The New Mortgage Servicing Rules. FMS East Coast Regional Conference September 17, 2013

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1 The New Mortgage Servicing Rules FMS East Coast Regional Conference September 17, 2013

2 What are the new Mortgage Servicing Rules? Ability to Repay/Qualified Mortgage Rule 2013 HOEPA Rule Loan Originator Compensation Equal Credit Opportunity Act (ECOA) Valuations Truth In Lending (TILA) High Priced Mortgage Loan (HPML) Appraisals Escrows 2

3 What are the new Mortgage Servicing Rules? Escrows Servicing TILA Servicing Real Estate Settlement Procedures Act (RESPA) 3

4 Ability to Repay and Qualified Mortgage Rule Final rule issued January 10, 2013 Set to take effect on January 10, 2014 Finalized changes to the rule May and July

5 ATR/QM

6 ATR/QM This rule generally applies to closed-end consumer credit transactions that are secured by a dwelling for which you receive an application on or after January 10, The ATR rule provides 8 specific factors you must consider (including verifications of income or assets relied on, employment if relied on, and review of credit history), the rule does not dictate that you follow particular underwriting models. 6

7 ATR/QM The rule contains special requirements for creditors that are refinancing their own customers into more affordable loans to help those customers avoid payment shock. The rule defines the requirements for Qualified Mortgages and how QM status works if there is a question about whether a creditor has assessed the borrower s ATR. 7

8 ATR/QM The rule provides a safe harbor for QMs that are not higher-priced. Qualified Mortgages have 3 types of requirements: restrictions on loan features, points and fees, and underwriting. One of the underwriting requirements under the general definition for Qualified Mortgages is that the borrower s total debt-to-income ratio is not higher than 43 percent. 8

9 ATR/QM For a temporary, transitional period, certain loans that are eligible for sale or guarantee by a government sponsored enterprise (GSE) Fannie Mae, Freddie Mac or are eligible under specified federal agencies guarantee or insurance program will be considered QMs under a temporary definition. The loans must meet certain QM restrictions on loan features and points and fees, but they are not subject to a flat 43 percent DTI limit. 9

10 ATR/QM There are also special provisions for QMs held in portfolio by small creditors, including some types of balloon-payment mortgages. 10

11 ATR/QM The rule bans most prepayment penalties, except on certain nonhigher priced QMs with either fixed or step rates. 11

12 Summary of June 2013 Changes Exemptions: Regulation Z typically prohibits a creditor from making a mortgage loan unless the creditor has determined that the consumer will be able to repay the loan. The June 2013 ATR/QM Concurrent Final Rule provides an exemption to these requirements for: Creditors with certain designations Loans pursuant to certain programs Certain nonprofit creditors, and Mortgage loans made in connection with certain Federal emergency economic stabilization programs. See ( (a)(3)(iv) to(vi) for the types of creditors and loan programs that are exempt from the ATR requirements. 12

13 Summary of June 2013 Changes Qualified Mortgages (QM): Loans Held in Portfolio by Small Creditors. An additional definition of a qualified mortgage for certain loans made and held in portfolio by certain small creditors. There are two additional types of Qualified Mortgages that can only be originated by small creditors. You can make these types of QMs but you have to meet two requirements 13

14 Summary of June 2013 Changes Qualified Mortgages: Balloon Loans. The June 2013 ATM/QM Concurrent Final Rule provides a transitional definition of creditors eligible to originate Balloon Payment QMs. 14

15 Summary of June 2013 Changes Qualified Mortgages: Higher-Priced Mortgage Determination. The June 2013 ATR/QM Concurrent Final Rule shifts the annual percentage rate (APR) threshold for Small Creditor and Balloon- Payment QMs from 1.5 percentage points above the average prime offer rate (APOR) on first lien loans to 3.5 percentage points above APOR. 15

16 Summary of June 2013 Changes Points and Fees Calculation: Inclusion of Loan Originator Compensation. The ATR/QM Concurrent Final Rule modifies the requirements regarding the inclusion of loan originator compensation in the points and fees calculation. ( (b)(1) and (e)(3)) 16

17 Summary of the 2013 Changes Qualified Mortgages: Determining Eligibility under the Temporary Definition. The July 2013 Final Rule clarifies how eligibility will be determined for QMs under the temporary provision allowing QM status for loans eligible for purchase, guaranty, or insurance by the GSE s or certain federal agencies. 17

