FINANCIAL SERVICES REGULATORY GROUP

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1 EXPLOSION OF NEW MORTGAGE REGULATION ECOA Appraisal Rule; HOEPA Regulations; Appraisals for High-Priced Mortgage Rule; Escrow Rule Mortgage Regulation Teleseminar Series March 7, 2013 FINANCIAL SERVICES REGULATORY GROUP Leonard A. Bernstein Robert M. Jaworski Travis P. Nelson

2 What We Will Be Discussing HOEPA Regulations Escrow Rule ECOA Appraisal Rule TILA HPML Appraisal Rule TILA/RESPA Counseling Rules CFPB Examinations and Investigations 2

3 Penalties Civil Actions TILA Sections 130, 131 Any creditor who fails to comply is subject to: Actual damages. Statutory damages (individual actions, $400-$4,000; class action, up to the lesser of $1 million or 1% of creditor s net worth). Attorney s fees and court costs. 60-day cure provision; bona fide error defense. 1-year statute of limitations. Limits on assignee liability. Enhanced HOEPA damages: Sum of all finance charges and fees paid by the consumer, unless violation is immaterial. 3

4 Penalties Civil Actions ECOA Actual damages. Punitive damages. Individual action: Capped at $10,000. Class action: Lesser of $500,000 or 1% of creditor s net worth. Injunctive relief. 4

5 Penalties Administrative Actions Who has jurisdiction? Prudential bank regulators: Compliance with TILA, RESPA, and ECOA by depository institutions with $10 billion or less in assets. CFPB: Consumer mortgage lending activities performed by depository institutions with over $10 billion in assets, and non-bank covered entities, i.e., non-bank mortgage lenders. Agencies can undertake lengthy investigations. Role of state attorneys general. Agencies must refer pattern or practice of ECOA violations to Justice Department. Available relief. Permanent and temporary cease and desist orders. Agencies can order a variety of remedial actions. Fines. Prohibition from working in the banking industry (prudential regulators). 5

6 HOEPA Regulations High-cost mortgage : Expanded Coverage ( (a)/(b)) Effective Date: January 10, New name: High Cost Mortgages ( HCMs ) - no longer HOEPA loans or Section 32 loans Broader Scope: Loans secured by consumer s principal dwelling, including purchase money and open-end loans Before Dodd-Frank: Only applied to refinancings and closed-end non-purchase money mortgages Exemptions: Reverse mortgage and construction loans 6

7 HOEPA Regulations High-cost mortgage : Expanded Coverage (Continued) APR Trigger (Lowered): Loan is HCM if APR > average prime offer rate ( APOR ) (new index) as of date interest rate is set by: 6.5 percentage points for first-lien loans (new - was 8) 8.5 percentage points for first-lien loans if the dwelling is personal property and the loan amount is $50,000 or less (new trigger) 8.5 percentage points for subordinate-lien loans (new was 10) Note: APR must be based on: (1) for fixed-rate loans, the fixed rate; (2) for ARMs, greater of index value on date rate set + maximum margin, or introductory rate; (3) for step-rate loans, maximum rate possible (last two are new) 7

8 HOEPA Regulations High-cost mortgage : Expanded Coverage (Continued) Points and Fees Trigger (Lowered): Loan is HCM if total points and fees > 5% of total loan amount for loans $20,000 (new was 8%), or Lesser of 8% of total loan amount or $1,000 for loans < $20,000 (replaces flat fee trigger) Total loan amount means: For closed-end loans: Amount financed minus certain financed points and fees For open-end loans: Credit limit when account opened 8

9 HOEPA Regulations High-cost mortgage : Expanded Coverage (Continued) Points and fees (only if known at or before closing) = Finance charges (except interest, gov t MI/PMI, 3rd-party charges NOT retained by creditor or affiliate, up to 1 or 2 bona fide discount points ) LO Comp attributable to transaction (when interest rate set) Real estate-related (4(c)(7)) fees paid to affiliate Credit life premiums paid at or before closing Maximum prepayment penalty chargeable on loan Prepayment penalty paid on own loan being refinanced 9

