Navigating the CFPB s Mortgage Requirements

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1 Navigating the CFPB s Mortgage Requirements

2 Dodd Frank Update is a production of October Research, LLC, specializing in business news and analysis for the financial services industry and is published 12 times a year. Contact information: 3046 Brecksville Rd, Suite D, Richfield, OH Tel: (330) Fax: (330) Owner & Publisher Erica Meyer Chief Executive Officer Chris Casa Editorial & Publishing Editorial Director Syndie Eardly Editors Nathan Marinchick, Chris Crowell, Andrea Golby, Jason Morgan, Angela Rulffes Seminars & Webinars Director Kelly McCarel Marketing & IT Rick Harris, ecommerce Director Dan Kearsey, Production & Design Sales & Advertising Emily Murray, Advertising & Sales Manager Dave Broaddus, Senior Account Executive Circulation/Customer Service Michelle Guyot Jennifer Pierce Business Offices Sam Warwar, Esq. Christine Horvath, Accountant TO SUBSCRIBE, PLEASE GO TO Copyright October Research, LLC All Rights Reserved. Any copying or republication without the express written or verbal consent of the publisher is a violation of federal copyright laws and the publisher will enforce its rights in Federal court. The publisher offers a $500 reward for information proving a federal copyright violation with regard to this publication. Dear Readers, Several long-awaited Dodd-Frank mortgage rules were finally unleashed on the industry in the month of January and it certainly was a whirlwind. The Consumer Financial Protection Bureau (CFPB) unveiled more than a half-dozen major rules in a week and a half. The rule avalanche had industry watchers putting in some overtime. However, the work is only just beginning. In many cases, the rules give lenders a full year to implement the CFPB s requirements, and industry participants have begun the long process of digesting the rules and outlining their compliance plans. The following months will be difficult for the industry, which must now square existing mortgage rules, practices and technologies with the bureau s new regulatory framework. Dodd Frank Update is providing the information and expert insight mortgage professionals need to face the transitions ahead. For instance, this report provides an in-depth overview of each of the CFPB s new final rules. Dodd Frank Update and sponsor North American Title Insurance Co. also recently hosted a 90-minute training webinar on the important pieces of the CFPB s new abilityto-repay/qualified mortgage rule. The webinar features compliance attorneys Richard Andreano, a partner at Ballard Spahr LLP, and Jed Mayk, a shareholder at Stevens & Lee. You can find more information on the webinar at Our coverage of the new rules doesn t end there. We will release a special report on the CFPB s ability-to-repay rule in the coming weeks and we will host a webinar on the bureau s new loan originator compensation rule in April. Of course, you can always get up-to-the-minute coverage of the CFPB and everything Dodd-Frank at Dodd Frank Update is committed to bringing you the information and resources necessary to thrive in this new regulatory era, so if you encounter an issue we re not talking about, feel free to drop me a line anytime at Until next time, To obtain permission to redistribute material or to report a violation of federal copyright laws, please call , or To obtain reprints, ISSN Pending Nathan Marinchick Editor Dodd Frank Update

3 Eight New Rules Index ability to repay/qm page 4 The ability-to-repay rule issued by the CFPB on Jan. 10 requires lenders to make a reasonable and good faith determination that a consumer has a reasonable ability to repay the loan and establishes a presumption of compliance. ability-to-repay concurrent proposal page 6 The CFPB has proposed amendments that would provide QM status for certain loans made and held in portfolio by small creditors. servicing/reg. x, reg. z page 8 The CFPB released two key mortgage servicing rules on Jan. 17 amending Regulation Z (TILA) and Regulation X (RESPA). loan originator compensation page 10 The CFPB s loan originator compensation rule makes important changes regarding how loan originators are paid and how they qualify for their jobs. high-cost mortgage: hoepa page 12 The CFPB finalized key rules implementing Dodd-Frank s expansion of the types of mortgage loans that are subject to the protections of the HOEPA. high-cost mortgage: escrow page 14 The CFPB finalized key rules requiring creditors to establish escrow accounts for certain mortgage transactions to help ensure that consumers set aside funds to pay property taxes, homeowners insurance premiums, and other mortgage-related insurance required by the creditor. lender-furnished appraisals page 16 Lenders will be required to provide mortgage applicants with free copies of all appraisals and other home-value estimates under final rules officially issued on Jan. 18 by the CFPB. appraisals for higher-priced mortgages Lenders will be required to obtain a written appraisal from a certified or licensed appraiser and meet other requirements before making a higher-priced mortgage loan under a joint rule approved by the FDIC board on Jan. 15. page 18

4 Ability-to-repay /QM Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z) (12 CFR Part 1026) The housing finance sector s long wait for one of Dodd-Frank s most highly-anticipated final rules is at an end.the ability-to-repay rule issued by the Consumer Financial Protection Bureau (CFPB) on Jan.10 will establish a 43 percent debt-to-income ratio threshold for qualified mortgages (QM). However, in a surprise move, the final rule establishes a temporary category of QMs that has more flexible underwriting requirements. The bureau said it crafted this temporary provision because it fears lenders will initially be reluctant to write loans that are not QMs, even though the loans are responsibly underwritten. The final rule also answers the question of whether the writing of a QM should afford lenders a compliance safe harbor. Under the final rule, lenders would be granted a legal safe harbor when they write a QM loan that is also a prime loan. The CFPB, however, chose to establish a rebuttable presumption of compliance for subprime