18 Summary of 2013 Changes Qualified Mortgages: Determining Debt and Income under the General Definition. The July 2013 Final Rule amends and clarifies how debt and income will be determined under appendix Q for the purpose of meeting the 43% Debt to Income (DTI) requirements under the general QM provision. 18

19 What is the ATR/QM Rule About? The ATR/QM rule requires that you make a reasonable, good faith determination before or when you consummate a mortgage that the consumer has a reasonable ability to repay the loan 19

20 What is the ATR/QM Rule About? The ATR/QM rule also implements other provisions of the Dodd-Frank Act that: Limit prepayment penalties Require that you retain records for three years after consummation showing you complied with ATR and other provisions of the rule. 20

21 What transactions are covered by the ATR/QM rule? The rule applies to almost all closed-end consumer credit transactions secured by a dwelling including any real property attached to the dwelling. This means loans made to consumers and secured by residential structures that contain one to four units, including condominiums and co-ops. The ATR/QM rule is not limited to first liens or to loans on primary residences. 21

22 What loans are excluded from the rule? Open-end credit plans (home equity lines of credit, or HELOCs) Time-share plans Reverse mortgages Temporary or bridge loans with terms of 12 months or less (with possible renewal) A construction phase of 12 months or less (with possible renewal) of a construction-to-permanent loan Consumer credit transactions secured by vacant land 22

23 Title of Presentation Change in Master Slide What are the eight (8) ATR underwriting factors that must be considered and verified under the rule ( (c)(2)-4)? 23

24 HOEPA

25 2013 Home Ownership and Equity Protection Act (HOEPA) Rules January 2013, the Consumer Financial Protection Bureau (CFPB) issued the 2013 HOEPA Rule that amends TILAs Regulation Z to implement the Dodd-Frank Act s changes to HOEPA The 2013 HOEPA Rule also implements two additional Dodd-Frank counseling requirements that may apply to creditors regardless of whether or not they make high-cost mortgages. Specifically it requires or encourages consumers to obtain homeownership counseling for other types of loans. 25

26 HOEPA Rules It is important to keep in mind that these homeownership counselingrelated requirements are not amendments to HOEPA, but are separate amendments to the Real Estate Settlement Procedures Act s (RESPA s) Regulation X and the Truth In Lending Act s (TILA s) Regulation Z that apply to different types of transactions. All of the new requirements in the 2013 HOEPA Rule will apply to transactions for which you receive an application on or after January 10,

27 HOEPA Rules When you originate a high-cost mortgage, you must give additional disclosures, avoid certain loan terms, and ensure that the consumer receives additional protections, including homeownership counseling. Some parts of the 2013 HOEPA Rule are related to homeownership counseling. Whether these provisions apply does not depend on whether a loan is a high-cost mortgage. 27

28 HOEPA Rules The 2013 HOEPA Rule extends HOEPA coverage to HELOCs. HELOCs will need to be analyzed under HOEPA s coverage tests, and any HELOCs that are high-cost mortgages will be subject to most of the same requirements and restrictions as closed-end, high-cost mortgages. The 2013 HOEPA Rule provides additional guidance to help creditors apply HOPEA s coverage tests to HELOCs. 28

29 HOEPA Rules The 2013 HOEPA Rule also provides details to help creditors apply certain HOEPA requirements and restrictions to HELOCs. For example the rule tells creditors how to calculate a consumer s ability to repay a high-cost HELOC, as well as how to apply the prohibition against balloon payments to high-cost HELOCs with a draw period and a repayment period. 29

30 What types of transactions are subject to HOEPA coverage ( (a)(1)) Transactions that are secured by a consumer s principal dwelling Purchase money mortgages Refinances Closed-end home equity loans Open-end credit plans (i.e. HELOCs) 30

31 What transactions are exempt from HOEPA coverage ( (a)(2)) Reverse mortgages Construction loans Loans originated and directly financed by a Housing Finance Agency (HFA), as defined in 24 CFR Loans originated under the U.S. Department of Agriculture s (USDA s) Rural Development Section 502 Direct Loan Program However, note that these exemptions can have qualifications 31

32 Exempt Transactions You are not required to test these types of transactions against the HOEPA coverage tests These transactions do not need to comply with the restrictions on loan terms and other protections relating to high-cost mortgages These transactions may still be subject to some of the counseling rules 32

