Mortgage Rules Are Out; Now What? The New Rules. A LOT becomes effective in January 2014!

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1 Mortgage Rules Are Out; Now What? presented by Jack Konyk Executive Director, Government Affairs Presentation for Mortgage Bankers Association Of Southwestern Pennsylvania 1 November 4, 2013

2 The New Rules A LOT becomes effective in January 2014! Ability To Repay / Qualified Mortgage Loan Originator Standards (and LO Comp) Escrow Accounts for Higher-Priced Loans HOEPA Homeowner Counseling Appraisal Rules (In general, and for HPML s) Servicing Rules 2

3 The Ability To Repay Overview Requirement Creditors must make a reasonable & good faith determination, at or before consummation, that the consumer will have a reasonable ability to repay the loan according to its terms. Applicability Closed-end, consumer loans secured by a dwelling Except for: Home-Equity Lines Of Credit (HELOC s) Investment Properties (Business-purpose loans) Timeshare Plans Reverse Mortgages Temporary or Bridge Loans of 12 months or less Construction/Perm Loans with Construction terms of 12 months or less 3

4 The Ability To Repay Overview How To Comply Meet The Standard In Practice Analyze and consider 8 general underwriting factors Calculate and evaluate those factors properly Document and retain evidence thereof Refi a Non-Standard Loan into a Standard Loan Both types defined, and additional requirements apply Must hold or service the existing loan Make a Qualified Mortgage ( QM ) 4 kinds : General, Temporary, Rural Balloon and Small Creditor Portfolio Points/Fees Limitations and some terms restrictions apply to all Different levels of protection, depending on cost 4

5 The Ability To Repay Meet The Standard Analyze and consider these factors: Current or reasonably expected income and assets Except the value of the subject property Verified by reasonably reliable third-party records Current employment status (if income relied upon) Monthly payment on covered transaction (per rule) Monthly payment on simultaneous loan(s) (per rule) Monthly payment for mortgage-related obligations Current debt obligations (incl. alimony / child support) Borrower s debt-to-income ratio (DTI) (per rule) Borrower s credit history 5

6 The Ability To Repay Meet The Standard Creditor flexibility in underwriting, but limited Income / assets need only consider needed amounts MUST be verified using third-party records Employment status May be full or part-time, irregular, seasonal, etc. Can be verified orally if a record of the conversation is kept Monthly loan payments Must use greater of fully-indexed rate or introductory rate Must fully amortize entire balance over remaining term, essentially equal Monthly payments for mortgage-related obligations Include any ongoing items arising from ownership, not just loan-related Include any recurring items, regardless of frequency Current debt obligations Start with credit report, but don t necessarily end there Accept application info for debts not on the credit report Flexibility exists to exclude SOME disputed or nearly-paid debts 6

7 The Ability To Repay Meet The Standard Creditor flexibility in underwriting, but limited Debt-To-Income Ratio (DTR) Creditors can make their own reasonable and good faith determination Not capped at 43% like for QM s May decide to exceed in light of compensating factor(s) Credit History Does not specify what elements must or must not be considered Does not specify how various elements must be weighted Does not require to obtain or consider a consolidated credit score Evidence of reasonable and good faith determination ATR determinations are fully open to challenge by borrower Creditor will have burden of proof of meeting standard Full documentation should be retained regarding: How long borrower paid timely without accommodation How underwriting standards were determined Any modeling, analytics, performance assessments used Validation testing, model confirmation, etc. Consistent, uniform application of standards to individual cases 7

8 The Ability To Repay Refi Non-Standard Loan Non-Standard to Standard Refi s are Exempt Standard Mortgage Definition Regular payments, and no neg. am, I-O, or balloon Fixed interest rate for at least 5 years; maximum term of 40 years 3% Points and Fees cap; No Cash Out Non-Standard Mortgage Definition ARM with introductory fixed-rate for 1 year or longer Interest-Only Loan with negative amortization Tightly Controlled Qualifications New creditor is holder or servicer of existing loan New payment is materially lower than existing payment (i.e., 10%) Application is received no later than 2 months after existing recast No more than 1 30-day late in last 12 months and none in last 6 Creditor must consider whether refi will prevent a likely default 8

