New Loan Origination and Mortgage Servicing Rules

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1 5/15/ New Loan Origination and Mortgage Servicing Rules Personal Finance Seminar for Professionals University of Maryland Extension Presenter: Diane Cipollone, Esq. Director of Training National Fair Housing Alliance (mobile) 2 1

2 5/15/ Part I Loan Origination Ability to Repay and Qualified Mortgages Part II Mortgage Servicing Rules for Borrowers in Default Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB) Transferred regulatory, supervisory and enforcement authority to CFPB for numerous consumer financial protection and mortgage related laws including o Equal Credit Opportunity Act (ECOA) o Home Mortgage Disclosure Act (HMDA) o Fair Debt Collections Practices Act (FDCPA) o Truth-in-Lending Act (TILA) o Real Estate Settlement Procedures Act (RESPA) U.S. Department of Justice also has authority to enforce ECOA HUD and U.S. Department of Justice retain authority to enforce the federal Fair Housing Act 4 2

3 5/15/ Consumer Financial Protection Bureau Congress gave the CFPB authority over large banks, private student lenders, mortgage companies, and certain other businesses that offer credit Mandated creation of Office of Fair Lending and Equal Credit Opportunity within the CFPB o Office of Fair Lending is responsible for ensuring fair, equitable, and nondiscriminatory access to credit o Office of Fair Lending works with CFPB Office of Supervision and Office of Enforcement to ensure compliance with ECOA and HMDA o CFPB will refer Fair Housing Act violations to Department of Justice 5 Consumer Financial Protection Bureau Issues Bulletins Guidance for the Industry Conducts fair lending and compliance reviews at financial institutions across the country Brings enforcement actions not limited to fair lending Submit a complaint on-line if you think you have been discriminated against or have any other type of complaint regarding a lender, mortgage servicer or any other consumer financial transaction 6 3

4 5/15/ Mortgage Reform and Anti-Predatory Lending Act Part I of this presentation covers the new CFPB Rules in Regulation Z - implementing the TILA amendments regarding loan origination aspects of these reforms New Regulation Z Rules are effective in connection with loan applications received on or after January 10, Part II covers the mortgage servicing reforms under TILA (Regulation Z) and RESPA (Regulation X) o Emphasis on Servicer s obligations to assist borrowers in default or in imminent default 7 Mortgage Reform and Anti-Predatory Lending Act Mortgage Reform Act passed to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable, and not unfair, deceptive or abusive Reforms in response to predatory and deceptive practices that led to foreclosure crisis, such as qualifying borrower for loan approval based on: o Low introductory teaser rates for adjustable rate mortgages (ARMs) o Deceptively low monthly payments with balloon mortgages, interest only payments (IO), and payment option ARMs that result in negative amortization 8 4

5 5/15/ Mortgage Reform and Anti-Predatory Lending Act Reforms in response to predatory and deceptive practices such as qualifying borrower for loan approval based on: o Failing to consider taxes and insurance in monthly mortgage obligation o Stated Income No documentation loans o Borrower s equity in property Reforms in response to unfair practices such as: o Excessive points, fees and higher than required interest rates o Excessive prepayment penalties o Mandatory Arbitration Clauses 9 Question I Prohibitions Which of the following are now prohibited? o Loans that do not escrow for taxes and insurance o Adjustable Rate Mortgages (ARMs) o Interest Only Mortgages (IO) o Mortgages with Balloon Payments o "Stated Income Loans also known as No Documentation Loans" o Subprime Loans o 40 year Loans o Payment Option ARMs o Prepayment Penalties o Loans with Points and Fees Exceeding 3% of the Loan Amount o Loans with Negative Amortization 10 5

6 5/15/ Answer Question I Prohibitions The only aspect of loan origination in the list in Question I that is prohibited by the new rules: o A residential mortgage loan based on Stated Income Also known as a No Documentation or No Income/No Assets Loan 11 Prohibited and Required Practices The Truth in Lending Act (15 U.S.C et seq.) was amended to add the following: o No creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments 12 C.F.R o Minimum standards for transactions secured by a dwelling o 12 C.F.R (c) Ability to Repay 12 6

