RPL Number 10-17 Financial Services Regulatory Practice Regulatory Practice Letter ADVISORY Amendments to Mortgage Loan Provisions under Regulation Z Executive Summary The Federal Reserve Board ( Fed ) announced the release of five issuances on August 16, 2010 that either finalize or propose amendments to its Regulation Z, which implements the Truth-in-Lending Act ( TILA ). The rules are all directed toward mortgage loans. In general, they include a(n): Final rule addressing the compensation of mortgage loan originators (compliance is required beginning April 1, 2011); Final rule requiring consumers to receive notice when their mortgage loan is sold or transferred (compliance is required beginning January 1, 2011); Interim final rule requiring lenders to disclose how borrowers regular mortgage payments can change over time (compliance is required beginning January 30, 2011 comments accepted for 60 days following publication in the Federal Register); Proposed rule updating provisions related to reverse mortgages, consumers right of rescission and other modifications intended to update and clarify TILA provisions related to home-secured credit (comments will be due within 90 Register); and Proposed rule revising the threshold for jumbo loans required to have an escrow account (comments will be due within 30 Register). Some of the provisions addressed in the Fed s final and proposed rules are consistent with provisions in the Dodd- Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ). The Fed notes, however, that the current issuances have been in process for some time and it will address the Dodd-Frank Act provisions in a separate rulemaking, making necessary revisions as appropriate. Background The Fed initiated a review of TILA in 2004 focusing first on disclosures related to open-end (revolving) credit accounts that are not home-secured and moving to home-secured credit disclosures in 2007. Since that time, the Fed has finalized or proposed a variety of rule changes under TILA affecting disclosures for home-secured Subject: Final and proposed rules amending certain of the mortgage loan provisions under Regulation Z, which implements the Truth-in-Lending Act As Issued By: Federal Reserve Board (August 16, 2010) Date: September 7, 2010 professionals, including more than 7,900 partners, in 146 countries. All rights reserved. Printed in the U.S.A.
2 Financial Services Regulatory Practice Letter #10-17 credit based on their review and related consumer testing. In addition, a number of laws have passed through Congress, such as the Credit Card Accountability, Responsibility and Disclosure Act, the Helping Families Save Their Homes Act, and the Mortgage Disclosure Improvement Act, which are intended to increase consumer protections through amendments to TILA. The rules recently released by the Fed are directly related to its own review or legislation passed prior to the Dodd-Frank Act. Description Each of the five issuances is discussed in more detail below. Final Rule - Loan Originator Compensation The Fed issued a final rule to prohibit certain practices relating to payments made to compensate mortgage brokers and other loan originators. In particular, for closed-end consumer credit transactions secured by a consumer s principal dwelling (including first and subordinate liens and reverse mortgages), the final rule prohibits: A creditor or any other person from directly or indirectly paying compensation to a mortgage broker or other loan originator that is based on the terms or conditions of a mortgage transaction other than the loan amount. Any person from paying compensation to a loan originator if the consumer pays the originator s compensation directly. A loan originator from steering a consumer to consummate a loan that provides greater compensation to the loan originator than other loans that could have been offered unless the loan is in the consumer s interest. A safe harbor is provided for a loan originator that presents the consumer with loan options for each type of loan (e.g., fixed rate, adjustable rate or reverse mortgage) in which the consumer expressed an interest, including: The lowest interest rate; No risky features such as prepayment penalties, negative amortization or a balloon payment in the first seven (7) years; and The lowest dollar amount for the origination points or fees and discount points. Further, to qualify for the safe harbor, the loan originator must have a good faith belief that the loan options presented to the consumer are transactions for which the consumer likely qualifies. A mortgage loan originator is defined to include mortgage brokers and mortgage brokerage companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans. A loan servicer that modifies a mortgage on behalf of the current owner is not considered to be a loan originator. Creditors and persons who compensate loan originators are required to maintain records for at least two years after a transaction is consummated. The final rule becomes mandatory on April 1, 2011 and applies to transactions for which a creditor receives an application on or after that date. Note: a mortgage broker may take an application prior to April 1, 2011 that would be covered by the final rule if the creditor receives the application on or after April 1, 2011. Final Rule Consumer Notice of Mortgage Loan Sale or Transfer The Fed issued a final rule to implement amendments to TILA effected by the Helping Families Save Their Homes Act of 2009, which was enacted in May 2009. The legislation created a new TILA Section 131(g) that, upon enactment, established a requirement for a creditor that becomes a new owner or assignee of a mortgage loan to notify the consumer in writing of the sale, transfer or assignment of their loan within 30 days. The final rule applies to all consumer mortgage credit secured by a consumer s principal dwelling. It requires a purchaser or assignee that acquires legal title to the debt obligation of an existing consumer mortgage loan to provide clear and conspicuous disclosures to the consumer in writing by mail or delivery no later than 30 days after the date on which the loan was sold, transferred or assigned. The disclosure must state the: Name, address and telephone number of the new owner; Transfer date; Name, address and telephone number of an agent or other party authorized to resolve issues concerning the consumers payments on the loans; and Location of where the transfer of ownership is recorded. All purchasers and acquirers of consumer mortgage loans are covered by the final rule without regard to whether they also extend credit by originating mortgage loans. However, the application of the final rule is limited