9 The Ability To Repay Make a QM Four Types Of Qualified Mortgage (QM) Requirements common to all four types Limits on Points and Fees (3% on $100K or more; higher below) No negative amortization or interest-only Loan term of 30 years or less No balloon (except for Rural Balloon QM) General QM Underwrite using fully amortizing schedule and max rate in first 5 years Consider AND VERIFY assets, income, debts, alimony, child support, etc. Maximum DTI of 43%, calculated per Appendix Q of Regulation Z Temporary QM Meets requirements of Government Agency or GSE Underwritten to the agency/gse rules and requirements No 43% DTI limit Expires at the earlier of 7 years or when each agency issues its own rules 9

10 The Ability To Repay Make a QM 10

11 The Ability To Repay Make a QM Four Types Of Qualified Mortgage (QM) Small Creditor Portfolio Exclusively for small creditors holding loans in portfolio Institution must have less than $2 billion in assets Maximum of 500 covered loans done last year (including affiliates) Specific requirements Must meet ALL General QM standards except 43% DTI DOES NOT have to be in a rural or underserved area Lose status if, within 3 years, sold or transferred to another except: To another entity qualified to make such loans As part of an acquisition or merger of or by the originating creditor Pursuant to a supervisory action or agreement Full safe harbor if APR doesn t exceed APOR by more than 3.5% 11

12 The Ability To Repay Make a QM The Points and Fees Cap The Amount of the Cap For loans $100,000-3% For loans $60,000, but < $100,000 - $3,000 For loans $20,000, but < $60,000-5% For loans $12,500, but < $20,000 - $1,000 For loans < $12,500-8% What s In Finance charge items other than interest Normally excluded fees if paid to lender, broker or affiliate Third-party settlement agent fees if creditor requires the service Third-party settlement agent fees if creditor retains part of the charge Points charged to consumer to offset loan-level price adjustments All loan-related compensation to creditor, broker and loan officer Up-front PMI in excess of comparable FHA amount All up-front PMI if not pro-rata refunded upon early payoff Discount points in excess of acceptable limits (bona-fide discounts) 12

13 The Ability To Repay Make a QM Notable Underwriting Requirements Employment considerations Must verify for most recent 2 full years Borrower must explain any gaps Must analyze probability of continued employment Proposed changes still in the works Income considerations Useable ONLY if from a source that is verifiable, stable, and will continue Continuity must be expected for at least the first 3 years of the loan Overtime and bonus received for past 2 years and will continue Part time & seasonal uninterrupted for past 2 years and will continue Alimony, Child Support, Trust Income likely to be consistent for 3 years Strict new rules on how to analyze tax returns Proposed changes still in the works 13

14 The Ability To Repay Make a QM Notable Underwriting Requirements Debt considerations Monthly payments on revolving accounts included regardless of balance Debts of less than 10 months included if affect ability to pay during period New standards for consideration of contingent liabilities Consideration of new debts to become due within 12 months of closing Student loans entering repayment Balloon loans Debt-To-Income Ratio (DTI) Must include any other loans creditor knows or has reason to know Must include related obligations/expenses similarly known Must be calculated in accordance with Appendix Q of Regulation Z Has differing effects on different types of QM Is limited to 43% for the General QM Must be considered, but no specific limit, for the Rural Balloon QM Only applicable in Temporary QM if included in the agency/gse rules 14

15 The Ability To Repay Make a QM Levels of Protection Afforded by QM Safe Harbor Safest type of protection for lender If loan proven to meet QM requirements, no ATR challenge possible Borrower can always challenge if QM standards were actually met Safe Harbor applies to QM loans that ARE NOT higher-priced APR not exceeding APOR by more than 1.5% (first-lien) APR not exceeding APOR by more than 3.5% (junior-lien) Rebuttable Presumption of Compliance Far less protective of lender Even if QM requirements were met, ATR challenge can be brought Borrower can allege that lender knew enough to know better The longer the borrower does pay, the tougher the argument against ATR Rebuttable Presumption applies to QM that ARE higher-priced 15

16 The Ability To Repay Importance Penalties Consumer Primary Challenge Can be brought up to 3 years from consummation Provides for actual damages, court costs and attorney fees, AND Special Statutory Damages of ALL FINANCE CHARGES AND FEES Unless creditor proves failure to comply is not material Penalties are cumulative (added together, not pick one ) Recoupment or Set-Off in Foreclosure No time limit on use Survives transfer of loan; applies to assignees and servicers as well Limits recovery/set off to first 3 years of finance charges and fees 16

