Financial Services Update

Transcription

1 Financial Services Update September 29, 2010 In this Alert, we highlight the fllwing recent develpments: Regulatin Z: Final rules n Lan Originatr cmpensatin, effective April 1, 2011; Final rules n Mrtgage Transfer Ntices, with a mandatry cmpliance date f January 1, 2011; Interim Final rules n MDIA related disclsures, with cmments due by Nvember 23, 2010 and a mandatry cmpliance date f January 30, 2011; Significant Prpsed Amendments t Cnsumer Prtectin and Disclsure Rules fr Reverse Mrtgages and Other Hme Lans, with cmments due by December 23, 2010; and Prpsed Rules n Escrw Requirements fr Jumb Lans, with cmments due by Octber 25, 2010 FHA: HECM Prgram Changes, including a New HECM Saver Prgram State Mrtgage Banking and Servicing: Amendments t Regulatins implementing changes t Flrida s Mrtgage Brkering and Mrtgage Lending Act, effective Octber 1, 2010; Issuance f New Yrk Mrtgage Servicer Regulatins, effective Octber 1, 2010 Litigatin: A discussin f the Gburek v. Littn Lan Servicing LP case where the U.S. Curt f Appeals fr the Seventh Circuit decided that a letter t a brrwer in default,

2 which ffered t discuss freclsure alternatives, was a cmmunicatin sent in cnnectin with an attempt t cllect a debt fr purpses f stating a claim under the FDCPA Federal Reserve Issues Final Rules Regarding Lan Originatr Cmpensatin Practices On August 16, 2010, the Federal Reserve annunced final rules regarding lan riginatr cmpensatin practices. On Friday, September 24, 2010, the final rules were published in the Federal Register. The stated gals f the new rules are t prtect mrtgage brrwers frm unfair, abusive, r deceptive lending practices and t help ensure that cnsumers can chse frm lan ptins that include the lwest interest rate and lwest amunt f pints and riginatin fees. The new rules apply t mrtgage brkers and the cmpanies that emply them, as well as mrtgage lan fficers emplyed by depsitry institutins and ther lenders wh riginate mrtgage lans cvered by Regulatin Z. These new rules als apply t all clsed-end cnsumer credit transactins secured by a dwelling regardless f price r lien psitin. Further, the dwelling need nt be the cnsumer s principal dwelling. These final rules prhibit a lan riginatr frm: receiving cmpensatin that is based n the interest rate r ther lan terms (ther than the lan amunt); receiving cmpensatin frm the lender r anther party if the lan riginatr is receiving cmpensatin directly frm the cnsumer; and directing r steering a cnsumer t accept a mrtgage lan that is nt in the cnsumer s interest in rder t increase the lan riginatr s cmpensatin. The Federal Reserve, under its authrity t prhibit unfair r deceptive acts r practices, fund that paying a lan riginatr based n the terms r cnditins f the lan, ther than the amunt f credit extended, r steering cnsumers t lans that are nt in their interest t maximize lan riginatr cmpensatin are unfair practices. The Federal Reserve als fund that disclsure culd nt remedy these practices. The Federal Reserve cncluded that these practices cause substantial injury t cnsumers, which cnsumers cannt reasnably avid, and that the injuries are nt utweighed by the benefits t either cnsumers r t cmpetitin in the marketplace. The fcus f the analysis f injury sustained by cnsumers was yield spread premiums.

3 Therefre, these final rules effectively eliminate the use f a yield spread premium as a way fr a lender t pay a mrtgage brker cmpensatin that is based n the interest rate at which the brker delivers the lan t the lender. Hwever, the final rules permit cmpensatin t be based n a percentage f the lan amunt and affrd creditrs sme flexibility in lan pricing, such that they can preserve the cnsumer benefits f cmpensating a lan riginatr, r paying fr all r part f the clsing csts, thrugh the interest rate (s lng as any creditr-paid cmpensatin retained by the lan riginatr is nt based n the lan terms r cnditins). The final rules nte that the permissibility f cmpensatin based n the lan amunt may, in the future, be subject t a minimum r maximum dllar amunt. Mrever, as prpsed, the final rule defines a lan riginatr t include bth persns wh are cvered by the current definitin f a mrtgage brker, as well as thse emplyees f a creditr wh are nt therwise already cnsidered t be mrtgage brkers. The final rule als defines a lan riginatr as cvering bth a natural persn and a mrtgage brker cmpany, including thse mrtgage brker cmpanies that clse a lan in their name, but use table-funding frm a third party t fund the lan. Hwever, a creditr that funds a transactin ut f its wn funds is excluded frm the definitin f a lan riginatr. Thus, secndary market gain n sale cmpensatin is nt subject t the rule. As the Federal Reserve is well aware, these rules and the definitin f lan riginatr will have a significant impact n smaller firms, such as small mrtgage brker cmpanies, and will likely extend t cmmunity banks and credit unins acting as mrtgage brkers in particular transactins. Hwever, like the prvisins f the Ddd- Frank Wall Street Refrm Act, the definitin and final rules d nt address secndary market transactins between creditrs and secndary market investrs. The rules als d nt cnsider mrtgage servicers as lan riginatrs, where the servicer is mdifying an existing lan n behalf f the current wner f the lan. As stated abve, the final rules apply t all clsed-end cnsumer credit transactins secured by a dwelling, regardless f price r lien psitin, in rder t be cnsistent with the definitin f residential mrtgage lan, as defined in the Ddd-Frank Wall Street Refrm Act. The dwelling need nt be the cnsumer s principal dwelling. While the rules d nt apply t HELOCs, timeshare transactins, r lans secured by real prperty that d nt include a dwelling, the Federal Reserve will cnsider whether brader cverage is necessary in a future rulemaking. New Federal Reserve Staff cmmentary indicates examples f thse things determined nt t be terms r cnditins f the lan, as well as examples f permissible

