Single-Family Legal Essentials: CFPB Rules. Part 1

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1 Single-Family Legal Essentials: CFPB Rules Part 1

2 2 Introduction & Background

3 Dodd-Frank Act Rulemaking Mandate Established CFPB and transferred authority over TILA, RESPA, and other consumer financial protection statutes from Fed, HUD, and FTC Eight final mortgage rules in 18 months (plus remittances and TILA-RESPA integrated mortgage proposal) Mortgage rules must be effective no later than one year after issuance (i.e., January 2014) 3

4 Regulators on Vendor Oversight CFPB Bulletin (04/13/12) Supervised entities must oversee vendors in a manner that ensures compliance with Federal consumer financial law Focus is to avoid preventing unwarranted risks to consumers Requires supervised entities to: Conduct thorough due diligence of vendors to verify that they understand and comply with the law Review vendors policies, procedures, internal controls, and training materials to ensure that they conduct appropriate training and oversight of employees/agents who have consumer contact or compliance responsibilities Include clear expectations about compliance in contracts, as well as consequences for violations of compliance-related responsibilities Establish internal controls and on-going monitoring to monitor compliance Take prompt action to address compliance issues 4

5 Regulators on Vendor Oversight OCC Bulletin (10/30/13) Enhances and augments the previous Bulletin in many notable areas Most detail of any regulatory guidance Failure to have in place effective risk management process commensurate with risk and complexity of relationships may be an unsafe and unsound banking practice Federal Reserve Board Supervision and Regulation Letter (12/5/13) Largely consistent with OCC Bulletin Emphasizes responsibility of Board of Directors and senior management to effectively manage third-party relationships Effective programs include a review of incentive and compensation arrangements that may encourage imprudent risk taking Specifies additional risk considerations relating to SAR reporting, foreign-based service providers, internal audits, and outsourcing of risk management activities 5

6 Ability to Repay Rule 6

7 Ability to Repay Standard Implements sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) Generally requires creditors to make a reasonable, good faith determination of a consumer s ability to repay any consumer credit transaction secured by a dwelling. 7

8 Liabilities An origination that does not meet the ability-to-repay requirement would subject the creditor and subsequent assignees to, among other things, civil liability under TILA and provide the borrower with a defense to foreclosure. In addition to actual damages, statutory damages in an individual or class action, and court costs and attorneys fees, the Dodd-Frank Act also amended TILA to include special statutory damages for a violation of the ability-torepay requirement equal to the sum of all finance charges and fees paid by the consumer 8

9 Transactions Outside of ATR Scope But wait!! Certain transactions outside of the scope of the rule An extension of credit made pursuant to a program administered by a Housing Finance Agency, as defined under 24 CFR CFR 266.5: Housing finance agency or HFA means any public body, agency, or instrumentality created by a specific act of a State legislature or local municipality empowered to finance activities designed to provide housing and related facilities, through land acquisition, construction or rehabilitation. Thus, ATR requirements do not apply to extensions of credit made by HFAs or extensions of credit made by intermediaries (e.g., private creditors) pursuant to a program administered by a HFA. Applies regardless of whether the program administered by a housing finance agency is funded by Federal, State, or other sources. 9

10 Transactions Outside of ATR Scope Cont d Open-end credit plans Timeshares Reverse mortgages Temporary loans including bridge and construction and the construction phase of CTP loans (terms of 12 months or less) 10

11 Transactions Outside of ATR Scope Cont d Extensions of credit made by: Community Development Financial Institution, as defined under 12 CFR (h); Downpayment Assistance through Secondary Financing Provider, pursuant to 24 CFR (a), operating in accordance with HUD regulations; Community Housing Development Organization provided that the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME program, pursuant to the provisions of 24 CFR (a); I.R.C. 501(c)(3) creditor with a tax exemption ruling or determination letter from the I.R.S., subject to conditions program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 U.S.C. 5211; 5219) 11

