Different deadline structure Comply with the earlier deadline 228

22 Regulation Z Loan Originator Rule Coverage Coverage Compensation limitations and recordkeeping requirements Qualifications Identification information on documents Policies and procedures Contract restrictions Financing of single-premium credit insurance Effective January 10, CFR (h) effective June 1,

23 Loan Originator Definition is broader than one under S.A.F.E. Act Refer to Commentary for 12 CFR (a) for explanation of origination activities 230

24 Compensation Limitations Compensation includes salaries, commissions, bonuses, and awards of merchandise, services, trips, and similar prizes Designed to protect consumers by reducing incentives to steer consumers 231

25 Compensation Limitations (Continued) Prohibits compensation based on transaction terms Term of single transaction Terms of multiple transactions conducted by single loan originator Terms of multiple transactions conducted by multiple originators, taken in the aggregate (profits-based compensation plans) 232

26 Compensation Limitations (Continued) Prohibits compensation based on transaction terms Interest rate APR Collateral type Existence of prepayment penalty Origination points or fees Fees for creditor-required title insurance 233

27 Compensation Limitations (Continued) Prohibited compensation examples Receiving 2% of loan amount if interest rate is > 6% and 1% if rate is 6% or less Receiving higher compensation based on whether note contains prepayment penalty Receiving higher compensation for closing 10 transactions per month with rates > 6% Additional compensation if consumer buys title insurance from originator s bank or affiliate rather than from third party 234

28 Safe Compensation Methods Volume dollar amount of credit extended or number of transactions originated Long-term performance of loans Hourly pay rate based on hours worked New customers vs. existing customers Advance fixed payment for every loan arranged Percentage of applications closed Quality of loan files (documentation accuracy and completeness) 235

29 Profit-Based Compensation Plans Profit-based compensation plans Generally may not receive compensation based on profits from mortgage-related business Contributions to certain Qualified Plans allowed Qualified profit sharing, 401(k), and ESOPs Designated tax-advantaged plans (defined contribution and defined benefit plans) See 12 CFR (d)(1)(i) and (ii) 236

30 Compensation Recordkeeping Requirements Compensation paid to loan originators Nature and amount Payee Timing Compensation agreements that govern payments Agreement between creditor and mortgage broker Employment contracts between creditor and loan originator Maintain for 3 years 237

31 Qualification Rules for Loan Originators Creditors to ensure loan originators are licensed or registered, as applicable, under the S.A.F.E. Act For loan originator employees not required to be licensed, rule requires employees: Meet character, fitness, and criminal background standards similar to S.A.F.E. Act Receive training appropriate with employee s origination activities 238

32 Information on Loan Documents Documents affected Credit application Note Security instrument Required information Bank name and NMLSR ID Loan originator name and NMLSR ID 239

33 Policies and Procedures Designed to monitor compliance with provisions on compensation, qualifications, identification, and steering Appropriate to nature, size, complexity, and scope of mortgagelending activities 240

34 Contract Restrictions Closed end consumer credit transactions secured by dwelling and HELOCs secured by principal dwelling No arbitration clauses or other non-judicial procedures to resolve disputes May not bar a consumer from bringing claim in court asserting violation of federal law Effective as of June 1,

35 Financing of Single-Premium Credit Insurance Closed end consumer credit transactions secured by dwelling and HELOCs secured by principal dwelling May not finance single-premium credit insurance Does not apply to insurance paid on monthly basis 242

36 Implementation Considerations Develop written policies and procedures Review compensation practices for loan originators Develop compensation recordkeeping method Update documents to reflect NMLSR identification information Review contracts for prohibited language (should be completed by now) Training 243

37 Regulations X and Z Mortgage Servicing Rules Coverage Regulation X Rules Regulation Z Rules Small Servicer Exemption Interest Rate Adjustment Notices Prompt Payment Crediting and Payoff Statements Force-Placed Insurance Error Resolution and Information Requests Loss Mitigation Provisions 244

38 Regulation X Coverage Error resolution and information requests Force-placed insurance General servicing policies, procedures, and requirements Early intervention with delinquent customers Continuity of contract with delinquent customers Loss mitigation 245

39 Regulation Z Coverage Interest rate adjustment notices for ARMs Prompt crediting of mortgage payments Responding to requests for payoff amounts Periodic statements for mortgage loans Effective January 10, 2014 Generally applies to closed end consumer mortgage loans secured by dwelling 246

40 Small Servicer Exemption General Service 5,000 or fewer mortgage loans If own mortgage servicing rights for loan not originated or owned, do not qualify for exemption, even if service 5,000 or fewer loans overall Exemption determined each calendar year based on loans serviced as of January 1 for remainder of year 247

41 Small Servicer Exemption Exempt from following provisions: Periodic statements General servicing policies, procedures, and requirements Early intervention with delinquent customers Continuity of contract with delinquent customers Some loss mitigation provisions 248

42 Small Servicer Exemption Must follow provisions: ARM disclosures Prompt crediting of mortgage payments Responding to requests for payoff amounts Force-placed insurance Error resolution and information requests Some loss mitigation provisions 249

43 Interest Rate Adjustment Notices General Applies to notices for ARMs secured by principal dwelling New initial interest rate adjustment disclosure notice Eliminate annual notice but requires ongoing interest rate adjustment disclosure when rate adjustment causes payment change Modify timing of both notices 250