7 5/15/ Ability to Repay Lenders may still offer all of these loan terms and conditions as long as lender makes a reasonable determination that the borrower has the Ability to Repay (ATR) the loan: o ARMs o Interest Only Payments o Balloon Mortgages o Subprime Loans o 40 Year Loans o Payment Option ARMS with Negative Amortization o Prepayment Penalties 13 Question II Covered Transactions The Ability to Repay Rules apply to which of the following types of loans? o Reverse Mortgages o Home Equity Lines of Credit (HELOCs) o Closed-end mortgages on residential property o Personal loans for housing purposes, for example, a personal loan to repair or rehab the house 14 7

8 5/15/ Answer Question II Covered Transactions ATR Rules apply only to closed-end mortgages on residential property The ATR Rules do not apply to o Reverse Mortgages o Home Equity Lines of Credit (HELOCs are open-end credit) o Personal loans for housing purposes But the Fair Housing Act covers unsecured loans for the purpose of purchasing, constructing, improving, repairing or maintaining a dwelling 15 Answer Question II Covered Transactions Ability to Repay applies to closed-end consumer credit transactions secured by a dwelling o Loans made to consumers that are Secured by residential structures that contain one to four units, including condominiums and co-ops o Unlike some other mortgage rules, the ATR rule is not limited to first liens or to loans on primary residences 16 8

9 5/15/ Reasonable Determination that the Consumer has the Ability to Repay Creditors generally must consider and verify eight underwriting factors and use reasonably reliable thirdparty records to verify the information used to evaluate these factors: 1. Current or reasonably expected income or assets 2. Current employment status 3. Monthly payment on the covered transaction 4. Monthly payment on any simultaneous loan 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 Does not dictate particular underwriting models 17 Reasonable Determination that the Consumer has the Ability to Repay Monthly payment on the covered transaction o Calculate payment based on fully amortizing loan schedule (for ex., if Interest Only or a Balloon Mortgage) o For ARMs calculate payment using greater of the fully indexed rate or introductory rate The fully-indexed interest rate is calculated by adding the margin to the index at the time the loan is made Typical indexes are the prime rate, LIBOR, and various U.S. Treasury bills and note rates 18 9

10 5/15/ Calculating Fully-Indexed Rate Introductory rate is 5% for first 2 years Index is 6 month LIBOR (typical subprime index) o London Interbank Offered Rate At origination, 6 month LIBOR is 4% Margin is 3% 4% Index + 3% Margin 7% Fully Indexed Rate at Origination 19 Calculating ATR for Adjustable Rate Mortgage Calculate using greater of introductory rate at 5% or fully-indexed rate at 7% Monthly payment of P&I on $150,000 loan at 7% is $ Compare to P&I at intro rate of 5% - $ Difference of $ Must now qualify borrower based on higher potential monthly payment 20 10

11 5/15/ Reasonable Determination that the Consumer has the Ability to Repay Consider monthly payment for mortgage-related obligations o Taxes and insurance, and, as applicable - condo/association dues, mortgage insurance, flood insurance and any assessments related to the property (water/sewer hook-up fees for example) Consider monthly payment on any simultaneous loan o Junior closed-end mortgages and HELOCs 21 Creditors and Loan Programs Exempt from Ability-to-Repay Requirements Exempt from the ATR requirements, under certain conditions: o Community Development Financial Institutions (CDFIs) o Creditors designated by HUD as either a Community Housing Development Organization or o Downpayment Assistance Provider of Secondary Financing 22 11

12 5/15/ Creditors and Loan Programs Exempt from Ability-to-Repay Requirements 501(c)(3) nonprofit organizations that o Extend credit no more than 200 times annually o Provide credit only to low-to-moderate income consumers o Follow their own written procedures to determine that consumers have a reasonable ability to repay 23 Creditors and Loan Programs Exempt from Ability-to-Repay Requirements Extensions of credit made pursuant to certain loan programs are exempt from the ATR requirements o Housing finance agencies directly to consumers o Other creditors pursuant to a program administered by a housing finance agency o Extensions of credit made pursuant to an Emergency Economic Stabilization Act program, such as a State Hardest Hit Fund program 24 12

