NEW CFPB RULES FOR HIGH COST MORTGAGES AND HOMEOWNERSHIP COUNSELING February 3, 2013

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1 NEW CFPB RULES FOR HIGH COST MORTGAGES AND HOMEOWNERSHIP COUNSELING February 3, 2013 On January 10, 2013, the Consumer Financial Protection Bureau ( CFPB ) issued a final rule that carries out changes to the Home Ownership and Equity Protection Act ( HOEPA ) made by the Dodd Frank Wall Street Reform and Consumer Protection Act (the Dodd Frank Act ) and that carries out two additional Dodd Frank Act provisions related to homeownership counseling. 1 The final rule will become effective on January 10, Consistent with the requirements of the Dodd Frank Act, the final rule expands the types of loans that are covered by HOEPA to include purchase money mortgage loans and home equity lines of credit, amends the tests for determining whether a loan is high cost under HOEPA, imposes restrictions on the features of high cost loans, and requires new consumer disclosures. The final rule also carries out a new provision of the Dodd Frank Act that sets forth the conditions under which a creditor may cure a violation of HOEPA. As under current law, loans that are covered by HOEPA are subject to limits on loan terms, enhanced borrower disclosure requirements, and special borrower remedies for creditor violations of HOEPA. The final rule adopts two homeownership counseling requirements based on other provisions of the Dodd Frank Act: a requirement that consumers receive homeownership counseling by a federally certified or approved counselor before obtaining a high cost loan and a requirement that first time borrowers receive homeownership counseling before obtaining a closed end loan with negative amortization (except for a reverse mortgage or a timeshare loan). 1 CFPB, High Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act (Regulation Z) and Homeownership Counseling Amendments to the Real Estate Settlement Procedures Act (Regulation X). RIN 3170 AA12 (January 10, 2013), available at: rule_high costmortgages.pdf ( CFPB Final Rule, High Cost Mortgage and Homeownership Counseling Amendments ) Wilson Blvd. Suite 100 Arlington, VA Tel: Fax: info@mfghome.org

2 I. HIGH COST MORTGAGES The Dodd Frank Act and the final rule expand the types of loans that may be considered high cost, and therefore covered by HOEPA, to include purchase money mortgage loans and home equity lines of credit. Reverse mortgages, construction loans, loans that are originated and financed by housing finance agencies and loans originated through the US Department of Agriculture s Rural Housing Service Section 502 Direct Loan Program are exempt from coverage under HOEPA. 2 The final rule expands the annual percentage rate ( APR ) and points and fees and tests for determining whether a loan is considered a high cost mortgage and adds a new prepayment penalty trigger. A transaction that is secured by a consumer s principal dwelling will be considered a highcost mortgage if any one of these three tests is met. Each of the tests for determining whether a consumer credit transaction is high cost, and therefore covered by HOEPA, is described below. A. Annual percentage rate test A consumer credit transaction is high cost, and therefore covered by HOEPA, if the APR applicable to the transaction exceeds the average prime offer rate ( APOR ) for a comparable transaction: by more than 6.5 percentage points for a first-lien mortgage (except as described immediately below); by more than 8.5 percentage points for a first-lien mortgage if the dwelling is personal property and the transaction is less than $50,000; or by more than 8.5 percentage points for a subordinate-lien mortgage. The 8.5 percentage points threshold for a first-lien mortgage where the dwelling is considered personal property is intended to apply to loans secured by manufactured homes that constitute personal property under applicable state law. 3 The final rule allows a creditor to use any one of three ways for determining the interest rate that 2 12 CFR (a)(2). 3 The CFPB indicated that it does not have authority under HOEPA to increase the APR threshold for first lien transactions to more than 10 percentage points above APOR and that it was not certain that manufactured home creditors would cease originating loans even if a portion of those loans exceed the high cost mortgage APR threshold. Further, the CFPB indicated that, in the current market, a 10 or 15 year, fixed rate manufactured home loan secured by real property (or by personal property where the loan amount is $50,000 or more) would not fall within the APR coverage threshold, unless the loan had an APR of greater than approximately 10.5 or 9.25 percent, respectively. CFPB Final Rule, High Cost Mortgage and Homeownership Counseling Amendments at pp Page 2