QMs. Lenders have until January 2014 to comply with the final rule. In addition to the release of the final rule, the bureau unveiled proposed rule amendments that would provide QM status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. What the rule does The CFPB s final rule implements Dodd-Frank provisions that require a lender to make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms. Congress also established a presumption of compliance for QM s. Ability-to-repay determinations The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors: 1) current or reasonably expected income or assets; 2) current employment status; 3) the monthly payment on the covered transaction; 4) the monthly payment on any simultaneous loan; 5) the monthly payment for mortgage-related obligations; 6) current debt obligations, alimony and child support; 7) the monthly debt-to-income ratio or residual income; and 8) credit history. The rule provides guidance as to the application of these factors under the statute. For example, monthly payments must generally be calculated by assuming that the loan is repaid in substantially equal monthly payments during its term. For adjustable-rate mortgages, the monthly payment must be calculated using the fully indexed rate or an introductory rate, whichever is higher. Special payment calculation rules apply for loans with balloon payments, interest-only payments or negative amortization. The final rule also provides special rules to encourage creditors to refinance nonstandard mortgages which include various types of mortgages which can lead to payment shock that can result in default into standard mortgages with fixed rates for at least five years that reduce consumers monthly payments. QM safe harbor and rebuttable presumption The CFPB noted that under Dodd-Frank, QMs are entitled to a presumption that the creditor making the loan satisfied the abilityto-repay requirements. However, the act did not specify whether the presumption of compliance is conclusive (that is, creates a safe harbor) or is rebuttable. The question regarding how the bureau should structure this presumption of compliance was a focal point of intense public debate. The final rule provides a safe harbor for loans that satisfy the definition of a qualified mortgage and are not higher-priced as generally defined by the Federal Reserve s 2008 rule, which prohibits creditors from making higher-price mortgage loans without assessing consumers ability to repay the loans. The final rule provides a rebuttable presumption for higher-priced mortgage loans. The line the bureau is drawing is one that has long been recognized as a rule of thumb to separate prime loans from subprime loans, the CFPB wrote. The CFPB noted that under the Fed s 2008 rule, only higher-priced mortgages are subject to an ability-to-repay requirement and a rebuttable presumption of compliance if creditors follow certain requirements. Higher-priced QMs The CFPB said its final rule strengthens the requirements needed to qualify for a rebuttable presumption for subprime loans and defines with more particularity the grounds for rebutting the presumption. Specifically, the final rule provides that consumers may demonstrate a violation with regard to a subprime QM 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 would 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. Guidance accompanying the rule notes 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 DoddFrankUpdate.com 4

5 mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income. Prime QMs With respect to prime loans which are not currently covered by the Fed s ability-to-repay rule the final rule applies the new ability-to-repay requirement but creates a strong presumption for those prime loans that constitute qualified mortgages. Thus, if a prime loan satisfies the qualified mortgage criteria described below, it will be conclusively presumed that the creditor made a good faith and reasonable determination of the consumer s ability to repay, the CFPB said. QM general requirements The Dodd-Frank Act set certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and the final rule implements the statutory criteria, which generally prohibit loans with negative amortization, interest-only payments, balloon payments or terms exceeding 30 years from being qualified mortgages. So-called no-doc loans where the creditor does not verify income or assets also cannot be qualified mortgages. Finally, a loan generally cannot be a QM if the points and fees paid by the consumer exceed 3 percent of the total loan amount, although certain bona fide discount points are excluded for prime loans. The final rule provides guidance on the calculation of points and fees and thresholds for smaller loans. The final rule also establishes general underwriting criteria for QMs. The general rule requires that monthly payments be calculated based on the highest payment that will apply in the first five years of the loan and that the consumer have a total debt-toincome ratio that is less than or equal to 43 percent. Temporary QM The bureau said there are many instances in which individual consumers can afford a debt-to-income ratio above 43 percent based on their particular circumstances, but that such loans are better evaluated on an individual basis under the ability-torepay criteria rather than with a blanket presumption. However, the bureau said it is concerned that creditors may initially be reluctant to make loans that are not QMs, even though they are responsibly underwritten. For this reason, in light of the fragile state of the housing market, the final rule provides for a second, temporary category of QMs that have more flexible underwriting requirements. To conform to this temporary standard, a loan would still be required to satisfy the general product feature prerequisites for a QM. Such loans would also be required to satisfy the underwriting requirements of: 1) the government sponsored enterprises while they operate under federal conservatorship or receivership; or 2) the Department of Housing and Urban Development, Department of Veterans Affairs, Department of Agriculture or Rural Housing Service. This temporary provision will phase out over time as the various federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years, the CFPB wrote. Other rule provisions The final rule also implements a special provision in the Dodd- Frank Act that would treat certain balloon-payment loans as qualified mortgages if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. The CFPB said it will designate a list of rural and underserved counties each year. The agency noted that it defined coverage of this provision more broadly than originally had been proposed. The final rule also implements Dodd-Frank Act provisions that generally prohibit prepayment penalties except for certain fixedrate, qualified mortgages where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties. To match certain statutory changes, the final rule also lengthens to three years the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions and prohibits evasion of the rule by structuring a closed-end extension of credit that does not meet the definition of open-end credit as an open-end plan. Rule amendments planned In addition to the final rule, the CFPB proposed a rule that would exempt certain nonprofit creditors that work with low- and moderate-income consumers. The proposed amendments would also make exceptions for certain homeownership stabilization programs such as those that offer loans made in connection with the Making Home Affordable program. The proposed amendments would provide QM status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. Finally, the proposed amendments seek comment on how to calculate loan origination compensation under the points and fees provision of qualified mortgages. The proposed amendments, if adopted, would be finalized this spring and go into effect at the same time as the ability-to-repay rule in January Get your hands on critical Dodd-Frank Act resources FAST! Subscribers to get full access to: Proposed regulations, final rules, position papers,court actions, enforcement documents, special reports, legislation, reports, studies, surveys, guidance documents and more! OctoberStore.com 5

6 Ability-to-repay concurrent proposal Proposed Amendments to the Ability-to-Repay Standards under the Truth in Lending Act(Regulation Z) [Docket No. CFPB ] The Consumer Financial Protection Bureau (CFPB) released its ability-to-repay (ATR)/qualified mortgage (QM) rule on Jan. 10, but the rule s impact on community lenders and the customers they serve still isn t clear. That s because, in addition to the final rule, the bureau released a concurrent proposal that includes a set of important rule modifications and exemptions. The comment period for the concurrent proposal closed on Feb. 26, and hundreds of community lenders and mortgages brokers commented on the CFPB s plans to craft a new QM category and settle outstanding issues related to loan originator compensation. The CFPB s ATR final rule scheduled to take effect in January 2014 establishes a 43 percent debt-to-income (DTI) ratio threshold for QMs. The proposed amendments, however, would provide QM status for certain loans made and held in portfolio by small creditors, such as community banks and credit unions. The proposal would establish a new category of QM that does not include a specific DTI threshold. The creditor and the loan would need to meet certain requirements to qualify for this new QM category. Specifically, the proposed QM category would pertain to certain loans originated by small creditors that have total assets of $2 billion or less; and together with all affiliates, originated 500 or fewer first-lien covered transactions during the previous calendar year. Under the proposal, the loan would have to conform to all of the requirements under the general definition of a qualified mortgage as set forth in the ATR final rule except the 43 percent limit on monthly DTI. That means the loan could not have: negative-amortization, interest-only or balloon-payment features; a term longer than 30 years; and points and fees greater than 3 percent of the total loan amount or for smaller loans, the amount specified in the ATR final rule. APR triggers Ron Haynie, vice president of mortgage finance policy with the Independent Community Bankers of America (ICBA), supported the proposed creation of a QM category for community banks. However, he suggested changes to provisions of both the bureau s final and proposed rules. For instance, he said the limit for the number of mortgage loans originated and retained in portfolio to qualify as a community bank lender should be raised to 1,000 per year. He also said the bureau should amend certain provisions related to annual percentage rate (APR) triggers to help banks more appropriately price their portfolio loans. The CFPB s proposal would allow small creditors to charge a higher APR for first-lien qualified mortgages in the proposed new category and still benefit from a conclusive presumption of compliance, commonly known as the QM safe harbor. Under the bureau s ATR final rule, first-lien qualified mortgages with an APR less than or equal to the average prime offer rate (APOR) plus 1.5 percentage points and subordinate-lien qualified mortgages with an APR less than or equal to the APOR plus 3.5 percentage points are within the safe harbor. Qualified mortgages with APRs above these thresholds are presumed to comply with the ability-to-repay rules, but a consumer can rebut that presumption under certain circumstances. A QM in the proposed new category would be granted safe harbor status if the APR is equal to or less than the average prime offer rate plus 3.5 percentage points for both first-lien and subordinate-lien loans. The APOR is heavily weighted towards the pricing that Fannie Mae and Freddie Mac set based on their ability to access capital and funding markets that community banks cannot, Haynie wrote. Community banks price all other types of credit based on their cost of funds plus their spread or margin. Banks that hold mortgage loans in portfolio should be able to do the same. Haynie said the bureau should extend the safe harbor conclusive presumption of compliance for community bank mortgage loans held in portfolio with APRs up to the higher of the APOR plus 3.5 percent or the community bank cost of funds plus 4 percent, subject