1 The 4 CFPB Final Rules of the Dodd-Frank Wall Street Reform and Consumer Protection Act December 2013
2 Agenda 1. LO Compensation 2. ATR / QM / TQM 3. ECOA & HPML 4. HOEPA & Home Counseling
3 Agenda In the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act aka DFA), Congress adopted Ability to Repay (ATR) requirements on closed-end mortgage loans and also established a presumption of compliance with certain mortgages called Qualified Mortgages (QM), and other changes affecting the origination of mortgage loans, such as LO Compensation, ECOA, HPML, and Home Ownership Counseling. In January 2013, the CFPB adopted a rule implementing them with a mandatory effective date of: January 10, 2014
4 CFPB Implementation Dates The CFPB has issued the following effective dates:
5 Subject 1. LO Compensation Rule
6 Loan Originator Compensation Rule New LO Comp rules are effective with loan applications taken on or after January 1, In the aftermath of the mortgage crisis, regulators and lawmakers imposed a number of new requirements concerning loan originator s licensing and registration, training, screening, and compensation practices. The regulations also implement Dodd-Frank Act (DFA) requirements concerning LO qualifications that build upon existing requirements under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act).
7 Am I A Loan Originator? Activities of a Loan Originator include: Taking a loan application Arranging a credit transaction Assisting a consumer in applying for credit Offering or negotiating credit terms Making an extension of credit Referring a consumer to a particular loan originator or creditor Advertising or communicating to the public that you can or will perform any loan origination services See commentary to Regulation Z (a) for further info
8 Am I A Loan Originator? Activities of a Loan Originator DO NOT include: A servicer or servicer s employee, unless you perform LO activities on replacing an existing obligation with a new debt as listed below: To avoid application of the LO Comp Rule, do not engage in LO activities, such as handling a refinance or assisting in adding a different consumer on an existing debt. The LO Comp Rule will not apply to the renegotiation or modification of an existing mortgage. An employee of a manufactured home retailer who does not take applications, offer or negotiate terms, or advise consumers on credit terms. A seller financer who meets certain requirements of the LO Comp Rule, under Reg. Z (a)(4) and (5).
9 Am I A Loan Originator? Activities of a Loan Originator DO NOT include: Real estate brokers, who do not receive LO or referral compensation Management, clerical, and administrative staff Loan processors Underwriters Closers
10 Other LO Comp Rule Requirements Prohibition on mandatory arbitration clauses and single premium credit insurance: Prohibits the inclusion of clauses requiring the consumer to submit disputes concerning a residential mortgage loan or HELOC to arbitration. Prohibits the financing of any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling, but allows for credit insurance to be paid for on a monthly basis.
11 Loan Documentation Requirements The following data must be listed on the Note and the Mortgage: Loan Originator Organization (LOO) company name Name and NMLS ID of the individual Loan Originator who is primarily responsible for the transaction Special Note: Names of the LOO and LO registered on NMLS must appear on the documents as they appear on NMLS The LOO and LOO ID must be on the specified docs when they are delivered to the borrower to sign and cannot be added post-closing The LO name and LO ID must also be on the specified docs when they are delivered to the borrower to sign and cannot be added postclosing
12 Subject 2. ATR / QM / TQM Rule
13 Ability to Repay / Qualified Mortgage New ATR-QM-TQM rules are effective with loan applications taken on or after January 10, However, in alignment with Fannie Mae DU 9.1 release, the max DTI and min FICO score for DU Refi+ HPML transactions are effective with loans submitted to DU after November 16, Key Concept: lender has protections from challenge that the loan was made without regard to the borrower s ability to pay if at time of loan closing: a) lender has determined the borrower is able to repay the loan using the criteria in the regulation b) all QM requirements regarding loan terms and characteristics have been satisfied
14 Ability to Repay / Qualified Mortgage What is ATR? - that the lender must make a reasoned determination that the borrower has the ability to repay the loan; thus a sound underwriting decision. If the ATR requirements are not met, the borrower can sue the lender for money damages or to stop a foreclosure, even in the loan is then owned by a subsequent purchaser/lender. The ATR requirement is presumed to be satisfied if the loan is a qualified mortgage
15 ATR-QM Overview Applicability: Primary residence Second Homes Investment if not for business purpose (e.g., borrower intends to occupy for greater than 14days in the year) Ineligible Risky Product Features: Payments with deferred principal Negative amortization Interest-only payments Balloon payment Terms in excess of 30 years Irregular payments (except ARMs and Step rate loans)
16 ATR-QM Overview Exempt categories: Open-end credit plans (HELOCs) Time-share plans Reverse mortgages Temporary or bridge loans with terms of 12 months or less A construction phase of 12 months or less of a construction-topermanent loan Consumer credit transactions secured by vacant land Exempt types of lenders: Community Development Financial Institutions Community Housing Development Organizations Downpayment Assistance Providers of Secondary Financing 501(c)(3) Nonprofit Organizations that meet specific requirements
17 ATR-QM Overview ATR Verifications: PITI monthly payment, and any payment on simultaneous mortgages Income, assets and debt obligations including alimony and child support Employment Credit History DTI max 43% using Appendix Q requirements; and Points/fees are 3% or less of the total loan amount (cures not permitted) Special Note: The Temporary QM provision allows for a higher DTI% for loans eligible for sale to the GSEs (must meet Agency investor guidelines and receive an Approve/Eligible or Accept/Eligible AUS findings result) and government insurance transactions (including manually underwritten loans as long as it meets FHA/VA/RHS investor guidelines) Currently valid until 2021 or unless GSE s provide their own QM rules sooner.
