Mortgage Banking/Consumer Finance Commentary

Transcription

1 FEBRUARY 2005 Mortgage Banking/Consumer Finance Commentary STATE TE ANTI-PREDATOR TORY LENDING STANDARDS INCORPORATED INTO NEW OCC GUIDELINES FOR NATIONAL BANKS Responding to criticisms that it is an enabler of predatory lending because of its views on federal preemption, the Office of the Comptroller of the Currency (OCC) issued anti-predatory lending Guidelines for national banks and their operating subsidiaries that effectively incorporate the substantive prohibitions contained in controversial state and local laws. The Guidelines, published in the February 7, 2005 Federal Register, flag certain loan terms, conditions and features as susceptible to abusive, predatory, unfair or deceptive practices. National banks are advised to exercise care when offering loans with these terms, conditions and features and apply enhanced care and heightened internal controls and monitoring if offering such loans to certain high risk individuals. Unlike the state and local laws the Guidelines seek to replicate, however, there is no private right of action for aggrieved consumers and thus no assignee liability. Instead, if the OCC believes a bank does not meet the standards set forth in the Guidelines, the agency may require the bank to submit a corrective plan. Failure to submit an acceptable plan or to comply with an accepted plan subjects the bank to potential cease and desist orders and monetary penalties. The Guidelines become effective April 8, GUIDELINES APPENDIX C TO PAR ART 30 The Guidelines will be located in a new Appendix C to Part 30 of the OCC s regulations. Appendix C is divided into the following three sections, each of which is discussed below: (I) Introduction; (II) Standards for Residential Mortgage Lending Practices; and (III) Implementation of Residential Mortgage Lending Standards. I. INTRODUCTION The Introduction provides that the Guidelines apply to loans and extensions of credit made by a national bank, federal branch or agency of a foreign bank, or operating subsidiary of the above, for personal, family or household purposes, secured by an owner-occupied 1 to 4 family residential dwelling, including a cooperative unit or mobile home. Brokers, dealers, persons providing insurance, investment companies and investment advisers are exempt from coverage. Rather than imposing high cost trigger tests that determine when the substantive prohibitions apply, the Guidelines focus on loan terms and practices that could be harmful if used inappropriately with respect to virtually any residential mortgage loan. Thus, the Guidelines focus on the loan term or practice and not the cost of the loan. The Guidelines essentially incorporate and expand on the OCC s anti-predatory lending principles previously set forth in two February 2003 Advisory Letters and in the agency s January 2004 rulemaking. By issuing these principles as Guidelines, the OCC has enhanced its ability to enforce its anti-predatory lending standards. The Guidelines specify that certain predatory lending practices may violate several of the OCC s existing regulations and other existing laws, such as the Federal Trade Commission Act, the Equal Credit Opportunity Act, and the Fair Housing Act. In addition, pursuant to Part 39 of the Federal Deposit Insurance Act and Part 30 of the Kirkpatrick & Lockhart Nicholson Graham LLP

2 OCC s implementing regulations, if the OCC determines that a bank does not meet the standards set forth in the Guidelines, the OCC has discretion to require the bank to submit a corrective plan. Failure to adequately comply with this requirement subjects the bank to potential cease and desist orders and monetary penalties. II. STANDARDS FOR RESIDENTIAL MORTGAGE LENDING PRACTICES This section recognizes that a bank s standards and practices regarding residential mortgage lending activities may vary depending on the size and complexity of the bank and the scope of its lending activities. For all banks, however, such standards and practices should reflect the following two overarching objectives: Effective risk management including credit, legal, compliance, reputation and other risks associated with lending activities. Prevention of involvement in abusive, predatory, unfair or deceptive practices whether direct or indirect (through mortgage brokers, other intermediaries, or purchased loans). III. IMPLEMENTATION OF RESIDENTIAL MORTGAGE LENDING STANDARDS This section is the heart of the new Guidelines. It includes six components to assist banks in implementing the general objectives discussed in Section II. First, Section III directs banks to avoid involvement, directly or indirectly, in the following specific lending practices that are considered abusive, predatory, unfair or deceptive: Equity stripping and fee packing Repeat refinancings where a borrower s equity is depleted as a result of financing excessive fees for the loan or ancillary products. Loan flipping Repeat refinancings under circumstances where the relative terms of the new and refinanced loan and the cost of the new loan do not provide a tangible economic benefit to the borrower. Unfortunately, like their state counterparts, the Guidelines do not seek to define the inherently subjective tangible economic benefit test. Refinancing of special mortgages Refinancing a special subsidized mortgage that contains terms favorable to the borrower with a loan that does not provide a tangible economic benefit to the borrower relative to the refinanced loan. Encouraging default Encouraging the borrower to breach a contract and default on an existing loan prior to and in connection with a refinancing of all or part of the existing loan. Second, Section III flags loan terms, conditions and features that are susceptible to abusive, predatory, unfair or deceptive practices. The OCC recognizes that, alternatively, these same terms, conditions and features may benefit consumers under certain circumstances. Thus, banks are advised to exercise care and prudently consider the circumstances of the targeted market to which loans are offered when banks engage, directly or indirectly, in making loans containing any of the following twelve terms, conditions and features: Financing single premium credit life, disability or unemployment insurance. Negative amortization. Balloon payments in short-term transactions. Prepayment penalties that are not limited to the early years of the loan, particularly in subprime loans. The Guidelines do not define early years. Interest rate increases on default at a level that is not commensurate with risk mitigation. 2 FEBRUARY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