10 HOEPA Regulations High-cost mortgage : Expanded Coverage (Continued) Prepayment Trigger (New): Loan is HCM if prepayment penalty is payable more than 36 months after consummation or account opening, or prepayment penalty can exceed 2% of amount prepaid 10

11 HOEPA Regulations 3-Day Cooling Off Notice ( (c)) Content (both open- and closed-end): You are not required to complete this agreement. APR If variable-rate statement that interest rate and monthly payment may increase, amount of maximum monthly payment (based on maximum rate during loan term) 11

12 HOEPA Regulations 3-Day Cooling Off Notice (Continued) Additional Content (Closed-end): Amount of regular monthly payment and any balloon payment Amount borrowed 12

13 HOEPA Regulations 3-Day Cooling Off Notice (Continued) Additional Content (Open-end): Initial minimum payment for draw period and repayment period, balance outstanding at beginning of repayment period, and amount of any balloon payment, assuming full credit limit borrowed at account opening/consumer makes only minimum payments/apr does not change Statement of assumptions on which above payments are based, and that amounts shown are not consumer s actual payments, which will depend on circumstances Credit limit 13

14 HOEPA Regulations 3-Day Cooling Off Notice (Continued) Timing: Creditor must furnish at least 3 business days prior to consummation or account opening If creditor changes terms making disclosure inaccurate, new disclosure + additional 3-day waiting period required New disclosure by phone OK under limited circumstances Waiting period may be waived for bona fide personal financial emergency 14

15 HOEPA Regulations New Limitations ( (d)) No balloon payments (except seasonal payment adjustments, bridge loans, QMs, initial payment of repayment period) previously only balloon payments within first 5 years prohibited No prepayment penalties (previously permitted under certain circumstances) 15

16 HOEPA Regulations New Prohibitions ( (a)) Ability to Repay: Creditor may not make HCM (except bridge loans ) without regard to consumer s ability to repay For closed-end must comply with new Ability to Repay Rule ( ) For open-end must consider consumer s income, employment, assets, and current obligations (including mortgage-related obligations required by terms of another loan secured by same property) must verify income or assets, and current obligations presumption of compliance under certain conditions 16

17 HOEPA Regulations New Prohibitions ( (a)) (Continued) Pre-loan Counseling: Creditor may not make HCM (but may process) absent written certification from HUD-approved counselor Consumer must receive initial GFE or open-end plan disclosure before counseling Counselor must not be affiliated with creditor Certification must state that (1) consumer counseled on loan advisability based on terms in GFE, and (2) counselor verified consumer s receipt of required HOEPA 3-day cooling off notice or RESPA disclosures 17

18 HOEPA Regulations New Prohibitions ( (a)) (Continued) Pre-loan Counseling (continued): Creditor may not steer consumers to a particular counselor Creditor may pay for counseling, but may not condition payment on extension of credit Creditor may finance (bona fide 3rd party) counselor fee paid by consumer 18

19 HOEPA Regulations New Prohibitions ( (a)) (Continued) Creditor may not Recommend or encourage default on existing loan Charge modification or deferral fee Charge late fees > 4% of past due amount or sooner than 15 days past due date (or 30 days, if interest paid in advance) Pyramid late fees 19

20 HOEPA Regulations New Prohibitions ( (a)) (Continued) Creditor may not Charge for first 4 payoff quotes in calendar year, but may charge fax or courier fee to deliver (subject to disclosure requirement) Quote must be provided within 5 business days after receipt of request tighter than Servicing Rule Finance points and fees Credit insurance premiums or debt cancellation/suspension fees required to be included in points and fees not considered financed when calculated and paid on a monthly basis Structure transaction to evade requirements of the rule 20