12 Safe Harbor/Presumption of Compliance Qualified Mortgage (QM) with: Safe Harbor (deemed compliant) Rebuttable Presumption (presumed compliant) Higher Priced Covered Transaction 3% Total Points and Fees QM that is a Higher-Priced Covered Transaction: APR exceeds Average Prime Offer Rate: 1.5% - 1st lien 3.5% - subordinate liens; certain small creditor first liens including balloon loans 12

13 ATR and Standard QM Loan Criteria ATR None specified by rule QM Regular periodic payments that are substantially equal (except for the effect of interest rate changes after consummation on adjustable-rate or step-rate mortgages). no increase in the principal balance (e.g., no negative amortization loans) no principal deferral (e.g., no interest-only or graduated payment loans); no balloon payments (i.e., a scheduled payment that is more than twice as large as the average of earlier scheduled payments), except that certain special criteria apply to small creditors Loan term not in excess of thirty (30) years Total points and fees (including mortgage broker compensation) of 3% of the total loan amount for a loan equal to or greater than $100,000, less up to 2 bona fide discount points if the interest rate without any discount does not exceed the average prime offer rate by more than 1 percentage point 13

14 ATR/QM Underwriting Comparison 8 ATR Borrower Underwriting Factors ATR Factor in QM Borrower Underwriting Requirements? 1. Consumer s current or reasonably expected income or assets (other than the value of the dwelling) that secures the loan Yes. Stand-alone QM requirement and encompassed in DTI but cannot consider certain assets as income (in accordance with Appendix Q). Under Appendix Q short term assets can be considered income under narrow circumstances. However, most other assets are not included in income that could be useful to help further substantiate a borrower s ATR if the 43% DTI is exceeded 2. Consumer s monthly payment on the covered transaction (ARM: Use the fully indexed rate or any introductory interest rate, whichever is greater; and substantially equal, monthly payments of principal and interest that will repay the loan amount over the term of the loan remaining as of the date the loan is recast) Yes. Encompassed in DTI but calculation differs (in accordance with Appendix Q) (ARM: use the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due and periodic payments of principal and interest that will repay either: (i) the outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate, assuming the consumer will have made all required payments as due prior to that date or (ii) the loan amount over the loan term) 3. Consumer s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made Yes. Encompassed in DTI (in accordance with Appendix Q) 4. Consumer s monthly payment for mortgage-related obligations Yes. Stand-alone QM requirement and encompassed in DTI. DTI provision references for calculating the monthly payment for the covered transaction and mortgage-related obligations (ARM: use the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due and periodic payments of principal and interest that will repay either: (i) the outstanding principal balance over the remaining term of the loan as of the date the interest rate adjusts to the maximum interest rate, assuming the consumer will have made all required payments as due prior to that date or (ii) the loan amount over the loan term) 14

15 ATR/QM Underwriting Comparison Cont d 8 ATR Borrower Underwriting Factors 5. Consumer s current debt obligations, alimony, and child support 6. Consumer s monthly debt-toincome ratio or residual income ATR Factor in QM Borrower Underwriting Requirements? Yes. Stand-alone requirement and encompassed in DTI (in accordance with Appendix Q) Yes. DTI (in accordance with Appendix Q) but residual income not used for QM safe harbor 7. Consumer s current employment status if income from the consumer s employment is relied on in determining repayment ability Yes. Encompassed in DTI (in accordance with Appendix Q) but stringent and specific historical, continuing and ongoing employment verifications and qualifications are required. For example, under ATR, there are no prescribed limitations or additional conditions when employment is less than full-time, has gaps, or involves self-employment. If ATR not conducted, there is no fall back for erroneous employment verifications and qualifications under Appendix Q. 8. Consumer s credit history No, but typically a general underwriting practice 15

