CFPB Mortgage Rules: Planning for Upcoming Deadlines

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1 CFPB Mortgage Rules: Planning for Upcoming Deadlines Amy Avitable Director of Regulatory Compliance, TCS BaNCS Copyright 2012 Tata Consultancy Services Limited 1

2 Amy Avitable, JD, CPA Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations and the American Bankers Association, and articles in banking and compliance publications. Amy is the Director of Regulatory Compliance for the TCS BaNCS system at Tata Consultancy Services. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she has supported software products for financial institutions and engaged in lobbying efforts in Congress as well as with the FDIC, CFPB, and NCUA. She was previously the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In- Chief for the renowned Big Orange Book compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC. 2

3 New Lending Process Within 3 Business Days of Application Processing the Application Prior to Closing After Closing After Delinquency 3

4 Before You Do Anything Else! Consider getting E-SIGN consent in place Cannot required disclosures without it! Including copies of appraisals E-SIGN Requirements Provide customer with notice containing specified information about electronic disclosures Customer consents to receive disclosures electronically Consent is provided electronically or is confirmed electronically in a manner that reasonably demonstrates that the customer can access the electronic disclosures 4

5 Within 3 Business Days of Application 1. Appraisal Notice 2. Homeownership Counseling Notice 5

6 Within 3 Business Days of Application 1. Appraisal Notice Regulation B Required for all applications for a loan to be secured by a 1 st lien on a dwelling Including commercial loans and HELOCs Applies even if no loan is originated Regulation Z Required for Higher Priced Mortgage Loans Exemptions for certain loans, including Qualified Mortgages, loans secured by mobile homes and new manufactured homes, 12 month or less bridge loans and construction loans Regulation B appraisal notice meets Regulation Z requirement 6

7 Within 3 Business Days of Application 2. List of Homeownership Counselors Required for all RESPA-covered loans Including HELOCs! Not required if denied or withdrawn during 3 day period May be provided with GFE/early TIL or application Must be updated every 30 days Must include counselors from CFPB or HUD website that serve the applicant s location Tip: Consider adding Regulation B appraisal notice and homeownership counseling list to all application forms for HELOCs and home loans. Then you will only need procedures to update the homeownership counseling list and provide the appraisal notice for commercial loans. 7

8 Processing the Application 1. Determine customer s Ability To Repay and make loan offer Qualified mortgage Balloon loan under rural / underserved exception 2. Only include prepayment penalties if allowed 3. Test loan for special requirements Higher Priced Covered Transaction HPML High Cost Mortgage 8

9 Ability to Repay Subject to Rule Consumer loans secured by a dwelling (1-4), including real property attached to a dwelling Qualified Mortgages, but Rebuttable presumption of compliance if higher priced covered transaction Safe harbor of compliance if not higher priced covered transaction Not Subject to Rule Loans not subject to Regulation Z Change to existing loan that is not a refinancing (e.g., modification) Home equity lines of credit Mortgages secured by a timeshare Reverse mortgages 12 month or shorter temporary or bridge loans Refinancings of non-standard mortgages into standard mortgages 9

10 Ability to Repay Must consider 8 factors in determining if consumer has reasonable ability to repay 1. Current or reasonably expected income or assets 2. If income relied on, current employment status 3. Monthly payment on the covered transaction 4. Monthly payment on simultaneous loan that the lender knows or has reason to know will be made 5. Monthly payment for mortgage-related obligations 6. Current debt obligations, alimony and child support 7. Monthly debt to income ratio or residual income 8. Credit history Must also verify using reasonably reliable third party records Must be able to reproduce copies, not just info from the records 10

11 Role of Qualified Mortgages in Ability to Repay Does the Ability to Repay Rule Apply? If an exception is met, No. If an exception is not met, Yes. Continue to next step. Is the Loan a Qualified Mortgage? If no, apply the Ability to Repay rule without a presumption of compliance. If yes, continue to next step. Is the Loan a Higher Priced Covered Transaction? If no, you are deemed compliant and such safe harbor cannot be rebutted. If yes, you receive a presumption of compliance but it can be rebutted. 11