4 cmpensatin practices. Fr example, the staff cmmentary clarifies that credit scres r similar indicatrs f credit risk, such as the debt-t-incme rati, are nt terms r cnditins f the lan. Hwever, staff cmmentary prvides that these items may act as a prxy fr a terms r cnditins f the lan (thrugh, fr instance, risk based pricing), and thus may nt be utilized when setting lan riginatr cmpensatin. Staff cmmentary als clarifies that a payment that is fixed in advance fr each riginated lan and cmpensatin that accunts fr a lan riginatr s fixed verhead csts are permissible cmpensatin methds. These final rules permit creditrs t cmpensate their lan fficers differently than mrtgage brkers. It is als permissible t cmpensate lan riginatrs based n lan vlume, whether by the ttal dllar amunt f credit extended r the ttal number f lans riginated ver a given time perid. Hwever, such cmpensatin adjustments must nly be made prspectively. These cmpensatin prgrams may als be peridically reviewed by the creditr t determine if lan riginatr cmpensatin shuld be revised. Hwever, the Federal Reserve des nt permit cmpensatin t vary based n the lan prgram and des nt permit cmpensatin t be paid by bth the cnsumer and anther surce. Finally, lan riginatrs are prhibited frm directing r steering a cnsumer t cnsummate a dwelling-secured lan based n the fact that the riginatr will receive greater cmpensatin frm the creditr in that transactin than in ther transactins the riginatr ffered r culd have ffered t the cnsumer, unless the cnsummated transactin is in the cnsumer s interest. The Federal Reserve intended t preserve cnsumer chice by ensuring that cnsumers have lan ptins that reflect cnsideratins ther than the maximum amunt f cmpensatin that will be paid t the riginatr. Therefre, the Federal Reserve created a safe harbr where a lan riginatr is deemed t have cmplied with these anti-steering rules if the lan riginatr satisfies the fllwing three requirements: 1. Fr each type f transactin in which the cnsumer expresses an interest, the cnsumer must be presented with, and able t chse frm, lan ptins that include a lan with the lwest interest rate, a lan with the lwest ttal dllar amunt fr riginatin pints r fees and discunt pints, and a lan with the lwest rate with n risky features, such as a prepayment penalty r negative amrtizatin;

5 2. The lan ptins presented t the cnsumer are btained by the lan riginatr frm a significant number f the creditrs with whm the lan riginatr regularly des business; and 3. The lan riginatr believes in gd faith that the cnsumer likely qualifies fr the lan ptins presented t the cnsumer. Special Cnsideratins fr Reverse Mrtgages Despite cmments submitted t Bard staff asking that the lan amunt fr purpses f reverse mrtgages be equated t a maximum claim amunt (a lan amunt equivalent cmmnly used t calculate and riginate reverse mrtgages), the Bard ignred such cmments in its final rule. Further, statements in the Preamble t the rule regarding Cmmunity Reinvestment Act (CRA) eligible lans have been mis-cnstrued by sme as a flat prhibitin n cmpensating lan riginatrs differently fr different lan prgrams. First, with respect t lan amunts fr reverse mrtgages, arguably the maximum claim amunt is the superir methd t utilize as a reverse mrtgage lan amunt, as this is the cncept emplyed in the federal FHA-insured HECM prgram t define and limit riginatin fees (amng ther things) and is ne methd f allwable cmpensatin t lan riginatrs. Next, the cmment n CRA lans is in the Preamble t the rule, nt in the rule r cmmentary, and n further definitive explanatin with regard t cmpensating fr different lan types f prgram is given in the rule r cmmentary. Hwever, the rule des prvide that a lan riginatr may be cmpensated based n flat fees r hurs expended t riginate a lan, in additin t, r in lieu f, a percentage f the lan amunt, and a creditr may cmpensate its lan fficers differently than mrtgage brkers. Thus, strng and reasnable arguments can be made that the time and effrt necessary t riginate a reverse mrtgage are greater than that usually required fr frward mrtgages, and, therefre, creditrs shuld be able t cmpensate reverse mrtgage lan riginatrs based n ther permissible criteria that are distinct frm thse used fr its frward mrtgage lan riginatrs. These new rules becme effective April 1, Federal Reserve Bard Issues Final Rules n Mrtgage Transfer Ntices t Brrwers Sectin 404 f the Helping Families Save Their Hmes Act, that became effective n May 20, 2009, amended the Truth-in-Lending Act (TILA) t require purchasers r assignees f residential mrtgage lans t prvide a written ntice t brrwers within 30 days f a sale r ther transfer f the wnership f their lan. On Mnday, August

6 16, 2010, the Federal Reserve released final rules t implement this statutry change. On September 24, 2010, these final rules were published in the Federal Register. The final rule requires an acquiring party t prvide the required disclsures t the brrwer n later than 30 days after the date f sale, assignment r transfer. This disclsure must state: The name, address and telephne number f the new wner f the mrtgage lan; The transfer r acquisitin date; The name, address and telephne number f an agent r ther party authrized t receive a cnsumer s rescissin ntice and reslve issues cncerning the cnsumer s payments n the lan (if ther than the wner); Where the transfer f wnership is recrded, r that it has nt been recrded as f the date f the disclsure; and Any ther infrmatin that the cvered persns, in their sle discretin, deem relevant r helpful t cnsumers. These disclsure requirements are impsed n any persn r entity that acquires wnership (legal title) f an existing cnsumer mrtgage lan (debt bligatin). Significantly, these final rules apply t a persn that acquires mrtgage lans withut regard t whether the persn als extends cnsumer credit by riginating mrtgage lans, but nly if such persn acquires mre than ne lan in a 12-mnth perid. Mrever, a party servicing a mrtgage lan is nt treated as the wner f the bligatin, if the bligatin was assigned t the servicer slely fr administrative cnvenience f the servicer in servicing the bligatin. The final rules prvide fr three (3) exceptins. Under the final rule, a cvered persn must mail r deliver the required disclsures n r befre the 30th day fllwing the date the cvered persn acquired legal title t the lan. Hwever, if the cvered persn transfers r assigns all f its interest in the lan t anther party n r befre that date, disclsures are nt required t be given by that cvered persn. Secnd, where the wner f the mrtgage lan transfers legal title t the lan in a transactin that is subject t a repurchase agreement, disclsures are nt required t be given if the transferr is bligated t repurchase the lan. Third, where a cvered persn acquires nly a partial interest in the lan and the party authrized t reslve issues cncerning the cnsumer s payments n the lan r receive the rescissin ntice n behalf f a current wner des nt change as a result f the transfer, n disclsure is required t be given.