3 Financial Services Regulatory Practice Letter #10-17 to only those purchasers and acquirers that acquire more than one mortgage loan in a 12-month period. Mortgage servicers are not treated as acquirers if the loan is assigned to the servicer only to provide administrative convenience. Exceptions to the disclosure requirement are provided when: Acquirers subsequently sell, transfer or assign all of their interest in a mortgage loan on or before the 30 th day following its acquisition; Owners of a mortgage loan transfer title subject to a repurchase agreement; and Acquirers obtain a partial interest in the loan and the party authorized to resolve issues concerning the consumer s payments does not change. The final rule is effective 30 days after publication in the Federal Register though compliance is not required until January 1, 2011. Early compliance is permitted. Interim Final Rule Tabular Disclosures for Interest Rates and Payments The interim final rule implements certain provisions of the Mortgage Disclosure Improvement Act of 2008 ( MDIA ), which require creditors, for consumer credit secured by real property or a dwelling, to disclose certain summary information for loans where the interest rate or payment can change. The MDIA also requires the creditor to provide consumers with a statement that they are not guaranteed the ability to refinance the mortgage at a point in the future. The statute requires these provisions to become effective by January 30, 2011. Proposed regulations to implement these provisions were included in a Fed proposed rule published in August 2009 addressing disclosures for closedend credit secured by real property or a consumer s dwelling. The Fed indicates that it does not expect to finalize the 2009 proposal prior to the required January 30, 2011 effective date, and is issuing the interim final rule, substantially as proposed, to meet the statutory requirement. Under the interim final rule, creditors must disclose, in a tabular format that is substantially similar to the model forms provided in the interim final rule: For fixed-rate mortgages, the contract interest rate and the corresponding monthly payment including escrows for taxes and insurance; For adjustable rate or step-rate mortgages, the: Interest rate and payment (including esrow amounts) at consummation and the period of time until the first interest rate adjustment may occur; Maximum interest rate and payment during the first five (5) years after consummation and the earliest date that rate may apply; and Maximum interest rate and payment during the life of the loan and the earliest date that rate may apply. Details of interest rate and payment changes relevant to loans with negatively amortizing payment options, introductory interest rates, interest-only payments and balloon payments as well as, in some cases, special disclosures that are outside of the tabular format; A No Guarantee to Refinance statement that is substantially similar to the Fed s model disclosure, which states, There is no guarantee that you will be able to refinance to lower your rate or payments. The interim final rule becomes effective 30 days after publication in the Federal Register. Compliance is required as of January 30, 2011 and is applicable to applications for credit received by the creditor on or after that date. Early compliance is permitted. In addition, the Fed is soliciting comments on the interim final rule for a period of 60 days following publication Proposed Rule Reverse Mortgages, Consumer s Right to Rescind and Other Modifications As part of its comprehensive review to update and clarify TILA s rules for home-secured credit, the Fed is proposing a number of modifications that address reverse mortgages and the consumer s right to rescind, as well as a variety of other provisions including, among others, disclosures related to same creditor refinancings and advertising rules for home-equity lines of credit. Comments are due within 90 Register. Highlights of the proposed modifications follow. Reverse Mortgages The proposal would provide new and revised disclosure requirements for
4 Financial Services Regulatory Practice Letter #10-17 open-end and closed-end reverse mortgages, including: A new two-page notice summarizing key basic information and risks of reverse mortgages to be provided prior to submission of the application. Transaction-specific disclosures presented in tabular format and reflecting the actual terms of the loan being offered to be provided within three days of receiving the application. Final disclosures to be provided in the same tabular format at least three days prior to the closing of the loan. In addition, the proposal would prohibit a creditor or other person from: Originating a reverse mortgage loan unless the consumer has obtained counseling from an independent counselor that meets the standards established by the Department of Housing and Urban Development. Charging a nonrefundable fee until three days after the consumer has received counseling. Steering consumers to certain counselors, or compensating counselors or counseling agencies. Requiring a consumer to purchase another financial or insurance product as a condition of obtaining a reverse mortgage. A safe harbor would be created for purchases of a financial or insurance product that occurred at least ten days after the reverse mortgage transaction is consummated. Consumer s Right to Rescind The proposed revisions would: Simplify and improve the content and format of the notice of the right to rescind provided to consumers at closing; Revise the list of material disclosures that can trigger a consumer s right to rescind if not properly made (to focus on disclosure found to be most important to consumers through previously conducted consumer testing); Tolerances are provided for certain