12 What is a Qualified Mortgage? Possible scenarios: 1. Regular Qualified Mortgage 2. Qualified Mortgage during transition period VA, HUD and other agencies expected to issue their own QM definition that will supersede transition QM Otherwise, expires on January 10,

13 Regular Qualified Mortgage Six Required Components 1. Regular periodic payments that are substantially equal 2. Term no longer than 30 years 3. Total points and fees don t exceed specified limit 4. Specially calculated monthly payments for mortgage-related obligations are taken into account in underwriting 5. Income, assets, current debt obligations, alimony, and child support are verified under Appendix Q of Regulation Z 6. At closing, total monthly debt / total month income does not exceed 43% 13

14 Qualified Mortgage In Transition Period Four Required Components 1. Regular periodic payments that are substantially equal 2. Term no longer than 30 years 3. Total points and fees don t exceed specified limit 4. Must be eligible for one of the following: To be purchased or guaranteed by Fannie or Freddie, or by any successor agency Conforms to standards in Fannie Mae Single-Family Selling Guide or the Freddie Mac Single-Family Seller/Servicer Guide Approve/Eligible recommendation from Desktop Underwriter (DU) Accept and Eligible to Purchase recommendation from Loan Prospector (LP) To be insured by HUD To be guaranteed by VA, USDA or Rural Housing Service 14

15 What About Balloon Loans? Do you want QM protection? Yes No Must meet rural / underserved exception Must follow ATR factors Not a Higher Priced Covered Transaction = Consider highest payment in first 5 years after first payment due Is a Higher Priced Covered Transaction = Use highest payment in schedule, including balloon payment 15

16 Balloon Payments for Rural or Underserved Requirements for Creditor Must meet all of the following: In prior calendar year, made more than 50% of first-lien covered loans on properties located in rural or underserved counties In prior year, creditor and affiliates originated 500 or fewer first-lien covered loans As of end of prior year, had assets that do not exceed CFPB s asset threshold ($2B in 2013) Requirements for Loan Must meet all of the following: Regular, periodic, substantially equal payments amortized over no more than 30 years that don t cause negative amortization Loan term of 5 to 30 years Fixed rate Points and fees don t exceed QM limit Must determine ability to repay under ATR requirements (ignoring balloon payment) 16

17 Restrictions on Selling Rural / Underserved Balloons To meet rural / underserved exception, loan cannot be subject to commitment to be acquired But ok if acquired by another creditor that meets the rural or underserved exception No longer a QM once sold, transferred or assigned unless occurs in one of the following circumstances: To anyone at least 3 years after closing If sold at least 3 years after closing, will always be QM To another creditor that meets rural or underserved exception As part of capital restoration or other allowable plan, by order from a state or federal governmental agency, or in agreement with such an agency As part of the merger or acquisition of the creditor 17

18 Implementing ATR and QM Requirements Must make policy decisions before you can begin! Will you continue to make balloon loans? Will you make loans that are not Qualified Mortgages? Will your investors purchase loans that are not Qualified Mortgages? Tips to Consider: Do not assume that compliance with Fannie, Freddie, FHA and other program requirements will meet the Regulation Z requirements. Start with Regulation Z then use Appendix Q followed by program guidelines to fill in blanks. Include residual income even if you already consider DTI. 18

19 Prepayment Penalty Limitation Prepayment penalties prohibited on closed end, dwelling-secured loans unless all of the following are met: Qualified mortgage Not a higher priced mortgage loan under Sec APR cannot increase after consummation Prepayment penalty not prohibited under other law Penalty does not exceed: Up to 2% of prepaid amount if incurred in first 2 years after closing Up to 1% if incurred in 3 rd year after closing Not allowed after 3 rd year Alternative loan offered with no prepayment penalties and certain other requirements Tip: Consider simply eliminating prepayment penalties on closed end consumer real estate loans 19

