Break Out Session: Mortgage Loan Servicing and Administration 2
Agenda Mortgage Servicing Rules (Real Estate Settlement Procedures Act [RESPA] and Truth in Lending Act [TILA]) Effective Date: Applications received on or after January 10, 2014 Loan Originator Compensation Rule (TILA) Effective Date: January 10, 2014 Escrow Rule (TILA) Effective Date: Applications received on or after June 1, 2013 Many of the final rules issued this past January have been revised through subsequent final rule making. In addition, there are existing pending proposals that may result in even further amendments to the rules. 3
Agenda Mortgage Servicing Rules (RESPA and TILA) Effective Date: Applications received on or after January 10, 2014 Loan Originator Compensation Rule (TILA) Effective Date: January 10, 2014 Escrow Rule (TILA) Effective Date: Applications received on or after June 1, 2013 4
Mortgage Servicing: General Standards Coverage Exemptions Requirements Generally applies to closed end consumer loans, secured by a dwelling, however, each section of the rule has its own specific scope Generally reverse mortgages and timeshares are exempt, however, each section of the rule has its own specific scope Disclosures for adjustable rate mortgages Periodic statements and force placed insurance procedures Prompt crediting of payments and distribution of payoff statements Error resolution procedures and responses to information requests Policies and procedures regarding the designation of personnel to assist consumers who fall behind on their mortgage payments Procedures for early intervention and continuity of contact with delinquent consumers Loss mitigation procedures 5
Mortgage Servicing: Small Servicer Exemption Qualification As of January 1 st each year: Bank, together with any affiliates, services 5,000 or fewer mortgage loans Bank, or its affiliate, is the creditor or assignee of these mortgage loans Loans acquired in a merger or acquisition count as loans for which your institution is a creditor or assignee Additional Details Cannot qualify as a small servicer if your institution services loans which it did not originate or does not own If bank ceases to qualify for exemption, it has 6 months or until the next January 1 st to comply with requirements, whichever is later Mortgage Loan Definition A closed end consumer credit transaction secured by a dwelling. Do not include reverse mortgages or timeshares. Servicing Determination Tool 6
Mortgage Servicing: TILA Requirements Interest Rate Adjustment Notices Coverage Requirements All banks must comply All closed end adjustable rate mortgages, secured by the consumer s principal dwelling, where the term of the loan is greater than 1 year Initial interest rate adjustment notice: Provided 7 8 months before first payment at new rate is due; may be based on estimates if new rate is not yet known, and it is labeled as such Ongoing interest rate adjustment notice: Provided 2 4 months prior to due date of new payment, resulting from any rate change Content: Notices must be substantially similar to the model forms in appendix H 4(D)(1 4) of Regulation Z 7
Mortgage Servicing: TILA Requirements Prompt Crediting of Payments and Payoff Statements Coverage Requirements All banks must comply Generally, applies to all open and closed end loans that are secured by the consumer s principal dwelling Defines periodic payment: Amount sufficient to cover principal, interest, and escrow, if applicable, for a billing cycle Clarifies handling of partial payments: Credit upon receipt Return the partial payment to the consumer Hold the payment in a suspense or unapplied funds account Payoff statements: Must be provided within 7 days upon receipt of written request for any dwelling secured loan 8
Mortgage Servicing: TILA Requirements Periodic Statements Coverage Requirements All banks must comply, except small servicers Applies to all closed end loans that are secured by a dwelling Exceptions: Reverse mortgages, timeshares, fixed rate loans with coupon books Timing: Generally provide statement within 4 days of close of courtesy period of previous billing cycle Content: Must include certain groupings of information, as summarized in sample forms from Appendix H 30 of Regulation Z Housing counselor information website and HUD toll free telephone number 9
Mortgage Servicing: RESPA Requirements Force Placed Hazard Insurance Coverage Requirements All banks must comply Applies to all closed end federally related mortgage loans, per RESPA, that are secured by a dwelling First Notice: Reminder Notice: Renewal Notice: Provide at least 45 days before charging the consumer Provide at least 30 days after the first notice Required before each anniversary of renewal of force placed insurance. Provide at least 45 days prior to assessing charge for renewal to consumer Fees: May be assessed 15 days or more after sending reminder notice, if no evidence of insurance is received from consumer Cancellation: Must cancel and refund upon proof of borrower s hazard insurance coverage for periods of overlapping coverage Small servicers: Lower cost escrow option 10
Mortgage Servicing: RESPA Requirements Error Resolution and Information Requests Coverage Requirements All banks must comply Applies to all closed end federally related mortgage loans, per RESPA, that are secured by a dwelling Acknowledge error: Written notice due within 5 days of receipt Investigate: Respond to consumer in writing within 30 days* Information requests: Within 30 days*, provide requested information or a written explanation of why information is not available A 15 day extension is available, if customer is notified in writing of reason for extension within the initial 30 days 11