to thresholds set forth under the Home Ownership and Equity Protection Act. This will enable community banks to better price their portfolio loans reflecting the credit risk they are assuming and their cost of funds while providing protections to consumers, Haynie wrote. Balloon loans Under the ATR final rule, loans with balloon-payment features generally cannot qualify as a QM. However, the final rule implements a special provision in the Dodd-Frank Act that would treat certain balloon-payment loans as QMs if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas. The CFPB said it will designate a list of rural and underserved counties each year. The agency noted that it defined coverage of this provision more broadly than originally had been proposed. The CFPB s proposal would also allow small creditors operating predominantly in rural or underserved areas to offer first-lien balloon loans with higher annual percentage rates and still benefit from a QM safe harbor. The bureau said this change may be necessary to preserve access to affordable mortgage credit in rural and underserved areas. Haynie was concerned that the bureau s exemption for balloon payment loans does not cover a sufficient number of community banks. OctoberStore.com 6

7 David Andrews, executive vice president of Minnesota-based Farmers State Bank of West Concord, voiced similar concerns. He said roughly half of his institution s loan portfolio is made up of first lien residential mortgage balloon loans. While his bank operates in very small towns, the counties in which they are located are metropolitan statistical areas (MSA) that do not meet the CFPB s definition of rural as set forth in the ATR final rule. All of our real estate loans are written with a balloon to mitigate interest rate risk, Andrews said. We have been writing balloon real estate loans since our inception 32 years ago without any adverse effect on the bank or our customers. He urged the CFPB to weigh the impact of the ATR rule on community banks ability to offer balloon loans. He also asked the bureau to consider possible exemptions for small community banks that hold their loans in their portfolio that also happen to be located in a metropolitan or micropolitan statistical area.haynie said the CFPB should expand the QM definition to include additional loans held in portfolio by small creditors, including balloon payment mortgages originated by small creditors in non-rural markets. He also said the CFPB should expand its definition of rural to include any county outside of a metropolitan statistical area or any town with fewer than 50,000 residents. Credit unions The CFPB s proposal would exempt extensions of credit made under a program administered by a housing finance agency from the ability-to-repay requirements. It would also exempt an extension of credit made by certain types of nonprofit creditors from the ability-to-repay requirements. Carrie Hunt, general counsel and vice president of regulatory affairs for the National Association of Federal Credit Unions, said all covered transactions originated by a federally insured credit union should be deemed compliant with the ATR final rule. In the absence of a blanket exemption for these institutions, she said the bureau should expand its community focused lending exemptions to encompass low-income credit unions and credit unions operating in underserved areas. A credit union must obtain the approval of the [National Credit Union Administration (NCUA)] and meet the agency s requirements in order to add an underserved area into its field of membership, Hunt noted. The NCUA, in an effort to encourage credit unions to expand services to underserved areas, has allowed for more flexible policies to make expansion into such areas less burdensome. NAFCU believes the CFPB should follow suit and do the same for credit unions lending in underserved areas because they serve an important role in ensuring access to credit and promoting stabilization in the housing markets for the communities they serve. She said all mortgages held by federally insured credit unions should be deemed QMs under the CFPB s proposed QM category. The bureau should increase the ATR final rule s 500 transaction limit for small creditors. She also said the CFPB should consider raising QM s DTI threshold and assigning different DTI levels based on borrower income. Loan originator compensation The CFPB s concurrent proposal sought comments on outstanding issues related to loan originator compensation and QM s 3 percent points and fees cap. Despite industry opposition, compensation paid to loan originators is included in the points and fees calculation under the ATR final rule. The CFPB s proposal asked for feedback on amendments intended to address concerns that compensation could be counted multiple times in some instances. Haynie urged the CFPB to reconsider its decisions to include loan originator compensation in the QM points and fees calculation, arguing this requirement could increase costs for borrowers as firms raise interest rates to cover their compensation costs. This will make it more difficult for some borrowers to qualify for a loan since higher interest rates equate to higher monthly payments, Haynie said. To solve this issue, ICBA urges the bureau to exclude mortgage loan originator compensation from the points and fees calculation for any mortgage loan that meets the QM definition. Double counting The bureau noted that if read literally, the Truth in Lending Act, as amended by Dodd-Frank, appears to provide that compensation should be counted as it flows downstream from one party to another so that it is counted each time that it reaches a loan originator, whatever the previous source. The CFPB, however, doubted whether a literal reading of the statute in all cases is appropriate. Numerous brokers also voiced concern over possible double counting of loan originator compensation. If the 3 percent cap is determined by what my company receives and what I pay my [loan originator], I will have no choice but to reduce my staff and become a one-person shop, wrote Howard Howland of Altamonte Springs, Fla. based Contemporary Mortgage Services. I suggest eliminating double counting of the fees in the