13 5/15/ Question III Qualified Mortgage A Qualified Mortgage (known as QM) is the same thing as Ability to Repay (ATR) True or False 25 Answer Question III Qualified Mortgage A Qualified Mortgage (known as QM) is the same thing as Ability to Repay (ATR) False 26 13

14 5/15/ What is a Qualified Mortgage? 12 C.F.R (e) A Qualified Mortgage is a loan based on Ability to Repay that does not have any of the following features: o Negative amortization o Interest-only payments o Loan terms longer than 30 years o Points and fees exceeding 3 percent of the total loan amount Higher thresholds for loans under $100,000 o Balloon payment Exception allowed for small rural creditors 27 Qualified Mortgages There are four types of QMs o General QMs o Temporary QMs Can be originated by any creditor, regardless of the creditor s size Small Creditor Small Creditor Balloon-Payment QMs Can be originated only by Small Creditors 28 14

15 5/15/ General Qualified Mortgage General QM also requires creditor to o Underwrite ARM payment based on fully amortizing schedule using the maximum rate in first 5 years o Consider and verify the consumer s income or assets, current debt obligations, alimony and child-support obligations o Determine that the consumer s total monthly debt-toincome ratio is less than or equal to 43 percent 29 Temporary Agency/GSE QM Temporary Agency/GSE QM More flexible underwriting requirements (i.e., can have DTI greater than 43%) so long as loan does not have any of the following features: o Negative amortization o Interest-only payments o Loan terms longer than 30 years o Points and fees exceeding 3 percent of the total loan amount Exception - higher thresholds for loans below $100,000 o Balloon payment 30 15

16 5/15/ Temporary Agency/GSE QM Temporary Agency/GSE QM o Must also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs (Fannie Mae and Freddie Mac) while they operate under Federal conservatorship or receivership; or (2) FHA, VA, USDA or Rural Housing Service 31 Temporary Agency/GSE QM Temporary Agency/GSE QM Temporary QM will phase out the earlier of date these federal agencies issue their own QM rules/date GSE conservatorship or receivership ends/or January 10, 2021 o GSEs issued Guidance in May 2013 o HUD issued QM Rule in December 2013 Possible to have Temporary Agency/GSE QM with DTI greater than 43% 32 16

17 5/15/ Why Originate a Qualified Mortgage? The Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor satisfied the ability-to-repay requirements The final rule provides a safe harbor for a QM that is not higher-priced (prime rate loan) The final rule provides a rebuttable presumption for higher-priced QM (subprime loan) See 12 C.F.R (b)(4) for definition of higherpriced QM mortgage Why Originate a Qualified Mortgage? Safe harbor for a QM that is not higher-priced Creditor of a prime rate QM will be conclusively presumed to have made a good faith and reasonable determination of the consumer s ability to repay Safe harbor means that the Consumer does not get opportunity to rebut this strong presumption if it is a QM loan Consumer Advocacy Organizations strongly opposed safe harbor in comments on the proposed rule

18 5/15/ Why Originate a Qualified Mortgage? Safe harbor for a QM that is not higher-priced The consumer could attempt to show that the loan is not a QM (for example, under the General QM definition that the DTI ratio was miscalculated and exceeded 43 percent) and therefore is not presumed to comply with the ATR requirements However, if the loan is indeed a QM and is not higher-priced, the consumer has no recourse under this regulation Why Originate a Qualified Mortgage? Rebuttable presumption for higher-priced QM (Subprime QM) Consumers may establish a violation of the ATR Rules by showing that, at the time the loan was originated, the consumer s income and debt obligations left insufficient residual income or assets to meet living expenses The analysis in a rebuttable presumption would have the court consider the consumer s monthly payments on the loan, loan-related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware at origination