3 Call provisions permitting acceleration under circumstances other than a borrower s default or to mitigate a bank s exposure to loss. Absence of an appropriate assessment and documentation of the consumer s ability to repay the loan in accordance with its terms, commensurate with the type of loan, as required by Appendix A of Part 30 of the OCC s regulations. Mandatory arbitration clauses or agreements, particularly if the loan s eligibility for purchase in the secondary market is thereby impaired. Pricing terms that subject the loan to the provisions of the Home Ownership and Equity Protection Act. Original principal balance in excess of the appraised value. Note that few state anti-predatory lending laws seek to prohibit or regulate high loan to value loans. Payment schedules consolidating more than two periodic payments and paying them in advance from the loan proceeds. Payment to home improvement contractors under a home improvement contract from the proceeds of a residential mortgage loan other than by an instrument payable: (i) to the consumer; (ii) jointly to the consumer and the contractor; or (iii) through an independent third party escrow agent. Third, banks are further cautioned to exercise enhanced care and apply appropriate heightened internal controls and monitoring if offering loans with any of the above twelve features to high risk consumers that are elderly, substantially indebted, not financially sophisticated, have language barriers, have limited or poor credit histories, or have other characteristics that limit their credit choices. The Guidelines do not offer advice for determining whether consumers meet the above categories. For example, there are no definitions for the terms elderly and substantial indebtedness. In addition, there is no guidance on what the OCC would consider enhanced care or heightened internal controls and monitoring in determining a bank s compliance with the above requirement. Fourth, the Guidelines advise banks to provide timely, sufficient, and accurate information to consumers concerning the terms, costs, risks and benefits of the loan in order to avoid consumer misunderstandings. Fifth, regarding loans that banks purchase or make through mortgage brokers or other intermediaries, the Guidelines provide that banks activities should include appropriate risk mitigation measures, such as the following: Criteria for entering into and continuing relationships with intermediaries and originators, including due diligence requirements. Underwriting and appraisal requirements. Standards related to total loan compensation and total compensation of intermediaries, including maximum rates, points, and other charges, and use of overages and yield-spread premiums. Such standards should be structured to avoid providing an incentive to originate loans with predatory or abusive characteristics. This provision seems to invite banks and their operating subsidiaries to impose caps on total broker compensation. Requirements for agreements with intermediaries and originators. With respect to risks identified in the due diligence process, agreements should address compliance with appropriate bank policies, procedures and practices and with applicable law (including remedies for failure to comply), protection of the bank against risk, and termination procedures. 3 FEBRUARY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

4 Loan documentation procedures, management information systems, quality control reviews, and other methods through which the bank will verify compliance with agreements, bank policies, and applicable laws, and otherwise retain appropriate oversight of mortgage origination functions, including loan sourcing, underwriting, and loan closings. Criteria and procedures for the bank to take appropriate corrective action, including modification of loan terms and termination of the relationship with the intermediary or originator in question. Last, the Guidelines emphasize that banks have a continuing obligation to monitor their compliance with applicable law and monitor and evaluate handling of customer complaints. A bank s residential mortgage lending practices should include appropriate steps for taking corrective action in response to compliance failures and for adjusting the bank s activities as needed to enhance their effectiveness or to reflect changes in business practices, market conditions or the bank s lines of business, residential mortgage loan programs, or customer base. OBSERVATIONS The OCC has taken a lot of heat from federal and state legislators, state attorneys general and consumer groups because of its strongly held legal position that federal preemption exempts most of the provisions of state and local anti-predatory lending laws with respect to national banks and their operating subsidiaries. Those claiming that federal preemption is synonymous with no regulation should be encouraged by the new Guidelines, since the OCC adopted virtually every major anti-predatory lending restriction that is commonly found in most state and local anti-predatory lending laws. Indeed, the Guidelines create a parallel universe of anti-predatory lending restrictions for national banks and their operating subsidiaries. Nevertheless, opponents of federal preemption are not likely to be completely satisfied. The Guidelines, of course, do not create a private right of action that would enable a borrower to sue in court to enforce a lender s violation of the Guidelines; the OCC instead will enforce the Guidelines through its administrative, supervisory powers. As a result, the draconian penalties that characterize most state and local anti-predatory lending laws, as well as the ability to assert such penalties against innocent assignees, are absent as well. While some may claim that the lack of private enforcement undermines the deterrent effect of anti-predatory lending laws, the fact that the OCC will regularly examine national banks and their operating subsidiaries for compliance with the Guidelines just may prove to be more effective in the long run. If you have any questions about this Alert, please contact Laura Johnson, or via laura.johnson@klng.com; Larry Platt, or via lplatt@klng.com; or any member of the Mortgage Banking/Consumer Finance Practice listed on the following page to discuss the Guidelines in more detail. 4 FEBRUARY 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP

5 MORTGAGE BANKING/CONSUMER FINANCE PRACTICE Kirkpatrick & Lockhart Nicholson Graham LLP comprises 950 lawyers who practice in offices located in Boston, Dallas, Harrisburg, London, Los Angeles, Miami, Newark, New York, Pittsburgh, San Francisco, and Washington. K&LNG represents entrepreneurs, growth and middle market companies, and leading FORTUNE 100 and FTSE 100 global corporations in every major industry, nationally and internationally. K&LNG has an experienced privacy and information management practice on both sides of the Atlantic. As such, we are well positioned to assist companies in addressing their international privacy law compliance needs. For more information, please visit The Mortgage Banking/Consumer Finance Practice provides legal advice and licensing services to the consumer lending industry. We counsel clients engaged in the full range of mortgage banking activities, including the origination, processing, underwriting, closing, funding, insuring, selling, and servicing of residential mortgage loans and consumer loans, from both a transactional and regulatory compliance perspective. Our focus includes both first- and subordinate-lien residential mortgage loans, as well as open-end home equity, property improvement loans and other forms of consumer loans. We also have experience in multi-family and commercial mortgage loans. Our clients include mortgage companies, depository institutions, consumer finance companies, investment bankers, insurance companies, real estate agencies, homebuilders, and venture capital funds. ATTORNEYS Laurence E. Platt lplatt@klng.com Phillip L. Schulman pschulman@klng.com Costas A. Avrakotos cavrakotos@klng.com Melanie Hibbs Brody mbrody@klng.com Steven M. Kaplan skaplan@klng.com Jonathan Jaffe jjaffe@klng.com H. John Steele jsteele@klng.com R. Bruce Allensworth ballensworth@klng.com Daniel J. Tobin dtobin@klng.com Nanci L. Weissgold nweissgold@klng.com Phillip John Kardis II pkardis@klng.com Stephen E. Moore smoore@klng.com Stanley V. Ragalevsky sragalevsky@klng.com David L. Beam dbeam@klng.com Emily J. Booth ebooth@klng.com Krista Cooley kcooley@klng.com Eric J. Edwardson eedwardson@klng.com Suzanne F. Garwood sgarwood@klng.com Anthony C. Green agreen@klng.com Laura A. Johnson laura.johnson@klng.com Kris D. Kully kkully@klng.com Drew A. Malakoff dmalakoff@klng.com Christopher G. Morrison chris.morrison@klng.com Erin Murphy emurphy@klng.com Lorna M. Neill lneill@klng.com Sam A. Ozeck sozeck@klng.com Stephanie C. Robinson srobinson@klng.com Holly M. Spencer hspencer@klng.com DIRECTOR OF LICENSING Stacey L. Riggin sriggin@klng.com REGULATOR TORY COMPLIANCE ANALYSTS Dana L. Lopez dlopez@klng.com Nancy J. Butler nbutler@klng.com Susan C. Curtin scurtin@klng.com Joelle Myers jmyers@klng.com Marguerite T. Frampton mframpton@klng.com Jeffrey Prost jprost@klng.com Patricia E. Mesa pmesa@klng.com Kenasha Scott kscott@klng.com Heidi M. Evans hevans@klng.com Allison A. A. Rosenthal arosenthal@klng.com Jonathon P. Schuster jschuster@klng.com Brenda R. Kittrell bkittrell@klng.com Joann Kim jkim@klng.com BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PITTSBURGH SAN FRANCISCO WASHINGTON Kirkpatrick & Lockhart Nicholson Graham is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one established in Delaware, USA, and one incorporated in England. This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Unless otherwise indicated, the lawyers are not certified by the Texas Board of Legal Specialization. Data Protection Act We may contact you from time to time with information on Kirkpatrick & Lockhart Nicholson Graham LLP seminars and with our regular newsletters, which may be of interest to you. We will not provide your details to any third parties. Please cgregory@klng.com if you would prefer not to receive this information KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.