New Loan Origination and Mortgage Servicing Rules

(1)

New Loan Origination and

Mortgage Servicing Rules

2014 Personal Finance Seminar for Professionals University of Maryland Extension

Presenter:

Diane Cipollone, Esq. Director of Training National Fair Housing Alliance dcipollone@nationalfairhousing.org

www.nationalfairhousing.org 410-693-0943 (mobile)

(2)

Part I Loan Origination

Ability to Repay and Qualified Mortgages

Part II

Mortgage Servicing Rules for Borrowers in Default

2010 Dodd-Frank Wall Street Reform and

Consumer Protection Act

• The Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB)

• Transferred regulatory, supervisory and enforcement authority to CFPB for numerous consumer financial protection and mortgage related laws including

o Equal Credit Opportunity Act (ECOA) o Home Mortgage Disclosure Act (HMDA) o Fair Debt Collections Practices Act (FDCPA) o Truth-in-Lending Act (TILA)

o Real Estate Settlement Procedures Act (RESPA)

• U.S. Department of Justice also has authority to enforce ECOA

• HUD and U.S. Department of Justice retain authority to enforce the federal Fair Housing Act

(3)

Consumer Financial Protection Bureau

• Congress gave the CFPB authority over large banks, private student lenders, mortgage companies, and certain other businesses that offer credit

• Mandated creation of Office of Fair Lending and Equal Credit Opportunity within the CFPB

o Office of Fair Lending is responsible for ensuring fair, equitable, and nondiscriminatory access to credit

o Office of Fair Lending works with CFPB Office of Supervision and Office of Enforcement to ensure compliance with ECOA and HMDA o CFPB will refer Fair Housing Act violations to Department of

Justice

2014 ⁵

Consumer Financial Protection Bureau

• Issues Bulletins – Guidance for the Industry

• Conducts fair lending and compliance reviews at financial institutions across the country

• Brings enforcement actions – not limited to fair lending

• Submit a complaint on-line if you think you have been discriminated against or have any other type of

complaint regarding a lender, mortgage servicer or any other consumer financial transaction

• www.consumerfinance.gov © National Fair Housing Alliance

2014 ⁶

(4)

Mortgage Reform

and Anti-Predatory Lending Act

• Part I of this presentation covers the new CFPB Rules in Regulation Z - implementing the TILA amendments regarding loan origination aspects of these reforms

• New Regulation Z Rules are effective in connection with loan applications received on or after January 10, 2014

• Part II covers the mortgage servicing reforms under TILA (Regulation Z) and RESPA (Regulation X)

o Emphasis on Servicer’s obligations to assist borrowers in default or in imminent default

2014 ⁷

Mortgage Reform

and Anti-Predatory Lending Act

• Mortgage Reform Act passed to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable, and not unfair, deceptive or abusive

• Reforms in response to predatory and deceptive

practices that led to foreclosure crisis, such as qualifying borrower for loan approval based on:

o Low introductory teaser rates for adjustable rate mortgages (ARMs)

o Deceptively low monthly payments with balloon mortgages, interest only payments (IO), and payment option ARMs that result in negative amortization

(5)

Mortgage Reform

and Anti-Predatory Lending Act

• Reforms in response to predatory and deceptive

practices such as qualifying borrower for loan approval based on:

o Failing to consider taxes and insurance in monthly mortgage obligation

o Stated Income – “No documentation loans” o Borrower’s equity in property

• Reforms in response to unfair practices such as:

o Excessive points, fees and higher than required interest rates o Excessive prepayment penalties

o Mandatory Arbitration Clauses

2014 ⁹

Question I

Prohibitions

• Which of the following are now prohibited?

o Loans that do not escrow for taxes and insurance o Adjustable Rate Mortgages (ARMs)

o Interest Only Mortgages (IO) o Mortgages with Balloon Payments

o "Stated Income Loans” also known as “No Documentation Loans"

o Subprime Loans o 40 year Loans

o Payment Option ARMs o Prepayment Penalties

o Loans with Points and Fees Exceeding 3% of the Loan Amount o Loans with Negative Amortization

2014 ¹⁰

(6)

Answer Question I

Prohibitions

• The only aspect of loan origination in the list in

Question I that is prohibited by the new rules:

o A residential mortgage loan based on “Stated

Income”

• Also known as a “No Documentation” or “No Income/No Assets Loan”

2014 ¹¹

Prohibited and Required Practices

• The Truth in Lending Act (15 U.S.C. 1631 et seq.) was amended to add the following:

o No creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments

• 12 C.F.R. § 1026.43

o Minimum standards for transactions secured by a dwelling o 12 C.F.R. § 1026.43 (c) Ability to Repay

(7)

Ability to Repay

• Lenders may still offer all of these loan terms and conditions as long as lender makes a reasonable determination that the borrower has the “Ability to Repay” (ATR) the loan:

o ARMs

o Interest Only Payments o Balloon Mortgages o Subprime Loans o 40 Year Loans

o Payment Option ARMS with Negative Amortization o Prepayment Penalties

2014 ¹³

Question II

Covered Transactions

• The Ability to Repay Rules apply to which of the

following types of loans?