20 Test Loan for Special Requirements Higher Priced Covered Transaction If QM - Rebuttable presumption of compliance If non-qm balloon loan - Must consider balloon payment in underwriting Higher Priced Mortgage Loans Appraisal and 2 nd appraisal requirements Mandatory escrow High Cost Mortgages HOEPA loan restrictions High cost mortgage disclosure HELOC underwriting Prohibition on prepayment penalties, modification and renewal fees, financing of points and fees Limited balloon payments, late fees, demand clauses, payoff statement fees Mandatory homeownership counseling Error correction procedures 20

21 Special Definitions Higher Priced Closed end Higher Priced Covered Transaction Secured by a dwelling APR exceeds APOR by: 1.5% or more for 1 st lien loans 3.5% or more for subordinate lien loans Remember: No special disclosures apply to higher priced covered transactions. The calculation is simply a factor in ATR and QM rule! Higher Priced Mortgage Loan Closed end Secured by principal dwelling APR exceeds APOR by: 1.5% or more for first lien non-jumbo loans 2.5% or more for first lien Jumbo loans 3.5% or more for subordinate lien loans 21

22 Higher Priced Mortgage Loans 1. Formal appraisal Formal appraisal meeting specific criteria must be obtained Including visit of interior of property 2. 2 nd Appraisal for Flipped Property - If property bought within 180 days of seller s acquisition and property appreciated by certain amount, property will be viewed as flipped Must order 2 nd appraisal that meets same special criteria and explains why property appreciated 2 nd appraisal will be free to the consumer Requirements don t apply to Qualified Mortgages, loans secured by mobile homes and new manufactured homes, 12 month or less bridge loans, construction loans, and certain other exempt loans 22

23 Special Definitions High Cost Mortgage Definition Open or closed-end loan Secured by principal dwelling Where any of the following 3 thresholds is met: APR exceeds APOR by: 6.5% for 1 st lien loans 8.5% for subordinate lien loans and 1 st lien loans where dwelling is personal property and loan amount is less than $50,000 Total points and fees exceed: 5% of total loan amount if loan amount = $20,000 or more Lesser of 8% of total loan amount or $1,000 if loan amount < $20,000 Prepayment penalty can be charged more than 36 months after closing or can exceed more than 2% of amount prepaid 23

24 Special Definitions High Cost Mortgage Exceptions from High Cost Mortgage: Reverse mortgage Loan to finance initial construction of dwelling Loans originated by Housing Finance Agency Loan originated under USDA s Rural Development Section 502 Direct Loan Program What is not exempt? Open end loans and residential mortgage transactions. So HELOCs and home purchase loans may now be subject to high cost rules! 24

25 If You Have a High Cost Mortgage, You Also Have: HELOC Underwriting - Ability to repay, presumption of compliance and income verification requirements if the loan is a HELOC Restrictions on balloon payments and demand clauses Prohibitions include: Negative amortization, prepayment penalties, penalty interest rate on default, fees to defer payment or modify, renew, extend or amend loan Financing any charges that would be points and fees Selling or assigning loan without providing notice to assignee about status Refinancing high cost mortgage into another one within 12 months 25

26 Prior to Closing 1. Provide Free Copy of Appraisals and Valuations 6 Days Before Closing or Earlier 2. Provide High Cost Mortgage Disclosure 3 Days Before Closing 3. Ensure Mandatory Homeownership Counseling Completed Any time Before Closing 4. Ensure Loan Documents Compliant 26

27 Free Copies of Valuations Regulation B If the loan will be secured by a 1 st lien on a dwelling, must provide free copy of any valuation obtained by earlier of: Promptly upon completion or 3 business days before closing What does that mean? It is considered timely to: Drop the copy in the mail (or it, if E-SIGN is met) within 1 week after the complete and correct copy of the appraisal is received and Received by the customer at least 3 business days before closing If mailed, must mail 6 business days before closing Not timely to wait until subsequent appraisals received 27

28 Free Copies of Valuations Regulation B 3 business day time period can only be waived if: Waived at least 3 business days before closing or Waived within 3 business days before closing but customer already received a copy and additional copy only reflects minor clerical changes and Borrower receives copy before closing Waiver may be oral or written and must be provided by primary applicant 28