7 Please nte that the Federal Reserve published interim rules in Nvember f 2009 regarding mrtgage transfer ntices that became effective upn publicatin in the Federal Register. In cnnectin with this latest publicatin in the Federal Register, the mandatry cmpliance date is January 1, 2011; hwever, cvered persns may cntinue t cmply with the Nvember 2009 interim rules until January 1, Federal Reserve Issues Interim Rule t Revise Disclsure Requirements under Regulatin Z On August 16, 2010, the Federal Reserve als issued an interim rule that further implements prvisins f the Mrtgage Disclsure Imprvement Act. On September 24, 2010, this interim rule was published in the Federal Register. The interim rules amend the disclsure requirements fr clsed-end mrtgage lans under Regulatin Z and require lenders t disclse t brrwers hw their mrtgage rates and/r payments can change thrughut the life f the lan in cnnectin with variable rate r payment lans. As part f the Husing and Ecnmic Recvery Act f 2008, Cngress enacted the Mrtgage Disclsure Imprvement Act (MDIA), which amended the federal Truth-in- Lending Act t prvide fr additinal disclsures fr variable rate, clsed-end residential mrtgage lans. The MDIA, as riginally enacted, prvided that these changes wuld becme effective upn the earlier f 30 mnths frm the Act r the issuance f regulatins by the Federal Reserve Bard. The Bard issued these interim rules t give creditrs guidance n the statutrily mandated disclsures by the 30 mnth effective date. Nte, hwever, that while the MDIA requires these additinal disclsures fr variable-rate transactins secured by a dwelling, this interim rule expands this requirement t cver fixed-rate transactins secured by a dwelling, as well as transactins secured by real prperty withut a dwelling. In rder t disclse applicable changes t the rates and/r payment f the mrtgage lan, lenders cst disclsures must include a payment summary that is disclsed in a table frmat. Under the interim rule, the disclsure must cntain the fllwing: The initial interest rate and crrespnding mnthly payment; Fr adjustable-rate r step-rate mrtgage lans, the maximum interest rate and payment pssible during the first five (5) years f repayment and a wrst case scenari that displays the maximum interest rate and payment pssible ver the entire life f the lan; and The fact that cnsumers might nt be able t avid increased payments by refinancing the lan (the n-guarantee-t-refinance statement).

8 Additinal specialized disclsures are als required fr lans with negativelyamrtizing payment ptins, intrductry interest rates, interest-nly payments and balln payments. The tabular frmat f the interest rate and payment summary replaces the payment schedule that was previusly required as part f the TILA disclsures. These new disclsures are required fr all transactins secured by a dwelling, ther than a timeshare transactin, as well as fr lans secured by real prperty that des nt include a dwelling. The disclsures fr nn-mrtgage, clsed-end cnsumer credit will cntinue t include the current payment schedule. Fr purpses f these new disclsures, the interim rule utlines the fllwing definitins: Adjustable-rate mrtgage means a lan in which the annual percentage rate may increase after cnsummatin. Step-rate mrtgage means a lan in which the interest rate will change after cnsummatin, and the rates and perids in which they will apply are knwn. Fixed-rate mrtgage means a lan that is nt adjustable-rate r step-rate. Interest-nly means that ne r mre peridic payments may be applied slely t interest and nt t lan principal. An interest-nly lan is a lan that permits interest-nly payments. An amrtizing lan is defined as a lan in which the regular peridic payments cannt cause the principal balance t increase. Negative amrtizatin means the regular peridic payments may cause the principal balance t increase. Negative amrtizatin lan means a lan with a negative amrtizatin feature but explicitly excludes a reverse mrtgage. Fully-indexed rate means the interest rate calculated using the index value and margin. Each f these terms triggers specific disclsure requirements with respect t the payments and interest rates assciated with such lans. Fr example, fr fixed-rate mrtgages, the interim rule requires creditrs t disclse the interest rate applicable at cnsummatin. If the transactin des nt prvide fr any payment increases, then nly ne interest rate is disclsed.

9 Hwever, sme fixed-rate mrtgages may have scheduled payment increases. In these cases, creditrs must shw the interest rate assciated with such payments, even thugh the rate has nt changed. Als, fr example, the interim rule requires creditrs t disclse examples f payment increases, including the maximum pssible payment fr adjustable-rate mrtgages and ther mrtgages where payments may vary. Creditrs must disclse mre than ne interest rate fr adjustable-rate mrtgages and step-rate mrtgages because the payments can vary. Mrever, as nted abve, the interest rate at cnsummatin must be disclsed, as well as the maximum pssible rate at any time during the first five years after cnsummatin, even if that is nt the first adjustment, and the earliest date that rate may apply. The Federal Reserve has slicited cmments as t whether five years is the apprpriate time frame fr this disclsure. With respect t the payment disclsures, the interim rule requires disclsure f the principal and interest payment that crrespnds t each interest rate disclsed, as well as the ttal estimated mnthly payment. Fr transactins where the regular peridic payment fully amrtizes the lan, the payment amunt including bth principal and interest must be disclsed. The rule als requires disclsure f the payment amunt at any scheduled payment increase that des nt cincide with an interest rate adjustment, and the date n which the increase is scheduled t ccur. If an escrw accunt is t be established, creditrs must disclse the estimated payment amunt fr taxes and insurance, including mrtgage insurance. Hwever, staff cmmentary indicates that premiums r payments fr credit prtectin shuld nt be included in the disclsed escrw amunts. In additin, with respect t the ttal estimated mnthly payments t be disclsed, if any regular peridic payment amunts will include interest, but nt principal, all payments fr the lan must be itemized int principal and interest. Fr negative amrtizatin lans, fr each interest rate disclsed, the creditr must disclse payments in tw separate rws. One rw f the table shws the fully amrtizing payment fr each interest rate. T calculate these payments, the creditr must assume the interest rate reaches the maximum at the earliest pssible date and that the cnsumer makes nly fully amrtizing payments. The secnd rw f the table shws the minimum required payment fr each rate, until the recast pint. At the recast pint, the minimum payment rw shws the fully amrtizing payment. Fr

