CFPB: January 2013 Roundup

If you are not a mortgage lender, you can probably stop reading now. (We are only half joking). Dominating the CFPB's activities in January was the issuance of a number of mortgage regulations needed to implement Title XIV of the Dodd Frank Act.

In addition to the Bureau's mortgage lending activities, President Obama re-nominated Director Cordray and the Bureau launched an inquiry into providing financial products to college students.

MORTGAGE LOANS

To avoid the calamity of Title XIV of the Dodd Frank Act going into effect without implementing regulations, the Bureau scheduled two events on January 10 and January 17 in Baltimore and Atlanta, respectively, to announce the release of their mortgage regulations.

At the January 10 event, the Bureau released the long-awaited final "ability to repay"/qualified mortgage regulation. That same day the Bureau also posted final regulations for: (i) escrow requirements for higher priced mortgage loans; and (ii) high cost mortgage loans.

At the January 17 event in Atlanta, an area hit hard by the foreclosure crisis, the Bureau released its final mortgage servicing regulations. Shortly thereafter, the CFPB issued final regulations relating to: (i) appraisals for higher priced mortgage loans; (ii) free appraisals under Regulation B; and (iii) loan originator compensation.

The regulations are voluminous totaling well in excess of 3,000 pages (suggesting the involvement of the paper lobby in the creation of the Bureau). Below are brief summaries of the regulations along with important information relating to effective dates.

The summaries below are high-level discussions of the identified regulations. Venable conducted two webinars discussing the final regulations in greater detail. You can access the webinars at our website here.

Ability to Repay/QM

Effective Date: January 10, 2014

Link to Final Rule: http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/

Rule Highlights:

• Ability to Repay Determinations. Creditors generally must consider eight underwriting factors when originating mortgage loans: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony, and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history.
• Presumption for Qualified Mortgages. "Qualified mortgages" generally are entitled to a safe harbor presumption that the creditor making the loan satisfied the ability to repay requirements. Qualified mortgages that are "higher-priced," however, are entitled to a rebuttable presumption of compliance.
• General Requirements for Qualified Mortgages. The final rule generally provides that loans with: (i) negative amortization; (ii) interest-only payments; (iii) balloon payments; (iv) terms exceeding 30 years; (v) no verification of income or assets; and (vi) points and fees paid by the consumer that exceed three percent of the total loan amount (excluding certain "bona fide discount points") will not qualify as qualified mortgage loans.
• Underwriting Criteria. The final rule establishes general underwriting criteria for qualified mortgages. Most importantly, the general rule requires that creditors calculate monthly payments based on the highest payment that will apply in the first five years of the loan and that the consumer have a total (or "back-end") debt-to-income ratio that is less than or equal to 43 percent. Appendix Q details the calculation of debt-to-income for these purposes, drawing upon Federal Housing Administration guidelines for such calculations.
• Temporary Qualified Mortgage Exemption. The final rule provides for a temporary category of qualified mortgages that have more flexible underwriting requirements provided they satisfy the general product feature prerequisites for a qualified mortgage and also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either (1) the GSEs while they operate under Federal conservatorship or receivership; or (2) the U.S. Department of Housing and Urban Development, Department of Veterans' Affairs, or Department of Agriculture or Rural Housing Service. This temporary provision will phase out over time as the various Federal agencies issue their own qualified mortgage rules and if GSE conservatorship ends, and in any event after seven years.
• Prepayment Fees. Prepayment fees are generally prohibited except for certain fixed-rate, qualified mortgages where the penalties satisfy certain restrictions and the creditor has offered the consumer an alternative loan without such penalties.

Escrow

Effective Date: June 1, 2013

Link to Final Rule: https://www.federalregister.gov/articles/2013/01/22/2013-00734/escrow-requirements-under-the-truth-in-lending-act-regulation-z

Rule Highlights:

• Escrow Requirements. For those "higher priced mortgage loans" that also are first lien loans, creditors must establish and maintain escrow accounts for at least five years.
• Small Servicer Exemption. Small creditors that: (1) make more than half of its first-lien mortgages in rural or underserved areas; (2) have an asset size less than $2 billion; (3) together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; and (4) together with its affiliates, not escrow for any mortgage it or its affiliates currently services, need not establish escrow accounts for mortgages intended at consummation to be held in portfolio, but must establish accounts at consummation for mortgages that are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption.

