MAINE S NEW PREDATORY LENDING LAW

Transcription

1 MAINE S NEW PREDATORY LENDING LAW 1

2 L.D An Act to Protect Maine Homeowners from Predatory Lending : Impact on Maine s Truth-in-Lending Act Lori A. Desjardins, Esq. October 11,

3 Who Is Covered by Maine TILA (Title 9-A, Article 8)? State SFO at Home in Maine: Federal SFO at Home in Maine: State SFO from Away: Federal SFO from Away: SL NSFO from Anywhere: YES NO YES NO YES 3

4 New Key Definitions Residential Mortgage Loan [ 8-103(1-A)(W)] means an extension of credit, including open-end, in which: (1) The loan does not exceed the maximum original principal obligation as set forth in and from time to time adjusted according to the provisions of 12 United States Code, Section 1454(a)(2) i.e., is less than the Freddie Mac maximum conventional loan amount (currently $417,000); (2) The loan is considered a federally related mortgage loan as set forth in 24 Code of Federal Regulations, Section i.e., is a RESPA-covered loan; (3) The loan is not a reverse mortgage transaction or a loan made primarily for business, agricultural or commercial purposes; and (4) The loan is not a construction loan. 4

5 New Key Definitions (cont.) Subprime Mortgage Loan [ 8-103(1-A)(BB)] means either: (1) a nontraditional mortgage, as defined here, or (2) a rate spread home loan, as defined here. 5

6 New Key Definitions (cont.) Nontraditional Mortgage Loan [ 8-103(1-A)(T)] has the same meaning as those mortgages described in the "Interagency Guidance on Nontraditional Mortgage Product Risks" issued September 29, 2006 and published in 71 Federal Register, on October 4, 2006 and as updated from time to time - i.e., option ARMs and interest-only mortgages. 6

7 New Key Definitions (cont.) Rate Spread Home Loan [ 8-103(1-A)(V)] means: (1) any loan for which the rate spread must be reported under the Home Mortgage Disclosure Act of 1975, Regulation C, 12 Code of Federal Regulations, Section 203.4(a)(12) i.e., loans reportable as exceeding the high rate trigger under HMDA; and (2) any loan that meets the criteria of a high-rate, high-fee mortgage. 7

8 New Key Definitions (cont.) High-Rate, High-Fee Mortgage [ 8-103(1-A)(Q)&(FF)] means a residential mortgage loan in which the terms of the loan meet or exceed one or more of the following thresholds: (1) A rate threshold where the APR equals or exceeds the TILA Section 32 triggers (T-bill + 8% for first lien, 10% 2d), including purchase money and open-end transactions; or (2) A points and fees threshold as follows: (a) For loans in which the total loan amount is $40,000 or more, the point at which the total points and fees payable in connection with the residential mortgage loan less any excluded points and fees exceed 5% of the total loan amount; and (b) For loans in which the total loan amount is less than $40,000, the point at which the total points and fees payable in connection with the residential mortgage loan less any excluded points and fees exceed 6% of the total loan amount. 8

9 New Key Definitions (cont.) Points and Fees [ 8-103(1-A)(U)] means: (1) All items included as finance charges under the TILA, other than periodic interest; (2) All amounts that count as points under Section 32 of TILA; (3) All compensation paid directly or indirectly to a mortgage broker from any source, even if a table-funded transaction; (4) All financed credit insurance or debt cancellation, except for premiums calculated and paid on a monthly basis or through regularly scheduled periodic payments; (5) Maximum possible prepayment fees and penalties; and (6) Actual prepayment penalties incurred refinancing an existing loan with same creditor or affiliate. 9

10 New Key Definitions (cont.) Points and Fees means (cont.): - Exclude Regulation Z, Section 226.4(d)(2) charges paid to persons other than the creditor, such as taxes, filing fees, recording fees and charges to public officials, fees for flood certifications and determination, appraisal fees, fees for credit reports, fees for surveys, title insurance premiums, etc. - For open-end loans, add the total points and fees known at or before closing, including the maximum prepayment penalties that may be charged or collected, and the minimum fees the borrower would be required to pay to draw down an amount equal to the total credit line i.e., maximum cashadvance fees. 10

11 New Key Definitions (cont.) Total Loan Amount [ 8-103(1-A)(GG)] means: the principal of a loan minus those points and fees that are included in the principal amount of the loan. For open-end loans, the total loan amount must be calculated using the total line of credit allowed under the residential mortgage loan at closing. 11

12 New Maine TILA Restrictions Residential Mortgage Loans [ D(1)] : - Creditor may not recommend default. - No flipping - defined as refinancing without net tangible benefit to the borrower (to be defined by rulemaking of OCCR/BofFI). - Late charges must be capped at 5% & assessable after 10 days. - No pyramiding. 12

13 New Maine TILA Restrictions (cont.) Residential Mortgage Loans (cont.): - No accelerating debt except in good faith due to borrower s failure to abide by material loan terms. - No single-premium credit life/disability insurance or debt cancellation (monthly expressly allowed). - No extra fee for discharges beyond actual public discharge fee. 13