29 Free Copies of Valuations Regulation Z If the loan is a Higher-Priced Mortgage Loan, must provide copy of all appraisals obtained at least 3 business days before closing Provide means received by the customer at least 3 business days before closing If mailed, must mail 6 business days before closing No waiver of the 3 business day period under Regulation Z Tip - To cover both requirements, consider implementing a procedure that: Requires a copy of all appraisals and valuations to be sent within 1 week of being completed and at least 6 business days before closing Delays closing rather than allowing the customer to waive the 3 business day period 29

30 High Cost Mortgage Disclosure Must be provided at least 3 business days before closing If any change makes the disclosures inaccurate, must be redisclosed at least 3 business days before closing Revisions may be provided by telephone in very limited circumstances Consumer can only waive 3 day period if: Receives disclosures before waiving time period and Waives for bona fide financial emergency through written statement describing emergency signed by all consumers entitled to waiting period Tips: Triple check that this disclosure was provided. Failure to provide it is both a high cost mortgage and rescission violation! Do not allow waivers of the 3 day period as such waivers are high risk for criticism and legal liability. 30

31 Mandatory Homeownership Counseling 1. Loan with Negative Amortization to First Time Borrower 2. High Cost Mortgage Process will be: Provide customer with GFE or HELOC disclosures Customer receives homeownership counseling from HUDapproved counselor on the advisability of the mortgage Counselor provides certification with specific content Requirements Counselor must be HUD-approved and unaffiliated with creditor Creditor cannot: Steer consumer to particular counselor Condition payment of counselor s fees on receiving certification or closing loan 31

32 Ensure Loan Documents Compliant Prohibited Provisions Documents cannot contain a mandatory arbitration clause or other provision that would bar a consumer from bringing a claim in court for violations of federal law Prohibited Financed Fees Ensure that: Points and fees are not financed on a High Cost Mortgage Credit life insurance is not financed for any consumer real estate loans Creditor and MLO Names and NLMSR IDs Must be disclosed on all of the following: Application Note or loan contract Security instrument 32

33 THE LOAN HAS FINALLY CLOSED! 33

34 After Closing 1. Taking Payments 2. Providing Disclosures 3. Handling Hazard Insurance 4. Handling Escrow Accounts 5. Payoff 6. Providing Info and Investigating Errors 7. Delinquency and Default 8. Other Requirements for Large Servicers 34

35 Taking Payments 1. Payment Crediting If partial payments are held in a suspense account, must credit to the loan when partial payments aggregate to entire amount of payment and disclose suspense account info on periodic statements 2. Late Fees on High Cost Mortgages Must not exceed 4% of amount past due May only be charged once on a single late payment and may not be charged on other outstanding late fees Restrictions on when may be charged 35

36 Providing Disclosures 1. Periodic Statements Exemptions for: Coupon book for fixed rate loans where additional disclosures provided Small servicer that services 5,000 or fewer mortgage loans, for all of which servicer or an affiliate is the creditor or assignee 2. ARM Adjustment Notices Current ARM notices replaced with two new ones Disclosure at the initial adjustment of the interest rate generally days before first payment at adjusted level is due Disclosure at each interest rate adjustment that causes a change in payment generally days before first payment at adjusted level is due 36

37 Handling Hazard Insurance 1. Force Placing Hazard Insurance Cannot charge a fee for force placing hazard insurance unless: Written notice provided at least 45 days before assessing the fee Reminder notice provided at least 15 days before assessing fee but not until at least 30 days after delivering 45-day notice and Did not receive evidence of continuous coverage To renew or replace force placed policy, must: Provide written notice at least 45 days before assessing fee Provide renewal notice before each anniversary of purchase of force placed insurance 37

38 Handling Hazard Insurance 2. Cancelling a Force Placed Policy Within 15 days after receiving evidence that borrower has had hazard insurance coverage in place that meets loan agreement requirements, must do all of the following: 1. Cancel force placed insurance purchased by servicer 2. Refund to borrower all force placed insurance premium charges and related fees paid by borrower for any period of overlapping insurance coverage 3. Remove from borrower s account all force placed insurance charges and related fees assessed for overlapping period Tip: Leverage flood insurance processes. Under Biggert-Waters, similar cancellation requirements now apply to flood insurance. 38