High Cost

Effective Date: January 10, 2014

Link to Final Rule: https://www.federalregister.gov/articles/2013/01/31/2013-00740/high-cost-mortgage-and-homeownership-counseling-amendments-to-the-truth-in-lending-act-regulation-z

Rule Highlights:

• Scope. Under the final rule, most mortgage loans secured by a consumer's principal dwelling, including purchase-money mortgages, refinances, closed-end home-equity loans, and open-end credit plans are potentially subject to high cost coverage. The final rule retains the exemption for reverse mortgages. In addition, the final rule adds exemptions for three types of loans that the Bureau believes do not present the same risk of abuse as other mortgage loans: loans to finance the initial construction of a dwelling, loans originated and financed by Housing Finance Agencies (which are the creditor), and loans originated through the United States Department of Agriculture's (USDA) Rural Housing Service section 502 Direct Loan Program.
• Coverage Tests. A transaction is a high-cost mortgage if any of the following tests is met:
• • APR. The transaction's annual percentage rate exceeds the applicable average prime offer rate by more than 6.5 percentage points for most first-lien mortgages, or by more than 8.5 percentage points for a first mortgage if the dwelling is personal property and the transaction is for less than $50,000; The transaction's APR exceeds the applicable average prime offer rate by more than 8.5 percentage points for subordinate or junior mortgages;
  • Points and Fees. The transaction's points and fees exceed 5 percent of the total transaction amount or, for loans below $20,000, the lesser of 8 percent of the total transaction amount or $1,000 (with the dollar figures also adjusted annually for inflation); or
  • Prepayment Fees. The credit transaction documents permit the creditor to charge or collect a prepayment penalty more than 36 months after transaction closing or permit such fees or penalties to exceed, in the aggregate, more than two percent of the amount prepaid.
• Loan Term Restrictions.
• • Balloon Payments. Balloon payments are generally banned, unless they account for the seasonal or irregular income of the borrower, they are part of a short-term bridge loan, or they are made by creditors meeting specified criteria, including operating predominantly in rural or underserved areas.
  • Prepayment Fees. Creditors are prohibited from charging prepayment penalties.
  • Late Fees. Late fees are restricted to four percent of the payment that is past due.
  • Fee Prohibitions. Financing points and fees and fees for providing payoff statements are generally prohibited and restricted, respectively, and fees for loan modification or payment deferral are banned.
• Counseling-Related Requirements.
• • High Cost. Before making a high-cost mortgage, creditors are required to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the mortgage.
  • List of Counselors. The final rule requires lenders to provide a list of homeownership counseling organizations to consumers within three business days after they apply for a mortgage loan, with the exclusion of reverse mortgages and mortgage loans secured by a timeshare. The final rule requires the lender to obtain the list from either a website that will be developed by the Bureau or data that will made available by the Bureau or the Department of Housing and Urban Development (HUD) for compliance with this requirement.
  • First Time Homebuyers. Creditors must obtain confirmation that a first-time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a loan that provides for or permits negative amortization to the borrower.

Appraisals (High Cost)

Effective Date: January 18, 2014

Link to Final Rule: https://www.federalregister.gov/articles/2013/01/31/2013-01384/disclosure-and-delivery-requirements-for-copies-of-appraisals-and-other-written-valuations-under-the

Rule Highlights:

• Higher Priced Mortgage Loans. A creditor may only extend a higher priced mortgage loan if: (i) the creditor obtains a written appraisal; (ii) the appraisal is performed by a certified or licensed appraiser; and (iii) the appraiser conducts a physical property visit of the interior of the property.
• Notice at Application. At application, the creditor must provide the applicant with a prescribed notice that states the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, that the creditor may charge the applicant for the appraisal, and that the applicant may choose to have a separate appraisal conducted at the expense of the applicant. This disclosure requirement overlaps with another rule the Bureau released relating to Regulation B; and creditors may use a single unified disclosure notice to comply with both rules.
• Free Appraisal. The creditor must provide the consumer with a free copy of any written appraisals obtained for the transaction at least three business days before consummation.
• Second Appraisal. A creditor must obtain a second written appraisal for certain "flipped" higher priced mortgage loan based on an interior inspection of the property, at no cost to the borrower. Subject to certain exemptions, the second appraisal would be required where: (i) the seller acquired the home within 180 days prior to the date of the consumer's purchase agreement; and (ii) the consumer is acquiring the home for a price that exceeds the seller's acquisition price by 10% (if the seller acquired the property within the past 90 days) or 20% (if the seller acquired the property between 91 and 180 days earlier).
• Exemptions. Exempt loans are: (i) all reverse mortgages; (ii) loans for initial construction of a dwelling; (iii) temporary bridge loans (for 12 months or less); (iv) loans secured by a new manufactured home; and (v) transactions secured by a mobile home, boat, or trailer. The rule only applies to closed-end credit transactions.

Appraisals (ECOA)

Effective Date: January 18, 2014

Link to Final Rule: https://www.federalregister.gov/articles/2013/01/31/2013-01384/disclosure-and-delivery-requirements-for-copies-of-appraisals-and-other-written-valuations-under-the

Rule Highlights:

• Notice at Application. Within three days of application, the creditor must provide the applicant with a prescribed notice that states the purpose of the appraisal, that the creditor will provide the applicant a copy of any written appraisal, that the creditor may charge the applicant for the appraisal, and that the applicant may choose to have a separate appraisal conducted at the expense of the applicant.
• Free Appraisal. Creditors must provide applicants a copy of each appraisal and other written valuation promptly upon their completion or three business days before consummation (for closed-end credit) or account opening (for open-end credit), whichever is earlier. Waiver of the three-day requirement is permitted. If the transaction is not consummated or the account is not opened, creditors must provide the appraisal no later than 30 days after the creditor determines the transaction will not be consummated or the account will not be opened.
• Fees Prohibited. Creditors are prohibited from charging for the copy of appraisals and other written valuations, except to pass through reasonable fees for the cost of the appraisals or other written valuation.

Loan Originator Compensation

Effective Date: The amendments to Sections 1026.36(h) (mandatory arbitration) and (i) (single premium insurance) are effective on June 1, 2013. All other provisions of the rule are effective on January 10, 2014.

Link to Final Rule: https://www.federalregister.gov/articles/2013/02/15/2013-01503/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z

Rule Highlights:

• Prohibition on Dual Compensation. The final rule continues to provide for a prohibition on dual compensation, but provides an exception to allow mortgage brokers to pay their employees' or contractors' commissions (although the commissions cannot be based on the terms of the loans that they originate).
• Prohibition on Compensation Based on Terms. Creditors may not base a loan originator's compensation on "any of the transaction's terms or conditions." A "term of a transaction" is "any right or obligation of the parties to a credit transaction." For example, a mortgage broker employee cannot receive compensation based on the interest rate of a loan or on the fact that the loan officer steered a consumer to purchase required title insurance from an affiliate of the broker, since the consumer is obligated to pay interest and the required title insurance in connection with the loan.
• Proxies. The final rule prohibits compensation based on a "proxy" for a term of a transaction. The rule further clarifies the definition of a proxy to focus on whether: (i) the factor consistently varies with a transaction term over a significant number of transactions; and (ii) the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.
• Permissible Pricing Concessions. Creditors are generally prohibited from reducing compensation to offset the cost of a change in transaction terms; however, the final rule allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs.
• Profit Sharing. Creditors generally are prohibited from conditioning loan originator compensation based upon the profitability of a transaction or a pool of transactions. However, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans, such as a 401(k) plan, and to make bonuses and contributions to other plans that do not exceed ten percent of the individual loan originator's total compensation.
• SAFE Act Compliance. Loan originator organizations must make sure that their individual loan originators are licensed or registered as applicable under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) and other applicable law. For employers whose employees are not required to be licensed, including depository institutions and bona fide non-profits, the rule requires them to: (1) ensure that their loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards; and (2) provide training to their loan originator employees that is appropriate and consistent with those employees' origination activities.
• Unique Identifier. Loan originators must provide their unique identifiers under the Nationwide Mortgage Licensing System and Registry (NMLSR) on loan documents. Accordingly, mortgage brokers, creditors, and individual loan originator employees that are primarily responsible for a particular origination will be required to list on enumerated loan documents their NMLSR unique identifiers (NMLSR IDs), if any, along with their names.
• Mandatory Arbitration Prohibited. Creditors are prohibited from including clauses requiring the consumer to submit disputes concerning a residential mortgage loan or home equity line of credit to binding arbitration. It also prohibits the application or interpretation of provisions of such loans or related agreements so as to bar a consumer from bringing a claim in court in connection with any alleged violation of Federal law.
• Single Premium Insurance. Creditors are prohibited from financing any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling, but SPI does allow credit insurance to be paid for on a monthly basis.