21 HOEPA Regulations New Cure Provisions ( (h)) No liability for violations of HCM Rule if creditor, before commencement of legal action, AND: within 30 days of consummation or account opening, where the consumer is notified of or discovers the violation, or within 60 days of the creditor s discovery of a bona fide error/unintentional violation and the consumer is notified of the violation, makes appropriate restitution within reasonable time thereafter, and makes adjustments so that loan is (a) compliant with HCM Rule, or (b) no longer an HCM 21

22 Escrow Rule ( (b)) Effective Date: June 1, 2013 Scope: All first-lien higher-priced mortgage loans ( HPMLs ). HPML = closed-end loans secured by principal dwelling with APR > APOR percentage points for 1st lien conforming APOR percentage points for 1st lien jumbo APOR percentage points for subordinate lien General HPML Escrow Rule: No closing without escrow account for taxes and insurance Escrow account must be maintained for 5 years (or longer, under certain conditions) (was 1 year) 22

23 Escrow Rule (Continued) Exemptions: Co-op loans Construction loans (permanent take-out financing not exempt) Bridge loans with terms 12 months Reverse mortgages Loans by creditors in rural or underserved counties, not subject to forward purchase commitment from ineligible investor (see next slide) Partial Exemption: may only escrow for taxes on loans secured by condos, PUDs, etc. (whose governing associations must maintain master insurance policies) 23

24 Escrow Rule (Continued) Rural or underserved exemption: To qualify, creditors must have made > 50% of their first-lien dwelling-secured loans during preceding calendar year in rural or underserved counties together with affiliates, made 500 first-lien dwellingsecured loans during preceding calendar year total assets in preceding calendar year < $2 billion (adjusted for inflation), AND not maintained an escrow account on any dwellingsecured loan that they service (with limited exceptions) 24

25 Escrow Rule (Continued) Cancellation of escrow account: Account may be canceled upon the EARLIER of Termination of underlying debt obligation, or Receipt after 5 years of consumer request to cancel but only if: Unpaid principal balance < 80% of original value of property, and Consumer not delinquent or in default. 25

26 ECOA Appraisal Rule ( ) Effective Date: January 18, 2014 Scope: First lien, dwelling-secured includes HELOC s Dodd Frank narrowed scope to first lien Business purpose loans within above scope covered Renewals if a new appraisal developed, rule applies Loss mitigation application for HAMP modification can be application for credit (Reg B guidance) 26

27 ECOA Appraisal Rule (Continued) Requirement to Provide Written Copy Change from prior rule formerly, only upon request Must provide appraisal or other written evaluation ; used or unused Includes hard copies and electronically-transmitted copies 27

28 ECOA Appraisal Rule (Continued) Timing: Must deliver to consumer EARLIER of (a) promptly upon completion, or (b) 3 business days prior to consummation Delivery occurs EARLIER of (a) 3 business days after mailing, or (b) evidence of actual receipt. Don t want receipt after closing! Promptly upon completion is when last version received; can include period for review/revision Deadline still applies if appraisal not yet complete Copy must be provided even if loan not consummated 28

29 ECOA Appraisal Rule (Continued) Waiver of Delivery Timing Requirement By waiving, consumer agrees to receive at or before consummation Waiver must be obtained at least 3 business days before consummation or account opening If parties decide not to proceed, creditor must provide copies no later than 30 days after determination not to close Waiver can be oral or written If waiver within 3 business days before closing, can only pertain to new version containing only clerical changes, and new version must be given prior to consummation 29

30 ECOA Appraisal Rule (Continued) Disclosure Requirement Timing: Not later than 3rd business day after application Contents: Right to receive copy of all written appraisals: SAMPLE: WE MAY ORDER AN APPRAISAL TO DETERMINE THE PROPERTY S VALUE AND CHARGE YOU FOR THIS APPRAISAL. WE WILL PROMPTLY GIVE YOU A COPY OF ANY APPRAISAL, EVEN IF YOUR LOAN DOES NOT CLOSE. YOU CAN PAY FOR AN ADDITIONAL APPRAISAL FOR YOUR OWN USE AT YOUR OWN COST. Creditor may add (a) phone number for applicants to call to leave name and address, and (b) notice of cost applicant must pay 30