10 purpses f the minimum payment rw, creditrs must assume the interest rate reaches the maximum at the earliest pssible date and that the cnsumer makes nly the minimum required payment fr as lng as permitted under the terms f the legal bligatin. If a lan prvides fr a balln payment, it must be disclsed in a specific manner in the table, depending n whether it cincides with an interest rate adjustment r ther payment increase. Finally, the interim rule adds anther new sectin t TILA that requires creditrs t disclse a statement that there is n guarantee that the cnsumer will be able t refinance the lan t btain a lwer interest rate and payment; the Federal Reserve prvides a mdel disclsure t cmply with this requirement. Nte that while the MDIA requires this statement fr variable-rate transactins secured by a dwelling, this interim rule expands this requirement t cver fixed-rate transactins secured by a dwelling, as well as transactins secured by real prperty withut a dwelling. This interim rule becmes effective n Octber 25, 2010; hwever, cmpliance is ptinal until January 30, These rules are being implemented under the MDIA nw, and cmpliance is expected by January 30, 2011 fr the disclsure f examples f payment adjustments. Lenders must cmply with these rules fr applicatins received n r after January 30, Cmments n this interim rule are required t be submitted by Nvember 23, Federal Reserve Bard Issues Significant Prpsed Cnsumer Prtectin and Disclsure Rules fr Reverse Mrtgages and ther Hme Lans On August 16, 2010, the Federal Reserve als issued a set f prpsed rules that are aimed at enhancing cnsumer prtectin and clarity f disclsures fr pen-end and clsed-end mrtgage transactins, including reverse mrtgage transactins. On September 24, 2010, the prpsed rule was published in the Federal Register fr public cmment. This is the secnd majr rulemaking phase t imprve cnsumer disclsures and t prhibit certain practices in the mrtgage lending industry. The first phase began with rules prpsed in August This phase represents significant changes t Regulatin Z that include changes t reverse mrtgages and all ther mrtgages. Summary f Majr Prpsed Prvisins

11 This latest prpsed rule cntains significant changes t required disclsures and practices in cnnectin with reverse mrtgage transactins, including: Imprving cnsumer disclsures prvided in cnnectin with reverse mrtgage lans, including changes t the timing, frmat and cntent f such disclsures; Requiring a new, tw-page disclsure t be given at applicatin fr a reverse mrtgage lan t clarify basic features and risks f reverse mrtgages; Prhibiting certain practices in the sale f financial prducts in cnnectin with a reverse mrtgage lan, including prhibiting a creditr frm cnditining a lan n the purchase f anther financial r insurance prduct; Requiring cunseling abut reverse mrtgages at least three business days befre a creditr can impse any nnrefundable fees r clse a reverse mrtgage lan; and Impsing new rules n the advertising f reverse mrtgage lans. The prpsed rule als makes significant changes t all hme lan transactins, including: Requiring a transactin-specific disclsure within three days f receiving an applicatin; Prviding final disclsures at least three days befre clsing; Imprving disclsures t clearly explain t the cnsumer that they have a right t rescind certain mrtgage transactins; Ensuring that new disclsures are prvided when a mdificatin t an existing clsed-end mrtgage lan ccurs; Revising the definitin f a higher-priced mrtgage lan in rder t ensure exclusin f prime lans; Clarifying the respnsibilities f the creditr if a cnsumer exercises a right t rescind; Requiring the refunding f fees if a cnsumer decides t withdraw the applicatin within three days after receiving the disclsures; and Requiring a lan servicer t respnd t a brrwer request fr infrmatin n the wnership f their lan within 10 business days. Detail n Majr Prpsed Prvisins The Cnsumer s Right t Rescind The prpsed revisins t Regulatin Z wuld:

12 Simplify and imprve the ntice f the right t rescind prvided t cnsumers at clsing by including: The calendar date when the three business- day rescissin perid expires, withut the explanatin f hw t calculate the deadline. A statement that the cnsumer s right t cancel the lan may extend beynd the date stated in the ntice and, in that case, the cnsumer must send the ntice t either the current wner f the lan r the servicer. A tear ff frm that a cnsumer may use t exercise his r her right t rescind. Require that the infrmatin in the rescissin ntice be disclsed: In a tabular frmat, as ppsed t the narrative frmat used in the current mdel rescissin frms. On the frnt side f a ne-page dcument, separate frm all ther unrelated material; and In a minimum 10-pint fnt; Require nly ne ntice f the right t rescind be prvided t each cnsumer entitled t rescind, instead f the currently required tw ntices; Revise the list f material disclsures that can trigger the extended right t rescind t fcus n disclsures that testing shws are mst imprtant t cnsumers with respect t clsed-end transactins and HELOCs, such as: Including the credit limit applicable t the HELOC plan; Adding a disclsure f the ttal ne-time csts impsed t pen a HELOC plan (i.e., ttal clsing csts), but the prpsed rule remves an itemizatin f these csts. Adding tlerances fr accuracy f the credit limit and the ttal ne-time csts impsed t pen a HELOC plan t ensure incnsequential errrs in these disclsures d nt result in extended rescissin rights. Adding infrmatin abut the interest rate, the ttal settlement charges, and whether a lan has negative amrtizatin r permits interest-nly payments fr clsed-end lans; Adding disclsures f the lan amunt and the lan term (e.g., 30 year lan) t the definitin f material disclsures. These disclsures wuld replace disclsures f the amunt financed, and the ttal and number f payments. Adding ther disclsures t the definitin f material disclsures, such as disclsure f any prepayment penalty.