lender-paid origination fees and limiting the total fee that the lender or the consumer can pay to the [loan originator] company to 3 percent, including any affiliate fees. To address concerns related to potential double counting, the CFPB s concurrent proposal sought comment on some generalized rules regarding the accounting of loan originator compensation payments. Specifically, under the proposals, mortgage broker fees would be counted toward the points and fees cap by virtue of their inclusion in the finance charge. Compensation paid by the broker to the individual loan originator employee, however, would not be included in points and fees. With regard to payments to creditor employees who are loan originators, the CFPB proposed two alternatives. Hunt noted that under the first alternative, a creditor must include compensation paid by a consumer or creditor to a loan originator in the calculation continued on page 13 DoddFrankUpdate.com 7

8 Servicing/Reg. X, Reg. Z Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X) (12 CFR Part 1024) Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z) (12 CFR Part 1026) The Consumer Financial Protection Bureau released two key mortgage servicing rules on Jan. 17. The final rules, which implement provisions of the Dodd-Frank Act, are intended to protect consumers from detrimental actions by mortgage servicers and provide consumers with tools and information when dealing with servicers. The final rules, which amend Regulation Z (Truth in Lending Act) and Regulation X (Real Estate Settlement Procedures Act), cover nine major topics ranging from periodic billing statements and other disclosures to procedures related to force-placed insurance, error resolution, requests for information, early intervention with delinquent borrowers and loss mitigation. The final rules include a number of exemptions and other adjustments for small servicers. Small servicers are defined as servicers that service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own. This definition covers substantially all of the community banks and credit unions that are involved in servicing mortgages, the CFPB wrote in a summary released in advance of the official final rules. These exceptions and adjustments should help reduce burdens for these institutions that have strong consumer service safeguards already built into their business models. The 5,000 loan threshold represents a key change from the CFPB proposal which would have established a 1,000 loan cap for the purposes of the small servicer exemption. The effective date for both rules is Jan. 10, Periodic billing statements Section 1420 of the Dodd-Frank Act requires servicers to provide borrowers with a periodic statement for each billing cycle. Under the final rules, creditors, assignees and servicers must provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors and, where applicable, information regarding delinquencies. These statements must meet the timing, form and content requirements provided in the rule. The rule contains sample forms that may be used. The rule provides an exemption for small servicers. Rate adjustment notices Servicers are currently required to notify consumers with adjustable rate mortgage (ARM) each time the interest rate adjustment results in a payment change. Like the proposal, the final rule requires creditors, assignees and servicers to provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Creditors, assignees and servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change. The rule contains model and sample forms that servicers may use. Prompt payment crediting and payoff statements The rule provides that servicers must promptly credit periodic payments from borrowers as of the day of receipt. A periodic payment consists of principal, interest and escrow. If a servicer receives a payment that is less than the amount due for a periodic payment, the payment may be held in a suspense account. When the amount in the suspense account covers a periodic payment, the servicer must apply the funds to the consumer s account. In addition, creditors, assignees and servicers must provide an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information. Force-placed insurance As required by Dodd-Frank, the final rules prohibit servicers from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance. The rules also set forth notice requirements. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance coverage, and a second reminder notice must be sent no earlier than 30 days after the first notice and at least 15 days before charging the borrower for force-placed insurance coverage. The rule contains model forms that servicers may use. If a borrower provides proof of hazard insurance coverage, the servicer must cancel any force-placed insurance policy and refund any premiums paid for overlapping periods in which the borrower s coverage was in place. The rule also provides that charges related to force-placed insurance other than those subject to state regulation as the business of insurance or authorized by federal law for flood insurance must be for a service that was actually performed and must bear a reasonable relationship to the servicer s cost of providing the service. DoddFrankUpdate.com 8

9 As in the proposed rule, the final rule provides that when a borrower has an escrow account for the payment of hazard insurance premiums, the servicer is prohibited from obtaining force-placed insurance where the servicer can continue the borrower s homeowner insurance, even if the servicer needs to advance funds to the borrower s escrow account to do so. The rule against obtaining force-placed insurance in cases in which hazard insurance may be maintained through an escrow account exempts small servicers so long as any force-placed insurance purchased by the small servicer is less expensive to a borrower than the amount of any disbursement the servicer would have made to maintain hazard insurance coverage. Error resolution, info requests Servicers are currently required to meet certain procedural requirements for responding to written information requests or complaints of errors. Dodd-Frank amended RESPA to change this process. For instance, Dodd-Frank shortened the