31 ECOA Appraisal Rule (Continued) Appraisal fees May not charge for copying (new prohibition) May charge appraisal fee; may not gross up to cover cost of copying May not charge appraisal fee where prohibited by law Other Written Evaluation (in addition to or in lieu of Appraisal) Includes staff prepared document; GSE report of value Includes an automated valuation model (AVM) Includes a broker price opinion prepared by realtor 31

32 TILA HPML Appraisal Rule ( ) Effective Date: January 18, 2014 Scope: Closed end, principal dwelling secured HPMLs: APR exceeds average prime offer rate at date rate is set: By 1.5 or more percentage points for first lien conforming By 2.5 or more percentage points for first lien jumbo By 3.5 or more percentage points for subordinate lien Exemptions: Qualified mortgage, new manufactured home, mobile home, finance initial construction, bridge loan 12 months or less, reverse mortgage 32

33 TILA HPML Appraisal Rule (Continued) Penalties. In addition to typical Section 130 penalties: Statutory damages of $2,000 for willful failure to obtain a required appraisal. No indication of whether class relief is possible. No enhanced HOEPA damages. 33

34 TILA HPML Appraisal Rule (Continued) General HPML Appraisal Requirement - Creditor must obtain prior to consummation a written appraisal by certified or licensed appraiser who conducts physical visit of the interior Safe Harbor creditor deemed in compliance if: Appraisal conforms to USPAP and FIRREA Verifies appraiser certified or licensed through Registry Verifies that Appendix N elements are addressed, AND No actual knowledge contrary to written appraisal 34

35 TILA HPML Appraisal Rule (Continued) HPML Home Acquisition Loans Additional Requirements Must obtain two written appraisals if: Seller acquired property 90 or fewer days prior to consumer s agreement and price exceeds seller s acquisition price by more than 10%, OR Seller acquired property 91 to 180 days prior to consumer s agreement and price exceeds seller s acquisition price by 20% Must use two different appraisers 35

36 TILA HPML Appraisal Rule (Continued) HPML Home Acquisition Loans Additional Content one of two appraisals must include analysis of: Difference between seller acquisition price and consumer acquisition price Changes in market conditions Any improvements made after seller acquired 36

37 TILA HPML Appraisal Rule (Continued) HPML Home Acquisition Loans - No need for 2nd appraisal if property located in federal disaster area or rural county or if acquisition is from: Government agency Purchaser at foreclosure sale Non-profit that buys property for resale Person who acquired thru inheritance Relocation agency Service member who received change order 37

38 TILA HPML Appraisal Rule (Continued) HPML Appraisal Disclosure In writing, to consumer who applies for an HPML: WE MAY ORDER AN APPRAISAL TO DETERMINE THE PROPERTY S VALUE AND CHARGE YOU FOR THIS APPRAISAL. WE WILL GIVE YOU A COPY OF ANY APPRAISAL, EVEN IF YOUR LOAN DOES NOT CLOSE. YOU CAN PAY FOR AN ADDITIONAL APPRAISAL FOR YOUR OWN USE AT YOUR OWN COST Mailed no later than 3rd business day after HPML application Compliance with same disclosure requirement in Reg B satisfies the rule 38

39 TILA HPML Appraisal Rule (Continued) HPML: Delivery of Copies Creditor shall provide a copy of any written appraisal Timing: not later than 3 business days prior to closing; or If no closing, no later than 30 days after determination not to close Electronic form OK No charge for a copy 39

40 TILA Counseling Rule ( (k)) Effective Date: January 10, 2014 Scope: All dwelling-secured loans Only first-time borrowers Only loans which may result in negative amortization Not reverse or time share mortgages General rule: No closing (but processing OK) absent written certification from HUD-approved counselor Counseling must include information regarding the risks and consequences of negative amortization Steering to particular counselor prohibited 40