33 HOEPA Rules HOEPA applies to most types of consumer credit transactions secured by a consumer s principal dwelling. Mortgages secured by manufactured housing (whether titled as real property or personal property) and other types of personal property (e.g., an RV or a houseboat) are subject to HOEPA coverage if the dwelling is the consumer s primary residence Mortgages secured by vacation or second homes are not covered 33

34 Loan Originator Rule

35 2013 Loan Originator Rule January 2013 the CFPB issued regulations to implement the Dodd- Frank Act requirements (Loan Originator Rule) The regulations expand upon and refine earlier regulations adopted by the Board of Governors of the Federal Reserve System that became effective in April 2011 The regulations also implement Dodd-Frank Act requirements concerning loan originator qualifications that build upon existing requirements under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) 35

36 What Does the Rule Cover? Clarifies the existing definition of loan originator for purposes of the rule, including exclusions for certain employees of manufactured home retailers; servicers; seller financers; real estate brokers; management, clerical, and administrative staff; and loan processors, underwriters, and closers. Prohibits a loan originator s compensation from being based on the terms of transaction (with limited exceptions) or a proxy for a transaction term Permits contributions to and benefits under designated taxadvantaged plans and certain bonuses and other compensation under non-deferred profits-based compensation plans based on mortgagerelated business profits Prohibits loan originators in a transaction from being compensated by both a consumer and another person, such as a creditor 36

37 What Does the Rule Cover? Extends existing recordkeeping requirements concerning loan originators compensation so that they apply to creditors and other companies that hire loan originators, such as mortgage broker companies, and also lengthens the time certain records must be retained Requires loan originators to be licensed and registered if required under state or federal law and requires the organizations that hire them to ensure they are licensed or registered Requires companies that hire loan originators to make sure that their loan originator employees who are not required to be licensed and are not licensed meet certain character and fitness standards, pass a criminal background check and are appropriately trained 37

38 What Does the Rule Cover? Requires certain loan originator identification information to be included on loan documents Requires depository institutions to establish and maintain written policies and procedures to monitor compliance with various new and existing rules applicable to their loan originator employees Restricts creditors from including in their contracts mandatory arbitration clauses and provisions where consumers would waive federal statutory causes of action Restricts creditors from financing certain credit insurance premiums or fees 38

39 Overview of the Loan Originator Rule The rule generally regulates how compensation is paid to a loan originator in most closed-end mortgage transactions 39

40 Overview of the Loan Originator Rule The rule also imposes qualification duties on loan originators. They must be licensed and registered if required under the SAFE Act or other state or federal law. The rule requires that loan originators who are not required to be licensed and are not licensed to be trained on the state and federal requirements that apply to their loan origination activities. The rule also makes existing background and character screening requirements more consistent for different types of loan originators 40

41 Overview of the Loan Originator Rule Companies that hire loan originators must make sure that their employees meet the rule s requirements, including licensing or registration. Companies that hire loan originators under a brokerage agreement must make sure that their brokers meet licensing or registration requirements, but do not have to ensure that they meet other qualification requirements The rule requires that certain identification information, such as the primary originator s name and NMLSR unique identifier (NMLSR ID), and the name and NMLSR ID of the originator s employer, if any, appear on certain loan documents 41

42 Overview of the Loan Originator Rule Depository institutions must establish and maintain written policies and procedures to monitor compliance with the provisions on compensation, qualifications, identification, and steering contain in

43 Overview of the Loan Originator Rule The rule implements two other provisions of the Dodd-Frank Act that apply to most closed-end mortgage loans and to HELOCs secured by the consumer s principal dwelling. These provisions are: Prohibit mandatory arbitration clauses in contracts Prohibit contracts from being interpreted to waive federal statutory causes of action Prohibit certain financing of credit insurance premiums or fees (but allow consumers to pay credit insurance that is calculated on a monthly basis) 43

44 Overview of the Loan Originator Rule If applicable you must start following the provisions on compensation, qualification, identification, and establishing and maintaining written policies and procedures to monitor compliance on January 10, 2014 The effective date for the prohibition of financing credit insurance is January 10, Originally this was to be effective June 1, 2013 but was delayed Effective June, 2013, you must make sure that your contracts for closed-end and HELOC mortgage loans do not contain mandatory arbitration clauses or waives federal claims. 44