14 New Maine TILA Restrictions (cont.) Residential Mortgage Loans (cont.): - Free annual payoff balances. - New borrower right to cure all defaults after initiation of foreclosure - creditor can recover reasonable costs incurred before cure - reinstates borrower to same position as if no default - is exercisable once every 12 months. 14

15 New Maine TILA Restrictions (cont.) Subprime Mortgage Loans [ D(1)(G)] : (are a subset of Residential Mortgage Loans) - Cannot extend unless reasonable creditor believes that borrower can, at time of closing, make the scheduled payments. - Determination of ability to repay must include review of: - Income, both stated and any contradictory facts - Credit history - DTI (including PITI) - Employment - Other resources except home equity 15

16 New Maine TILA Restrictions (cont.) Subprime Mortgage Loans (cont.): - Determination of ability to repay must utilize: - Fully amortizing payment at fully indexed rate - VOIs - Full negative amortization in payment calculation 16

17 New Maine TILA Restrictions (cont.) High-Rate, High-Fee Mortgages [ C(1)]: (also are a subset of residential mortgage loans) - Cannot finance any points or fees - No prepayment penalties - No scheduled payment that is more than twice the average of earlier scheduled payments (unless due to seasonal/irregular income of borrower) - No negative amortization 17

18 New Maine TILA Restrictions (cont.) High-Rate, High-Fee Mortgages (cont.): - No default interest rates - No consolidation of more than 2 payments paid in advance from loan proceeds - Payments to home improvement contractors must be made jointly with borrower or, at borrower s election, by an escrow agent under a written agreement - Must obtain certification of borrower counseling - Special borrower notice 18

19 Consequences of Violations Violations of 8-206(C) and (D) expose the violating party to liability to the borrower for: - actual damages, including consequential and incidental damages (without proof of reliance); - statutory damages twice the finance charge plus loss of future interest (an amount likely to dwarf loan principal) - punitive damages when the violation was malicious or reckless; AND - costs, including reasonable attorney s fees. Injunctive, declaratory and other equitable relief is also available. Furthermore, any person who knowingly violates, in pertinent part, C is guilty of a Class E crime. 19

20 Questions? Lori A. Desjardins Pierce Atwood, LLP One Monument Square Portland, ME Tel: (207) Fax: (207)

21 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Lori A. Desjardins by phone at (207) , or by at 2007 Pierce Atwood LLP 21

22 The Rest of L.D. 1869: Other Mortgage The Rest of L.D. 1869: Other Lending Restrictions Mortgage Lending Restrictions Richard P. Hackett, Esq. October 11, 2007 Richard P. Hackett, Esq. October 11,

23 Correcting Early TILA Disclosure Regarding Prepayment Penalties New 8-206(3): If the early TILA (3 days) reads no prepayment penalty and becomes inaccurate, creditor must notify consumer as soon as practicable of the change Applies to: all state chartered banks and all mortgage companies 23

24 RESPA Compliance Under State Law, New Sections and Certain creditors must comply with RESPA as state law and can be subjected to state regulatory enforcement for violations Applies to: mortgage companies and loan brokers 24

25 Prohibition on Encouraging False Applications New Sections and prohibit a lender or loan officer from encouraging or assisting a consumer in making false statements in an application Applies to: mortgage companies and mortgage brokers 25

26 Protection of Rate Locks New Sections and require that, if a creditor charges for a rate lock, it must take the steps necessary to guaranty the rate, set a lock period during which the loan reasonably can be expected to close, and use good faith efforts to close in that period. Applies to: mortgage companies and mortgage brokers 26

27 No Prepayment Penalty of Riders New Section prohibits the use of the rider to add a prepayment penalty if the underlying note or mortgage states there is no prepayment penalty. Applies to: mortgage companies 27

28 Good Faith and Fair Dealing by Loan Brokers New Section A requires loan brokers to use good faith and fair dealing, and to make suitability decisions about all products that they offer to their consumers. Applies to: loan brokers 28

29 Trigger Leads Under New Section 1330 of the Maine Fair Credit Reporting Act, if you purchase a trigger lead, it is an unfair and deceptive practice under Maine law to: fail to state up front that you are not the person who received the consumer s loan application when you contact the consumer fail to follow firm offer rules under federal FCRA ignore prescreen opt outs offer teaser rates Applies to: everybody 29

30 Questions? Richard P. Hackett Pierce Atwood, LLP One Monument Square Portland, ME Tel: (207) Fax: (207)

31 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Richard P. Hackett by phone at (207) , or by at 2007 Pierce Atwood LLP 31

32 FEDERAL MORTGAGE LAW DEVELOPMENTS 32

33 Interagency Guidance on Nontraditional Mortgage Product Risks (NTM Guidance) Ryan S. Stinneford, Esq. Matthew McIntyre, Esq. October 11,

34 At a Glance: Issued by: OCC, FRB, FDIC, OTS and NCUA Scope: - Residential Mortgage Loan Products that allow borrowers to defer principal and/or interest Effective Date: October 4,

35 Topics Covered by NTM Guidance Scope: Loan Terms and Underwriting ( U/W ) Standards - Qualifying Applicants - Collateral-Dependent Loans - Risk-Layering - Reduced Documentation - Simultaneous Second-Liens - Introductory Interest Rates - Lending to Subprime Borrowers - Non-Owner Occupied Investor Loans 35

