The New Mortgage Lending Process: A 2014 Check-Up and 2015 Planning

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1 The New Mortgage Lending Process: A 2014 Check-Up and 2015 Planning Copyright 2012 Tata Consultancy Services Limited No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice 1

2 Amy Avitable, JD, CPA Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations, the American Bankers Association, and the Mortgage Bankers Association, as well as articles in banking and compliance publications. Amy is the Director of Regulatory Compliance for the TCS BaNCS system at Tata Consultancy Services. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she has supported software products for financial institutions and engaged in lobbying efforts in Congress as well as with the FDIC, CFPB, and NCUA. She was previously the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In- Chief for the renowned Big Orange Book compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC. 2

3 Mortgage Reform Effective January 2014 Homeownership Counseling Disclosure Homeownership Counseling for Certain Negative Am Loans Ability to Repay and Qualified Mortgage Standards Disclosure and Delivery Requirements for Copies of Appraisals and Valuations Appraisals for Higher-Priced Mortgage Loans Escrow Requirements High-Cost Mortgage Requirements Mortgage Servicing Loan Originator Compensation Effective August 1, 2015 Regulation Z and RESPA Scope Changes Definition of Application New Loan Estimate and Closing Disclosure Modified Tolerances Requirements for Changing or Correcting Loan Estimate and Closing Disclosure Timing Requirements Escrow Cancellation Notice 3

4 Mortgage Reform 2014 Currently Applicable 4

5 Reminder: Homeownership Counseling Disclosure Applies to ALL RESPAcovered loans Must use CFPB s tool Cannot provide preprinted list Can use HUD tool only if additional disclosures provided Must be specific to customer 5

6 Reminder: Mandatory Homeownership Counseling Only required in two circumstances: Loan to first time borrower where loan could result in negative amortization High Cost Mortgage May include HELOCs! 6

7 Reminder: Documenting Ability to Repay Legal Liability Special statutory damages - All finance charges and fees paid by the consumer Actual damages Court costs and attorneys fees Recoupment or setoff in foreclosure action Statute of Limitations 3 years but may be raised as defense to foreclosure at any time Documentation Minimum retention 3 years Must be able to produce copies of documents, not just data 7

8 Reminder: QM Protection Does the Ability to Repay Rule Apply? If an exception is met, No. If an exception is not met, Yes. Continue to next step. Is the Loan a Qualified Mortgage? If no, apply the Ability to Repay rule without a presumption of compliance. If yes, continue to next step. Is the Loan a Higher Priced Covered Transaction? If no, you are deemed compliant and such safe harbor cannot be rebutted. If yes, you receive a presumption of compliance but it can be rebutted. 8

9 Reminder: QM Protection Five QM Categories 1. Regular Qualified Mortgage 2. Qualified Mortgage with a balloon payment for creditors that operate in rural or underserved areas 3. Small creditor portfolio loan In prior year, creditor and affiliates originated 500 or fewer first-lien covered loans As of end of prior year, had assets that do not exceed CFPB s asset threshold $2B in Agency Qualified Mortgage Expires on January 10, 2021 Follow program definition of QM 5. Temporary balloon payment QMs Loan must be closed on or before January 10,

10 Reminder: QM Protection Higher Priced Covered Transaction APR exceeds APOR by: 1.5% or more for 1 st lien loans 3.5% or more for: Subordinate lien loans Loans made under small creditor portfolio or balloon QM Loans made under rural/underserved QM No separate threshold for non-conforming loans Not limited to loans secured by a principal dwelling Are you: Identifying Higher Priced Covered Transactions separately from HPMLs? Tracking QM, HPCT, HPML, and High Cost Mortgage statuses? Tracking QM and HPCT statuses for life of loan? Considering residual income? 10

11 Reminder: Fair Lending and ATR Interagency Statement on Fair Lending Compliance and the Ability-to- Repay and Qualified Mortgage Standards Rule But Decision to make all or mostly QMs will not, absent other factors, elevate fair lending risk Will you require certain products to be QMs and others to be underwritten using the Ability to Repay standards? How do you decide which products are subject to which standards? Could different underwriting standards for different products inadvertently result in denials and pricing that disproportionately affect protected classes negatively? Apply underwriting consistently and use exceptions VERY CAREFULLY! 11

12 Reminder: Copies of Appraisals Must provide copy of appraisal in two circumstances: Regulation B For all loans to be secured by a 1 st lien on a dwelling Regulation Z For all higher-priced mortgage loans Timing - Earlier of: Promptly upon completion Deemed prompt if provided within 1 week after complete and correct copy of the appraisal is received Received by customer 3 business days before closing Not received for 3 business days if mailed E-SIGN applies! Cannot unless E-SIGN requirements are met 12