18 Safe Harbor vs. Rebuttable Presumption QM Safe Harbor (QM non-hpml loans): No prohibited terms (no risky loan features) Does not exceed the point/fees limit Meets agencies guidelines regarding DTI, etc. QM Rebuttable Presumption (QM HPML loan): Max DTI 45% Min FICO depending on LTV and transaction type FHA Streamlines and VA IRRRLs; Max DTI 50%
19 3% Points and Fees Limit The loan must pass the QM Points and Fees Test. Points/Fees are the same as outlined under the updated HOEPA regulation. However, QM thresholds differ from the HOEPA regulation. The table below outlines thresholds for QM Points and Fees:
20 3% Points and Fees Limit Points and fees include: 1) Compensation paid to a mortgage broker by a borrower or lender 2) Any origination charges paid by a borrower to the broker or lender 3) LLPA s that are not included in the interest rate of the loan 4) Discount points that do not lower the interest rate 5) Non-refundable PMI 6) Fees paid to a lender affiliate (e.g., credit reports, appraisals, or escrow services) 7) All prepayment penalties, including prepayment penalty paid in a refinance payoff 8) Credit life or similar insurance payable at closing if the lender is the beneficiary
21 3% Points and Fees Limit Points and fees exclude: 1) Prepaid interest charges 2) Govt MI (UFMIP) or VA Funding Fee 3) UFMIP if premium is less than or equal to FHA premium amount (currently 1.75%) and borrower receives a pro-rated refund upon early payoff 4) Bona fide 3 rd party fees not retained by lender or an affiliate (e.g., title exam, title insurance, escrow survey, credit report or appraisal) 5) Bona fide Discount Points Up to 2 points if interest rate without discount does not exceed the APOR by more than 1% 1 point if interest rate exceeds APOR by more than 1% but less than 2%
24 Borrower Paid Compensation PHE Retail LO s cannot perform Borrower Paid Comp loans. TPO submitted loans are acceptable up to a max of 2.50% compensation. Note: if switching from lender paid comp to borrower paid comp the TPO origination cannot exceed what was initially disclosed under the lender paid comp plan disclosure. Note: PHE does not allow switching from borrower paid comp to lender paid comp.
25 Subject 3. ECOA & HPML Valuation Rule
26 ECOA and HPML New ECOA Appraisal and Valuation rules are effective with loan applications taken on or after January 10, Covered transactions: All first liens on dwellings, including closed-end mortgage loans and open-end loans. New standards: previously Reg. B required only that lenders provide copies of appraisals to applicants upon request and notify them of their right to make a request. The changes to ECOA broaden the scope to include property valuation and requires lenders to: Disclose to applicants that they have the right to receive copies of appraisals and written valuations Automatically send a free copy of the home appraisal and other written valuations promptly after the valuation is complete, regardless of whether credit is extended, denied, incomplete, or withdrawn.
27 ECOA and HPML Special Note: the new ECOA rule applies to all written valuations (not just appraisals) that the lender develops or obtains in connection with an application for covered transactions. Covered transactions: All first liens on dwellings, including closed-end mortgage loans and open-end loans.
28 ECOA and HPML New HPML Appraisal requirements are effective with applications taken on or after January 18, Current requirements effective June 1, 2013: Reg. Z defines Higher Priced Mortgage Loans (HPML) as a mortgage secured by the borrower s principal dwelling with an annual percentage rate (APR) that is at least: 1.50% higher than the Average Prime Offered Rate (APOR) 2.50% higher than the APOR for a Jumbo loan (first lien) As of the rate lock date (with the borrower). Validation of repayment ability Verification of income and assets Establishment of Escrow accounts for taxes and insurance premiums for a period of 1year after closing Non-financing of closing costs / points & fees ARM loans of 7/1 terms or greater FHA Streamlines and VA IRRRLs require ATR and income/assets are verified.
29 ECOA and HPML NEW requirements effective January 18, 2014: A full interior appraisal by a certified or licensed appraiser is required. Note: QM loans are exempted, but TQM are not. Lender disclosure must provide applicant with a statement that any appraisal or state of value prepared or obtained for the mortgage is for the sole use of the lender, and Applicant may choose to have a separate appraisal conducted at the applicant s expense which must be given within three business days of application (or, it at application was not a HPML, within three business days of when it becomes a HPML).