13 Retaining the current rule s existing tlerances fr certain material disclsures, and prviding tlerances fr certain f the prpsed material disclsures, such as the ttal settlement charges, the lan amunt and the prepayment penalty, t ensure incnsequential errrs in these disclsures d nt result in extended rescissin rights; and Clarify the parties bligatins when the extended right t rescind is asserted, t reduce uncertainty and litigatin csts by prpsing a revised prcess fr rescissin in the extended right cntext. The prpsed rule prvides that if a creditr receives a cnsumer s ntice f rescissin utside f a curt prceeding, the creditr must send a written acknwledgement t the cnsumer within 20 calendars days f receipt f the ntice. The acknwledgement must indicate whether the creditr will agree t cancel the transactin. If the creditr agrees t cancel the transactin, the creditr must release its security interest upn the cnsumer s tender f the amunt prvided in the creditr s written statement. The prpsed rule wuld als amend Regulatin Z t prvide that: A cnsumer wh exercises the extended right may send the ntice t the servicer rather than the current hlder, because many cnsumers cannt readily identify the hlder; Certain events terminate the extended right t rescind, such as a refinancing with a new creditr; Bna fide persnal financial emergencies that enable a cnsumer t waive the right t rescind will usually invlve imminent prperty damage r threats t health r safety, nt the imminent expiratin f a discunt n gds r services; and A cnsumer wh guarantees a lan that is subject t the right f rescissin and wh pledges his principal dwelling has a right t rescind. Lan Mdificatins That Require New TILA Disclsures The prpsed rule wuld prvide that new TILA disclsures are required when the parties t an existing clsed-end lan secured by real prperty r a dwelling agree t mdify key lan terms, withut reference t state cntract law. New disclsures wuld be required when, fr example, the parties agree t change the interest rate r mnthly payment, advance new mney, r add an adjustable rate r ther risky feature, such as a prepayment penalty.

14 Cnsistent with current rules, n new disclsures wuld be required fr mdificatins reached in a curt prceeding, and mdificatins fr brrwers in default r delinquency, unless the lan amunt r interest rate is increased, r a fee is impsed n the cnsumer. Certain beneficial mdificatins, such as n cst rate and payment decreases, wuld als be exempt frm the requirement fr new TILA disclsures. The prpsed rule wuld require new TILA disclsures when the same creditr and the cnsumer agree t mdify certain key mrtgage lan terms, including mdificatins: changing the interest rate r mnthly payment; advancing new debt; adding an adjustable rate r ther risky feature such as a prepayment penalty. Whenever a fee is impsed n a cnsumer in cnnectin with a mdificatin, including a mdificatin fr a cnsumer in default, a new transactin wuld ccur requiring new TILA disclsures. If the new transactin s APR exceeds the threshld fr a higher-priced mrtgage lan, then special HOEPA (TILA Sectin 32) prtectins wuld apply t the new transactin. The right f rescissin wuld likely apply t any new transactins. Hwever, transactins are exempt frm rescissin if they: invlve the riginal creditr wh is als the current hlder f the nte; d nt invlve an advance f new mney; and d nt add a new security interest in the cnsumer s principal dwelling. Cverage Test fr 2008 HOEPA Final Rule and HOEPA The Bard prpses t revise hw a creditr determines whether a clsed-end lan secured by a cnsumer s principal dwelling is a higher-priced mrtgage lan subject t the Bard s 2008 HOEPA Final Rule in , and hw pints and fees are calculated fr cverage under the HOEPA rules in and

15 The prpsed rule wuld replace the APR as the metric a creditr cmpares t the average prime ffer rate t determine whether the transactin is a higher-priced mrtgage lan. Creditrs instead wuld use a cverage rate that wuld be clsely cmparable t the average prime ffer rate, and wuld nt be disclsed t cnsumers. The prpsed rule wuld clarify that mst third party fees wuld nt be cunted twards pints and fees that trigger HOEPA cverage. Cnsumer s Right t a Refund f Fees Fr clsed-end lans secured by real prperty r a dwelling, the prpsed rule wuld require a creditr t: Refund any appraisal r ther fees paid by the cnsumer (ther than a credit reprt fee), if the cnsumer decides nt t prceed with a clsed-end mrtgage transactin within three business days f receiving the early disclsures (fees impsed after this three-day perid wuld nt be refundable); and Disclse the right t a refund f fee t cnsumers at the time f applicatin fr a clsed-end mrtgage lan. The prpsed rule will likely cause a delay in prcessing the transactin and may result in creditrs waiting until 4 days after the cnsumer receives the initial disclsures t charge any fees in rder t avid having t refund fees later. Reverse Mrtgage Disclsures The prpsed rule wuld require a creditr t prvide a cnsumer with new and revised reverse mrtgage disclsures. Disclsures at Applicatin Currently, a creditr is required t prvide a cnsumer with a Bard-published, 20-page lng HELOC brchure, r similar, at the time f an applicatin fr a HELOC. Hwever, it des nt cntain infrmatin specific t reverse mrtgages. Befre the cnsumer applies fr a mrtgage, the creditr must prvide a new tw-page ntice summarizing basic infrmatin and risks regarding reverse mrtgages, entitled

16 Key Questins T Ask abut Reverse Mrtgage Lans t replace the current HELOC and clsed-end applicatin disclsures. The prpsed rule wuld require a creditr t prvide the new Key Questins dcument fr all reverse mrtgages, whether pen- r clsed-end, r fixed- r adjustable-rate. Within three business days f applicatin, and again befre the reverse mrtgage lan is cnsummated (r the accunt is pened, fr an pen-end reverse mrtgage), the fllwing must be prvided: Lan cst infrmatin specific t reverse mrtgages that is integrated with infrmatin required t be disclsed fr all hme-equity lines f credit (HELOCs) r clsed-end mrtgages, as applicable; and A table expressing ttal csts as dllar amunts, in place f the table f reverse mrtgage ttal annual lan cst rates. Reverse Mrtgage Cst Disclsures Currently, all reverse mrtgage creditrs must prvide the TALC disclsure at least three business days befre accunt-pening fr an pen-end reverse mrtgage, r cnsummatin fr a clsed-end reverse mrtgage. Fr clsed-end reverse mrtgages, creditrs must prvide early TILA disclsures within three business days after a cnsumer s applicatin and at least seven business days befre cnsummatin. If the early TILA disclsure becmes inaccurate, the creditr must prvide crrected disclsures befre cnsummatin. Under the MDIA, if the APR changes and exceeds certain tlerances, the creditr must prvide a crrected disclsure that the cnsumer must receive at least three business days befre cnsummatin. Fr pen-end reverse mrtgages, creditrs must prvide disclsures n r with an applicatin that cntains infrmatin abut the creditr s pen-end reverse mrtgage plans. Creditrs are then required t disclse transactin-specific csts and terms at the time that an pen-end reverse mrtgage plan is pened. The prpsed rule creates three cnslidated reverse mrtgage disclsure frms: An early disclsure fr pen-end reverse mrtgages; An accunt-pening disclsure fr pen-end reverse mrtgages; and