13 Reminder: Copies of Appraisals If the copy is being provided under Regulation B, requirement for customer to receive it 3 business days before closing can be waived if: Waived at least 3 business days before closing or Waived within 3 business days before closing but customer already received a copy and additional copy only reflects minor clerical changes and Borrower receives copy before closing No waiver allowed under Regulation Z! Routinely obtaining waiver has been viewed as an Unfair or Deceptive Act or Practice! 13

14 Reminder: High Cost Mortgages Definition Open or closed-end loan Secured by principal dwelling Where any of the following 3 thresholds is met: APR exceeds APOR by: 6.5% for 1 st lien loans 8.5% for subordinate lien loans and 1 st lien loans where dwelling is personal property and loan amount is less than $50,000 Total points and fees exceed: Now applicable to home purchase loans and HELOCs! 5% of total loan amount if loan amount = $20,000 or more Lesser of 8% of total loan amount or $1,000 if loan amount < $20,000 Prepayment penalty can be charged more than 36 months after closing or can exceed more than 2% of amount prepaid (or initial credit limit, for lines of credit) 14

15 Reminder: High Cost Mortgages and HELOCs Prepayment penalty = Charge for terminating open-end credit plan before end of term other than waived bona fide third-party charges imposed for terminating sooner than 36 months after account opening $10,000 HELOC with $500 flat fee for closing line within first 36 months = High Cost Mortgage because higher than 2% of initial credit limit $10,000 HELOC with $200 flat fee for closing line any time before maturity = High Cost Mortgage because may be charged after 36 months Where waived closing costs are charged due to early closure: Ensure that none can be charged after 36 months Identify amount of third party vs. bank closing costs Compare amount of bank closing costs to initial credit limit to determine if > 2% 15

16 Reminder: High Cost Mortgages HELOC underwriting requirements Various restrictions and prohibitions Mandatory homeownership counseling High Cost Mortgage disclosure Customer must receive at least 3 business days before closing If information changes, must be redisclosed with additional 3 day wait period Failure to provide before closing: Violation of High Cost Mortgage provisions Rescission violation! 16

17 Reminder: High Cost Mortgages ATR isn t the only rule with a high risk of civil liability! Are you: Identifying High Cost Mortgages before closing? Recommendation: At least 6 business days before closing Tracking HPCT, HPML and High Cost Mortgage statuses? 17

18 Mortgage Reform 2015 Applications on or after August 1,

19 Scope Change: Agricultural Loans Before final rule, RESPA exempted loans on property of 25 acres or more 25 acre exemption removed from RESPA but Regulation Z exemption for loans with primary purpose of business, commercial, agricultural, or organizational will still apply for both Regulation Z and RESPA Result: Cannot look to acreage alone! Look to whether >50% of the proceeds are used for a consumer or agricultural purpose Primary Use of Proceeds Regulation Z and RESPA Apply? Integrated Disclosures Apply? Consumer Yes Yes Agricultural No No 19

20 Scope Change: Loans to Trusts Regulation Z and RESPA only apply to loans to natural persons Trusts Previously unclear other than land trusts New Regulation Z commentary clarifies that a loan to a trust will be covered if it is, in substance, for personal, family or household purposes Be Aware! Revocable trusts should be treated as subject to Regulation Z Irrevocable trusts will now be subject to Regulation Z if the loan is effectively a consumer transaction 20

21 Integrated Disclosures Applicable to closed end consumer real estate loans Home purchase Refinancings Closed end home equity loans Not Applicable to: Open end lines of credit (HELOCs) Reverse mortgages Mortgages secured by a mobile home or dwelling but not the land Will still receive regular TIL Loans made by a creditor who makes 5 or fewer mortgages per year Partial exemption for certain limited purpose subordinate lien loans Homebuyer assistance, foreclosure prevention and similar loans that meet specific requirements 21

22 Mortgage Process with Integrated Disclosures Step 1: Take an Application Step 2: Provide the Information Booklet May Charge a Credit Report Fee May Provide Other Estimate Step 5: Revise Loan Estimate May Charge Other Fees Step 4: Receive Intent to Proceed Step 3: Give a Loan Estimate with Written List Step 6: Provide Closing Disclosure Step 7: Revise Closing Disclosure Close the Loan Step 8: Provide Another Revised Closing Disclosure 22