o Reverse Mortgages

o Home Equity Lines of Credit (HELOCs)

o Closed-end mortgages on residential property o Personal loans for housing purposes, for example, a

personal loan to repair or rehab the house

2014 ¹⁴

(8)

Answer Question II

Covered Transactions

• ATR Rules apply only to closed-end mortgages

on residential property

• The ATR Rules do not apply to

o Reverse Mortgages

o Home Equity Lines of Credit (HELOCs are open-end credit)

o Personal loans for housing purposes

• But the Fair Housing Act covers unsecured loans for the purpose of purchasing, constructing, improving, repairing or maintaining a dwelling

2014 ¹⁵

Answer Question II

Covered Transactions

• Ability to Repay applies to closed-end consumer

credit transactions secured by a dwelling

o Loans made to consumers that are

• Secured by residential structures that contain one to four units, including condominiums and co-ops o Unlike some other mortgage rules, the ATR rule is not

limited to first liens or to loans on primary residences

(9)

Reasonable Determination that the

Consumer has the Ability to Repay

• Creditors generally must consider and verify eight underwriting factors and use reasonably reliable third- party records to verify the information used to evaluate these factors:

1. Current or reasonably expected income or assets 2. Current employment status

3. Monthly payment on the covered transaction 4. Monthly payment on any simultaneous loan 5. Monthly payment for mortgage-related obligations 6. Current debt obligations, alimony, and child support 7. Monthly debt-to-income ratio or residual income 8. Credit history

• Does not dictate particular underwriting models

2014 ¹⁷

Reasonable Determination that the

Consumer has the Ability to Repay

• Monthly payment on the covered transaction

o Calculate payment based on fully amortizing loan schedule (for ex., if Interest Only or a Balloon Mortgage)

o For ARMs – calculate payment using greater of the fully indexed rate or introductory rate

• The fully-indexed interest rate is calculated by

adding the margin to the index at the time the

loan is made

• Typical indexes are the prime rate, LIBOR, and

various U.S. Treasury bills and note rates

2014 ¹⁸

(10)

Calculating Fully-Indexed Rate

• Introductory rate is 5% for first 2 years

• Index is 6 month LIBOR (typical subprime

index)

o London Interbank Offered Rate

• At origination, 6 month LIBOR is 4%

• Margin is 3%

4% Index

+ 3% Margin

7% Fully Indexed Rate at Origination

2014 ¹⁹

Calculating ATR for Adjustable Rate

Mortgage

• Calculate using greater of introductory rate at

5% or fully-indexed rate at 7%

• http://bretwhissel.net/amortization/

• Monthly payment of P&I on $150,000 loan at 7%

is $997.95

• Compare to P&I at intro rate of 5% - $805.23

• Difference of $192.72

• Must now qualify borrower based on higher

potential monthly payment

(11)

Reasonable Determination that the

Consumer has the Ability to Repay

• Consider monthly payment for mortgage-related

obligations

o Taxes and insurance, and, as applicable -

condo/association dues, mortgage insurance, flood insurance and any assessments related to the property (water/sewer hook-up fees for example)

• Consider monthly payment on any

simultaneous loan

o Junior closed-end mortgages and HELOCs

2014 ²¹

Creditors and Loan Programs Exempt

from Ability-to-Repay Requirements

• Exempt from the ATR requirements, under

certain conditions:

o Community Development Financial Institutions (CDFIs)

o Creditors designated by HUD as either a Community Housing Development Organization or

o Downpayment Assistance Provider of Secondary Financing

2014 ²²

(12)

Creditors and Loan Programs Exempt

from Ability-to-Repay Requirements

• 501(c)(3) nonprofit organizations that

o Extend credit no more than 200 times annually o Provide credit only to low-to-moderate income

consumers

o Follow their own written procedures to determine that consumers have a reasonable ability to repay

2014 ²³

Creditors and Loan Programs Exempt

from Ability-to-Repay Requirements

• Extensions of credit made pursuant to certain

loan programs are exempt from the ATR

requirements

o Housing finance agencies directly to consumers o Other creditors pursuant to a program administered

by a housing finance agency

o Extensions of credit made pursuant to an Emergency Economic Stabilization Act program, such as a State Hardest Hit Fund program

(13)

Question III

Qualified Mortgage

• A “Qualified Mortgage” (known as QM) is the same thing as “Ability to Repay” (ATR)

• True or False

2014 ²⁵

Answer Question III

Qualified Mortgage

• A “Qualified Mortgage” (known as QM) is the same thing as “Ability to Repay” (ATR)

• False

2014 ²⁶

(14)

What is a Qualified Mortgage?