3 applies for purposes of calculating the APR under the APR test. First, for a transaction in which the APR will remain constant, a creditor may use the interest rate that is in effect as of the date the interest rate is set for the transaction. Second, for a transaction in which the interest rate may change, a creditor may use the interest rate that results from adding the maximum margin permitted at any time to the value of the index rate that is in effect as of the date the interest rate is fixed for the transaction, or the introductory rate, whichever is greater. Finally, for any other transaction in which the interest rate may change, a creditor may use the maximum interest rate that may be imposed for the loan. Guidance for determining the APOR for a comparable transaction is set forth in the existing Regulation Z, which requires creditors to publish tables of average prime offer rates for fixed- and variable-rate closed-end credit transactions. The new commentary to the final rule provides that to determine the APOR for a comparable transaction for closed-end credit, a creditor will focus on the date the interest rate is set and if the credit plan is fixed-rate, the term to maturity or if the credit plan is variable-rate, the duration of any initial, fixed-rate period. 4 B. Points and fees test A consumer credit transaction is high-cost, and therefore covered by HOEPA, if the points and fees associated with the transaction will exceed: 5 percent of the total transaction amount, for a transaction with a loan amount of $20,000 or more, adjusted annually for inflation; or the lesser of 8 percent of the total transaction amount or $1,000, for a transaction with a loan amount of less than $20,000 (adjusted annually for inflation) The definition of points and fees for purposes of the final rule is comparable, for the most part, to the new definition of this term in the safe harbor in the final rule on qualified mortgages and ability-torepay recently adopted by the CFPB. Points and fees generally includes all non-interest elements of the finance charge with several exclusions. i. Exclusions from points and fees Government mortgage insurance and guarantee fees, such as those for Federal Housing Administration ( FHA ), Veterans Affairs and Rural Housing Service loans, are excluded from points and fees. Private mortgage insurance premiums that are payable after closing are excluded from points and fees. Some private mortgage insurance premiums that are payable at or before closing are also excluded, where the premium is refundable on a pro rata basis and the refund is automatically issued when the loan is paid in full. 4 See 12 CFR (a)(2). Page 3

4 Bona fide third-party charges that are not retained by the creditor, originator or an affiliate of either are excluded from points and fees with exceptions (i) for private mortgage insurance premiums that are payable at or before closing and that exceed the FHA premium amount or are not required to be automatically refunded on a pro rata basis when the loan is paid in full; (ii) for real estate charges that are not considered reasonable; and (iii) for premiums for credit insurance and debt cancellation coverage that are payable at or before closing. 5 Finally, bona fide discount points are excluded from points and fees in varying amounts if they meet certain conditions. 6 ii. Loan originator compensation The final rule includes in points and fees all compensation paid directly or indirectly by a consumer or creditor to a loan originator...that can be attributed to that transaction at the time the interest rate is set. 7 Compensation includes the dollar value of both monetary and non-monetary rewards paid to a loan originator. The focus is on retention of value by the loan originator. Compensation in the form of a bonus, commission, or award of merchandise, services, trips, or similar prizes is included. 8 A loan originator is a person who for compensation, or in the expectation of receiving compensation, arranges, negotiates, or otherwise obtains a loan for another person. This definition is parallel to the definition in the loan originator compensation rules issued by the CFPB. Within this definition, a person can be an organization or an individual; however, a person is not a creditor that provides funds for the credit transaction. 9 iii. Charges for real estate related services below: Certain real estate related services are included in points and fees, including those listed fees for preparing loan-related documents such as deeds, mortgages and settlement documents; 5 The final rule considers includes in points and fees any point charged to the consumer to offset loan level price adjustments imposed by Fannie Mae and Freddie Mac. See CFPB Final Rule, High Cost Mortgage and Homeownership Counseling Amendments at pp A bona fide discount point is an amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate...based on a calculation that is consistent with established industry practices. See 12 C.F.R (b)(3)(i) and Commentary to 12 CFR (b)(1)(i)(E) 3 and (b)(1)(i)(f) CFR (b)(1)(ii). 8 Commentary to 12 CFR (b)(1)(ii) 1, 2. 9 Commentary to 12 CFR (a). Page 4