17 A clsed-end reverse mrtgage disclsure. Rather than receiving tw r mre disclsures under TILA at different times and in different frmats, under the prpsed rule, cnsumers wuld receive all the disclsures in a single frmat regardless f whether the reverse mrtgage is structured as pen-end r clsed-end credit. The prpsed rule als prvides creditrs with a single set f frms that are specific t and designed fr reverse mrtgages, rather than requiring creditrs t mdify and adapt disclsures designed fr frward mrtgages. Fr reverse mrtgages, the prpsed rule requires creditrs t prvide either: The early pen-end reverse mrtgage disclsure within three business days after applicatin, and the accunt-pening disclsure at least three business days befre accunt pening; r The clsed-end reverse mrtgage disclsures within three business days after applicatin and again at least three business days befre cnsummatin. Infrmatin abut Reverse Mrtgage Ttal Csts Currently, Regulatin Z requires reverse mrtgage creditrs t disclse a table f TALC rates t shw cnsumers hw the cst f the reverse mrtgage varies ver time and with huse price appreciatin. The prpsed rule wuld replace the TALC rates disclsure with mre meaningful infrmatin fr cnsumers and requires a table that demnstrates hw the reverse mrtgage balance grws ver time. The table expresses this infrmatin as dllar amunts, rather than as annualized lan cst rates. Under the prpsed rule, creditrs must prvide three items f infrmatin: The sum f all advances t and fr the benefit f the cnsumer; The sum f all csts and charges wed by the cnsumer; and The ttal amunt the cnsumer wuld be required t repay. This infrmatin must be prvided fr each f three assumed lan perids f ne year, 5 years, and 10 years. Other Reverse Mrtgage Cst Infrmatin

18 The prpsed reverse mrtgage disclsures wuld cmbine reverse-mrtgage-specific infrmatin with infrmatin that was prpsed fr HELOCs and clsed-end mrtgages in The prpsed disclsure includes infrmatin abut APRs, variable interest rates and fees. Hwever, because nt all f the infrmatin currently required fr HELOCs and clsed-end mrtgages is relevant r applicable t reverse mrtgage brrwers, the prpsed rule remves, r replaces, disclsures that are nt likely t prvide a meaningful benefit t reverse mrtgage cnsumers. Fr pen-end reverse mrtgages, the prpsed rule requires creditrs t prvide disclsures at least three business days befre accunt pening, cnsistent with the current rule fr the TALC disclsure. Required Cunseling fr Reverse Mrtgages The prpsed rule requires cunseling f cnsumers seeking t btain a reverse mrtgage lan prir t a creditr charging fees r riginating a reverse mrtgage lan. Prspective brrwers f FHA-insured reverse mrtgages, knwn as Hme Equity Cnversin Mrtgages (HECMs), must receive cunseling befre btaining a HECM. The prpsed wuld prhibit a creditr, r ther persn, frm: Originating a reverse mrtgage befre the cnsumer has btained independent cunseling frm a cunselr that meets the qualificatin standards established by HUD, r substantially similar standards; Impsing a nnrefundable fee n a cnsumer (except a fee fr the cunseling itself) until three business days after the cnsumer has received cunseling frm a qualified cunselr; and Steering cnsumers t specific cunselrs r cmpensating cunselrs r cunseling agencies. The prpsed rule applies t HECMs as well as prprietary reverse mrtgages. Similar rules already apply t FHA-insured HECM lans under current FHA rules and guidelines. T cnfirm that the cnsumer cmpleted the cunseling, creditrs wuld rely n a certificate f cunseling in a frm apprved by HUD, r a substantially similar frm.

19 Prhibitin n Crss-Selling fr Reverse Mrtgage The Federal Reserve is prpsing anti-tying rules specific t reverse mrtgages t cver all reverse mrtgage riginatins including HECMs, prprietary reverse mrtgage prducts and reverse mrtgages riginated by depsitry and nndepsitry institutins. The prpsed rule wuld: Prhibit a creditr r brker frm requiring a cnsumer t purchase anther financial r insurance prduct (such as an annuity) as a cnditin f btaining a reverse mrtgage; and Prvide a safe harbr fr cmpliance if, amng ther things, the reverse mrtgage transactin is cnsummated (r the accunt is pened) at least ten calendar days befre the cnsumer purchases anther financial r insurance prduct. Define financial r insurance prduct t include bth bank prducts, such as lans and certificates f depsit, and nn-bank prducts, such as annuities, lngterm care insurance, securities, and ther nndepsitry investment prducts. Exempt frm the definitin f financial r insurance prduct savings and certain ther depsit accunts established t disburse reverse mrtgage prceeds, as well as prducts and services intended t prtect the creditr s r insurer s investment, such as mrtgage insurance, prperty inspectin services, and appraisal r prperty valuatin services. Reverse Mrtgage Advertising The prpsed rule amends Regulatin Z t revise the advertising rules fr reverse mrtgages. Regulatin Z currently cntains rules that apply t advertisements f HELOCs and clsed-end mrtgages, including reverse mrtgages. Advertisements cntaining certain specified credit terms, including payment terms, must als include additinal advertising disclsures under Regulatin Z, such as the APR. Fr clsed-end mrtgages, including reverse mrtgages, Regulatin Z prhibits seven misleading r deceptive practices in advertisements, including: Misleading advertising f ``fixed'' rates and payments; Misleading cmparisns in advertisements; Misrepresentatins abut gvernment endrsement; Misleading use f the current lender's name;