23 Taking an Application Will be an application when all 6 pieces of information are collected: Applicant name Income Social security number Property address Estimate of value of the property Mortgage loan amount sought Be Aware! Any other information deemed necessary by the loan originator is no longer part of the definition. You can no longer use this language to support requiring additional information or documentation, such as a completed application form, to start the clock for the early disclosure. You may sequence information to obtain other info before collecting all 6 items. 23

24 Providing the Loan Estimate Deliver or place in mail: Within 3 business days after receiving application and No later than 7 business days before closing 7-day period can be waived for bona fide financial emergency where requirements met Warning verbiage required on any other estimate provided Specific content, formatting and location requirements 24

25 Providing the Loan Estimate Still Required: Provide written list of settlement service providers with Loan Estimate Cannot require customer to provide verifying documentation before providing Loan Estimate Cannot charge fee (other than credit report fee) before customer receives Loan Estimate and expresses intent to proceed Cannot accept check early and deposit it later! Cannot take credit card authorization early for fees other than credit report fee! Explicit intent to proceed must be communicated and documented 25

26 Revising the Loan Estimate Must have a changed circumstance Interest Rate Dependent Charges - Must provide revised Loan Estimate when rate is locked Expiration of Loan Estimate - If customer does not indicate intent to proceed within 10 business days after Loan Estimate provided, Loan Estimate expires and revised Loan Estimate may be issued if customer continues with loan Delayed Settlement on Construction Loan For new construction, may revise Loan Estimate more than 60 days prior to settlement if disclosure about such revision provided on initial Loan Estimate If initial Loan Estimate omitted such disclosure, can only revise Loan Estimate if another changed circumstance arises 26

27 Revising the Loan Estimate Receive Info on Changed Circumstance Provide Closing Disclosure Within 3 Business Days At Least Day Before Provide Revised Loan Estimate Must be received by customer at least 4 business days before closing Closing Business Days = Regular definition for 3 days to provide, rescission for rest 27

28 Providing the Closing Disclosure Must be received by the customer no later than 3 business days before closing 3 business day period for initial and revised Closing Disclosure may be waived for bona fide financial emergency where requirements met Seller copy can be provided to the seller on the day of closing 28

29 Accuracy of Closing Disclosure Cannot increase: Creditor or broker charges for own services Charges for services provided by affiliate of creditor or broker Charges for services for which customer cannot shop 10% tolerance applies to aggregate other charges unless exception applies Exception from tolerance for: Prepaid interest Property insurance premiums Amounts in escrow, impound or reserve Providers not on the written list Charges not required by creditor 29

30 Revising the Closing Disclosure at or Before Closing Revised Closing Disclosure must be received no later than 3 business days before closing if: 1. APR becomes inaccurate outside of tolerance More than 1/8% for regular loans More than 1/4% for irregular loans Loans with multiple advances, irregular payment periods, or irregular payment amounts (other than an irregular first period or an irregular first or final payment) 2. Loan product changes so Product information on Closing Disclosure is inaccurate 3. Prepayment penalty added so Prepayment Penalty statement on Closing Disclosure is inaccurate For other changes, provide revised Closing Disclosure at or before closing 30

31 Revising the Closing Disclosure After Closing Event Affecting Charges 30 Days After Closing Must provide revised Closing Disclosure within 30 days after receiving information on the change if: Event occurs during 30 day period after closing that causes Closing Disclosure to become inaccurate and Inaccuracy results in change to an amount actually paid by customer from amount disclosed on the Closing Disclosure Rule also applies to seller s copy if amounts paid by seller affected Overpayment - If customer paid more than disclosed, must refund overpayment and provide revised Closing Disclosure within 60 days after closing Changes Due to Clerical Errors - May provide corrected Closing Disclosure up to 60 days after closing if only changes are nonnumerical clerical errors 31

32 Escrow Notice Required where escrow will be cancelled on loan secured by 1 st lien on real property or a dwelling Timing Customer request Must be received at least 3 business days before escrow account closed Other reason Must be received at least 30 business days before escrow account closed 32

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34 Action Items 1. Review processes for: Documenting and retaining ATR/QM support Identifying and tracking Higher Priced Covered Transactions, High Priced Mortgage Loans, and High Cost Mortgages Providing homeownership counseling notice 2. Evaluate impact of ATR/QM policy on fair lending risk 34

35 Action Items 3. Review and consider revising: How you determine if an agricultural loan is exempt from disclosures Practices regarding loans to trusts Early closure fees on home equity lines of credit 4. Considering adopting: Policy of NO WAIVERS for disclosure and appraisal timing requirements Pre-closing process 6 days before closing 35

36 Questions? No Legal Advice, Opinions, or Services Provided This presentation does not constitute legal advice Copyright 2012 Tata Consultancy Services Limited 36