19 5/15/ Why Originate a Qualified Mortgage? CFPB noted that the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, after consummation or, for an adjustable-rate mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income Enforcement and Remedies Three-year statute of limitations on ATR claims brought as affirmative cases Remedy for failure to make a reasonable, good-faith determination of ATR - up to three years of finance charges and fees paid by consumer Consumers attorney s fees After three years, consumers can bring ATR claims only as setoff/recoupment claims in a defense to foreclosure 38 19

20 5/15/ Loan Originator Compensation 12 C.F.R Prohibited acts or practices and certain requirements for credit secured by a dwelling TILA Regulation Z bans or limits certain incentives for loan originators to sell unsafe loans to consumers or loans with higher interest rates than for which the consumer qualifies Rules limit incentives to steer by prohibiting compensation based on loan terms, other than principal amount of loan 39 Loan Originator Compensation A broker or loan officer cannot directly get paid more if o Consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees o Consumer agrees to buy title insurance from the lender's affiliate or uses lender s affiliated homeowner s insurance company There are loopholes for compensation based on loan terms, such as through retirement and bonus plans 40 20

21 5/15/ Part II RESPA Mortgage Servicing Rules for Borrowers in Default Personal Finance Seminar for Professionals University of Maryland Extension 41 Major Topics in New Regulations Relating to Borrowers in Default All of the Servicing Rules discussed in this presentation apply to closed-end/principal residence mortgages Rules are effective January 10, Small Servicers exempt from certain provisions Small Servicer definition not the same as Small Servicer for ATR/QM Rule 42 21

22 5/15/ Small Servicer Definition Small Servicer is a servicer that: o Services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee o CFPB estimates that exemption covers substantially all of the community banks and credit unions that service mortgages that they own o A Housing Finance Agency is also treated as a small servicer 43 Major Topics in New RESPA Mortgage Servicing Regulations RESPA Regulation X 12 C.F.R. Part 1024 o Borrower payments during transfer of servicing (c) o Notice of Error o Requests for Information o Force-placed insurance o General servicing policies, procedures, and requirements o Early intervention with delinquent borrowers o Continuity of contact with delinquent borrowers o Loss Mitigation Procedures

23 5/15/ 12 C.F.R Payments During Transfer of Servicing Long standing RESPA rule that it was the responsibility of the transferor servicer to forward a borrower s payment to the transferee servicer has been changed Transferor servicer now shall promptly either: o Transfer the payment to new servicer OR o Return the payment to borrower and notify borrower of the proper recipient of the payment CFR Loss Mitigation Procedures Loss mitigation procedures apply to mortgage secured by borrower s principal residence o Small Servicer exemption for most of this section other than 120 day filing requirement and dual tracking Private right of action RESPA 6(f) o 12 U.S.C. 2605(f) Loss mitigation regulation does not impose duty on Servicer to provide any specific loss mitigation option 46 23

24 5/15/ 12 CFR Loss Mitigation Procedures Prohibits servicer from initiating foreclosure until a borrower is more than 120 days delinquent As of January 10,, rule pre-empts all state foreclosure laws that permit initiating foreclosure earlier than 120 days delinquent State laws can provide greater protections but not fewer than in the CFPB mortgage servicing rules Prohibits moving for foreclosure judgment or conducting sale if foreclosure started but complete loss mitigation application received more than 37 days prior to foreclosure sale CFR Loss Mitigation Procedures If a borrower who is more than 120 days delinquent submits a complete application for loss mitigation before Servicer has filed foreclosure complaint, Servicer may not start the foreclosure process unless (1) Servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted) (2) Borrower rejects all loss mitigation offers or (3) Borrower fails to comply with the terms of a loss mitigation option such as a trial payment plan 48 24

25 5/15/ 12 CFR Loss Mitigation Procedures Note terminology in o Loss mitigation application o Complete loss mitigation application o Facially complete loss mitigation application o Notify borrower regulation refers to a written notice CFR Loss Mitigation Procedures Loss mitigation application received 45 or more days before a foreclosure sale Servicer must promptly review to determine if complete o Complete loss mitigation application contains all information Servicer requires from borrower to evaluate for all available options Acknowledge receipt by notifying borrower in writing within 5 business days after receipt of application Notice must state whether application is complete or incomplete 50 25