20 Misleading claims f debt eliminatin; Misleading use f the term cunselr; and Misleading freign-language advertisements. Mrever, a clarifying statement wuld be required fr: Advertisements stating that a reverse mrtgage requires n payments; Advertisements stating that a cnsumer need nt repay a reverse mrtgage during yur lifetime; and Advertisements stating that a cnsumer cannt lse r there is n risk t a cnsumer s hme with a reverse mrtgage. Fr example, the prpsed rule requires advertisements that state that a reverse mrtgage requires n payments t clearly disclse the fact that brrwers must pay taxes and required insurance. Other Prpsed Revisins The prpsed rule wuld cntain several changes t the rules fr HELOCs and clsedend mrtgage lans. These changes include: Cnfrming advertising rules fr HELOCs t rules fr clsed-end mrtgage lans adpted as part f the Bard s 2008 HOEPA Final Rule; Clarifying hw creditrs may cmply with the 2008 HOEPA Final Rule s ability t repay requirement when making shrt-term balln lans; Clarifying that certain practices regarding prepayment f FHA lans cnstitute prepayment penalties fr purpses f TILA disclsures and the Bard s 2008 HOEPA Final Rule; Requiring servicers t prvide cnsumers with the name and address f the hlder r master servicer f the cnsumer s lan bligatin, upn the cnsumer s written request; and Revising the disclsure rules related t credit insurance and debt cancellatin and suspensin prducts. In cnnectin with this secnd phase f the Federal Reserve s rulemaking regarding imprving cnsumer disclsures, the Federal Reserve indicated that it expects t issue final rules in the future that will cmbine the first and secnd phases f this rulemaking. The cmment perid fr this set f rules ends n December 23, 2010.

21 Federal Reserve Issues Prpsed Rule t Revise Escrw Accunt Requirements fr Jumb Lans On August 16, 2010, the Federal Reserve als issued a prpsed rule that wuld revise the escrw accunt requirements fr higher-priced, first-lien jumb mrtgage lans, implementing a prvisin f the recently enacted Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act. On September 24, 2010, the prpsed rule was published in the Federal Register fr public cmment. The prpsed rule wuld increase the annual percentage rate (APR) threshld used t determine whether a lender must establish an escrw accunt fr prperty taxes and insurance fr first-lien jumb mrtgage lans. Jumb lans are thse lans exceeding the Freddie Mac cnfrming lan size limit. Sectin 1461 f the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act amended TILA, such that an escrw accunt will be required fr jumb lans nly if the APR exceeds the applicable prime ffer rate by 2.5 percentage pints r greater. The rule des nt amend the nn-jumb APR threshld, which remains at 1.5 percentage pints abve the applicable prime ffer rate. Prpsed staff cmmentary wuld clarify that this higher threshld applies slely t whether a jumb lan is subject t the escrw requirement. Other requirements, such as ability t repay, and restrictins n pre-payment penalties, remain n all lans, including jumb lans, and wuld cntinue t be based n the 1.5 percentage pint threshld. Cmments must be received by Octber 25, FHA Annunces Significant Changes t the HECM Prgram On September 21, 2010, HUD issued Mrtgagee Letter (ML 10-34) that implemented several significant changes t the FHA-insured Hme Equity Cnversin Mrtgage (HECM) prgram. ML annunced the creatin f a new HECM prduct called the HECM Saver. ML als implemented certain HECM prgram changes, including changes: (1) setting initial and mnthly mrtgage insurance premiums (MIP); (2) establishing a frmula fr initial MIP in HECM refinance transactins; (3) reducing HECM principal limit factrs and the effective interest rate flr; (4) prviding fr management f the existing pipeline f HECM lans; and (5) updating HECM lan dcuments. This article prvides a general verview f these imprtant HECM prgram changes.

22 The HECM Saver Effective fr all HECM case numbers assigned n r after Octber 4, 2010, brrwers may chse frm tw HECM pricing ptins. Brrwers may chse either a HECM Saver r a HECM Standard ptin. The HECM Saver is a new HECM pricing ptin with significantly reduced upfrnt clsing csts designed fr senir brrwers wh wish t receive less cash prceeds frm their HECM lan than the prceeds that therwise wuld be available under the HECM Standard ptin. The HECM Saver prvides fr a significantly lwer initial MIP. HECM Saver Prgram Features All existing prgram features currently available with the HECM Standard are als available with the HECM Saver. This includes all HECM transactin types (traditinal, purchase mney and refinance), all five payment plans (tenure, term, line f credit, mdified tenure and mdified term), adjustable and fixed interest rate features, and all interest rate indices (CMT and LIBOR). Initial and Mnthly Mrtgage Insurance Premiums (MIP) Fr the HECM Saver, the initial MIP will be 0.01% f the maximum claim amunt (r MCA). Fr the HECM Standard, the initial MIP will cntinue t be 2% f the MCA. Mnthly MIP fr bth HECM Saver and HECM Standard will be charged at an annual rate f 1.25% f the utstanding lan balance. Initial MIP Calculatin fr Refinance Transactins ML requires HECM lenders and cunselrs t use the fllwing frmula t calculate the initial MIP in cnnectin with refinance transactins (fr bth HECM Saver and HECM Standard): (1) New MCA multiplied by new initial MIP (%) = New MIP (2) Old MCA multiplied by ld initial MIP (%) = Old MIP (3) Subtracting the result f (2) frm the result f (1) yields the MIP amunt wed t HUD ML prvides examples fr calculating the initial MIP due n HECM refinance transactins.