30 ECOA and HPML A 2 nd appraisal is required, by a different non-affiliated appraiser from the 1 st appraisal, if the loan will be used to finance the purchase of a dwelling and either: Seller is reselling the property within 90days of acquiring it and the resale price exceeds the seller s acquisition price by more than 10%, OR Seller is reselling the property within 91 to 180 days of acquiring it and the resale price exceeds the seller s acquisition price by more than 20%.
31 ECOA and HPML When a 2 nd appraisal is required the following requirements also apply: One of the 2 required appraisals must include an analysis of: Difference between the price the seller acquired the property and the price the consumer is obligated to pay for the property as outlined in the Purchase Contract Changes in market conditions Any improvements made to the property between date acquired and resale date Cost of the 2 nd appraisal cannot be charged to the borrower
32 2 nd appraisal exclusions: ECOA and HPML A 2 nd appraisal is not required when the seller: Is a local, state or federal government agency or acquired title: Through Foreclosure or Deed-in-Lieu of Foreclosure when the seller was the foreclosing holder of the mortgage By inheritance or through court-ordered dissolution of marriage, civil union, or domestic partnership, or through the partition of the seller s joint or marital assets From an employer or relocation agency in connection with the relocation of an employee From a service member who received deployment or change of station order after purchasing the property area Or the property is: (1) located in a disaster area and a regulatory waiver is issued and available, or (2) located in a defined rural area
33 Subject 4. HOEPA & Home Counseling
34 HOEPA & Home Counseling The new HOEPA Regulations are effective with applications taken on or after January 10, The current HOEPA (Section 32-industry nickname) Reg. Z (12 CFR ) was enacted in 1994 to address abusive practices in refinancing of home-equity mortgages with high interest rates or fees. Loans that meet HOEPA s high-cost tests are subject to special disclosure requirements and restrictions on loan terms, and borrowers in high-cost mortgages have enhanced remedies for violations of the law. In 2010, Congress passed the Dodd-Frank Act, which made changes to the high-cost provisions of the Truth in Lending Act. Special Note: PHE does not originate Section 32 loans. Rate/fees must be adjusted under the limits of Reg. Z 12 CFR before signup of the consumer s mortgage loan. Cures are not permitted.
35 HOEPA & Home Counseling Section 32 loans apply to consumer credit transactions secured by a consumer s principal residence. Excluded from coverage are: Reverse mortgages Loans to finance the initial construction of a dwelling Loans originated and financed by a Housing Finance Agency (HFA) Loans originated through the USDA Rural Development section502 Direct Loan Program New inclusions: purchase loans, HELOCs, bridge loans Certification of counseling: a written certification that the consumer has obtained counseling on the advisability of the mortgage from a counselor that is approved to provide such counseling by HUD or by a State housing finance authority. Homeownership Counseling changes: a lender must provide an applicant with a list of Homeownership Counseling organizations in the applicant s area within three business days after the application is received.
36 HOEPA & Home Counseling The HOEPA changes are made to the following thresholds: APR Test: the annual percentage rate applicable to the transaction exceeds the Average Prime Offered Rate (APOR) by more than: 1) 6.5% on a 1 st lien transaction 2) 8.5% on a 1 st lien transaction if the dwelling is personal property and the loan amount is less than $50,000; or 3) 8.5% on a 2 nd lien transaction Points and Fees Test: the transactions total points and fees exceed either: 1) 5% of the total loan amount of $20,000 or greater (subject to change annually); or 2) The lesser of 8% of the total loan amount or $1,000 (subject to change annually) for a loan amount less than $20,000. Prepayment Test: loan documents showing a prepayment penalty more than 36 months after closing, or more than 2% of the amount prepaid. Special Note: PHE does not allow prepayment penalties to be charged.
37 HOEPA & Home Counseling Scope of the included and excluded fees has changed. Points and Fees include: All items required to be disclosed in (a) and (b); except for the interest or time-price differential; and any Federal or State agency guaranty or MI; optional credit insurance of non- Agency MI payable at or prior to closing (e.g., credit life, disability, unemployment, property insurance, or other life, accident, health or loss-of-income insurance if the lender is the beneficiary; the amount in excess of FHA UFMIP Less excludable discount points (Bona Fide limits) All compensation or fees paid by the borrower or lender to a mortgage broker or its affiliates known at closing Prepayment penalties charged on a refinance payoff Prepayment penalties charged on the new loan, if any HELOCs participation fees charged at or before account opening HELOCs draw fees charged to the borrower from the credit line
38 HOEPA & Home Counseling Special Note: a number of State high-cost loan laws have been impacted by these HOEPA changes as they use HOEPA definitions; be sure to know your State laws for which you are licensed to originate loans. See attached HOEPA comparison chart describing current parameters through January 9, 2014 vs. new parameters effective on January 10, 2014.
39 QUESTIONS? Contact the PHE Compliance Committee for questions: Phone: x603 Mail: 5205 Maryland Way, Ste100 Brentwood, TN 37027
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