amount of time servicers have to respond to certain written requests. The CFPB s final rule requires servicers to comply with the error resolution procedures for certain listed errors as well as any error relating to the servicing of a mortgage loan. Servicers may designate a specific address for borrowers to use. Servicers generally are required to acknowledge the request or notice of error within five days. Servicers also generally are required to correct the error asserted by the borrower and provide the borrower written notification of the correction, or to conduct an investigation and provide the borrower written notification that no error occurred, within 30 to 45 days. Further, within a similar amount of time, servicers generally are required to acknowledge borrower written requests for information and either provide the information or explain why the information is not available. General servicing policies, procedures and requirements Servicers are required to establish policies and procedures reasonably designed to achieve objectives specified in the rule. Examples of the specified objectives include accessing and providing accurate and timely information to borrowers, investors, and courts; properly evaluating loss mitigation applications in accordance with the eligibility rules established by investors; and facilitating oversight of, and compliance by, service providers The reasonableness of a servicer s policies and procedures takes into account the size, scope and nature of the servicer s operations, the CFPB said. The rule also requires servicers to maintain certain documents and information for each mortgage loan in a manner that enables the servicer to compile it into a servicing file within five days. This section includes an exemption for small servicers, the bureau wrote. The agency added that the rule does not provide a private right of action to enforce these general servicing provisions. Early intervention Servicers must now establish or make good faith efforts to establish live contact with borrowers by the 36th day of their delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide a borrower a written notice with information about loss mitigation options by the 45th day of a borrower s delinquency. The rule contains model language servicers may use for the written notice. This section includes an exemption for small servicers. Continuity of contact The rules require servicers to maintain policies designed to ensure that a servicer assigns personnel to a delinquent borrower by the time a servicer provides the borrower with the written notice required by the early intervention requirements, but in any event, by the 45th day of a borrower s delinquency. These personnel should be accessible to the borrower by phone to assist the borrower in pursuing loss mitigation options, including advising the borrower on the status of any loss mitigation application and applicable timelines. The personnel should be able to access all of the information provided by the borrower to the servicer and provide that information, when appropriate, to those responsible for evaluating the borrower for loss mitigation options. Community institutions requested an exemption from these provisions and the final rule provides an exemption for small servicers. The final rule does not establish a private right of action to enforce these provisions. Loss Mitigation Procedures Servicers are now required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower s principal residence. If a borrower submits an application for a loss mitigation option, the servicer is generally required to acknowledge the receipt of the application in writing within five days and inform the borrower whether the application is complete and, if not, what information is needed to complete the application. The servicer is required to exercise reasonable diligence in obtaining documents and information to complete the application. For a complete loss mitigation application received more than 37 days before a foreclosure sale, the servicer is required to evaluate the borrower, within 30 days, for all loss mitigation options for which the borrower may be eligible in accordance with the investor s eligibility rules, including both options that enable the borrower to retain the home such as a loan modification and non-retention options such as a short sale. During the public comment period, industry groups voiced continued on page 11 OctoberStore.com 9

10 Loan originator compensation Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z) (12 CFR Part 1026) The Consumer Financial Protection Bureau s (CFPB) long-awaited final rule on mortgage loan originator compensation does not include a proposed prohibition on consumer payment of upfront points and fees. The rule, however, will make important changes regarding how loan originators are paid and how they qualify for their jobs. The bureau s August 2012 proposed rule would have required mortgage loan originators to make available a loan option with no upfront discount points or origination fees, if they were making available one with upfront discount points or origination fees. Based on the comments received, the CFPB has decided not to finalize this part of the proposal. However, the bureau said it will continue to study the issue. The final rule implements Dodd-Frank s restrictions on dual compensation but provides an exception to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of the loans that they originate. The final rule also clarifies the scope of a prohibition against compensation based on a term of a transaction. Relative to their job qualifications, the rule provides that loan originators: Must meet character, fitness and financial responsibility reviews; Must be screened for felony convictions; and Are required to undertake training to ensure they have the knowledge about the rules governing the types of loans they originate. The final rule implements Dodd-Frank provisions that, for mortgage and home equity loans, generally prohibit mandatory arbitration of disputes related to mortgage loans and the practice of increasing loan amounts to cover credit insurance premiums. The rules take effect in January 2014; except that the prohibition on