16 Special Safe Harbor QMs Possible Special GSE/Agency Exemptions Until Eligible to be purchased or guaranteed by either Fannie Mae or Freddie Mac while they operate under government conservatorship (or any limited life regulatory entity succeeding the charter of either) 2 Eligible to be insured by HUD; 3 Eligible to be guaranteed by the VA; 4 Eligible to be guaranteed by the Department of Agriculture, or; 5 Eligible to be insured by the RHS. If one of the aforementioned agencies in (ii) (v) implements its own definition of QM" in accordance with TILA the special exemption will expire with respect to that agency. 16

17 Special Safe Harbor QMs Loans originated by smaller creditors (e.g., community banks and credit unions) that make and hold loans in their own portfolios Temporary safe harbor for balloon payment loans made by small creditors (Jan. 10, 2016) Balloon payment loans made by small creditors operating primarily in rural and underserved areas and held in portfolio (or to be sold to other small creditors meeting this criteria) 17

18 ATR/QM Rule Extensions of credit made by housing finance agencies directly to consumers, as well as extensions of credit made by other creditors pursuant to a program administered by a housing finance agency, are exempt from the ATR requirements. This ATR exemption applies to extensions of credit made pursuant to a program administered by a housing finance agency, regardless of the funding source. Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide (October 17, 2013) at pg. 25.

19 ATR/QM Rule The exemptions above apply to all loans made by these creditors or pursuant to these programs, provided the conditions for the exemption are satisfied. An exempt loan remains exempt even if sold, assigned or otherwise transferred to a creditor that would not qualify for the exemption. Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide (October 17, 2013) at pg. 26.

20 ATR/QM Rule Note that the ATR requirements do not apply to these loans. Thus, a loan that is eligible for one of these exemptions is not eligible for QM status, as the QM provisions are only applicable to loans subject to the ATR requirements. A consumer who obtained a loan that was exempt from the ATR requirements would have no abilityto-repay claim under the ATR/QM rule. Ability-to-Repay and Qualified Mortgage Rule Small Entity Compliance Guide (October 17, 2013) at pg. 26.

21 21 Mortgage Servicing Rules

22 Small Servicer Exemption Small servicers are exempt from certain requirements (highlighted in green below) A small servicer is a servicer that either: Services 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee; or Is a Housing Finance Agency, as defined in 24 CFR

23 Disclosure & Error Resolution Periodic statements Must be provided for each billing cycle Not required for fixed-rate loans if a coupon book is provided ARM interest rate adjustment notices Notice for first adjustment: 210 to 240 days prior to the first payment due after the rate first adjusts Notice for all adjustments: 60 to 120 prior to the first payment due after the rate adjusts if payment will change Error resolution Acknowledgement of written error notices or information requests generally required in 5 days; response generally required in 30 days Also applies to requests for information 23

24 Policies & Procedures, LPI Servicers must maintain policies and procedures reasonably designed to: Provide timely and accurate information when responding to borrower requests and complaints, responding to investor requests, submitting documents during foreclosure, and transferring files Evaluate loss mitigation options by consulting with investors to identify available options, providing borrowers accurate information on those options, and evaluating applications Servicers may not charge a borrower for lender-placed insurance coverage unless: Reasonable basis to believe borrower has failed to maintain required insurance Notices provided at least 45 and 15 days before charges imposed Charges are for services actually performed and bear a reasonable relationship to servicer s cost of providing the service For escrowed borrowers, servicer may not charge for insurance if servicer can maintain delinquent borrower s existing coverage by advancing funds 24

25 Delinquent Borrowers Early Intervention By 36 th day, make good faith effort to contact borrowers By 45 th day, provide written information to borrowers Continuity of Contact Application of Receipt and Completion Evaluation and Notification Appeal Policies and procedures to assign support personnel Policies and procedures to ensure that personnel can access borrower provided information and provide such information to decision makers Screen applications received 45 days before foreclosure sale; identify missing information and send acknowledgement within 5 days Servicer must exercise reasonable diligence to obtain missing items Evaluate a complete application received more than 37 days before foreclosure sale for all loss mitigation options within 30 days Provide written decision including reasons for loan modification denials If complete application received 90 or more days before foreclosure sale, borrower may appeal denial of a loan modification Appeal determined in 30 days by independent servicer personnel 25

