CFPB and Lenders. A presentation on the Consumer Financial Protection Bureau and its impact on the lending industry

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1 CFPB and Lenders A presentation on the Consumer Financial Protection Bureau and its impact on the lending industry

2 What is the Consumer Financial Protection Bureau (CFPB)? Independent agency of the United States government Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Jurisdiction includes credit cards, mortgages, and loans Charged with overseeing (and enforcing) all federal financial laws that specifically protect consumers For our industry, these are legal safeguards that our clients rely on when pursuing loans to engage in real property transactions

3 Why was the CFPB created? Prior to establishment, seven different federal agencies were responsible for various aspects of consumer financial protection Their ultimate goal is to restrict the use of unfair, deceptive, and abusive practices against consumers, while ensuring that providers issue clear, upfront information For the first time, non-bank financial institutions will be federally regulated Practically speaking, this means mortgage servicers in our industry (like title companies and conveyancing law firms)

4 How is the CFPB operating? Three main tools are being used in order to promote fair, transparent, and competitive markets 1. Reformation: Fine print and overly long agreements can make transactions difficult to understand for consumers. As such, the CFPB is making substantial changes to lending documents 2. Enforcement: The CFPB is responsible for rule-making, supervision, and filing law suits against practices that produce unfair, deceptive, or abusive acts against consumers 3. Research: The Bureau also engages consumer complaints, analyzes consumer behavior, and monitors financial markets for new risks to consumers

5 CFPB and Lending Reform Congress enacted Section 1032(f) of the Dodd-Frank Act. This required the CFPB to propose a regulation that combines RESPA and TILA disclosures After 18 months, the CFPB announced a new rule on July 9, Goals of New Rule: 1) Easier to use mortgage disclosure forms 2) Improve consumer understanding 3) Aid comparison shopping 4) Prevent surprises at the closing table Effective Date October 1, 2015 Pushed back on June 17, 2015 (original date was August 1)

6 CFPB and Lending Reform Two New Forms: 1) The Loan Estimate Must be provided to consumers within three business days after submission of loan application and at least seven business days prior to closing Replaces early TIL statement and GFE Provides a summary of key loan terms and estimates of loan/closing costs Designed to promote comparison shopping Records must be kept three years from date of closing MUST disclose that title insurance is optional- if the borrower refuses, do not include on LE 2) The Closing Disclosure Received by consumers at least three business days before closing *This rule is absolute, and will have the most impact* Replaces final TIL and HUD-1 Settlement Statement Provides detailed accounting of the transaction Records must be kept five years from date of closing

7 CFPB and Lending Reform New closing disclosures apply to nearly all closed-ended consumer mortgage loans However, they do not apply to: 1) Home equity lines of credit 2) Reverse mortgages 3) Mortgages secured by mobile homes or dwellings not attached to property 4) Creditor that makes five or fewer mortgages loans in one year 5) Loans primarily for business, commercial, or agricultural purposes 6) Some temporary construction Loans However, fixed, permanent construction financing are covered *So, creditors originating these types of mortgages must continue to use, as applicable, the GFE, HUD-1, and Truth-in-Lending disclosures required under current law.

8 CFPB and Lending Reform Definition of a Business Day When providing the new Loan Estimate to consumers within three business days of application submission: Defined as day on which the creditor s offices are open to the public to carry on all substantial functions (Saturday may be in question) Re-disclosure (new loan estimate changes) must occur within three business days of receiving information for the change. The revised disclosure must be received at least 4 days before closing Reasons for re-disclosure: increased settlement charges, changes to interest rate and loan amount Business days for consumer receipt of Closing Disclosure: Defined as all calendar days except Sunday and major federal holidays *The CFPB defines closing as date of consummation, which is when the borrower becomes contractually obligated (signed note)

9 CFPB and Lending Reform Disclosure timing exceptions: 1) The Loan Estimate and Closing Disclosure may be waived in bona fide financial emergencies by written statement from consumer Example(s): Bankruptcy refinances, pending foreclosure, estate issues 2) There are a limited number of changes that require a new threebusiness-day waiting period: a) Changes to APR by more than 1/8 of one percent, b) change to loan product, c) any addition of a prepayment penalty *If the closing disclosure becomes inaccurate before closing, but does not entail the above changes, lender must still provide a corrected disclosure before consummation at least one business day prior to closing *Seller must receive disclosures no later than the day of closing, and this is solely the settlement agents responsibility.