36 Topics Covered by NTM Guidance (cont.) Portfolio and Risk Management Practices - Policies - Concentrations - Controls - Third-Party Originations - Secondary Market Activity - Management Information and Reporting - Stress Testing - Capital and Allowance for Loan and Loan Losses 36

37 Topics Covered by NTM Guidance (cont.) Consumer Protection Issues - Concerns - Recommended Practices Consumer Communications - Promotional Materials and Product Descriptions Payment Shock Negative Amortization Prepayment Penalties Pricing Premiums - Monthly Statements on Payment Option ARMs - Practices to Avoid - Control Systems 37

38 Scope Applies to insured financial institutions and their affiliates. Conference of State Bank Supervisors and American Association of Residential Mortgage Regulators have promulgated a modified version of NTM Guidance which applies to state licensed residential mortgage brokers and lenders. Currently, state regulators in approximately 38 states have adopted the CSBS/AARMR Guidance. 38

39 Scope (cont.) NTM guidance applies to all residential mortgage loan products that allow borrowers to defer repayment of principal or interest. Includes: IO Products Negative Amortization Mortgages (not HELOCs) NB: HELOCs are already covered by May 2005 Interagency Credit Risk Management Guidance for H.E. Lending. However, the May 2005 Guidance has been amended to include the consumer disclosure recommendations made in the NTM Guidance. 39

40 Scope (cont.) Guidance does not apply to: Fully amortizing residential loan products Reverse mortgages HELOCs (other than simultaneous second-lien loans) 40

41 Key Definitions IO Loan = Interest Only Mortgage Loan A nontraditional mortgage on which, for a specified number of years, the borrower is required to pay only the interest due during which time the interest rate may fluctuate or be fixed. After the interest-only period, the rate may be fixed or fluctuate based on the prescribed index and payments include both principal and interest. 41

42 Definitions (cont.) Payment Option ARM A nontraditional mortgage that allows the borrower to choose from a number of different payment options. Reduced Documentation A loan feature that is commonly referred to as low doc/no doc, or no income/no asset, stated income, or stated assets (i.e., normal documentation to substantiate income (e.g., W-2, payroll stub) is not required). 42

43 Definitions (cont.) Simultaneous Second-Lien Loan A lending arrangement where either a closed-end second-lien or HELOC is originated simultaneously with the first lien mortgage loan, typically in lieu of a higher downpayment. 43

44 The Regulator s Concerns: Less stringent underwriting standards Broader marketing of NTM loans Equals increased exposure for financial institutions In addition, Regulators see growth of NTM loans being fueled by the combination of less stringent U/W and other risky features such as low-documentation and simultaneous record-lien loans. 44

45 Management Obligations to Mitigate Increased Risk I. Loan Terms and U/W Standards: Should be consistent with prudent lending practices; II. III. Risk Management Practices: Recognize NTMs are untested in a stressed environment; and Consumer Protection: Consumers should have sufficient information to clearly understand loan terms and risks prior to making a product choice. 45

46 I. Loan Terms and Underwriting Central to prudent lending is the internal discipline to maintain sound loan terms and U/W standards despite competitive pressures. Qualify borrowers Avoid collateral-dependent loans Mitigate risk-layering, low-documentation loans and simultaneous seconds Minimize payment shock at ending of teaser rate period Subprime borrowers should be handled with care Properly Qualify Non-Owner-Occupied Investor Applicants 46

47 Loan Terms and Underwriting (cont.) Qualifying Borrowers: Repayment Capacity Analysis (i) Determine applicant s ability to repay the debt by the final maturity date; at the fully-indexed rate; assuming a fully-amortizing repayment schedule; and (ii) Loan amount should include the amount of negative amortization, if any, that may accrue But should not consider other future events (like future income). 47

48 Loan Terms and Underwriting (cont.) Qualifying Borrowers Avoid over-reliance on credit scores as a substitute for income verification. Collateral-Dependent Loans Avoid use of loan terms that may heighten the need for a borrower to rely on the sale or refinancing of the property once amortization begins. Considered unsafe and unsound if repayment contingent on sale of property only. 48

49 Loan Terms and Underwriting (cont.) Risk-Layered NTMs Combining NTM features (e.g., IO loans) with a reduced documentation or simultaneous second lien loan. If Risk-Layering is used, applicant should have one of the following (preferably more): - Higher credit score - Lots of cash - Lower LTV ratio - Mortgage insurance - Lower DTI ratio - Other credit enhancement NB: A higher interest rate is not a substitute for sound U/W. 49

50 Loan Terms and Underwriting (cont.) Reduced Documentation Loans Use with caution because assumptions are substituted for analysis. Clear policy to govern the use of reduced documentation. (Higher credit risks should require more thorough valuation/verification). Verify income with W-2 Statement, pay stubs or tax returns. 50

51 Loan Terms and Underwriting (cont.) Simultaneous Second-Lien Loans Minimal or no equity can mean that the borrower has little or no incentive to bring loan current/avoid foreclosure. Avoid a payment structure that allows for negative amortization unless significant risk mitigation factors exist. 51