26 Delinquent Borrowers 120-day prohibition: Servicer may not make the first notice or filing required for foreclosure for a borrower 120 days or less delinquent. Foreclosure: If servicer receives complete loss mitigation application, servicer cannot start foreclosure process or, if process has begun but scheduled sale is more than 37 days away, servicer cannot complete sale until: Servicer has evaluated application for all available loss mitigation options; Notified borrower of result; and Either: (1) servicer denies application and time for appeal has expired; (2) borrower declines or fails to accept loss mitigation option; or (3) borrower fails to comply with loss mitigation agreement. 26

27 Mortgage Servicing Rules HFA EXEMPTIONS TILA Periodic Statements 12 CFR NO HFA EXEMPTION TILA ARM Disclosures 12 CFR RESPA Servicing Policies & Procedures 12 CFR TILA Prompt Crediting 12 CFR RESPA Early Intervention Requirements 12 CFR TILA Payoff Statements 12 CFR RESPA Continuity of Contact 12 CFR RESPA Error Resolution 12 CFR RESPA Loss Mitigation Procedures 12 CFR (a)(-(h) RESPA Information Requests 12 CFR RESPA Loss Mitigation Procedures 12 CFR (j)

28 Mortgage Servicing Rules- Vendor Management The term service provider does not include a person solely by virtue of such person offering or providing to a covered person (i) a support service of a type provided to businesses generally or a similar ministerial service; or (ii) time or space for an advertisement for a consumer financial product or service through print, newspaper, or electronic media. 12 USC 5481(26)

29 Mortgage Servicing Rules Vendor Management The CFPB s Expectations Regarding Vendor Management: Conducting thorough due diligence to verify that the service provider understands and is capable of complying with Federal consumer financial law; CFPB Bulletin , Service Providers (April 13, 2012) at pg. 2

30 Mortgage Servicing Rules Vendor Management The CFPB s Expectations Regarding Vendor Management: Requesting and reviewing the service provider s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities; CFPB Bulletin , Service Providers (April 13, 2012) at pg. 3

31 Mortgage Servicing Rules Vendor Management The CFPB s Expectations Regarding Vendor Management: Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive or abusive acts or practices; CFPB Bulletin , Service Providers (April 13, 2012) at pg. 3

32 Mortgage Servicing Rules Vendor Management The CFPB s Expectations Regarding Vendor Management: Establishing internal controls and on-going monitoring to determine whether the service provider is complying with Federal consumer financial law; and CFPB Bulletin , Service Providers (April 13, 2012) at pg. 3

33 Mortgage Servicing Rules Vendor Management The CFPB s Expectations Regarding Vendor Management Taking prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate. CFPB Bulletin , Service Providers (April 13, 2012) at pg. 3

34 Mortgage Servicing Rules Vendor Management In smaller or less complex entities where staffing is limited, a full-time compliance officer may not be necessary. However, management should have clear responsibility for compliance management and compliance staff should be assigned to carry out this function in a manner commensurate with the size of the entity and the nature and the risks of its activities. CFPB Supervision and Examination Manual 2.0, Part II Examinations Procedure, Compliance Management Review, pg. 3.

35 Loan Originator Compensation 35

36 Overview Prohibits compensation based on a transaction term or a proxy for a transaction term Prohibits dual compensation (borrower and other paid) Waived the DFA s ban on consumers paying upfront points or loan fees when the LO s compensation is paid by someone other than the consumer Creditor and LOO record retention for 3 years Qualification and NMLSR document identifier requirements Liability for violating compensation prohibitions is the same as the ATR Rule 36

37 Transactions not covered Not covered: Open-end credit Lot/vacant land loans Timeshare loans HFA loans are covered.. 37

38 Loan Originator Definition takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or represents to the public that such person can or will perform any of these activities For, or in expectation of direct or indirect compensation or other monetary gain. 38

