1 Regulatory Practice Letter February 2013 RPL High Cost Mortgages and Homeownership Counseling; Escrow Requirements - CFPB Final Rules Executive Summary The Bureau of Consumer Financial Protection ( CFPB or Bureau ) released a final rule on January 10, 2013, to amend Regulation Z, which implements the Truth-in- Lending Act ( TILA ), to address provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) that: Expand the types of mortgage loans subject to the Home Ownership and Equity Protection Act ( HOEPA ) by including purchase money mortgage loans and home equity lines of credit ( HELOCs ); Revise the high cost mortgage triggers used to identify mortgage loans covered by HOEPA by lowering the relevant annual percentage rates ( APRs ) and points and fees thresholds, and adding a trigger for certain prepayment penalties; and Impose certain other requirements on mortgage loans covered by HOEPA, including a pre-counseling requirement. The final rule also amends Regulation Z and Regulation X, which implements the Real Estate Settlement Procedures Act ( RESPA ), to impose other requirements related to homeownership counseling including: A requirement for lenders to distribute a list of homeownership counselors or counseling organizations to consumers within three days after applying for any mortgage loan; and A requirement that first-time borrowers receive homeownership counseling before taking out a negatively amortizing loan. The CFPB issued this final rule to be effective January 10, This final rule is substantially similar to the proposed rule issued in 2012 (see Regulatory Practice Letter 12-15) with minor adjustments and revisions. Also on January 10, 2013, the CFPB separately issued a final rule to amend Regulation Z to address provisions of the Dodd-Frank Act relative to escrow accounts that are maintained for higher-priced mortgage loans (which are defined differently than the high-cost mortgages under HOEPA and discussed more fully later in this Regulatory Practice Letter) secured by a first lien on a primary dwelling, and other issues related to escrow accounts. This rule is effective June 1, 2013 for applications received by creditors on or after that date.
2 Background The Home Ownership and Equity Protection Act was enacted in 1994 as an amendment to TILA to provide additional protections to consumers of certain mortgage loans with high interest rates or high fees. At that time, the statute applied to closed end mortgage credit generally, but excluded purchase money mortgages and reverse mortgages. Loans that met HOEPA s established high interest rate or high fee trigger thresholds were determined to be high-cost mortgages and were subject to special disclosure requirements and restrictions on loan terms. High cost mortgages governed by Regulation Z under the HOEPA provisions are different from higher-priced mortgage loans under Regulation Z, which were introduced in 2008 by the Federal Reserve Board and are generally defined as having APRs lower than high-cost mortgages but above the average prime offer rate ( APOR ) by prescribed amounts. Description High-Cost Mortgages The CFPB s final rule implements changes to the HOEPA regulations governing high cost mortgages imposed by the Dodd-Frank Act. Scope of Coverage Consistent with the proposed rule, the final rule amends Regulation Z to expand the scope of loans to be considered for HOEPA requirements to include most types of mortgages secured by a consumer s principal dwelling including purchase money mortgage loans, refinances, closed-end home-equity loans, and open-end credit plans such as HELOCs. The current exclusion for reverse mortgage loans has been retained in the final rule. The final rule also exempts three types of loans from HOEPA coverage that the CFPB believes do not present the same risk of abuse as other loans. These loan types include loans; To finance the initial construction of a dwelling; Originated and financed by Housing Finance Agencies; and Originated through the United States Department of Agriculture s ( USDA ) Rural Housing Service section 502 Direct Loan Program. Coverage Tests The final rule amends Regulation Z, substantially as proposed, to implement the Dodd- Frank Act modifications to the interest rate and fee thresholds that trigger application of the HOEPA requirements for the scope of covered loans. Under the final rule, a high-cost mortgage means any consumer credit transaction, other than a reverse mortgage transaction or one of the exempt loan types added by the final rule (discussed above), that is secured by a consumer s principal dwelling and in which any one of the prescribed thresholds is met: The loan s APR exceeds the APOR of a comparable transaction by: 6.5 percentage points for most first-lien mortgages, or 8.5 percentage points for a first lien transaction if the dwelling is personal property and the total loan amount is less than $50,000, or