52 Loan Terms and Underwriting (cont.) Introductory Teaser Rates/Payment Shock Wider spread between teaser and fully indexed rates equates to payment shock, negative amortization and earlier than scheduled recasting of payments. Financial institution should minimize the likelihood of these concerns. Establish controls at both bank and borrower levels. 52

53 Loan Terms and Underwriting (cont.) Lending to Subprime Borrower Targeted marketing effort - See Interagency Guidance of Subprime Lending, March 1, 1999 and Expanded Guidance for Subprime Lending Program, January 31, Credit Unions should refer to 04-CU-12 - Specialized Lending Activities. Risk-layering in subprime arena may significantly increase risks to lender and borrower. 53

54 Loan Terms and Underwriting (cont.) Non-Owner Occupied Investor Loans Borrowers should qualify based on ability to repay over the life of the loan. Have sufficient cash reserves to cover periods of vacancy and variability of debt service. 54

55 II. Portfolio and Risk Management Practices Re: NTM Products Develop written policies (i.e., policy exceptions, limits on risklayering, appropriate mitigation factors, volume limits by loan type). Design early warning or concentration reports, measures and controls (i.e., track concentrations by loan types, third-party originations, geographic areas, property occupancy, high LTV, negative amortization, lower credit scores, incentive programs). Establish appropriate ALLL levels considering limited performance history with NTMs. Maintain appropriate capital levels to reflect stressed economic conditions on collectibility. 55

56 Portfolio and Risk Management Practices (cont.) Policies: In writing Should set acceptable risk levels (e.g., risk-layering mitigation tools) Should set growth & volume limits by loan type 56

57 Portfolio and Risk Management Practices (cont.) Monitoring: Track concentrations by portfolio segments - Loan type - Third-Party Originations - Geography - Property Occupancy 57

58 Portfolio and Risk Management Practices (cont.) Track concentrations by portfolio characteristics: High LTV, DTI ratios Potential for negative amortization Credit score below established threshold Risk-layered loans Track incentive programs that could produce higher concentrations 58

59 Portfolio and Risk Management Practices (cont.) Controls: QC, Compliance, Audit Procedures Examples: Monitor U/W exceptions Confirm origination channels follow policy Timely correct deficiencies Training 59

60 Portfolio and Risk Management Practices (cont.) Oversight of Third-Parties Perform appropriate due diligence prior to entering thirdparty relationship. Correct issues via more thorough application reviews; terminate the relationship as necessary. 60

61 Portfolio and Risk Management Practices (cont.) Secondary Markets If heavily involved, formal strategies for managing risks are likely necessary Prepare for reduced demand/heavy inventory Financial institution may need to repurchase defaulted mortgages to protect its reputation and access to markets NB: Under risk-based capital rules, financial institutions must maintain risk-based capital against the entire pool or securitization if it decides to buy-back loans independently. 61

62 Portfolio and Risk Management Practices (cont.) Management Information and Reporting Goal: Find deterioration as soon as possible Information should be available: By loan type By risk-layering feature (e.g., payment option ARM with low-documentation feature) By U/W characteristic (e.g., LTV, DTI, credit score) By borrower performance (e.g., interest accruals, negative amortization, delinquencies) 62

63 Portfolio and Risk Management Practices (cont.) Management Information and Reporting Track Volume/Performance Against Expectations: - Analyze differences and adjust as necessary to maintain appropriate risk level Stress Testing: Perform sensitivity analysis on key performance drivers on portfolio: - Interest rates - Employment levels - Economic growth - Other factors beyond institution s immediate control 63

64 III. Consumer Protection Issues Regulator s Concerns: - Significant risk of payment shock - Negative amortization - Not fully understood - Marketing emphasizes only potential benefits (unbalanced) 64

65 Consumer Protection Issues (cont.) Recommended Practices Communications with Consumers: - Promotional materials and other product descriptions (e.g., ads and oral statements) - Monthly Statements Practices to Avoid Control Systems 65

66 Consumer Protection Issues (cont.) Recommended Practices (cont.) Communications with Consumers Clear and balanced information about benefits and risks Timing: At inquiry; When shopping for loans and/or deciding which monthly payment amount to make; With marketing materials - Not just at application or consummation Promotional Materials: Inform consumers about costs, terms, features and risks of NTMs and discuss the following: 66

67 Consumer Protection Issues (cont.) Recommended Practices (cont.) Communications with Consumers (cont.) Payment shock Negative amortization Prepayment penalties Low-doc fees 67

68 Consumer Protection Issues (cont.) Recommended Practices (cont.) Monthly Statements Disclosures should enable borrower to make informed decisions about amount of payments, including the impact of a particular choice on loan balances. 68

69 Consumer Protection Issues (cont.) Practices to Avoid: Obscuring risks Promoting payment patterns that are structurally unlikely to occur Providing unwarranted assurances about interest rate changes Making statements regarding cash-savings, buying power Misleading claims Compensation systems that improperly encourage lending personnel to direct consumers to particular products when other products are suitable 69