Mortgage Servicing: RESPA Requirements Loss Mitigation Procedures Coverage Requirements All banks must comply (small servicers are exempt from all provisions except for the 2 requirements specifically listed below) Applies to all closed end federally related mortgage loans, per RESPA, that are secured by the consumer s principal dwelling Establish procedures to: Assist consumers in completing applications for loss mitigation options Evaluate loss mitigation applications within 30 days and inform consumers of results Designate independent personnel to evaluate appeals submitted by consumers No bank may: File for foreclosure unless borrower is more than 120 days delinquent Proceed to foreclosure judgment or order of sale if borrower is performing under loss mitigation agreement 12
Mortgage Servicing: RESPA Requirements Early Intervention and Continuity of Contact with Delinquent Consumers Coverage Requirements All banks must comply, except small servicers Applies to all closed end federally related mortgage loans, per RESPA, that are secured by the consumer s principal dwelling Exception: Reverse mortgages Early intervention: Make efforts to establish live contact with consumers by 36 th day of delinquency Provide consumers with written information about any available loss mitigation options by 45 th day of delinquency See model forms in Appendix MS 4 of Regulation X Continuity of contact: Develop policies and procedures to provide personnel to assist delinquent consumers with loss mitigation options 13
Mortgage Servicing: RESPA Requirements General Servicing Policies, Procedures, and Requirements Coverage Requirements All banks must comply, except small servicers Applies to all closed end federally related mortgage loans, per RESPA, that are secured by a dwelling Exception: Reverse mortgages Develop policies and procedures that address: Accessing and providing timely and accurate information Properly evaluating loss mitigation applications Facilitating oversight of, and compliance by, service providers Facilitating transfer of information during servicing transfers Written error resolution and information request procedures Document retention: Retain records for 1 year after loan is discharged Servicing file: Must enable servicer to compile required information into a servicing file within 5 days 14
Mortgage Servicing: Examiner Expectations All institutions: Update or develop policies, procedures, and internal controls; in addition, provide training to address each of the following: Initial and ongoing rate change adjustment notices Error resolution requirements Acceptance of partial payments Crediting of payments Payoff requests Force placed insurance Small servicers: Conduct annual review to determine small servicer exemption status Non exempt institutions: Develop coupon books or periodic statements as well as internal controls to monitor their contents and training in regards to timing of their distribution Develop policies, procedures, internal controls, and training for servicing, early intervention and continuity of contact with delinquent consumers, and loss mitigation 15
Agenda Mortgage Servicing Rules (RESPA and TILA) Effective Date: Applications received on or after January 10, 2014 Loan Originator (LO) Compensation Rule (TILA) Effective Date: January 10, 2014 Escrow Rule (TILA) Effective Date: Applications received on or after June 1, 2013 16
LO Compensation: General Standards Coverage Requirements LO, including an individual LO and a loan originator organization (LOO) Regulates how compensation is paid to a LO Imposes qualification duties on LOs Requires that certain identification information be disclosed on certain loan documents Requires written policies and procedures Prohibits mandatory arbitration clauses, waiver of bringing a claim to court, and financing of credit insurance 17
LO Compensation: LO Definition Loan Originator Definition Includes Employees, agents, and contractors that: Refer a consumer if referral is based on an assessment of consumer that may affect the loan product they receive Fill out an application form or assist a consumer in applying for credit Present credit terms Advertise/communicate loan origination services Takes an application, offers, arranges, assists consumer in obtaining or applying to obtain, negotiates, obtains, or makes a loan includes a creditor that makes table funded loans Does not Include Unless they conduct an activity of a LO, as listed above: Administrators/Clerical staff Managers (excluding producing managers) Persons who provide general information or confirm written offer terms already transmitted Persons who provide LO contact information, as long as consumer is not referred to a LO based on an assessment of consumer s financial characteristics Loan processors and underwriters working on behalf of a LO 18
LO Compensation: Limitations May not receive compensation based on: A term of a single transaction or a proxy for a transaction term The terms of multiple transactions conducted by an individual The terms of multiple transactions conducted by multiple individuals, taken in the aggregate (some exceptions allowed) NOTE: May not ever increase or decrease compensation in regards to a particular transaction, but may make periodic changes to compensation plan. May also decrease compensation to cover unexpected costs, such as RESPA tolerance cures. 19
LO Compensation: Permissible Compensation Methods For a Loan Originator Seven permissible compensation methods: 1. Originator s overall dollar volume 2. The long term performance of the originator s loans 3. An hourly pay rate based on actual number of hours worked 4. Loans made to new consumers versus existing consumers 5. A payment that is fixed in advance for every loan the originator arranges for the creditor 6. The percentage of the loan originator s applications that close 7. The quality of the loan For Loan Originator Organization 1. Third party charges, when amount charged is bona fide and reasonable, are not compensation 2. Fees for services provided by the loan originator that are not loan origination activities, such as title services, are not compensation 20