39 Transaction Terms A term of a transaction is any right or obligation of the parties to a credit transaction Includes: Rights and obligations in the note or other credit contract and in the security instrument (and any document incorporated by reference) Any loan originator or creditor fees or charges imposed on the consumer for the credit or for any product or service provided by the loan originator or creditor and related to the credit Any fees or charges for any product or service required to be obtained or performed as a condition of the extension of credit But limited to fees or charges required to be disclosed in either the Good Faith Estimate and the HUD-1 or HUD-1A (LE and CD) 39

40 Proxy for a Loan Term A factor (that is not itself a term of a transaction) is a proxy for a term of a transaction: 1. if the factor consistently varies with a term or terms of the transaction over a significant number of transactions, and 2. the loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction 40

41 Profits/Bonus Exceptions Limited exceptions to payment based on profits Designated tax advantaged plan contributions Compensation under a non-deferred profits-based plan Non deferred profits-based plan conditions Compensation is not based on terms of individual loan originator s transactions; and Plan compensation capped at 10% total compensation, or Individual was loan originator for 10 or fewer covered transactions in prior 12 months Not a general loan originator carve out for general definition 41

42 Permissible Compensation Methods Fixed percentage of loan amount (& min or max) Overall dollar volume or unit volume Long-term loan performance Hourly rate of pay for actual hours worked Existing or new customer Payment fixed in advance for each loan % of applications that result in consummated transactions Quality of loan files 42

43 Qualification and Identifier Requirements Duty on individual loan originators to be qualified and, when applicable, registered or licensed to the extent required under State and Federal law. Duty on loan originator organizations to ensure that their individual loan originators are licensed or registered to the extent required under the SAFE Act or State law. Loan originators must provide their unique identifiers under the Nationwide Mortgage Licensing System and Registry (NMLSR) on loan documents. 43

44 Qualification Nondepositories/Non-Profits For employers who have loan originator employees not required to be licensed under the SAFE Act or other applicable law: Ensure loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards. Provide training to loan originator employees that is appropriate and consistent with those loan originators origination activities. 44

45 Loan Originator Compensation Rule A loan originator for a consumer credit transaction secured by a dwelling must, when required by applicable State or Federal law, be registered and licensed in accordance with those laws, including the Secure and Fair Enforcement of Mortgage Licensing Act of 2008 (SAFE Act, 12 USC 512), its implementing regulations (12 CFR 1007 or 1008), and State SAFE Act implementing law. To comply with this paragraph (f), a loan originator organization that is not a government agency or State housing finance agency must: CFR (f)

46 Rules on High-Cost Mortgages, Escrows & Appraisals 46

47 High-Cost Mortgages (HOEPA) Expanded coverage Purchases, HELOCs APOR + 6.5% for most firsts, APOR + 8.5% for seconds Points and fees > 5% of loan amount Prepayment penalty after 36 months or > 2% amount prepaid New protections, including: Pre-loan counseling Balloon payments generally banned Financing points/fees banned Loan modification fees banned New restrictions on late fees and fees for payoff statements 47

48 Escrows & Appraisals Escrows Requires escrow accounts for a minimum of 5 years on first-lien HPMLs Exemption for certain small creditors that operate predominantly in rural or underserved areas Took effect June 1, 2013 Appraisals Interagency TILA Rule: New appraisal requirements for certain HPMLs; second appraisal requirement for flips CFPB ECOA Rule: Requires free copy of appraisal or valuation for consumer 48

49 High-Cost Mortgage Rule (2) Exemptions. This section does not apply to the following: (i) A reverse mortgage transaction subject to ; (ii) A transaction to finance the initial construction of a dwelling; (iii) A transaction originated by a Housing Finance Agency, where the Housing Finance Agency is the creditor for the transaction; or (iv) A transaction originated pursuant to the United States Department of Agriculture s Rural Development Section 502 Direct Loan Program. 12 CFR (a)(2)

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