70 Consumer Protection Issues (cont.) Control System for Compliance and Consumer Information Concerns Train lending personnel so they can convey information in a timely, accurate and balanced manner Monitor lending personnel actions for conformity with policies Review complaints for trends and other risks Seek appropriate legal review 70

71 Consumer Protection Issues (cont.) Control Systems (cont.) Mitigate Third-Party Origination/Servicing Risks Appropriate Due Diligence Avoid compensation schemes that create steering issue Set requirements for agreements with third-parties Monitor agreements for compliance Implement appropriate corrective action for deficiencies 71

72 Questions? Ryan Stinneford Matthew McIntyre Pierce Atwood, LLP Pierce Atwood, LLP One Monument Square 225 Franklin Street, Ste Portland, ME Boston, MA Tel: (207) Tel: (857) Fax: (207) Fax: (617)

73 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Ryan Stinneford by phone at (207) , or by at or Matt McIntyre by phone at (857) , or by at 2007 Pierce Atwood LLP 73

74 Illustrations of Consumer Information for Nontraditional Mortgage Products Effective: June 8, 2007 Ryan S. Stinneford, Esq. Matthew McIntyre, Esq. October 11,

75 Illustrations are intended to assist institutions in implementing the consumer protection portion of the Interagency Guidance on Nontraditional Mortgage Product Risks (Interagency NTM Guidance). or We re from the Government and we re here to help! 75

76 Not model forms - Financial institutions do not need to use them. - Just a suggestion... but the forms are available from the agencies from their respective websites. - However, not necessarily easy to find. 76

77 Regulatory Goals of the Disclosure Clear and balanced information Provided prior to making a mortgage product choice Timing/Examples With promotional materials on NTMs During face-to-face meetings with consumers when they are shopping for a mortgage With monthly statements on payment options ARMs 77

78 Three illustrations (1) A narrative explanation of NTM products; (2) A chart comparing IO loans and payment option ARMs to fixed rate and traditional adjustable rate loans; and (3) A table that could be used with any monthly statement for a payment option ARM. 78

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82 Questions? Ryan Stinneford Matthew McIntyre Pierce Atwood, LLP Pierce Atwood, LLP One Monument Square 225 Franklin Street, Ste Portland, ME Boston, MA Tel: (207) Tel: (857) Fax: (207) Fax: (617)

83 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Ryan Stinneford by phone at (207) , or by at or Matt McIntyre by phone at (857) , or by at 2007 Pierce Atwood LLP 83

84 Statement on Subprime Mortgage Lending Statement on Subprime Mortgage Lending Effective: July 10, 2007 Effective: July 10, 2007 Ryan S. Stinneford, Esq. Matthew Ryan R. S. McIntyre, Stinneford, Esq. Esq. Matthew October 11, R. McIntyre, 2007 Esq. October 11, 2007

85 At a Glance... Subprime Mortgage Lending Statement Issued by: OCC, FRB, FDIC, OTS and NCUA Applicable to: All banks and their subsidiaries, BHCs and their non-bank subsidiaries, savings associations and their subsidiaries, savings and loan holding companies and their subsidiaries, and credit unions Scope: Risk management practices and consumer protection principles relative to subprime ARM applicants/borrowers Effective Date: July 10,

86 In 2001 Subprime was Good Expanded Credit Access Offered attractive returns for financial institutions In 2007, Subprime presents heightened risks to lenders and borrowers. 86

87 Why Promulgate the Subprime Statement Now? Answer: Agencies are concerned: - Subprime borrower(s) cannot repay debts - Subprime borrower(s) do not understand risks and consequences of the ARM loans - Default and loss of home will result 87

88 Topics Covered by the Statement Risk Management Practices Predatory Lending Consideration Qualification of Applicants Workout Arrangements Consumer Protection Principles Control Systems Supervisory Review 88

89 Scope of the Statement Certain types of ARMs offered to subprime applicants/ borrowers. ARMs that have one or more of the following characteristics: Low initial payments based on fixed introductory rate Very high or no limit on payment or interest rate increase Low or no documentation of applicant s income Product features likely to result in frequent refinancing Substantial prepayment penalties or prepayment penalties beyond the initial rate period Note: While focus is on certain types of ARM products offered to certain types of applicants (i.e., subprime applicants), the guidelines are relevant to ARMs offered to non-subprime applicants. 89

90 Scope of the Statement (cont.) Subprime Applicants/Borrowers Is the term Subprime applicants/borrowers defined? Not exactly. Instead: Refer to the Subprime Borrower Characteristics from 2001 Expanded Guidance for Subprime Lending Programs or LCU 04-CU-13-Specialized Lending Activities. 90

91 Scope of the Statement (cont.) Subprime defined in the Expanded Guidance day delinquencies in last 12 months day delinquencies in last 24 months Judgment, foreclosure, repossession or charged off in last 24 months Relatively high default probability (i.e., based on FICO) DTI > 50% 91

92 Protections for Financial Institutions First, a subprime lender a predatory lender. Predatory lending involves at least one (1) of the following elements: Making a loan based primarily on foreclosure value of the applicant s collateral as opposed to ability to repay; Loan flipping (i.e., repeatedly refinancing a loan to charge high points and fees each time); or Deceiving the applicant to conceal true nature of the mortgage loan. 92

