Financial Services Update May 21, 2014

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1 Financial Services Update May 21, 2014 HIGHLIGHTS Federal Regulatory Developments VA Issues Its Qualified Mortgage Rule Freddie Mac Outlines Seller/Servicer Guide Changes In Bulletin Revised Examination Report And Supervisory Letter Templates Now Available On CFPB Website FHA Announces Steps To Expand Access To Credit WBK News Mitch Kider provided an industry update to the Regional Lenders Meeting on Sunday, May 18 in New York City. For more information contact Mitch at SUMMARIES Federal Regulatory Developments VA Issues Its Qualified Mortgage Rule On May 9, 2014, the Department of Veterans Affairs (VA) published an interim final rule defining the types of VA-guaranteed loans that are qualified mortgages for the purposes of the Ability to Repay provisions of TILA and Regulation Z. The VA s rule became effective on the date of publication, May 9, 2014, and therefore replaces the Consumer Financial Protection Bureau s (CFPB) temporary qualified mortgage provision for VAguaranteed loans on or after this date. 1

2 According to the rule, VA s current standards already require full underwriting of all origination loans such as purchase money loans and refinances, other than certain streamlined refinances, also known as Interest Rate Reduction Refinance Loans (IRRRLs). As a result, except for certain limitations on IRRRLs, the VA s rule defines all loans guaranteed, insured, or made by VA to be a qualified mortgage with a safe harbor with no change to VA s regulations or policies with respect to how lenders originate such loans. For IRRRLs, however, while all IRRRLs will be qualified mortgages, some will have a rebuttable presumption instead of a safe harbor. In addition, IRRRLs will only be exempt from income verification requirements if certain conditions are met. Specifically, IRRRLs that meet all of the following requirements will be a safe harbor qualified mortgage, while IRRRLs only meeting requirements (3) and (4) will be a rebuttable presumption qualified mortgage: (1) The loan being refinanced was originated at least 6 months before the new loan s closing date, and the veteran has not been more than 30 days past due during the 6 months preceding the new loan s closing date; (2) The recoupment period for all allowable fees and charges financed as part of the loan or paid at closing does not exceed 36 months; (3) The loan is either exempt from income verification requirements or the refinance loan complies with other income verification requirements under VA regulations and Regulation Z; and (4) All other VA requirements for guaranteeing an IRRRL are met. According to the VA s rule, the IRRRL is essentially the same loan as the original, the key difference being that the veteran should be in a better financial position than before. However, the VA recognizes the possible vulnerabilities in the IRRRL program and provides additional protection when the borrower may be more at risk of equity stripping or not recouping their investment of closing costs. Therefore, an IRRRL that does not meet the first two requirements on seasoning and recoupment will be considered a qualified mortgage, but will have a rebuttable presumption instead of a safe harbor. In addition, the following conditions must be met in order for an IRRRL to be exempt from income verification requirements: (1) The veteran is not more than 30 days or more past due on the prior existing residential mortgage loan; (2) The proposed streamlined refinance loan would not increase the principal balance outstanding on the prior existing residential mortgage loan, except to the extent of fees and charges allowed by VA; (3) Total points and fees payable in connection with the proposed streamlined refinance loan will not exceed 3% of the total new loan amount as defined by Regulation Z and are in compliance with VA s requirements on fees and charges; 2