17 Loan Origination Standards Adjusts Compensation AND Qualification Rules Loan Originator Compensation Definition of Loan Originator enhanced some more, some less General ban on terms-based variable compensation retained Dual comp ban retained, but broker paying their LO s clarified LO Comp COULD be adjusted for unforeseen third-party fee increases Clarify the definition of prohibited proxy term Revise and clarify restrictions on profit-sharing, bonus plans, etc. Outright statement prohibiting Point Banks, but in dicta, not rule Documentation and Recordkeeping All LO payments must be detailed and tracked Records must be kept for at least 3 years from payment Loan Originator Qualification Place SAFE Act equivalent standards on non-licensed LO s / employers Require NMLS ID numbers on certain loan documents 17

18 Escrow Accounts for Higher-Priced Loans Already in effect! Major elements: Extends mandatory account period to 5 years (from 1 year) (Still) Required for higher-priced mortgage loans that are: Closed-end First-lien Secured by the consumer s PRINCIPAL dwelling Cancellation of the account permitted: Upon termination of the debt (payoff, refi, rescission, foreclosure) After 5 years, if: Unpaid balance < 80% of original value, AND Consumer is not delinquent or in default Excludes Open-end loans Co-op s Initial Construction loans Bridge loans of 12 months or less Reverse Mortgages 18

19 High-Cost Mortgage & Counseling More HOEPA Loans, and more Counseling Two Rules some stuff in Reg. X and some in Reg. Z Major elements: Expands HOEPA coverage Purchase-money and open-ended are now included Reverse mortgages remain excluded Revised HOEPA triggers APR Test, based against APOR 6.5% over for first lien (8.5% personal property < $50,000) 8.5% over for junior lien Points and Fees Test = 5% (8% for loans < $20,000) Prepayment Penalty Test = Greater than 2% / longer than 2 years New Restrictions No fees for mod s and most payoff statements; caps late fees Require housing counseling RESPA now requires list of housing counselors within 3 days of app. 19

20 Appraisal Rules Everyone gets something; some get even more Two Rules some stuff in Reg. Z and some in Reg. B Requirements for Higher-Risk Mortgage Loans (Reg. Z) Creditor MUST obtain a written appraisal Appraisal MUST be performed by a certified appraiser Appraiser MUST conduct a physical inspection of the property INTERIOR Applicant MUST be given a statement about the purpose of the appraisal Anti-Flipping requirement Creditor MUST get a second appraisal : If seller bought the property at a lower price within 6 months At no cost to the applicant Certain loan types exempt Expanded consumer right to appraisal copy (Reg. B) Applies only to loans secured by a first-lien on a dwelling Expanded requirements Notice required within 3 business days of application Copy must be given not less than 3 business days before closing Can t charge for the copy 20

21 Mortgage Servicing Changes across the entire servicing space Two Rules some stuff in Reg. X and some in Reg. Z Exemptions for self-servicers of 5,000 loans or less Major elements: Periodic statements required for closed-end, non-reverse; samples given ARM disclosure notice and timing requirements Prompt payment crediting required, as of date received Rules for less-than-full payments (suspense) and Payoff statements Force-Placed (Lender-Placed) Insurance requirements: Reasonable basis to believe borrower failed to obtain Required notices and timing Cancellation and refund requirements if borrower obtains Error resolution process requirements with deadlines Information management policies and procedures required Information / document retention requirements and timelines Loss Mitigation / Default Requirements Early intervention requirements, with deadlines and language Single Point Of Contact (SPOC) requirements Limitations on dual tracking 21

22 The Stuff Still On The Block New Rules Yet To Come TILA / RESPA Integration Final rule expected sometime this summer (September?) Establishes 2 new documents Loan Estimate combines Initial TIL and GFE Closing Disclosure combines Final TIL and HUD-1 Proposal includes possible expansion of Finance Charge definition Credit Risk Retention Final rule expected before end of 2013 BREAKING NEWS : Out 8/26/13 Requires securitizer to hold up to 5% of risk Contains QRM safe enough loans that won t require retained risk Defines QRM to be exactly QM (actually references the QM definition)! HMDA Expansion Significantly increase reported information Not effective until CFPB issues final rule 22

23 What Else Is Happening? Third-Party Vendor Oversight CFPB s first official enforcement action July 18, 2012 In the credit card space CFPB Bulletin - expected monitoring and oversight (4/13/12) Supervised entity fully responsible for everything third-party does Must establish strict requirements for third-party s performance Must have extensive process to assess, monitor and enforce CFPB fines Capital One, Discover and American Express Capital One - $ 140 million in refunds; $25 million penalty Discover Bank - $ 200 million in refunds; $ 14 million penalty (9/24/12) Am Ex - $ 85 million in refunds; $ 27.5 million total penalties (10/1/12) 23