39 Escrowing for Property Taxes and Insurance 1. Higher Priced Mortgage Loans Must escrow for property taxes and insurance for 5 years for HPMLs with 1 st lien on principal dwelling Cannot cancel unless: Loan is paid off or All of the following are met: Customer requests cancellation after 5 year period Unpaid principal balance less than 80% of original value of collateral Consumer not currently delinquent or in default on loan Creditors Serving Rural or Underserved Areas Loans under commitment to be acquired Must still escrow Loans in portfolio Can only escrow for: HPMLs established between 4/1/2010 and 6/1/2013 Loans with escrow as accommodation to distressed consumers to help avoid default or foreclosure Escrow up to 2 nd installment due date 39

40 Escrowing for Insurance 2. Hazard Insurance - May not purchase force placed hazard insurance unless unable to disburse funds for hazard insurance premiums from borrower s escrow account Only unable to disburse if servicer has reasonable basis to believe either: Borrower s hazard insurance has been canceled or was not renewed for reasons other than nonpayment of premium charges or Property is vacant Cannot fail to make hazard insurance premium payment merely because of insufficient funds in escrow account Must advance funds to escrow account, make timely premium payments, and then seek repayment of advanced funds 40

41 Payoff 1. Payoff Statements Must provide within 7 business days after receiving request Longer time allowed for circumstances such as bankruptcy, foreclosure, natural disaster 2. High Cost Mortgages Must provide payoff statement within 5 business days after receiving request Generally may not charge to provide a payoff statement Limited circumstances where processing fee may be charged 3. Closing Escrow Account Must return remaining amounts within 20 days of payoff Limited circumstances when funds can be transferred to another escrow account 41

42 Providing Info and Investigating Errors Must have procedures for: Allowing customer to request information about loan or claim error in servicing Acknowledging customer s request or claim Providing info, investigating claim and resolving it Doing it all within the required timeframes and with the required disclosures Tips: Include information requests and error resolution in one set of procedures due to similarities in the requirements. Leverage existing error resolution processes and procedures. 42

43 Handling Delinquencies and Defaults Small Servicers - May not pursue foreclosure if: Borrower is delinquent for 120 days or less or Borrower is performing under loss mitigation agreement Large Servicers By 36 th day after becoming delinquent: Try to make live contact with borrower Promptly after live contact, inform borrower of available loss mitigation options By 45 th day: Provide written notice about delinquency and risks Assign personnel to a delinquent borrower Have extensive processes for handling loss mitigation options Review and evaluation of applications Limits on when foreclosure can be pursued Appeals process 43

44 Additional Requirements for Large Servicers Specific policies and procedures regarding servicing Ability to create servicing file within 5 days Processes for managing third party providers Processes for handling servicing transfers effectively 44

45 Summary of Deadlines June 1, 2013 Extension of mandatory escrow for higher-priced mortgage loans and new requirements for cancellation of escrow Prohibition on mandatory arbitration and other contract provisions Prohibition on financing credit insurance premiums January 10, 2014 Requirement to provide list of homeownership counseling organizations within 3 business days of application Ability to repay and qualified mortgages Requirements for high cost mortgages Mandatory homeownership counseling for negative amortization loans to first time borrowers Lender compensation and qualification requirements Mortgage servicing requirements under Regulation Z and RESPA January 18, 2014 Appraisal requirements for higher-priced mortgage loans Valuation notice and copies under Regulation B 45

46 Summary Educate management and Board of Directors on risks of new requirements and potential impact on products Make policy decisions Organize, prioritize, delegate and track progress Keep in mind other upcoming changes Monitor CFPB for additional clarifications Leave plenty of time for training and practice at end of

47 Questions? Amy Avitable Copyright 2012 Tata Consultancy Services Limited 47

48 Please evaluate this session using our Conference App. Search NYBA in your App Store or scan here. Pull up the Event and click on Rate Session. Thanks for your input.

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