material disclosures such as the total settlement charges, the loan amount and the prepayment penalty. Clarify creditor s obligations when a consumer extends the right to rescind. Other Modifications Among many others, additional modifications included in the proposal would: For refinancings by the same creditor, require new TILA disclosures if the consumer is charged a fee or if the creditor and the consumer agree to modify certain key loan terms, including changing the interest rate or monthly payment, advancing new debt or adding a risky term, such as a prepayment penalty. An exception would be provided for bona fide and reasonable fees for a consumer s credit history. To limit inappropriate classifications of higher-priced mortgage loans, replace the use of the annual percentage rate ( APR ) with a coverage rate calculated using the interest rate, points and any origination charges retained by the creditor. Require creditors to refund any fees charged a consumer if the consumer withdraws the application within three business days from receiving the disclosures for closed-end mortgages. Disclosure of the right to a refund of fees must be provided prior to submission of the application. Conform advertising rules for home equity lines of credit to the rules for closed end mortgages. Comments on the proposed rule are requested within 90 days of publication Proposed Rule Escrow Account Threshold for Jumbo Loans The Fed is proposing rules to implement Section 1461 of the Dodd- Frank Act, which adds a new Section 129D to TILA governing escrow and impound accounts on certain consumer credit transactions. In particular, the new Section 129D requires a creditor to establish an escrow or impound account (for the payment of taxes, insurance and any other required periodic payment or premium) for closed-end consumer credit transactions secured by a first lien on the consumer s principal dwelling when: Such an account is required by Federal or State law; The loan is made, guaranteed or insured by a State or Federal government lending or insuring agency; The original loan balance is below the conforming balance threshold ( does not exceed the maximum limitation on the original principal obligation of mortgage set by Freddie Mac currently $417,000) and the annual percentage rate exceeds the average prime offer
5 Financial Services Regulatory Practice Letter #10-17 rate by 1.5 percentage points or more; or The original loan balance is above the conforming balance threshold (a jumbo loan ) and the APR exceeds the average prime offer rate by 2.5 percentage points or more. The Fed currently requires all higherpriced first lien mortgages, defined as loans that have an APR that is 1.5 or more percentage points in excess of the average prime offer rate on comparable transactions. Section 1461 of the Dodd-Frank Act modifies this requirement for jumbo loans only and the proposed rule would amend the Fed s Regulation Z to implement the statutory provisions. As such, the Fed is proposing requirements that a creditor must establish an escrow or impound account for first lien mortgage loans secured by a creditor s principal dwelling if the original principal obligation exceeds the Freddie Mac conforming balance threshold and the APR exceeds the average prime offer rate for a comparable transaction by 2.5 or more percentage points. The Fed further proposes to make this rule effective upon final publication, but is seeking comment on the appropriate amount of time creditors would need to modify their systems and procedures to adapt to the new rule. Comments are requested within 30 days of publication KPMG Commentary Although the Fed s releases were all made on the same day, it is important to note that they reflect rules in varying stages of completion final, interim final and proposed and bear a variety of effective dates, compliance dates and comment periods. Similarly, although the releases generally share a relationship to consumer mortgage loan disclosures and practices, they address a broad variety of disparate issues. Interested and affected parties are strongly encouraged to read the releases in their entirety to understand the full scale of the operational and technical requirements of the rules. The Fed s actions are consistent with the overall focus of regulatory reform and consumer protection in the Dodd- Frank Act, which includes: 1) clarification and simplification of consumer disclosures, 2) compensation (including its relationship to potential conflicts of interest), and 3) demonstration of consumer education and choice. The Fed acknowledges that some of the releases address issues that are also part of the Dodd-Frank Act and will require implementing regulations pursuant to that legislation. It is possible that the Fed will complete the interim final rules and the proposed rules, and address any modifications required by the Dodd-Frank Act, in consultation with the other Federal bank and thrift regulatory agencies as they coordinate their transfer of responsibilities to the Bureau of Consumer Financial Protection ( CFPB ). Under the Dodd-Frank Act, the CFPB has rule-writing authority for Federal financial consumer laws, including the enumerated consumer laws (which include TILA), and their application to all persons covered by the enumerated laws. Financial institutions should consider that the CFPB rule-making is expected to focus attention on the clarity and simplicity of consumer disclosures, national mortgage underwriting standards, hidden fees, and enforcement of fair lending and antipredatory and anti-abusive acts and practices. Further, financial institutions are encouraged to review their retail strategies and infrastructure to determine the potential financial impacts such regulatory expectations might have on product and service offerings and related revenue streams in the near term, as well as to ensure satisfactory compliance and risk management in the changing the regulatory environment. For more detail on the CFPB, please refer to RPL 10-12. For additional information, please contact Linda Gallagher, Principal and National Lead, Financial Services Regulatory Practice: lgallagher@kpmg.com, or Kari Greathouse, Director: cgreathouse@kpmg.com or Amy Matsuo, Director: amatsuo@kpmg.com..