93 Protections for Financial Institutions (cont.) Second, management should implement strategies to reduce risk of nonpayment Risk Management Practices Solid applicant qualification standards Avoid reduced documentation/stated income loans Prudently use workout arrangements 93

94 Protections for Financial Institutions (cont.) Risk Management Practices (cont.) Qualification Standards include: A credible analysis of a borrower s capacity to repay the loan according to its terms Can the applicant repay the debt by maturity date? Fully-indexed rate; Fully amortizing repayment schedule; and Use Debt-to-Income using PITI. 94

95 Protections for Financial Institutions (cont.) Risk Management Practices (cont.) Qualification Standards (cont.) DTI Ratio Particularly Important if Risk Layering Risk Layering: a feature of a subprime loan that may significantly increase the risks to financial institution and applicant (e.g., reduced documentation loans and simultaneous second lien mortgages) 95

96 Protections for Financial Institutions (cont.) Risk Management Practices (cont.) Qualification Standards (cont.) If risk-layering is present, need documented mitigation factors that clearly minimize the need to directly verify repayment capacity (e.g., good payer, wants to refinance, credit not deteriorated, or lots of cash, etc.) Should verify and document applicant s income (both source and amount), assets and liabilities 96

97 Protections for Financial Institutions (cont.) Risk Management Practices (cont.) Workout Arrangements: Applies to: Borrowers in default and to those whose default is reasonably foreseeable Terms depend on borrower s ability to repay. Example: Convert loan to fixed rate loan No regulatory criticism for pursuing a reasonable workout 97

98 Protection for Consumers (Applicants) Consumer Protection Principles: Loan approvals based on applicant s ability to repay Timely disclosure material terms, costs and risks Timely, clear and balanced communications about benefits and risks of the products Timely = at a time that will help the consumer select a product 98

99 Protection for Consumers (cont.) Consumer Protection Principles (cont.) Information is NOT timely if it is provided just upon submission of an application or at consummation of the loan. Information is NOT clear and balanced if it steers consumers to these products to the exclusion of all other products for which the consumer may qualify. 99

100 Protection for Consumers (cont.) Consumer Protection Principles (cont.) Communications should address: Risk of payment shock Prepayment penalties Balloon payments Cost of reduced documentation loans Responsibilities for taxes and insurance NB: Federal Credit Unions are prohibited from charging prepayment penalties. 12 CFR

101 Protection for Consumers (cont.) Disclosure Content - Payment Shock: Potential payment increases, method of calculating new payment, when it may be imposed - Prepayment Penalties: Its existence, how it is calculated, when it may be imposed - Balloon Payment: Its existence - Cost of Reduced Document Loans: Fees for such a program or a stated-income program - Taxes & Insurance: State amounts are due in addition to loan payments and if not escrowed, these amounts can be substantial 101

102 Protection for Consumers (cont.) Control Systems - Evaluate whether you practice what you preach Important controls include: Establishing criteria for hiring and training loan personnel Establishing criteria regarding third-party relationships Due Diligence Incentive program should be consistent with solid U/W 102

103 Protection for Consumers (cont.) Important controls include (cont.) Monitor compliance with applicable law, third-party agreements and internal policies Corrective action plans Review customer complaints for weaknesses and trends 103

104 Agency Supervisory Review Will review risk management and consumer compliance processes Take action against institution engaging in predatory lending, violating consumer protection or fair lending laws engaging in unfair or deceptive acts/practices Otherwise engaging in unsafe/unsound liability practices 104

105 Questions? Ryan Stinneford Matthew McIntyre Pierce Atwood, LLP Pierce Atwood, LLP One Monument Square 225 Franklin Street, Ste Portland, ME Boston, MA Tel: (207) Tel: (857) Fax: (207) Fax: (617)

106 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Ryan Stinneford by phone at (207) , or by at or Matt McIntyre by phone at (857) , or by at 2007 Pierce Atwood LLP 106

107 Proposed Illustrations of Consumer Information for Subprime Mortgage Lending Comments are due on or before October 15, 2007 Ryan S. Stinneford, Esq. Matthew McIntyre, Esq. October 11,

108 Scope Covers the consumer protection portion of the Subprime Statement Illustrations are not model forms. Financial institutions are not required to use them. Rather they are illustrations of the type of information contemplated by the Subprime Statement. Use of the illustrations is entirely voluntary. 108

109 To Use or Not to Use Regardless, communications to consumers (e.g., ads, oral statements, promotional materials) should provide clear and balanced information about the relative benefits and risks of certain ARM products. Include: Information regarding costs, terms, features and risks of the product to the consumers 109

110 Contents: (Narrative or Chart) - Risk of payment shock - Consequence of prepayment penalties, balloon payments, pricing premiums for reduced documentation loans and the borrower s responsibility for real estate taxes and insurance if not escrowed 110

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113 Final illustrations will be available on the respective agency website. 113

114 Questions? Ryan Stinneford Matthew McIntyre Pierce Atwood, LLP Pierce Atwood, LLP One Monument Square 225 Franklin Street, Ste Portland, ME Boston, MA Tel: (207) Tel: (857) Fax: (207) Fax: (617)