24 What Else Is Happening? Mortgage Advertising FTC issues Mortgage Advertising Practices (MAP) Rule (7/22/11) CFPB codifies MAP Rule into its own Regulation N (12/16/11) Defines coverage very broadly Forbids material misrepresentation, express or implicit Sets forth a non-exhaustive list of per se deceptive practices Has strict recordkeeping requirements (2 years) on most everything CFPB issues warning letters to mortgage lenders and brokers (11/19/12) FTC issues warning letters to 20 realtors, home builders, lead providers Tells recipients that they saw violations in materials, so review and fix Shot across the bow for everyone else 24

25 What Else Is Happening? Fair Lending CFPB adopts HUD intent to use Disparate Impact CFPB issues several bulletins addressing concerns Most common shortcomings in CFPB exam findings: Missing or outdated policies Lack of training Lack of monitoring Lack of Management involvement and oversight Most common claims in complaints Pricing disparities (outpacing approval disparities) Underwriting Redlining Steering / Reverse Redlining 25

26 What Else Is Happening? Joint Ventures and Marketing Agreements HUD issues Home Warranty interpretive rule ( 6/25/10 ) Sets out when / for what agents can be paid when selling Warranties Can be paid for: Actual, necessary services that are distinctly different from primary agent services Not duplicative and not nominal in nature Paid only at reasonable value of actual services performed, not value of referral RESPA Goes to CFPB on Designated Transfer Date ( 7/21/11 ) CFPB reopens HUD investigations into joint title ventures CFPB fines 4 MI s >$ 15 million for captive reinsurance ( 4/4/13 ) CFPB fines Texas homebuilder in sham JV ( 5/17/13 ) 26

27 What Else Is Happening? Data Integrity, particularly HMDA One of two core elements in CFPB exams (along with CMS) Critical for CFPB to achieve its goal of being Data Driven Most common inaccuracies in CFPB exam findings: Required information simply missing or formatted incorrectly Inaccurate dates Inaccurate actions, particularly Withdraws that should be Denials Incorrect loan amounts CFPB issues and reactions CFPB says inaccurate data = inadequate management and controls Causes CFPB pre-work to be wasted, not generating good vibrations Sufficient error rates have resulted in 3-year scrub and re-file orders Putting YOUR money where their mouth is! Mortgage Master, Inc. $425,000 civil penalty (21,015 LAR records total) Washington Federal $34,000 civil penalty (5,785 LAR records total) 27

28 How Do We Get Ready? Get good information! Go to the source ( ) Go to other sources ( ) ( ) ( ) Identify your needs / issues (gap analysis) 1. Is what I m reading different than what we already do? 2. What will need to be changed to get to a No answer to question 1? 3. Are we WILLING to do what it will take? 4. Are we ABLE to do what it will take? 5. If No to question 3 and/or 4, what will we have to do about it? 6. Are all the RIGHT people involved in answering these questions? 7. Do we have a solid change management process and culture? BE HONEST WITH YOURSELF, ABOUT YOURSELF! 28

29 How Do We Get Ready? Involve the RIGHT team! Who needs involved? LOTS OF FOLKS! Compliance Management Systems Support / VENDORS Production Operations Servicing Operations Credit Policy / Risk Management Secondary Marketing / Investor Relations SENIOR MANAGEMENT Product Development Advertising / Marketing SALES / TRAINING Quality Assurance / Audit FINANCE / ACCOUNTING and, don t forget your LAWYERS! 29

30 How Do We Get Ready? Polish your Compliance Management System CFPB s Examination Manual describes what s necessary Atttributes How does the entity: Establish its compliance responsibilities Communicate those responsibilities to employees Ensure responsibilities are incorporated into business process Review operations to ensure that responsibilities are carried out Take corrective actions where necessary Update tools, systems and materials as necessary Components: Board and management oversight Compliance program Response to and analysis of consumer complaints Compliance audit 30

31 How Do We Get Ready? Know them; know yourself; don t kid yourself! 1) Read their manuals! ( ) 2) Read your own manuals! If you don t have them, CREATE THEM! 3) See how you stack up Is what you do, what they want? Is what you SAY you do, what you REALLY do? How do you know for sure? Do you routinely audit? Do you do it yourself, or use outside help? How, and to whom, do you report results? Do you require correction of errors found? Do you track corrections to be sure they re done? Do you train to be sure errors don t repeat? 4) BE HONEST WITH YOURSELF, ABOUT YOURSELF! 31

32 Questions? Jack Konyk Executive Director, Government Affairs Weiner Brodsky Kider PC

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