mandatory arbitration and on the financing of credit insurance will take effect in June Dual compensation The CFPB s final rule revises Regulation Z to implement amendments to the Truth in Lending Act (TILA). Regulation Z already provides that where a loan originator receives compensation directly from a consumer in connection with a mortgage loan, no loan originator may receive compensation from another person in connection with the same transaction. The Dodd-Frank Act codified this prohibition. The final rule implements this restriction but provides an exception to allow mortgage brokers to pay their employees or contractors commissions, although the commissions cannot be based on the terms of the loans that they originate. Proxy for a term of a transaction Regulation Z already prohibits basing a loan originator s compensation on any of the transaction s terms or conditions. Dodd-Frank codified this prohibition and the final rule clarifies the prohibition s scope. For instance, the final rule defines a term of a transaction as any right or obligation of the parties to a credit transaction. This means, for example, that a mortgage broker employee cannot receive compensation based on the interest rate of a loan or on the fact that the loan officer steered a consumer to purchase required title insurance from an affiliate of the broker, since the consumer is obligated to pay interest and the required title insurance in connection with the loan, the CFPB wrote. The rule further clarifies the definition of a proxy for a term of a transaction to focus on whether: 1) the factor consistently varies with a transaction term over a significant number of transactions; and 2) the loan originator has the ability, directly or indirectly, to add, drop or change the factor in originating the transaction. To prevent evasion, the final rule generally prohibits loan originator compensation from being reduced to offset the cost of a change in transaction terms, commonly known as a pricing concession. However, the final rule allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs. Qualified plans To prevent incentives to up-charge consumers on their loans, the final rule generally prohibits loan originator compensation based upon the profitability of a transaction or a pool of transactions. However, the final rule clarifies the application of this prohibition to various kinds of retirement and profit-sharing plans. For example, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans, such as a 401(k) plan, and to make bonuses and contributions to other plans that do not exceed 10 percent of the individual loan originator s total compensation. No ban on upfront points and fees Section 1403 of the Dodd-Frank Act generally prohibits consumers from paying upfront points or fees on transactions in which the loan originator compensation is paid by a person other than the consumer either to the creditor s own employee OctoberStore.com 10

11 or to a mortgage broker. However, the bureau had proposed to waive the ban so that creditors could charge upfront points and fees from page 10 This proposed zero-zero alternative loan requirement was unpopular with industry participants and consumer advocates alike. The final rule does not adopt this requirement and does not implement Dodd-Frank s ban on the payment of upfront points and fees. The bureau has decided not to finalize the proposal at this time, however, because of concerns that it would have created consumer confusion and other negative outcomes, the CFPB wrote. The bureau has decided instead to issue a complete exemption to the prohibition on upfront points and fees pursuant to its exemption authority while it scrutinizes several crucial issues relating to the proposal s design, operation and possible effects in a mortgage market undergoing regulatory overhaul. premiums or fees for credit insurance such as credit life insurance in connection with a consumer credit transaction secured by a dwelling, but allows credit insurance to be paid for on a monthly basis. The final rule extends existing recordkeeping requirements concerning loan originator compensation so that they apply to both creditors and mortgage brokers for three years. The rule also clarifies the definition of loan originator for purposes of the compensation and qualification rules, including exclusions for certain employees of manufactured home retailers, servicers, seller financers and real estate brokers; management, clerical and administrative staff; and loan processors, underwriters and closers. The bureau promised to study the issue further. Loan originator qualifications and identifier requirements The Dodd-Frank Act imposes a duty on individual loan officers, mortgage brokers and creditors to be qualified and, when applicable, registered or licensed to the extent required under state and federal law. The final rule imposes duties on loan originator organizations to make sure that their individual loan originators are licensed or registered as applicable under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and other applicable law. For employers whose employees are not required to be licensed, including depository institutions and bona fide non-profits, the rule requires them to: Ensure that their loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards; and Provide training to their loan originator employees that is appropriate and consistent with those employees origination activities. The final rule contains special provisions with respect to criminal background checks and the circumstances in which a criminal conviction is disqualifying, and with respect to situations in which a credit check on a loan originator is required. The final rule also implements a Dodd-Frank Act requirement that loan originators provided their unique identifiers under the Nationwide Mortgage Licensing System and Registry (NMLSR) on loan documents. Accordingly, mortgage brokers, creditors, and individual loan originator employees that are primarily responsible for a particular origination will be required to list on enumerated loan documents their NMLSR unique identifiers (NMLSR IDs), if any, along with their names. Other provisions As mandated by Dodd-Frank, the final rule prohibits