115 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Ryan Stinneford by phone at (207) , or by at or Matt McIntyre by phone at (857) , or by at 2007 Pierce Atwood LLP 115

116 Other Federal Law Developments Ryan S. Stinneford, Esq. October 11,

117 Interagency Statement on Working with Mortgage Brokers On April 17, 2007, federal regulatory agencies (FRB, FDIC, OCC, OTS and NCUA) issued a statement encouraging financial institutions to work with mortgage borrowers unable to make loan payments. Highlights of the statement include: Borrowers who cannot make payments should contact lenders and servicers at earliest indication of problems to discuss alternatives. Financial institutions should consider prudent workout arrangements that are consistent with safe and sound banking practices, such as modifying loan terms (including converting ARMs to fixed rate loans). 117

118 Interagency Statement on Working with Mortgage Brokers (cont.) Financial institutions may receive favorable CRA consideration for loan programs that transition LMI borrowers from high cost loans to lower cost loans, if the programs are consistent with safe and sound practices. Examination and supervision standards will not change. Financial institutions are not required to foreclose immediately when payment difficulties occur, and will not be penalized for pursuing reasonable workout arrangements. 118

119 Interagency Statement on Working with Mortgage Brokers (cont.) Financial institutions should identify and report credit risk, maintain adequate allowance for loan losses, and recognize credit losses in a timely manner. Financial institutions should inform delinquent borrowers about the availability of homeownership counseling, and refer them to HUD-approved counselors. 119

120 Interagency Statement on Working with Mortgage Brokers (cont.) Financial institutions are reminded of their obligations under the Servicemembers Civil Relief Act (including prohibition on foreclosure during period of active duty + 90 days, and duty to notify service members of their rights under SCRA). Financial institutions are encouraged to work with service members who are unable to make payments, even if the loans are not subject to SCRA. 120

121 Pilot Project to Evaluate Non- Depository Subprime Lenders On July 17, 2007, three federal regulatory agencies (FRB, OTS and FTC), together with two state regulator associations (the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators) announced a pilot project to coordinate compliance reviews of non-bank subprime lenders and brokers. A primary goal of the project is to ensure effective and consistent reviews of such entities, and to share lessons learned. 121

122 Pilot Project to Evaluate Non- Depository Subprime Lenders (cont.) Highlights of the announcement include: The pilot will begin in 4th quarter of 2007, and will target: Non-depository subprime lending subs of bank and thrift holding companies; Mortgage brokers doing business with those subs; Independent state-licensed subprime lenders; and Mortgage brokers associated with such lenders. 122

123 Pilot Project to Evaluate Non- Depository Subprime Lenders (cont.) Reviews will include evaluation of: underwriting standards; and senior management oversight of risk-management and compliance practices Agencies will share information about reviews and investigations, and take appropriate corrective or enforcement action. At the conclusion of the reviews, agencies will analyze results and determine whether to continue the project (and, if so, the focus of future reviews). 123

124 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices On August 6, 2007 (72 Fed. Reg ), the OTS issued an ANPR to determine whether and to what extent additional regulations are needed to ensure that customers of OTSregulated entities are treated fairly. Under Section 18(f)(1) of FTCAct, OTS is responsible for issuing regulations to prevent UDAPs by savings associations. At a minimum, OTS regulations must be consistent with FTC rules and guidance, but can be more protective. 124

125 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) HOLA gives OTS authority to issue regulations to prevent UDAPs by all entities subject to OTS supervision. Proposed rule would apply to: Savings associations Non-functionally regulated subsidiaries of savings associations Service companies owned by savings associations S&L holding companies Non-functionally regulated subsidiaries of S&L holding companies (other than a bank or bank subsidiary) 125

126 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Proposed rule would not apply to: Functionally regulated entities (e.g., entities governed by SEC) Banks Bank subsidiaries Unrelated service providers Issues: Should OTS consider rulemaking on UDAPs involving products and services other than consumer credit? Should such products and services be limited to financial products and services? How should financial products and services be defined? Should the rulemaking address UDAPs only by savings associations, or should it also address UDAPs by other related entities? 126

127 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Approaches: Should OTS follow FTC lead and adopt FTC guidance as OTS rules? For example: Bait advertising Use of Free Deceptive pricing Warranties and guarantees Endorsements and testimonials 127

128 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Should OTS convert OTS guidance to OTS UDAP rule? For example: Statement on Working with Mortgage Borrowers (failure to consider and implement reasonable workout practices = UDAP?) Interagency Guidance on Nontraditional Mortgage Product Risks Interagency Statement on Subprime Mortgage Lending OTS Guidance on Overdraft Protection Programs OTS Guidance on Gift Card Programs 128

129 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Should OTS adopt other agency guidance as OTS UDAP rules? For example: OCC Guidelines Establishing Standards for Residential Mortgage Lending practices equity stripping fee packing loan flipping refinancing special mortgages encouraging default financing single premium credit insurance negative amortization balloon payments in short-term transactions prepayment penalties not limited to early years of loan 129