Loan Originator Compensation

Effective Date: January 10, 2014

Link to Final Rule: https://www.federalregister.gov/articles/2013/02/14/2013-01248/mortgage-servicing-rules-under-the-real-estate-settlement-procedures-act-regulation-x; https://www.federalregister.gov/articles/2013/02/14/2013-01241/mortgage-servicing-rules-under-the-truth-in-lending-act-regulation-z

Rule Highlights:

The rules cover nine major topics:

1. Periodic billing statements. Creditors, assignees, and servicers must provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, where applicable, information regarding delinquencies. The periodic statement requirement generally does not apply to fixed-rate loans if the servicer provides a coupon book, provided the coupon book contains certain information specified in the rule and certain other information specified in the rule is made available to the consumer.
2. Interest rate adjustment notices for ARMs. Creditors, assignees, and servicers must provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Creditors, assignees, and servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change.
3. Prompt payment crediting and payoff statements. Servicers must promptly credit periodic payments from borrowers as of the day of receipt. If a servicer receives a payment that is less than the amount due for a periodic payment, the payment may be held in a suspense account. In addition, creditors, assignees, and servicers must provide an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information.
4. Force-placed insurance. Servicers are prohibited from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance and has provided required notices. An initial notice must be sent to the borrower at least 45 days before charging the borrower for force-placed insurance coverage, and a second reminder notice must be sent no earlier than 30 days after the first notice and at least 15 days before charging the borrower for force-placed insurance coverage.
5. Error resolution and information requests. Servicers must comply with the error resolution procedures for certain listed errors as well as any error relating to the servicing of a mortgage loan. Servicers generally are required to acknowledge the request or notice of error within five days. Servicers generally are also required to correct the error asserted by the borrower and provide the borrower written notification of the correction, or to conduct an investigation and provide the borrower written notification that no error occurred, within 30 to 45 days.
6. General servicing policies, procedures, and requirements. Servicers are required to establish policies and procedures reasonably designed to achieve objectives specified in the rule. The reasonableness of a servicer's policies and procedures takes into account the size, scope, and nature of the servicer's operations.
7. Early intervention with delinquent borrowers. Servicers must establish or make good faith efforts to establish live contact with borrowers by the 36th day of their delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide borrowers a written notice with information about loss mitigation options by the 45th day of a borrower's delinquency.
8. Continuity of contact with delinquent borrowers. Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. The policies and procedures must be reasonably designed to ensure that a servicer assigns personnel to a delinquent borrower by the time a servicer provides such borrower with the written notice required by the early intervention requirements, but in any event, by the 45th day of a borrower's delinquency.
9. Loss Mitigation Procedures. Servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower's principal residence. If a borrower submits an application for a loss mitigation option, the servicer is generally required to acknowledge the receipt of the application in writing within five days and inform the borrower whether the application is complete and, if not, what information is needed to complete the application. Servicers are free to follow "waterfalls" established by an investor to determine eligibility for particular loss mitigation options. The servicer must provide the borrower with a written decision, including an explanation of the reasons for denying the borrower for any loan modification option offered by an owner or assignee of a mortgage loan with any inputs used to make a net present value calculation to the extent such inputs were the basis for the denial. A borrower may appeal a denial of a loan modification program so long as the borrower's complete loss mitigation application is received 90 days or more before a scheduled foreclosure sale. The rule restricts "dual tracking," where a servicer is simultaneously evaluating a consumer for loan modifications or other alternatives at the same time that it prepares to foreclose on the property. This section includes an exemption for small servicers as defined above. However, a small servicer is required to comply with two requirements: (1) a small servicer may not make the first notice or filing required for a foreclosure process unless a borrower is more than 120 days delinquent, and (2) a small servicer may not proceed to foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing pursuant to the terms of a loss mitigation agreement.