44 Interest Rate Adjustment Notices Overview of Forms Item Initial Notice Ongoing Notice Required First time rate adjusts When payment amount changes Timing 210 to 240 days 60 to 120 days Estimate Estimate allowed Exact information Formatting (d)(3) (c)(3) Sample form H-4(D)(4) H-4(D)(2) Model form H-4(D)(3) H-4(D)(1) Delivery Separate document Segregated from other information 251

45 Prompt Payment Crediting and Payoff Statements Clarifies handling of partial payments Credit to account Return to customer Hold in suspense and apply when full payment received Payoff statement changes Applies to transactions secured by any dwelling (not just principal dwelling) Expands response deadline to 7 business days Applies only to written request 252

46 Force-Placed Insurance Limits use of force-placed insurance Applies to hazard insurance (not flood) Applies to federally related mortgage loans as defined under RESPA 253

47 Force-Placed Insurance (Continued) General Requirements Reasonable basis to believe customer failed to maintain insurance before charging for force-placed insurance Notice requirements met before charges allowed Cancel force-placed insurance within 15 days of receiving evidence that insurance in place and refund charges for periods of overlapping coverage 254

48 Force-Placed Insurance (Continued) Overview of Notices Timing First Notice Reminder Notice Renewal Notice 45 days before fee assessed 30 days after first notice and 15 days before fee assessed Once annually prior to anniversary of forceplaced insurance Content (c)(2) (d)(2) (e)(2) Format (c)(3) (d)(3) (e)(3) Forms Appendix MS-3 (A) Appendix MS-3 (B) to (C) Appendix MS-3 (D) 255

49 Error Resolution and Information Requests General Requirements Applies to federally related mortgage loans as defined under RESPA Acknowledge request or error notice within 5 days Errors correct and provide notice of correction within 30 to 45 days Information requests Provide information or conduct reasonable search for requested information within 30 to 45 days 256

50 Error Resolution and Information Requests (Continued) Examples of Errors Loan payment not appropriately applied to principal, interest, escrow, or other charges Failure to credit loan payment to account timely Failure to pay escrow amounts timely Fee or charge erroneously imposed (late payment fee) Several others listed under 12 CFR (b) 257

51 Loss Mitigation Provisions Applies to federally related mortgage loans as defined under RESPA that are secured by principal dwelling Only 2 provisions apply to small servicers Cannot make first notice or filing required to foreclose unless loan is > 120 days past due Cannot move for foreclosure judgment or order of sale if customer is performing in accordance with terms of loss mitigation agreement 258

52 Implementation Considerations Determine if small servicer exemption applies Develop written policies and procedures Verify core system and/or loan platform systems produce applicable disclosures and notices Training 259

53 Regulation E Coverage ATM Disclosures Remittance Transfer Rule 260

54 Regulation E ATM Disclosures Amends regulation Deletes requirement that fee notice be posted on or at ATM Only have to provide the on-screen or paper disclosure Includes amount of the fee to be charged Provided before the consumer is committed to transaction Effective March 26,

55 Regulation E Wire Remittance Rules Coverage Key Questions Remittance Transfer Remittance Transfer Provider Disclosure Obligations Cancellation, Refund, and Error Resolution Rights Effective October 28,

56 Regulation E Wire Remittance Rules (Continued) Key Questions Do you offer consumers method to send money abroad? Are transfers you provide remittance transfers? Are you a remittance transfer provider? If answer to all are yes, then rules apply 263

57 Regulation E Wire Remittance Rules (Continued) Remittance Transfer Consumer in U.S. who sends money electronically to consumers or businesses in foreign countries Examples Cash-to-cash transfers Cash-to-account transfers International wire transfers International ACH transfers Certain prepaid card transactions 264

58 Regulation E Wire Remittance Rules (Continued) Exception Transfers of $15 or less 265

59 Regulation E Wire Remittance Rules (Continued) Remittance Transfer Provider Provides remittance transfers for a consumer in normal course of business, regardless of whether consumer holds account at institution Exempt if 100 or fewer remittance transfers in calendar year 266

60 Regulation E Wire Remittance Rules (Continued) Disclosure Obligations Pre-Payment Disclosure Prior to payment Transfer amount Front-end fees and taxes Exchange rate Covered third party fees Total amount to be received Disclaimer regarding non-covered third party fees and foreign taxes Receipt When payment made Information from pre-payment disclosure Date of availability Recipient contact information Error resolution/cancellation rights Remittance transfer provider contact information State regulator and CFPB contact information Model disclosures available in Appendix A 267

61 Regulation E Wire Remittance Rules (Continued) Cancellation, Refund, and Error Resolution Rights Sender can cancel transfer up to 30 minutes after payment made (oral or written) Refund to sender within 3 business days of request 268

62 Regulation E Wire Remittance Rules (Continued) Cancellation, Refund, and Error Resolution Rights Error Resolution Process Sender reports within 180 days of disclosed date of availability of transfer Provider investigates and makes determination within 90 days of notice Provider reports results to sender within 3 business days after completing investigation Provider corrects error within 1 business day 269

63 Regulation E Wire Remittance Rules (Continued) Implementation Considerations Determine if exemption applies Develop written policies and procedures Verify system can produce applicable disclosures Training 270

64 Things to Watch Amendments/clarifications to mortgage loan regulations Integrated mortgage disclosures under RESPA Examinations for compliance with Servicemembers Civil Relief Act 271

65 Questions 272

66 Contact Information AUSTIN Martha Gallardo Massing, CPA 811 Barton Springs, Suite 550 Austin, Texas Annette Evans, CPA, CRCM Padgett, Stratemann & Co., L.L.P. SAN ANTONIO 100 NE Loop 410, Suite 1100 San Antonio, Texas

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