41 RESPA Counseling Rule ( ) Effective Date: January 10, 2014 Scope: All RESPA-covered loans, except reverse mortgages and time shares General Rule: Lender must give consumer list of homeownership counseling organizations in his/her location within 3 business days after receipt of application Broker may give, but lender must ensure list provided List must be obtained from CFPB website, 30 days before delivery to consumer Unless otherwise prohibited, list may be combined with other Reg Z or Reg X disclosures No private right of action under RESPA for this provision 41

42 Tips on Surviving a CFPB Examination First-day letters. Frequent document request items. Evaluate and address customer complaints. Possible indicators of compliance problems. Have an examination plan in place before the CFPB arrives. Separate policy/procedure for handling examinations. Designate an Examination Manager or Examination Liaison. 42

43 Surviving a CFPB Investigation/Enforcement Action: What to do and not do when the gov t comes calling Know the rules: Must be familiar with the examination policies and informal guidelines of the regulators. Involve counsel immediately: Comments in exit interview or supervisory letter. Protection of privilege and document control. Review comparable enforcement actions: What remedies have the regulators sought in the past? Consider corrective action. Do not overreact: Sometimes more regulators/enforcement counsel are brought than are necessary Shock and Awe! Know the players: Learn the relative authority and roles of the supervisory staff. Partner with local examiners to avoid escalation. The examiners do not just go away remember their unique role. Call Reed Smith!!! RS 43

44 This is the last installment of a Four-Part Teleseminar Series To access an audio recording and presentation slides from our previous teleseminars, please visit the series website: Regulatory-Group-Mortgage-Regulation- Teleseminar-Series/ For regular updates on these topics and more, please visit out blog at: 44

45 Leonard A. Bernstein Founder and chair of the firm's Financial Services Regulatory Group Concentrates his practice in the representation of banks, thrifts, mortgage bankers and finance companies in providing consumer credit compliance advice on federal, Pennsylvania and New Jersey laws and regulations The FSR Group addresses credit card, auto finance, deposit, residential mortgage and other retail finance products Nationally known for expertise with federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, and similar laws, and works regularly with federal and state financial services regulators Philadelphia, PA Princeton, NJ Defends class actions and individual claims filed against financial services providers Elected to the American College of Consumer Financial Services Attorneys 45

46 Robert M. Jaworski Member of the Financial Industry Group and the Financial Services Regulatory Group Focuses on consumer credit compliance and other regulatory issues of concern to banks, thrifts, mortgage bankers, secondary mortgage lenders, finance companies and industry-related trade associations A frequent speaker on compliance issues before state and national groups, Bob has authored numerous articles on the subject rjaworski@reedsmith.com Princeton, NJ Formerly Chief Editor of Pratt s Mortgage Compliance Letter; Co-Chair of the RESPA/Housing Finance Subcommittee of the ABA Consumer Financial Services Committee; Chair, New Jersey Bar Association Banking Law Section; and Member, Governing Committee of the Conference on Consumer Finance Law Developed and taught courses on federal and state laws and regulations affecting mortgage bankers, brokers, and servicers 46

47 Travis P. Nelson Member of the Financial Industry Group and the Financial Services Regulatory Group Former Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, Washington, D.C. Focuses his practice on financial services regulation, enforcement defense, internal investigations, and litigation matters Represents clients before federal law enforcement and regulatory agencies, including the OCC, the CFPB, and HUD, as well as various state authorities across the country Adjunct faculty teaching Regulation of Financial Institutions at Villanova University School of Law Princeton, NJ New York, NY Co-Leader, Reed Smith Financial Institutions Enforcement & Investigations Task Force Editor-in-Chief of the Reed Smith Financial Services blog National President, Office of the Comptroller of the Currency Alumni Association 47