26 5/15/ 12 CFR Loss Mitigation Procedures Loss mitigation application received 45 or more days before a foreclosure sale If incomplete, servicer must identify additional documents and information needed to complete the application and include a reasonable date for deadline to submit Official Interpretations Generally, it would be impracticable for borrower to obtain and submit documents in less than 7 days CFR Loss Mitigation Procedures Facially complete application Borrower submits all missing documents and information requested in Servicer s acknowledgement OR Servicer previously acknowledged application was complete but later determines that additional documents or corrections are required Servicer must promptly request missing/corrected docs and treat application as complete for purposes of denial notices, borrower response times, prohibition on initiating foreclosure or proceeding to judgment or sale while under review 52 26

27 5/15/ 12 CFR Loss Mitigation Procedures Requirement to complete the review within 30 calendar days refers to date loss mitigation application was actually complete Servicer could be waiting for credit report, information from condo association, etc CFR Loss Mitigation Procedures Evaluation of loss mitigation applications Complete loss mitigation application received more than 37 days before a foreclosure sale o Servicer must evaluate borrower within 30 days of receipt for all loss mitigation options available including loan modification and non-home retention options 54 27

28 5/15/ 12 CFR Loss Mitigation Procedures Complete application received more than 37 days before a foreclosure sale If loss mitigation is offered on complete application received 90 days or more before a scheduled foreclosure sale, must give borrower at least 14 days to accept or reject offer If loss mitigation is offered on complete application received less than 90 days but more than 37 days before foreclosure sale, must give borrower at least 7 days to accept or reject offer CFR (h) Loss Mitigation Procedures Borrower may appeal a denial of a loan modification if complete loss mitigation application was received 90 days or more before a scheduled foreclosure sale Borrower must be given no less than 14 days to appeal after Servicer informs borrower of denial of loan modification Appeal must be reviewed by different personnel than those who evaluated application 56 28

29 5/15/ 12 CFR Loss Mitigation Procedures Official Interpretations at 41(b)(3)1 o Foreclosure sale not scheduled. If no foreclosure sale has been scheduled as of the date that a complete loss mitigation application is received, the application is considered to have been received more than 90 days before any foreclosure sale. o Scheduled is not defined in rule CFR (h) Loss Mitigation Procedures Servicer must determine whether to offer loss mitigation within 30 days of borrower making an appeal If loss mitigation offered after appeal, Servicer must give borrower at least 14 days to accept or reject offer Servicer s determination of appeal is not subject to any further appeal 58 29

30 5/15/ 12 CFR (i) Loss Mitigation Procedures Duplicative Requests o Servicer only required to comply with requirements of this section for a single complete loss mitigation application for a borrower s mortgage loan account o Requirements refer to procedural rules CFR (i) Loss Mitigation Procedures Duplicative Requests o Must review if borrower has change in circumstances if subsequent review is required by investor or insurer o Servicer s receipt of new complete loss mitigation application after January 10, triggers obligation to review borrower pursuant to new rules 60 30

31 5/15/ 12 CFR (j) Loss Mitigation Procedures Small Servicer subject to prohibition on initiating foreclosure prior to 120 days delinquency AND Small Servicer shall not file foreclosure and shall not move for foreclosure judgment, or conduct foreclosure sale, if borrower is performing pursuant to the terms of an agreement on a loss mitigation option 61 RESPA Remedies Failure to Comply with RESPA Servicing Rules Private Right of Action o Except for and General Servicing Policies and Continuity of Contact o Remedies - Actual Damages, Costs and Attorney s Fees Includes Damages for Emotional Distress o Statutory Damages: Up to $2,000 per violation if pattern or practice of noncompliance o Capped in class actions at $1 million or 1% of Servicer s net worth, whichever is less Must file complaint within three years of violation 62 31

32 5/15/ Conclusion Questions and Answers 63 32

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