5 notary and credit report fees; property appraisal fees or fees for property inspections if performed prior to closing; fees for title examinations and insurance and property surveys; and sums paid into escrow that would otherwise not be included in the finance charge. iv. Credit insurance and debt cancellation premiums Premiums for credit life, unemployment or disability insurance, for property insurance, for life, accident or health insurance where the creditor is a beneficiary of the policy, and direct or indirect payments for debt cancellation contracts are all included in points and fees, provided they are payable at or before consummation of the credit transaction. The commentary to the final rule states that credit property insurance is insurance against loss of or damage to personal property, such as a.. manufactured home and does not include homeowners insurance. 10 v. Prepayment penalties Points and fees includes (a) the maximum prepayment penalty that may be assessed under the terms of the mortgage loan and (b) the total prepayment penalty that would be incurred by the consumer if the consumer were to refinance the existing mortgage loan with the current holder of the loan, with a loan servicer acting on behalf of the current holder of the loan, or with an affiliate of either. 11 C. Prepayment penalty test A loan is considered high-cost, and therefore covered by HOEPA, if the terms of the transaction or open-end credit agreement permit the creditor to charge or collect a prepayment penalty more than 36 months after the transaction is closed or the account is opened, or permit prepayment penalties to exceed, in the aggregate, more than 2 percent of the amount prepaid. The commentary to the final rule explains that a prepayment penalty includes an origination or other closing cost fee that is waived by the creditor on the condition that the consumer does not prepay the loan, but a waived charge is not considered a prepayment penalty if it a bona fide third-party charge and the waiver applies only to prepayment of the entire amount of principal earlier than 36 months following closing Commentary to 12 CFR (b)(1)(iv) CFR (b)91)(v), (vi). 12 See 12 CFR (b)(6), Commentary to 12 C.F.R (b)(6) 1.ii. Page 5

6 II. NEW RESTRICTIONS AND REQUIREMENTS FOR HIGH COST MORTGAGES Effective January 10, 2014, loans that meet one of the tests for high cost mortgages described above, and that are therefore considered high cost under HOEPA and the final rule, cannot have any of the following features or contractual terms. A. Balloon payments The borrower s payment schedule cannot include a payment that is more than two times a regular periodic payment, with certain exceptions to account for the seasonal or irregular income of the borrower, for a short-term bridge loan (of 12 months or less), and for loans made by creditors that operate predominantly in rural or underserved areas and meet certain other criteria. 13 B. Prepayment penalties Prepayment penalties are prohibited. Points and fees that must be included in the calculation of points and fees may not be financed. 14 C. Debt acceleration Debt acceleration features absent fraud, default, or an event affecting the creditor s security are prohibited. 15 D. Refinancing A creditor is prohibited from refinancing a borrower into another high-cost mortgage within one year of the prior transaction, unless the refinancing is in the consumer s interest. 16 E. Ability to repay for HELOCs A creditor that originates an open-end home equity line of credit ( HELOCs ) is required to assess the consumer s ability to repay the loan. Such a creditor must consider the ability to repay based on facts and circumstances known at the time of opening the credit account CFR (d)(1) CFR (d)(6) (7) (prepayment penalties) and (a)(9) (10) (financing points and fees) CFR (d)(8) CFR (a)(3) CFR (a)(4) and (7). Page 6