130 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) HUD rules re mortgages with unacceptable terms and conditions (i.e., loans with excessive fees exceeding greater of 5% of loan amount of $1,000, prepayment penalties except in very limited circumstances, prepaid single premium credit life insurance, inadequate consideration of repayment ability) Should OTS adopt state UDAP laws as OTS UDAP rule? For example: Michigan Consumer Protection Act North Carolina predatory lending law 130

131 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Should OTS target specific practices? For example: Credit card lending: universal default OTL fees triggered by other fees pyramiding penalty fees mandatory arbitration and waiver of trial application of payments first to lower-rate balances, or to fees, penalties and interest) 131

132 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Residential mortgage lending: repetitive refinancing with no financial benefit encouraging default increases in interest rates or balloon payments upon default discretionary pricing practices force placing insurance without notice and opportunity to cure failure to mitigate losses prior to foreclosure Gift cards: imposing fees exceeding a certain amount or percentage of original gift amount setting an expiration date less than one year from date of issuance 132

133 OTS Advance Notice of Proposed Rulemaking on Unfair or Deceptive Acts or Practices (cont.) Deposit accounts: freezing accounts containing federal benefit payments upon receipt of attachment or garnishment setting off debts owed to the financial institution from federal benefit payment deposits Comment Period closes November 5,

134 Questions? Ryan S. Stinneford Pierce Atwood, LLP One Monument Square Portland, ME Tel: (207) Fax: (207)

135 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Ryan Stinneford by phone at (207) , or by at 2007 Pierce Atwood LLP 135

136 Other Maine Statutes on Mortgage Lending Brandon M. Dell Aglio, Esq. October 11,

137 Funded Settlement Act 33 M.R.S.A. Sections 521 et seq. Applicability Loans secured by mortgages on 1-4 dwelling residential units For personal, family or household purposes Loan office or branch must be in Maine, or loan must be closed in Maine Not applicable to open end credit 137

138 Funded Settlement Act (cont.) Requirements for Lender Disburse loan funds to settlement agent For non-rescindable loans - at or before closing For rescindable loans - at or before noon on first business day after expiration of rescission period 138

139 Funded Settlement Act (cont.) Requirements for Settlement Agent "Settlement Agent" includes a lender that closes its own loans Record mortgage, deed or other documents For non-rescindable loans - within 2 business days of settlement For rescindable loans, at time agent reasonably determines that right of rescission has not been exercised 139

140 Funded Settlement Act (cont.) Form of Loan Proceeds Loan proceeds may be in: Cash; Wired or electronic funds transfer; Certified Check; Checks issued by government entity; Cashier's Check, Teller's Check, or any transfer of funds by check or otherwise that is finally collected and unconditionally available to the settlement agent; 140

141 Funded Settlement Act (cont.) Form of Loan Proceeds (cont.) Checks or other drafts drawn by a state or federal chartered financial institution or credit union; or Checks issued by an insurance company licensed and regulated by the Maine Bureau of Insurance. 141

142 Funded Settlement Act (cont.) Violation Violation of the act may result in consumer recovering greater of: Actual damages Penalties ranging from $250 to $1000 Plus court costs and attorneys' fees Recovery limited to actual damages plus court costs and attorneys' fees if violation is unintentional and result of bona fide error 142

143 Mortgage Discharge Statute 33 M.R.S.A. Section 551 et seq. 143

144 Mortgage Discharge Statute Recording of Mortgage Discharge Mortgagees must record discharge within 60 days of full performance by mortgagor If open-end credit, "full performance" includes request by mortgagor to terminate the line "Mortgagee" includes both owner of the mortgage at the time it is satisfied, and the servicer who receives final payment satisfying the debt Mortgagee may charge the mortgagor for the cost of recording the mortgage 144

145 Mortgage Discharge Statute (cont.) Violation If discharge is not recorded within the statutory time period, owner of mortgage and servicer are jointly and severably liable to any aggrieved party in amount equal to or greater than: Actual damages Penalties of $200 per week after expiration of 60 day period, up to $5000 maximum Plus court costs and attorneys' fees 145

146 Borrower's Choice of Accounting Service Law P.L. 2007, c. 185 Took effect September 20, 2007 Same standard as "Bring Your Own Title Attorney" law 146

147 Borrower's Choice of Accounting Service Law (cont.) Applicability Appears to apply to consumer and commercial loans Applies to all supervised lenders, creditors and financial institutions and credit unions authorized to do business in Maine ( Lenders ) 147

148 Borrower's Choice of Accounting Service Law (cont.) Choice of Accountant Creditor may not interfere with purchaser/borrower's free choice of accounting, tax or attest services provider in connection with extension of credit Provider must be accredited as a CPA, public accountant, or enrolled agent Lender may require that provider provide adequate evidence of liability insurance or other written policy requirements the Lender deems necessary to protect its interest 148

149 Questions? Brandon M. Dell Aglio Pierce Atwood, LLP One Monument Square Portland, ME Tel: (207) Fax: (207)

150 The Legal Stuff Because of its generality, the information provided in this summary may not be applicable to all situations and should not be acted upon without specific advice from legal counsel. If you have any questions concerning this summary or how it applies to any particular entity or circumstance, please contact Brandon Dell Aglio by phone at (207) , or by at 2007 Pierce Atwood LLP 150