CFPB LEADERSHIP

Steven Antonakes named Acting Deputy Director of the Consumer Financial Protection Bureau

Following Raj Date's departure, the Bureau announced that Steve Antonakes will serve as the Acting Deputy Director. Unlike Date, whose background leaned more toward the research purpose of the Bureau, Mr. Antonakes' background is that of a state regulator in Massachusetts (a state that has effectively outlawed small dollar lending and actively regulates its mortgage lenders).

Mr. Antonakes joined the CFPB in November 2010 as the Assistant Director of Large Bank Supervision and was named the Associate Director for Supervision, Enforcement, and Fair Lending in June 2012.

REGULATIONS

Concurrent Mortgage Proposal

At the same time it issued its qualified mortgage/ability to repay regulation, the CFPB seeks comment on four major topics:

• Non-Profit Exemption. A proposed exemption designated for non-profit lenders, homeownership stabilization programs, and certain Federal agency and GSE refinancing programs from the ability-to-repay requirements because they are subject to their own specialized underwriting criteria.
• New Category of Qualified Mortgage Loans. A proposed creation of a new category of qualified mortgages, similar to the one for rural balloon-payment loans, for loans without balloon-payment features that are originated and held on portfolio by small creditors. The new category would not be limited to lenders that operate predominantly in rural or underserved areas, but would use the same general size thresholds and other criteria as the rural balloon-payment rules.
• Increased Threshold. A proposal to increase the threshold separating safe harbor and rebuttable presumption qualified mortgages to 3.5 percentage points above APOR for first-lien loans for both rural balloon-payment qualified mortgages and the new small portfolio qualified mortgage for small creditors.
• Loan Officer Compensation. A proposal to determine the inclusion of certain payments as part of the loan officer compensation in the calculation of points and fees.

REMITTANCES (STILL)

Because the CFPB continues to tinker with its remittance rule, the Bureau was forced to delay the February 7, 2013 effective date. At present, the effective date is scheduled for 90 days following publication of a final regulation.

DEBIT CARDS

The CFPB is requesting feedback from students regarding their experiences with debit cards. Students are encouraged to email the CFPB at: CFPB_StudentsFedReg@cfpb.gov by March 18 to tell them about any aspects of their experience.

Along with this request for informal feedback, the Bureau seeks information on how partnerships between institutions of higher education (including their affiliated entities) and financial institutions might be structured to promote positive financial decision-making among young consumers. Topics the Bureau is soliciting input on include:

• What types of campus affinity products are being offered to students?
• What are the features of these campus affinity products?
• In what ways are campus-affiliated products marketed to students?
• What information about students is provided by institutions of higher education to financial institutions?
• How are card or other products offered to students?
• What percentage of students at a college or university use the affinity product?
• To what extent are students able to choose a product other than the affinity banking product associated with the institution of higher education?
• What types of fees are being charged in association with these products?
• To what extent are students able or not able to readily access funds from affinity products while on campus?
• What is the nature, number, and frequency of complaints related to these campus affinity products?

The Notice and Request for Information is available at: http://www.consumerfinance.gov/students/whats-the-deal/request-for-information-regarding-financial-products-marketed-to-students-enrolled-in-institutions-of-higher-education/

OUTSTANDING FEDERAL REGISTER PUBLICATIONS

UPCOMING REGULATIONS

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