3 (4) The interest rate on the proposed streamlined refinance loan will be lower than the interest rate on the original loan, unless the borrower is refinancing from an adjustable rate to a fixed-rate loan under guidelines that VA has established; (5) The proposed streamlined refinance loan will be subject to a payment schedule that will fully amortize the IRRRL in accordance with VA regulations; (6) The terms of the proposed streamlined refinance loan will not result in a balloon payment; and (7) Both the residential mortgage loan being refinanced and the proposed streamlined refinance loan satisfy all other VA requirements. As a result, other than IRRRLs, the VA s rule deems all VA-guaranteed loans as safe harbor qualified mortgages with no changes to its policies and requirements. The VA appears to impose the infamous 3% points and fees limit only on IRRRLs and only for the purpose of being exempt from income verification requirements. In contrast to the CFPB and HUD s qualified mortgage definitions, also note that, while the VA s rule classifies certain IRRRLs as rebuttable presumption instead of safe harbor qualified mortgages, the VA does not provide any guidance on how the borrower may rebut the presumption. For indemnification demands, the VA s rule mirrors HUD s qualified mortgage guidance and provides that an indemnification demand or resolution of a demand that relates to whether the loan satisfied relevant eligibility and underwriting requirements at the time of consummation may result from facts that could allow a change to qualified mortgage status, but the existence of an indemnification does not, by itself, remove qualified mortgage status. The VA s rule became effective immediately upon publication on May 9, However, the VA will accept comments on potential amendments and clarifications until June 9, Once the comment period closes, VA will exercise all reasonable efforts to publish the final rule as quickly as possible, with the goal of finishing the full rulemaking process within 90 days of publication of this interim final rule. As a result, lenders should submit comments if additional guidance or clarification regarding VA s qualified mortgage requirements are necessary for compliance. The interim final rule can be found at: Freddie Mac Outlines Seller/Servicer Guide Changes In Bulletin Freddie Mac recently issued Bulletin , which outlines several changes to the Freddie Mac Single-Family Seller/Servicer Guide ( Guide ). Highlights include tightening certain fraud reporting requirements, loosening certain flood insurance requirements, and expanding on certain document custody and possession requirements. 3

4 Tightening Certain Fraud Reporting Requirements Certain Freddie Mac reporting requirements for fraud and other misconduct have changed, tightened, in two important ways. Both are discussed in Bulletin First, Freddie Mac has added a new triggering event guilty plea for certain reporting requirements. Previously, the Guide contained a mandatory reporting requirement when a seller or servicer has notice of the entry of a civil judgment or criminal conviction indicating lack of integrity of certain persons. As revised, the Guide does not change those persons (they remain participants in mortgage and related real estate transactions, as well as board members, officers, employees, and contractor of sellers and servicers). But the Guide adds guilty plea to the list of events triggering a duty to report. Consequently, sellers and servicers can no longer wait until they receive notice of criminal conviction to report; they must report once notified of a guilty plea. Second, Freddie Mac has tightened the reporting requirement for a seller or servicer notified by law enforcement or other government authority of a fraud investigation or prosecution. Previously, the Guide imposed a mandatory reporting requirement on a seller or servicer who learns that law enforcement or other government authority is investigating or prosecuting fraud relating to a mortgage owned by or serviced for Freddie Mac. As revised, the Guide tightens this to include mandatory reporting when a seller or servicer learns that law enforcement or other government authority is investigating or prosecuting fraud relating to a board member, officer, employee, or contractor of the seller or servicer. Loosening Certain Flood Insurance Requirements Certain changes to Freddie Mac s flood insurance requirements have also changed. Unlike the fraud reporting requirements discussed above, however, the two flood insurance requirements discussed below have been loosened, not tightened. First, Freddie Mac has loosened the requirement that the flood hazard determination be made no more than 120 before the date of the mortgage. Previously, the Guide imposed a categorical rule: the date in the standard flood hazard determination form s date of determination field was required to be no more than 120 days before the note date of the mortgage (or refinance mortgage, as applicable). The revised Guide, however, permits dates of more than 120 days, if the lender uses a life of loan flood zone determination in which a third party certifies life-of-loan monitoring. Second, the Guide updates its standard flood hazard determination form to reflect the most recent FEMA form. Lenders are permitted to use the new form now, but may also continue to use the prior form (FEMA Form 81-93) for flood determinations made before May 31, Expanding on Certain Document Custody and Possession Requirements 4