7 F. Recommending default Creditors and mortgage brokers are prohibited from recommending or encouraging a consumer to default on a loan or debt in order to be refinanced into a high-cost mortgage. 18 G. Late fees and other fees Late fees are limited to four percent of the payment that is past due. Late fees must also be permitted specifically by the loan documents and cannot be assessed more than once for the same late payment. The final rule prohibits pyramiding of late fees. 19 Fees for providing payoff statements are prohibited, except that a creditor or loan servicer is permitted to charge a reasonable fee after the creditor or servicer has provided a payoff statement four times during a calendar year. Additionally, a processing fee may be charged for providing a pay-off statement by courier or facsimile, if the fee is similar to fees for comparable services provided for mortgages that are not high-cost mortgages and creditor or servicer discloses the fact that other delivery options are available with no charge. 20 The final rule prohibits loan modification and payment deferral fees. 21 III. NEW DISCLOSURES Creditors must make disclosures for closed end and open end loans within three business days prior to the closing a closed end high cost mortgage or the opening of an open end high cost mortgage, unless the borrower waives this requirement due to a bona fide personal financial emergency. 22 The final rule provides specific disclosure requirements for closed end loans, for open end loans and for variable rate loans CFR (a)(6) CFR (a)(8) and Commentary to 12 CFR (a)(8) CFR (a)(9) CFR (a)(7) CFR (c). Page 7

8 IV. CURE FOR GOOD FAITH VIOLATIONS OF HOEPA Under the final rule, a creditor (or assignee) that in good faith failed to comply with a requirement of HOEPA will not be considered to have violated HOEPA if it satisfies certain conditions within specified timeframes after closing of the transaction and prior to the initiation of any action based upon the violation. A creditor may avail itself of the option to cure a violation of HOEPA if within 30 days of closing of the transaction (or opening of the account for HELOCs), the consumer is notified or discovers the violation, restitution is made within a reasonable time, and necessary adjustments are made to the loan either to make the loan satisfy HOEPA requirements or to change the terms of the loan to benefit the consumer such that the loan is no longer high cost, at the election of the consumer. 23 Another way a creditor may avail itself of the option to cure a violation of HOEPA is if within 60 days of the creditor s discovery or receipt of notification of a bona fide error or unintentional violation of HOEPA, the consumer is notified of the error or violation, restitution is made within a reasonable time, and necessary adjustments are made to the loan either to make the loan satisfy HOEPA requirements or to change the terms of the loan to benefit the consumer such that the loan is no longer high cost, at the election of the consumer. 24 The commentary to the final rule provides additional explanation of the terms employed in these two options, including the timeframes that would be considered reasonable. For example, the commentary explains that a creditor should provide the consumer at least 60 days during which to consider and make a choice between the options provided. 25 V. HOMEOWNERSHIP COUNSELING Before making a high cost mortgage, the final rule requires a creditor to obtain confirmation from a non affiliated, federally certified or approved homeownership counselor that the consumer has CFR (h)(1) CFR (h)(2). 25 Commentary to 12 CFR (h)(1) (2). Page 8

9 received financial counseling on the advisability of the mortgage. 26 The consumer must receive this homeownership counseling after receiving the good faith estimate. The federally certified or approved homeownership counselor may not be an employee or affiliate of the creditor and the creditor is prohibited from steering the consumer to a particular counselor. A creditor may pay the counseling fee for the consumer but cannot condition the payment of the fee on the closing of the high cost mortgage. A creditor may begin processing a consumer s application prior to receiving the certification of counseling but may not make a high cost mortgage without obtaining the certification. The final rule also implements two homeownership counseling related provisions in the Dodd Frank Act. First, the rule requires a lender, mortgage broker or dealer to provide to the applicant a list of homeownership counseling organizations located near the applicant, unless the application is denied or the applicant withdraws the application within three business days after the application is received. 27 To facilitate creation of this list, in coordination with the Department of Housing and Urban Development, the CFPB plans to create a website that will enable lenders to generate a list of homeownership counseling organizations in the vicinity of the applicant. Second, the rule requires creditors to obtain confirmation that a first time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a loan that provides for or permits negative amortization CFR (a)(5) CFR This requirement does not apply to reverse mortgage transactions or timeshare plans CFR (k). Page 9