45 What Loans Does the Rule Cover? Almost all closed-end consumer credit transactions secured by a dwelling (including any real property attached to the dwelling) are subject to the provisions on compensation, qualification, identification, and the establishment and maintenance of written policies and procedures for compliance This includes loans made to consumers that are secured by residential structures that contain one to four units, including condominiums and co-ops. It is not limited to first liens or to loans on primary residences 45

46 What Loans Does the Rule Cover? The provisions on compensation, qualification, identification, and the establishment and maintenance of written policies and procedures do not apply to: Open-end credit plans including HELOCs Time-share plans 46

47 What Loans Does the Rule Cover? The prohibitions on mandatory arbitration clauses, waivers of federal claims, and certain financing practices for credit insurance apply to closed-end consumer credit transactions secured by a dwelling (except certain time-share plans) and to HELOCs secured by a consumer s principal dwelling 47

48 ECOA

49 Equal Credit Opportunity Act (ECOA) Valuations Rule In 2010 the Dodd-Frank Act amended ECOA provisions to provide guarantees that applicants receive important information about their home value estimates January 2013, to implement these amendments, the CFPB finalized the Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the ECOA (Regulation B) 49

50 What Does the ECOA Valuations Rule Require? It requires creditors to disclose to applicants that they have the right to receive copies of appraisals and written valuations It also requires creditors to automatically send a free copy of home appraisals and other written valuations promptly after they are completed, regardless of whether credit is extended, denied, incomplete, or withdrawn The new rule applies to all written valuations (not just appraisals) that you develop in connection with an application for covered transactions. It covers all first liens on dwellings, including closed-end mortgage loans and open-end loans 50

51 What is the ECOA Valuation Rule? Under the ECOA Valuation Rule: You have three business days to notify the applicant of their right to receive a copy of appraisals when you receive an applicant s application You must promptly share copies of appraisals and other written valuations with the applicant Promptly means promptly upon completion, or at least three business days before consummation (for closed-end credit) or account opening (for openend credit), whichever is earlier The applicant can waive the right to receive copies of the appraisal or other written valuations in advance of closing, but in those cases, you must still deliver the copies at or prior to consummation or account opening 51

52 What is the ECOA Valuation Rule? If you do not consummate the loan or open the account and the applicant has provided a waiver, you have 30 days after you determine that the loan will not consummate or open to send a copy of the appraisal and other written valuations You cannot charge for copies of appraisals or other written valuations, but you can charge the applicant a reasonable fee to reimburse you for the cost of preparing appraisals and other written valuations, unless applicable law prohibits it or otherwise restricts it. You may not upcharge consumers by adding fees to the cost of preparing the appraisal or other written valuations You must follow the ECOA Valuation Rule for applications received on or after January 18,

53 Which Loans are Covered by the ECOA Valuation Rule? The rule covers applications for closed-end or open-end credit secured by a first lien on a dwelling. 53

54 Which Loans are not Covered by the ECOA Valuation Rule Second liens and other subordinate loans and loans that are not secured by a dwelling (such as loans secured solely by land) 54

55 TILA - HPML

56 TILA Higher-Priced Mortgage Loans (HPMLs) Appraisal Rule In 2010, TILA was amended by the Dodd-Frank Act to require rules for appraisals on principal residences securing higher-priced loans To implement these TILA amendments, the CFPA along with five other federal regulatory agencies, adopted a new rule, the Higher-Priced Mortgage Loans (HPML) Appraisal Rule This rule is part of Regulation Z 56

57 TILA HPMLs Appraisal Rule Mortgage loans are HPMLs if they are secured by a consumer s principal dwelling and have interest rates above certain thresholds 57

58 TILA HPMLs Appraisal Rule When you originate a higher-priced first-lien or subordinate lien loan covered by the HPML Appraisal Rule there are certain things that you must do 58

59 TILA HPMLs Appraisal Rule Obtain an additional appraisal at your own expense if the property s seller acquired the dwelling within the past 180 days and is reselling it for a price that exceeds certain thresholds Provide a disclosure within three business days of application explaining the consumer s rights with regards to appraisals Give consumers free copies of the appraisal reports performed in connection with the loan at least three days before consummation of the transaction 59