5 To enhance the ability of servicers to take legal action, such as a Freddie Mac default legal matter, the Guide has been updated to elaborate on: When Freddie Mac deems a servicer to be in constructive possession of the note; How the servicer must notify the document custodian of the commencement and cessation of the constructive possession; What the document custodian s obligations are during the servicer s constructive possession; and How the servicer should request physical possession of the note from the document custodian when physical possession is the more appropriate form of possession for a particular legal action. Other Topics Other topics addressed in Bulletin include: removing the rent loss insurance requirement for 2- to 4-unit primary residences; updating certain uniform instruments; enhancing the available resources on AllRegs; and clarifying the selling requirements regarding unemployment compensation as an eligible source of income for Freddie Mac s relief refinance mortgages. The changes announced in the Bulletin are generally effective immediately. The updates announced to the Freddie Mac Uniform Instrument are effective October 15, The full text of Bulletin is available online at: Revised Examination Report And Supervisory Letter Templates Now Available On CFPB Website The Consumer Financial Protection Bureau (CFPB) posted its revised Examination Report and Supervisory Letter templates on its website on May 2, The CFPB uses these templates to report the results of CFPB examinations to the supervised entity that was examined. The CFPB anticipates that changes to these templates will result in reports finalized in less time, thereby allowing the CFPB to more efficiently provide the reports to the supervised entities. The new templates will be used for reviews with an on-site start date of January 2, 2014 or later and may be used for reviews with an on-site start date prior to January 2, 2014 if the report drafting started after such date. 5

6 The CFPB revised these templates in order to facilitate examiners drafting of the reports, to simplify reports and reduce repetition, and to facilitate follow-up reporting by supervised entities about actions they have taken to respond to potential compliance management weaknesses or legal violations that the CFPB has found in the course of a review. Principal changes to the templates include: (1) removal of written recommendations, which will be provided orally on-site instead; (2) removal of the CFPB team member list for those individuals participating in the review; and (3) creation of a single section in the report that includes all of the items that the CFPB expects the entity to address when the review identifies violations of law or weaknesses in compliance management, and the receiving entity will be expected to provide periodic progress reports to the CFPB regarding these items. The CFPB originally announced these changes in its 2013 Winter Supervisory Highlights report. The revised templates, along with all other Supervision Examination Manual materials, are available at: FHA Announces Steps To Expand Access To Credit FHA published in the Federal Register (Volume 79, Number 94, May 15, 2014) a Notice for public comment on a proposed four-year pilot program, Homeowners Armed With Knowledge (HAWK) to further expand credit for borrowers. The pilot program incorporates a broader use of housing counseling in the home buying process for borrowers using FHA financing. Under the program, new homebuyers who complete HUD-approved counseling will qualify for a reduction in their upfront and annual mortgage insurance premiums (MIP). FHA estimates that the average borrower would save approximately $9,800 over the life of the loan. The pilot program provides that borrowers who complete housing counseling before signing a contract to purchase a home and pre-closing housing counseling would receive a 50 basis point reduction in the upfront MIP and a 10 basis point reduction in the annual FHA MIP. After 18 months with no 90-day (or more) delinquencies, and completion of post-closing counseling, borrowers would receive an additional 15 basis point reduction in the annual MIP. The HAWK pilot program would be structured in two phases, an initial phase open to a limited number of borrowers and FHA selected lenders and servicers to test the operational aspects of the program, and a second phase open to all first-time homebuyers up to the limit established by FHA, and all FHA-approved lenders and servicers. FHA-approved lenders and servicers interested in participating in the initial phase of the HAWK pilot should send an to housing.counseling@hud.gov with the subject line HAWK Pilot Phase One. Comment due date: July 14,

7 This Financial Services Update is for general information purposes only and is not in any way intended, nor shall it be construed, as legal advice, legal opinion or any other advice on any specific facts or circumstances. No person or entity ( Person ) should act or refrain from acting upon this information without seeking professional advice. No Person may rely on this information or its applicability to any specific circumstances. The information in this Financial Services Update is in no instance to be taken as an indication of completeness, applicability to a particular situation, or an indication of future developments or results. 7