3 8.5 percentage points for a subordinate lien mortgage. The loan s points and fees (other than bona fide charges not retained by the mortgage originator, creditor or an affiliate) exceed 5 percent of the total transaction amount, or an amount equal to the lesser of 8 percent or $1,000 for loans below $20,000. This dollar figure is to be adjusted annually for inflation. The credit documents permit a prepayment penalty charge more than 36 months after loan consummation or account opening, or aggregate penalties that exceed more than 2 percent of the amount prepaid. The interest rate used to determine HOEPA coverage for variable-rate loans or credit plans would be the maximum interest rate that may be imposed over the term of the loan or, as appropriate, the maximum margin permitted at any time during the loan or plan, added to the value of the index rate in effect at consummation or account opening. The APOR for open-end credit plans would be determined based on the APOR for the most closely comparable closed-end mortgage loan. The definition of points and fees for closed-end mortgage loans conforms to the definition included in the Bureau s final rule requiring creditors to assess a consumer s ability to repay a mortgage loan (see Regulatory Practice Letter 13-05). Restrictions on Loan Terms and Practices The final rule also implements new Dodd-Frank Act restrictions and requirements concerning loan terms and origination practices associated with high-cost mortgages. For example: Balloon payments are largely banned with the exception of the following: to account for seasonal or irregular income of the borrower, included as part of a short-term bridge loan, or if creditors meet specific criteria such as predominantly operating in rural or underserved areas. Creditors are prohibited from charging prepayment penalties or financing points and fees. Late fees are restricted to 4 percent of the payment that is past due, fees for providing payoff statements are restricted, and fees to modify, renew, extend or amend a high-cost mortgage are prohibited. Creditors originating open-end credit plans are required to assess consumers ability to repay the loans. Creditors and mortgage brokers are prohibited from recommending or encouraging a consumer to default on a loan or debt to be refinanced by a highcost mortgage. Creditors are required to obtain confirmation from a Federally-certified or approved homeownership counselor that the consumer has received counseling on the advisability of the loan, before making a high cost mortgage. The counselor must be independent of the creditor. Other Homeownership Counseling Provisions In addition to the high-cost mortgages provisions specific to HOEPA, the Bureau s final rule imposes additional homeownership counseling requirements that are not specific to HOEPA. In particular, the final rule: Amends Regulation X to require that lenders, mortgage brokers or dealers provide a list of homeownership counselors or organizations to consumers within three business days of receiving from the consumer an application or sufficient information to complete an application for a mortgage loan. The rule applies to all
4 Federally-related mortgage loans, including purchase money mortgage loans, refinancing and HELOCs. Reverse mortgage loans and mortgage loans secured by a timeshare are specifically excluded. For compliance with this requirement, the lender must obtain the list from either a Web site that will be developed by the CFPB or data that will be made available by the Bureau or the Department of Housing and Urban Development ( HUD ) no more than 30 days prior to providing it to a consumer. A mortgage broker or dealer would be permitted to provide the list to the consumer but the lender would be required to ensure that such a list complied with the rule. Amendments to Regulation Z to implement a requirement under TILA stating that creditors must obtain confirmation that a first-time borrower has received homeownership counseling from a Federally-certified or approved homeownership counselor or counseling organization before making a negative amortization loan to the borrower. (A negative amortization loan has a payment schedule that can cause the loan s principal balance to increase over time.) Escrow Requirement Revisions The CFPB issued a final rule governing escrow accounts under Regulation Z. In general, the final rule: Lengthens the time for which a mandatory escrow account established for a higher-priced mortgage loan must be maintained from at least one year to at least five years after origination and measured from the consummation of the loan. A higher-priced mortgage loan is a closed-end mortgage loan with an APR that exceeds the APOR for a comparable transaction by 1.5 percentage points for a first-lien mortgage, 2.5 percentage points for a first-lien mortgage that exceeds the maximum principal obligation set by Freddie Mac (commonly referred to as a jumbo loan), and 3.5 percentage points for a second-lien mortgage. The rule applies to mortgages secured by a dwelling, including manufactured homes, boats and trailers used as a consumer s principal dwelling. In