The CFPB s New Mortgage Rules: Is Your Financial Institution Ready?

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1 BSA COMPLIANCE LOAN REVIEW VENDOR REVIEW MORTGAGE REVIEW The CFPB s New Mortgage Rules: Is Your Financial Institution Ready? September 18, 2013 Presented by: David Senior, Director of Enterprise Risk Management

2 Mortgage Reform - Seven Final Rules 3,500 pages of complicated changes in Rules Ability- to-repay & (QM) Rules Loan Originator Compensation Rule ECOA Appraisal Rule Escrows Rule (HPML) Appraisal Rule (HPML) Homeownership Counseling (HPML) Servicing Rule

3 Ability-To-Repay (ATR) Rules January Rule Applies To Closed end consumer transaction secured by 1 st or 2 nd lien Exceptions to Rule Bridge Construction Loans HELOC Timeshares, Reverse Mortgages Two Ways To Comply Make a Qualified Mortgage or Determine Ability-to-Repay By applying eight underwriting criteria

4 Ability-To-Repay Elements Four Basic Elements Consider eight criteria Apply the criteria Verify the information Qualify Presumed complied with first three if issued Low priced higher quality loan {QM - Safe Harbor} or Higher priced lower quality loan {HPML - Rebuttable presumption} Exceptions GSE / Agency Loans {Temporary QM Status} Under written FreddieMac, FannieMae guidelines Small Creditor Balloon-Payment QM s Covered transaction with a Balloon Payment Meets all other criteria for QM 50% portfolio in covered transactions secured by 1 st lien on properties in county designated as rural and underserved by CFPB

5 Ability-To-Repay Elements Consider and Apply Eight Criteria Income or assets Employment status Payments on new mortgage loan Payment on other loan Payment for mortgage related obligations Alimony and child support Debt-to-income ratio or residual income (calculation) Credit History Verify and Document Income resources Financial Resources

6 Ability-to-Repay Elements Qualify As Qualified Mortgage Meet Three Standards No excess up front fees or points No toxic loan features such as: More than 30 year terms Interest-only payments Negative amortization features Balloon payments Maximum DTI ratio 43% Riders to the Rule Prohibits Prepayment penalties (except fixed rate loans} Document / Record Retention {two to three years} Prohibits Evasion {structuring closed end loan as a open end credit}

7 Question # 1 Has your Bank decided to: A. Get out of the mortgage business all together B. Make Qualified Mortgages only C. Make both Qualified and Non-Qualified Mortgages D. Undecided

8 Loan Originator Compensation Rule January Rule Defines Term of transaction Any right or obligation of the parties to a credit transaction Clarifies definition of proxy and loan originator Prevent Evasion Prohibits compensation reductions to offset the cost of a change in transaction terms, known as Pricing Concessions Prohibits dual compensation Imposed duties on employer to check qualifications Prohibits mandatory arbitration clauses Prohibits financing of single premium insurance Document / retention records {two to three years}

9 ECOA Appraisal Rule January Rule {Amends Reg. B} Revises the disclosure and delivery requirements for Appraisals Other Valuations Applies to Consumer credit secured by 1 st lien on a dwelling Closed end and open end credits Renewals if creditor obtains another appraisal or valuation

10 Higher Priced Mortgage Loan Rules January Rule Adopted several sets of rules Escrow Rule Expanded HPML escrow requirement Amended HPML definition Appraisal Rule Requires written appraisals for 1 st and 2 nd lien HPML High Cost Mortgage Rule Revised Reg. Z HOEPA Ability to Repay Rule Eliminated Prepayment Penalty HPML Defined A consumer credit transaction secured by the consumers principal dwelling with an APR that exceeds the APOR for a comparable transaction as of the date the interest rate set by 1.5% or more for (1 st lien) or by 3.5% for (2 nd lien).

11 High Cost Mortgage Rule January Rule Amended Definition High Cost Mortgage Expanded Scope Apply to purchase money loans Altered Coverage Test Thresholds Three tier coverage test Added Restrictions

12 Regulation X Servicing Rule January Rule Added Limited Commentary Commentary Addresses Ten Topics Organization and scope of new and revised servicing related provisions Mortgage servicing transfers Timely escrow payments and treatment of escrow balances after payoff Error resolution procedures Information request procedures Force placed insurance General servicing polices, procedures and requirements Early intervention requirements Continuity of contract Loss mitigation procedures Excludes Certain Loan Types

13 Regulation Z Servicing Rule January Rule Addresses Adjustment notices for adjustable rate mortgages Periodic Statements for residential mortgages Prompt crediting of mortgage payments Responding to requests for payoffs

14 Information Overload

15 Mortgage Origination Rules Chart

16 QUESTION #2 Has your institution started a formal process to implement changes? Yes No

17 Where To Begin??

18 Getting Started Project Plan Assembling Team Appoint Project Manager Determine Scope of Project Develop Project Plan Assign Task Establish Timelines Perform Testing

19 Designing Implementation Plan

20 Items To Consider Bank Direction Direction from board Review existing mortgage loans Amend and create policies Amend and create procedures Software Changes Loan document changes Notices and forms Employee training

21 QUESTION #3 What is your Institution s major compliance concern? A. Risk Assessment B. Compliance Management Model C. Transactional Testing Specific Areas D. Implementing Change E. I have no concerns

22 September 6, 2013 Stronger And More Assertive September 6, 2013

23 Compliance Violations May Be Costly $112 Million $214 Million $210 Million CFPB Orders Auto Lenders to Refund $6.5 Million To Servicemembers $1.9 Billion $4.5 Million $6.5 Million $80 Million $10 Million

24 What The Future Holds

25 Market Reaction Experts Predictions Cost of credit higher for Non-Qualified Mortgage Lenders finding a balance to avoid liabilities and penalties Reduction in mortgage availability in market Challenge of compliance and litigation risk Constrict access to credit to those who need it most Lenders reluctant to make Non-Qualified Mortgages Non-Qualified Mortgage loans risky because the specific underwriting requirements of the ATR regulation invite borrowers to litigate

26 Helpful Resource Sites dbf.georgia.gov

27 CFPB Readiness Guide

28 Questions?? ENTERPRISE RISK MANAGEMENT DIVISION DAVID E. SENIOR, CLBB, CRC DIRECTOR

29 Join us for our next WEBINAR! Changes Ahead: 2013 COSO Internal Controls Framework Wednesday, November 6, 2013: 3:00-4:00pm (EST) Register Today!