60 TILA HPMLs Appraisal Rule When you originate first-lien mortgages covered by the HPML Appraisal Rule, you must also consider the requirements of the ECOA There are also several exemptions from the rule, as well as from the rule s requirement to obtain an additional appraisal for purchases of flipped properties that exceed specified price thresholds Among other exemptions, HPMLs that meet the Qualified Mortgage standards in section (e) of Regulation Z are exempted from HPML Appraisal Rule. You need to comply with the HPML Appraisal Rule only if you originate HPMLs that are not Qualified Mortgages You must comply with the HPML Appraisal Rule for applications received on or after January 18,

61 Which Loans are Covered by the HPML Appraisal Rule The rule applies to higher-priced, first-lien or subordinate-lien closedend loans secured by a consumer s principal dwelling, which are not otherwise exempt under the rule How do you know a loan is higher-priced? 61

62 Which Loans are not Covered by the HPML Appraisal Rule? The rule exempts these loans from all requirements: Qualified Mortgages as defined in Regulation Z (e) Reverse mortgages Bridge loans (for 12 months or less and intended to be used to acquire a new principal dwelling) Loans for initial construction of a dwelling (not limited to loans of 12 months or less) Loans secured by new manufactured homes Loans secured by boats, trailers, and mobile homes 62

63 RESPA and TILA

64 TILA Escrow Rule This rule implements statutory changes made by the Dodd-Frank Act that lengthen the time creditors must collect and manage escrows for higher-priced mortgage loans. It helps to ensure that consumers set aside funds to pay property taxes, homeowner s insurance premiums, and other mortgage-related insurance required by the creditor The final TILA Escrow Rule was effective for applications received on or after June 1,

65 TILA Escrow Rule The final TILA Escrow Rule has three main elements: 1. After you originate a HPML secured by a first-lien on a principal dwelling, you must establish and maintain an escrow account for at least five years regardless of loan-to-value ratio How long must you maintain the escrow account? 65

66 TILA Escrow Rule 2. You do not have to escrow for insurance premiums for homeowners whose properties are located in condominiums, planned unit developments, and other common interest communities where the homeowners must participate in governing association that are required to purchase master insurance policies 3. If you operate predominantly in rural or underserved areas and meet certain asset size and other requirements, you may be eligible for an exemption from the rule for certain loans you hold in portfolio 66

67 2013 Real Estate Settlement Procedures Act (RESPA) (Regulation X) and TILA (Regulation Z) Mortgage Servicing Final Rules The Regulation X rule addresses: Error resolution and information requests ( and ) Force-placed insurance ( ) General servicing policies, procedures, and requirements ( ) Early intervention with delinquent consumers ( ) Continuity of contact with delinquent consumers ( ) Loss mitigation ( ) 67

68 RESPA and TILA Mortgage Servicing Rules The Regulation Z rule addresses: Interest rate adjustment notices for ARMs ( ) Prompt crediting of mortgage payments and responses to requests for payoff amounts ( ) Periodic statements for mortgage loans ( ) 68

69 RESPA and TILA Mortgage Servicing Rules These rules take effect January 10, 2014 ARM regulations (c) and (d) apply to ARMs originated both prior to and after the January 10, 2014, effective date 69

70 RESPA and TILA Mortgage Servicing Rules These rules generally apply to mortgage loans. Servicers that qualify as small servicers are exempt from certain parts of the Mortgage Servicing Rules. You are a small servicer if you meet the following criteria: You, together with any affiliates, service 5,000 or fewer mortgage loans, and you (or an affiliate) are the creditor or assignee for all of them You are a Housing Finance Agency, as defined in CFR ( (e) (4) (ii)) 70

71 Implementation Considerations

72 Implementation and Compliance Considerations You should consult with legal counsel or your compliance officer to understand your obligations under all of these new rules For each part of the new rules you should identify affected products, departments, and staff Identify what business process, operational, and technology changes will be necessary for compliance Identify the impacts on key service providers or business partner impacts 72

73 Implementation and Compliance Considerations Identify training needs Consider all of the Title XIV rules Get started Do not wait 73

74 References CFPB Compliance Guides for: Ability to Repay/Qualified Mortgage 2013 HOEPA Rule Loan Originator Compensation ECOA Valuations TILA HPML Appraisals Escrows TILA and RESPA Servicing 74

75 Contact Information Experis Finance Baltimore Office 1 South Street (Suite 840) Baltimore, MD Cathy Dunn, Risk Advisory Professional (410) Bill Turner, Director Risk Advisory Services

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