23 Reduced Principal Limit Factrs and Interest Rate Flr Effective Octber 4, 2010, HUD has lwered the principal limit factrs that apply t the HECM Saver and the HECM Standard. The new principal limit factrs are available n HUD s web site at: In general, the reductin in principal limit factrs results in reduced maximum principal limit available t the brrwer at lan riginatin. Hwever, HUD als lwered the effective interest rate flr frm 5.5 t 5 percent. The effective interest rate is used in determining the initial principal limit fr a HECM lan. This change may cunter-act the reductin in principal limit factrs and, in sme cases, increase the maximum principal limit available t HECM brrwers at lan riginatin. Existing Pipeline f HECM Lans Fr all HECM Standard lans that have nt clsed and fr which the FHA case number was assigned as f Octber 3, 2010, the lender may prcess such lans using an initial MIP f 2%, a mnthly MIP f 0.5% and the fiscal year 2010 principal limit factr table. Thus, fr HECM Standard lan applicatins in the pipeline with case numbers assigned n r befre Octber 3, 2010, HECM lenders have the ptin f clsing the lan with the ld initial and mnthly MIP amunts and 2010 principal limit factrs. Further, fr such pipeline lans, FHA will permit brrwers with case numbers that were assigned n r befre Octber 3, 2010, but the lan has nt clsed befre that date, t cnvert t HECM Saver. Changes t HECM Lan Dcuments ML prvides certain specific changes t Sectin 1.7 f the mdel HECM Lan Agreement that was riginally published in the HUD HECM Handbk REV-1 and recently amended in Mrtgagee Letter Sectin 2.13 f the mdel HECM Lan Agreement prvides in part that mnthly MIP shall be calculated as prvided in 24 CFR Part 206. This reference will need t be changed t als make reference t ML HUD als reiterated its lng standing plicy that lenders must adapt their HECM legal dcuments as necessary t ensure cmpliance with the prgram requirements. HUD als reminded lenders that they are permitted t make the necessary and apprpriate mdificatins t the HECM legal dcuments t ensure cmpliance with FHA requirements, as well as ther federal, state and lcal laws. Lenders als will want t review their disclsure fr HECM Standard (2011) lans, particularly the Truth-in-

24 Lending Open End Imprtant Terms disclsures, t assure any references t n-ging MIP state 1.25% and nt.50%, and t make changes t the figures r descriptins stated fr up-frnt MIP n the HECM Saver, and HECM-t-HECM streamline refinances. FTC Issues Ntice f Prpsed Rulemaking n Mrtgage Advertising On September 22, 2010, the Federal Trade Cmmissin ( FTC ) issued a ntice f prpsed rulemaking that wuld prhibit material misrepresentatins in advertising abut cnsumer mrtgages. The prpsed rule wuld apply t mrtgage lenders, brkers and servicers; real estate agents and brkers; advertising agencies; hme builders; lead generatrs; rate aggregatrs; and ther entities under the FTC s jurisdictin. The prpsed rule wuld prhibit any persn frm making any material misrepresentatin, expressly r by implicatin, in any cmmercial cmmunicatin, regarding any term f any mrtgage credit prduct. The prpsed rule defines mrtgage credit prduct as any frm f credit that is secured by real prperty r a dwelling and that is ffered r extended t a cnsumer primarily fr persnal, family r husehld purpses. The prpsed rule includes a nn-exhaustive list f 19 misrepresentatins that wuld vilate the prpsed rule. Hwever, the prpsed rule des nt include any advertising disclsure requirements. Currently, the FTC Act authrizes the FTC t bring actins seeking injunctive relief against thse under the FTC s jurisdictin wh engage in deceptive mrtgage advertising. The prpsed rule wuld authrize the FTC t bring actins seeking civil penalties in additin t injunctive relief. Additinally, the prpsed rule wuld allw states t bring actins fr civil penalties fr vilatins f the prpsed rule. The FTC is seeking cmments n the csts and benefits f the prpsed rule, including whether any alternatives wuld adequately prtect cnsumers at a lwer cst. Additinally, the FTC seeks public input n whether there are advertising disclsures that shuld be included in the prpsed rule. The FTC is als seeking cmments n whether the prpsed rule shuld prhibit persns frm prviding substantial assistance t thse wh vilate the rule. Cmments are due by Nvember 15, A cpy f the Federal Register Ntice is available at: Flrida Amends Its Regulatins Relating t Mrtgage Brkering and Mrtgage Lending

25 Effective Octber 1, 2010, several rules under Chapter 69V-40 (entitled Mrtgage Brkerage ) will be amended, added, r repealed. These changes t the Flrida regulatins generally appear t reflect the recent changes t Flrida law relating t mrtgage brkering and mrtgage lending. Fr example, the frms and filings required in cnnectin with applicatin fr a mrtgage lender, mrtgage brker, r lan riginatr license refer t the Natinwide Mrtgage Licensing System and Registry ( NMLSR ) instead f the Flrida REAL System. Additinally, many f the amended regulatins are revised t reflect the apprpriate terminlgy under Flrida law, effective Octber 1, 2010, relating t mrtgage brkering and mrtgage lending (fr example, the substitutin f the phrase lan riginatin fr references t the phrase mrtgage brkerage, where apprpriate, in the fees and cmmissins sectin). Sme ther ntable changes t the Flrida regulatins include: (i) the repeal f many sectins f the regulatins, including the definitin sectin, the quarterly reprt filing requirement, the mrtgage lender surety bnd requirement, and references t license types that will n lnger exist under Flrida law, effective Octber 1, 2010; (ii) the additin f a thrugh descriptin f the effect that law enfrcement recrds will have n lan riginatr, mrtgage brker, and mrtgage lender license applicants, which is similar t prir regulatins n the matter (nte that the prvisins include dcumentatin typically requested in cnnectin with review f a persn s criminal histry, classificatin f crimes, effect n licensure based n number f crimes, and mitigating factrs, amng thers, and that there are fur classes f crimes that are cnsidered in cnnectin with lan riginatr and mrtgage lender applicants, in additin t mrtgage brker applicants); (iii) the additin f a sectin regarding the manner in which an applicant may demnstrate requisite character, general fitness, and financial respnsibility; (iv) the additin f new prvisins regarding license applicatin and renewal fr lan riginatrs, mrtgage brkers, and mrtgage lenders, as well as branch license applicatins; (v) the additin f a prvisin regarding the declaratin f a persn s intent t engage slely in lan prcessing; and (vi) the revisin f prvisins regarding amendments t the licensee, such as changes in cntrl r wnership (which will nw be filed thrugh the NMLSR). New Yrk Issues Mrtgage Servicer Regulatins In August 2008, the Mrtgage Lending Refrm Law was enacted which created a regulatry framewrk fr mrtgage servicers. Pursuant t that law, mrtgage servicers are required t register with the New Yrk State Banking Department prir t engaging in servicing activities. In respnse t this law, the New Yrk State Banking Department enacted regulatins as Part 418 in July Part 418 clarifies the registratin prcess and financial respnsibility standards fr mrtgage servicers.