addition, the rule does not apply to transactions secured by shares in a cooperative, a construction loan, a temporary or bridge loans with a term of 12 months or less, or a reverse mortgage. In general, a creditor may cancel an escrow account on the earlier of 1) termination of the underlying debt obligation, or 2) at the request of the consumer, though no earlier than five years after consummation. However, the escrow account may not be cancelled if: The unpaid balance is more than 80 percent of the original value of the property at consummation; or The consumer is currently delinquent or in default on the loan. Creates an exemption for small creditors that operate predominately in rural or underserved areas. Eligible creditors need not establish escrow accounts for higher-priced mortgage loans they originate and intend to hold in portfolio, however they must establish escrow accounts at consummation for mortgages if they are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption. Eligibility for the exemption requires the:
5 Creditor must make more than half of its first-lien mortgages in rural or underserved areas (as defined in the rule); Creditor must have an asset size of less than $2 billion; Creditor together with all affiliates must have originated 500 or fewer firstlien mortgages during the preceding calendar year; and Creditor together with all affiliates must not escrow for any mortgage it or its affiliates currently services, except in limited instances. Expands an existing exemption from escrowing for insurance premiums for condominium units, to include other situations in which an individual consumer s property is covered by a master insurance policy. Property taxes are not included in this exemption. The final rule becomes effective June 1, Commentary The Bureau states that it expects, based on HMDA (Home Mortgage Disclosure Act) data, only a small fraction of loans would qualify as high-cost mortgages under the final rule and that few creditors would make a large number of high-cost mortgages. Nevertheless, the combined effect of expanding the scope of covered loans, decreasing the interest rate trigger thresholds and adding new triggers has the potential to increase substantially the number of loans potentially subject to HOEPA requirements. All creditors, including those that do not engage in HOEPA lending, will need to reassess and update their policies and procedures, systems requirements and training programs to incorporate the new requirements and definitions by the effective dates. The new requirements for housing-related counseling under HOEPA and RESPA underscore the CFPB s mission of consumer protection and fairness. The Regulation X provisions, in particular, ensure that virtually all consumers seeking a mortgage loan will receive information regarding the opportunity for homeownership counseling. For creditors, the provisions require the information must be current (no more than 30 days old) and provided within three days of receiving an application. Other considerations include the following points: Systems and recordkeeping requirements will need to be updated to address the new escrow requirements and definitions applicable to higher-priced mortgage loans under the final escrows rule. Smaller creditors must track ongoing compliance with the small creditor parameters (such as limits on the number of loans made) to ensure ongoing compliance with the rule. The definition of points and fees is consistent with the definition that is part of the Bureau s final rule governing ability to repay and Qualified Mortgages and includes direct and indirect loan originator compensation as well as closing
6 Regulatory Practice charges paid to affiliated settlement providers, which may place upward pressure on the amount of points and fees paid by consumers and increase the number of loans subject to HOEPA. The CFPB intends to address the redefinition of the finance charge in its rulemaking to integrate TILA and RESPA mortgage disclosures, which is expected to be released later in Once finalized, the thresholds applicable to highcost mortgages and higher-priced mortgage loans may require additional operating adjustments. Contact us: This is a publication of KPMG s Financial Services Regulatory Practice Contributing authors: Linda Gallagher, Principal: Amy Matsuo, Principal: Jeff Hulett, Managing Director: Earlier editions are available at: ublications/regulatory-practice-letters/pages/default.aspx ALL INFORMATION PROVIDED HERE IS OF A GENERAL NATURE AND IS NOT INTENDED TO ADDRESS THE CIRCUMSTANCES OF ANY PARTICULAR INDIVIDUAL OR ENTITY. ALTHOUGH WE ENDEAVOR TO PROVIDE ACCURATE AND TIMELY INFORMATION, THERE CAN BE NO GUARANTEE THAT SUCH INFORMATION IS ACCURATE AS OF THE DATE IT IS RECEIVED OR THAT IT WILL CONTINUE TO BE ACCURATE IN THE FUTURE. NO ONE SHOULD ACT UPON SUCH INFORMATION WITHOUT APPROPRIATE PROFESSIONAL ADVICE AFTER A THOROUGH EXAMINATION OF THE FACTS OF THE PARTICULAR SITUATION KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International WDC