10 CFPB and Lending Reform Post-Closing changes that require issuance of a revised Closing Disclosure: Tolerance variations = refund and re-disclose within 60 days of closing Non-numeric clerical errors = re-disclose 60 days after closing *Either Lender or settlement Agent may provide Closing Disclosure to borrower, but the lender is still responsible for receipt *Settlement Agent must prepare and provide Closing Disclosure to seller, and a copy must be submitted to Lender

11 CFPB and Lending Reform Pre-Application Worksheet and Disclosure If a consumer is provided with a written estimate of terms or costs specific to that consumer before the creditor receives a loan application, the document must include the following disclaimer: Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan Font must be 12 or higher Not required for Advertisements and information not specific to the consumer *Note- Limits on up-front fees: Creditors are prohibited from imposing fees before consumer has received a Loan Estimate and expressed an intent on proceeding with the transaction (one exception present for obtaining credit reports)

12 CFPB and Lending Reform Disclosure Delivery: 1) Providing it to the consumer in person 2) By mailing, including Creditors may use electronic delivery methods subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act Creditors must ensure that the consumer receives the Closing Disclosure at least three business days prior to consummation *Closing Disclosure in person, received same day as acceptance *Mailed or delivered electronically, the consumer is considered to have received the Closing Disclosure three business days after it is delivered or placed in the mail *However, if the creditor has evidence that the consumer received the Closing Disclosure earlier than three business days after it is mailed or delivered, it may rely on that evidence and consider it to be received on that date

13 Disclosure Delivery Chart

14 CFPB Practical Impact New Closing Disclosure Form may require additional time to explain (increase from 3 pages to 5 pages) Three day advance Closing Disclosure will create longer purchase contract and closing times (minimum of 10 days) In other words, the days of let s get this closed tomorrow are completely over Technology changes and employee training will add to implementation coast This coast may be passed onto consumers The CFPB hold lenders responsible for Closing Disclosures CFPB acknowledges settlement agents have a role, but lenders will decide what that role will be For example, large lenders, like Bank of America and Wells-Fargo, have already stated that they will be completely controlling Closing Disclosure processing Effective October 1, 2015

15 Loan Estimate Page 1

16 Loan Estimate Page 2

17 Loan Estimate Page 3

18 Closing Disclosure Page 1

19 Closing Disclosure Page 2

20 Closing Disclosure Page 3

21 Closing Disclosure Page 4

22 Closing Disclosure Page 5

23 Loan Officer Impact Regulation Z, of the Truth in Lending Act, has been amended by the CFPB Enforcement is geared towards eliminating: 1) kick-back schemes, 2) agreements that force consumers to chose services they can shop for, and 3) illegal compensation that has been traditionally tied to higher interest rates The CFPB has been targeting lenders as well as individual loan officers Recent Examples: In April of 2015, the CFPB fined four individual JP Morgan Chase loan officers $35, $65, each for their participation in a kick-back scheme with two Maryland title companies Basically, the title company would complete marketing duties for loan officers, such as purchasing, analyzing, providing data on consumers, and creating letters with the loan officers contact information that the company printed, folded, stuffed into envelopes, and mailed. In exchange, the loan officers receiving these services would refer all of their customers to the title company

24 Loan Officer Impact Recent Examples (continued) In November of 2014, the CFPB entered into a settlement with Franklin Loan Corporation (Franklin) for $730, on allegations that Franklin paid its employee loan originators compensation based on the interest rates charged for mortgage loans, which is in strict violation of the Regulation Z loan originator compensation rule (TILA) The CFPB asserted that Franklin s compensation structure encouraged their loan officers to place consumers in higher interest rate mortgage loans Franklin paid commissions based partly on a cash rebate that depended on the interest rate of loans- higher interest rates generated higher rebates. Loan originators had discretion whether to pass the rebates on to borrowers. If they retained the rebate, a portion of it was included in their commission. After paying the fine, Franklin began paying its loan originators on a set percentage of the loan amount, which is acceptable.

25 Loan Officer Impact In November of 2013, Castle & Cooke Mortgage agreed to a $13,000, penalty for excessive bonuses to loan officers in exchange for steering consumers into higher-priced mortgages Bureau investigators claim Castle & Cooke s quarterly bonus program violated Federal Loan Originator Compensation rules by paying 150 loan officers higher levels of bonus compensation for distributing more expensive loans Average quarterly bonus ranged from $6,100 to $8,700. By contrast, those loan officers who did not charge consumers higher interest rates did not receive quarterly bonuses. The CFPB estimates that more than 1,100 illegal quarterly bonuses were paid and that tens of thousands of customers may have been upsold

26 Loan Officer Impact Joint advertising is allowed It is permissible for mortgage banker, real estate agents, and title companies to depict their services on the same advertisement The Issue is largely monetary Rule: each party must be paying their pro-rata share Marketing agreements are also satisfactory, provided that they are handled with care. In compensating a provider for marketing services, a company needs to be sure that the amount they pay bears a reasonable relationship to the fair market value of the services provided Affiliated business arrangements are also permissible It s important to note that the referring company must provide the consumer with an AFBA disclosure statement The disclosure must state arrangement existence, and it must be clear to the consumer that he or she is not required to use that company

27 Nonpublic Personal Information (NPPI) CFPB authority includes the disclosure of Nonpublic Personal Information, hereinafter NPPI, under Sections of the Gramm-Leach-Bliley Act (15 USC ). NPPI can be defined as personally identifiable data, such as information provided by a customer on a form or application, information about a customer s transactions, or any other information about a customer which is otherwise unavailable to the general public. Practically speaking, this includes: social security number, driver s license number, state-issued ID number, credit card number, debit card number, other financial account numbers, addresses, and phone numbers. Every non-internal electronic communication that contains the above information must be sent in a secure manner. Noncompliance will result in heavy fines Physical Documents with NPPI must be secure at all times as well Locked cabinets, desk draws, etc.

28 Questions?

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