the inclusion of clauses requiring the consumer to submit disputes concerning a residential mortgage loan or home equity line of credit to binding arbitration. It also prohibits the application or interpretation of provisions of such loans or related agreements so as to bar a consumer from bringing a claim in court in connection with any alleged violation of federal law. In addition, the final rule prohibits the financing of any Ability-to-repay concurrent proposal from page 7 of points and fees in addition to any fees or charges paid by the consumer to the creditor included in points and fees. Under the second alternative, only the amount of the origination fee would be included in the points and fees, unless the amount paid to the loan originator exceeds the amount of the origination fee paid by the consumer, in which case the difference would also count against the points and fees cap. NAFCU would first like to reiterate its position that it does not believe that loan originator compensation should be included in the points and fees calculation, Hunt wrote. However, of the two alternatives, NAFCU favors the second one. It would reduce the incidence of double counting, ensuring that loans do not have artificially higher total points and fees and avoiding pushing loans into the high-cost mortgage category. The National Association of Mortgage Brokers (NAMB) also urged the CFPB to adopt the second alternative. Alternative 1 should be stricken as it would result in the double counting of compensation and ultimately lead to mortgage loans artificially failing to meet the 3 percent points and fees test, NAMB wrote on its website. DoddFrankUpdate.com 11

12 High-cost mortgage: HOEPA High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X) (12 CFR Parts 1024 and 1026) The Consumer Financial Protection Bureau (CFPB) finalized key rules implementing Dodd-Frank s expansion of the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protection Act (HOEPA). The final rule, High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X), was officially issued on Jan. 10. When the rule was proposed last year, industry participants voiced concern that a separate proposal regarding the manner in which annual percentage rate (APR) is calculated could further broaden HOEPA coverage and restrict borrowers access to credit. In the final rule, the bureau explained it will defer its decision regarding the APR calculation until the agency releases rules integrating the various mortgage disclosures required under the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA). The bureau previously said it hopes to finalize the disclosure rule in September. Notably, the final high-cost mortgage rule did not adopt a proposal that would have established a separate benchmark for determining HOEPA s rate triggers. The final rule takes effect Jan. 10, Read on to learn more about the final rule and what the CFPB had to say about HOEPA s rate triggers. Rule requirements The Dodd-Frank Act required the CFPB to revise and expand the triggers for coverage under HOEPA, and imposed additional restrictions on HOEPA mortgage loans, including a pre-loan counseling requirement. The act expanded HOEPA to apply to more types of mortgage transactions, including purchasing money mortgage loans and home-equity lines of credit (HELOC). Dodd-Frank also imposed certain other requirements regarding homeownership counseling. Under the final rule, most types of mortgage loans secured by a consumer s principal dwelling are potentially subject to HOEPA coverage. The rule, however, exempts loans to finance the initial construction of a dwelling, loans originated and financed by housing finance agencies and loans originated through the U.S. Department of Agriculture s Rural Housing Service section 502 Direct Loan Program from HOEPA coverage. The final rule also retains the exemption from HOEPA coverage for reverse mortgages. Loretta Salzano, a founding partner of Franzen and Salzano PC, told Dodd Frank Update the reduced thresholds for HOEPA loans probably will have a relatively small impact due to existing state law limitations. Because so few lenders make high-cost loans or loans with negative amortization, changes to such loans and required counseling are not likely to have a substantial impact, Salzano added. HOEPA coverage tests The final rule provides that a transaction is a high-cost mortgage if any of the following tests are met: The transaction s APR exceeds the applicable average prime offer rate (APOR) by more than 6.5 percentage points for most first-lien mortgages, or by more than 8.5 percentage points for a first mortgage if the dwelling is personal property and the transaction is for less than $50,000; The transaction s APR exceeds the applicable average prime offer rate by more than 8.5 percentage points for subordinate or junior mortgages; The transaction s points and fees exceed 5 percent of the total transaction amount or, for loans below $20,000, the lesser of 8 percent of the total transaction amount or $1,000 (with the dollar figures also adjusted annually for inflation); or The credit transaction documents permit the creditor to charge or collect a prepayment penalty more than 36 months after transaction closing or permit such fees or penalties to exceed, in the aggregate, more than 2 percent of the amount prepaid. The final rule also provides guidance on how to apply the various coverage tests, such as how to determine the applicable APOR and how to calculate points and fees. Restrictions on Loan Terms The final rule implements new Dodd-Frank Act restrictions and requirements concerning loan terms and origination practices for mortgages falling within HOEPA s coverage test. For example: Balloon payments are generally banned, unless: they are to account for the seasonal or irregular income of the borrower; they are part of a short-term bridge loan; or they are made by creditors meeting specified criteria, including operating predominantly in rural or underserved areas. Creditors are prohibited from charging prepayment penalties and financing points and fees. Late fees are restricted to four percent of the payment that is DoddFrankUpdate.com 12

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