LO Compensation: Profits Based Compensation Profit Based Definition Compensation that is based on the terms of multiple transactions of multiple individual LOs Generally NOT ALLOWABLE Except in the following instances 1. As long as profits are not distributed to individual LOs based on the transaction terms of their loan originations they may be distributed in: Designated tax advantaged plans (retirement plans) Non deferred profits based compensation plans (profit sharing plans) if: Compensation paid does not exceed 10% of originator s total compensation for the time period it is paid; or The person was a LO for 10 or fewer transactions during the 12 month period preceding the date of compensation determination 2. May pay compensation through a profits based plan if it is NOT based on profits from mortgage related business 21
LO Compensation: Bonuses Bonus A bonus is generally allowed, as long as it is not determined based on profits from mortgage related business Examples of ALLOWABLE bonuses Retention Bonus: Must be budgeted for in advance Performance Bonus: Must be paid out of a bonus pool that was set aside at the beginning of the company s annual accounting period as part of the company s operating budget NOTE: Bonuses are still subject to 10% of total compensation limit or 10 total originations in previous 12 month period test (as covered on previous slide). 22
LO Compensation: Qualification Rules A LOO must determine which lenders meet the definition of a mortgage loan originator and/or a loan originator: SAFE Act: Mortgage Loan Originator An individual who takes a residential mortgage loan AND offers or negotiates terms of a residential mortgage loan for compensation or gain. Regulation Z: Loan Originator A person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. 23
LO Compensation: Qualification Requirements Qualification Requirements for LOs not Licensed Under SAFE Act Collect information about employee Qualifications for criminal background check Credit report Information from NMLSR or individual on any administrative, civil, or criminal findings Make qualification determinations In past 7 years, not been convicted of or pleaded guilty to a felony in a domestic or military court Never been convicted of or pleaded guilty to a felony involving an act of fraud, dishonesty, breach of trust, or money laundering Demonstrates financial responsibility, character, and general fitness that would lead to operating honestly, fairly, and efficiently as a LO Provide training Periodic training covering federal and state law requirements commensurate to LO activities 24
LO Compensation: Documentation Loan Documentation Policies and Procedures Recordkeeping Name and NMLS identification number of LO and LOO must be included on the following loan documents: Credit application Security instrument Note Must address each of the following : Compensation Steering Qualification Identification found on loan documents For 3 years after date of payment, maintain records to evidence: All compensation received All compensation paid 25
LO Compensation: Prohibitions Arbitration, Waivers, and Financing Credit Insurance For closed end consumer credit secured by a dwelling and Home Equity Line of Credit (HELOC) secured by consumer s principal dwelling, prohibitions on: Including terms that require arbitration or any other non judicial procedure to resolve claims Barring a consumer from bringing a claim in court asserting a violation of any federal law Financing any premiums or fees for credit insurance 26
LO: Examiner Expectations Review and update compensation policies and current practices to ensure they meet all requirements Conduct a review of current employees to determine if all LOs have been identified and if they meet qualification requirements Develop internal controls to monitor for employees that may become LOs Provide training to all applicable personnel in regards to LO compensation requirements Develop procedures to update loan documents with required information and internal controls to monitor these documents for continued compliance 27
Agenda Mortgage Servicing Rules (RESPA and TILA) Effective Date: Applications received on or after January 10, 2014 Loan Originator Compensation Rule(TILA) Effective Date: January 10, 2014 Escrow Rule (TILA) Effective Date: Applications received on or after June 1, 2013 28
Escrow: General Standards Coverage Exemptions Requirements Applies to first lien, higher priced mortgage loans secured by a consumer s principal dwelling Transactions secured by shares in a cooperative Subordinate liens HELOCs Reverse Mortgages Temporary, bridge, or construction loans w/terms of 12 months or less Lengthens minimum escrow coverage to five years Provides regulatory relief for certain small creditors operating predominately in rural or underserved markets 29
Escrow: Exemption and Requirements Exemption for small creditors: Asset size less than $2 billion Together with affiliates originates 500 or fewer 1 st lien high priced mortgage loans (HPMLs) Originates more than 50% of 1 st lien HPMLs in rural or underserved areas See the Consumer Financial Protection Bureau s (CFPB s) List of Rural and Underserved Counties Does not maintain escrow accounts Escrow can only be cancelled upon: Termination of loan; or Receipt of customer request to cancel and the following conditions are met: Loan had escrow for minimum of 5 years (instead of 1 year); and Loan to value must be less than 80% Clarifies requirements: Do not have to escrow insurance payments for homeowners in common interest communities such as condos and planned unit developments 30
Escrow: Examiner Expectations Update policies, procedures, and internal controls and provide training in regards to the revised escrow requirements and termination procedures For exempt banks, conduct an annual review of exempt status to determine if exemption still applies 31
Resources Federal Reserve Consumer Affairs Contact CFPB Website: Final Rules and Proposed Rules Small Entity Compliance Guides List of Rural and Underserved Counties: http://www.consumerfinance.gov/blog/final list of ruraland underserved counties for use in 2014/ 32
33 Questions?