12 C.F.R. § 1026.43 (e)

• A “Qualified Mortgage” is a loan based on

Ability to Repay that does not have any of the

following features:

o Negative amortization o Interest-only payments

o Loan terms longer than 30 years

o Points and fees exceeding 3 percent of the total loan amount

• Higher thresholds for loans under $100,000 o Balloon payment

• Exception allowed for small rural creditors

2014 ²⁷

Qualified Mortgages

• There are four types of QMs

o General QMs

o Temporary QMs

• Can be originated by any creditor, regardless of the creditor’s size

• Small Creditor

• Small Creditor Balloon-Payment QMs

• Can be originated only by Small Creditors

(15)

General Qualified Mortgage

• General QM also requires creditor to

o Underwrite ARM payment based on fully amortizing schedule using the maximum rate in first 5 years o Consider and verify the consumer’s income or assets,

current debt obligations, alimony and child-support obligations

o Determine that the consumer’s total monthly debt-to- income ratio is less than or equal to 43 percent

2014 ²⁹

Temporary Agency/GSE QM

• Temporary Agency/GSE QM

• More flexible underwriting requirements (i.e.,

can have DTI greater than 43%) so long as loan

does not have any of the following features:

o Negative amortization o Interest-only payments

o Loan terms longer than 30 years

o Points and fees exceeding 3 percent of the total loan amount

• Exception - higher thresholds for loans below

$100,000 o Balloon payment

2014 ³⁰

(16)

Temporary Agency/GSE QM

• Temporary Agency/GSE QM

o Must also satisfy the underwriting requirements of, and are therefore eligible to be purchased, guaranteed or insured by either

(1) the GSEs (Fannie Mae and Freddie Mac) while they operate under Federal conservatorship or receivership; or

(2) FHA, VA, USDA or Rural Housing Service

2014 ³¹

Temporary Agency/GSE QM

• Temporary Agency/GSE QM

• Temporary QM will phase out the earlier of date these federal agencies issue their own QM rules/date GSE conservatorship or receivership ends/or January 10, 2021

o GSEs issued Guidance in May 2013 o HUD issued QM Rule in December 2013

• Possible to have Temporary Agency/GSE QM with DTI greater than 43%

(17)

Why Originate a Qualified Mortgage?

• The Dodd-Frank Act provides that “qualified mortgages” are entitled to a presumption that the creditor satisfied the ability-to-repay requirements

• The final rule provides a safe harbor for a QM that is not “higher-priced” (prime rate loan)

• The final rule provides a rebuttable presumption for

“higher-priced” QM (subprime loan)

• See 12 C.F.R. § 1026.43(b)(4) for definition of “higher- priced” QM mortgage

2013 ³³

Why Originate a Qualified Mortgage?

• Safe harbor for a QM that is not “higher-priced”

• Creditor of a prime rate QM will be conclusively presumed to have made a good faith and reasonable determination of the consumer’s ability to repay

• “Safe harbor” means that the Consumer does not get opportunity to rebut this strong presumption if it is a QM loan

Consumer Advocacy Organizations strongly opposed safe harbor in comments on the proposed rule

2013 ³⁴

(18)

Why Originate a Qualified Mortgage?

• Safe harbor for a QM that is not “higher-priced”

• The consumer could attempt to show that the loan is not a QM (for example, under the General QM

definition that the DTI ratio was miscalculated and exceeded 43 percent) and therefore is not presumed to comply with the ATR requirements

• However, if the loan is indeed a QM and is not higher-priced, the consumer has no recourse under this regulation

2013 ³⁵

Why Originate a Qualified Mortgage?

• Rebuttable presumption for higher-priced QM

(Subprime QM)

• Consumers may establish a violation of the ATR Rules by showing that, at the time the loan was originated, the consumer’s income and debt obligations left insufficient residual income or assets to meet living expenses

• The analysis in a rebuttable presumption would have the court consider the consumer’s monthly payments on the loan, loan-related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring, material living expenses of which the creditor was aware at origination

(19)

Why Originate a Qualified Mortgage?

• CFPB noted that the longer the period of time that the consumer has demonstrated actual ability to repay the loan by making timely payments, without modification or accommodation, after consummation or, for an adjustable-rate mortgage, after recast, the less likely the consumer will be able to rebut the presumption based on insufficient residual income

2013 ³⁷

Enforcement and

Remedies

• Three-year statute of limitations on ATR claims brought as affirmative cases

• Remedy for failure to make a reasonable, good-faith determination of ATR - up to three years of finance charges and fees paid by consumer

• Consumers’ attorney’s fees

• After three years, consumers can bring ATR claims only as setoff/recoupment claims in a defense to foreclosure

2014 ³⁸

(20)

Loan Originator Compensation

• 12 C.F.R. § 1026.36 Prohibited acts or practices and certain requirements for credit secured by a dwelling

• TILA Regulation Z bans or limits certain incentives for loan originators to sell unsafe loans to consumers or loans with higher interest rates than for which the consumer qualifies

• Rules limit incentives to steer by prohibiting

compensation based on loan terms, other than principal amount of loan

2014 ³⁹

Loan Originator Compensation

• A broker or loan officer cannot directly get paid more if

o Consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees

o Consumer agrees to buy title insurance from the lender's affiliate or uses lender’s affiliated homeowner’s insurance company

• There are loopholes for compensation based on loan terms, such as through retirement and bonus plans

(21)

Part II

RESPA Mortgage Servicing Rules for Borrowers in Default

2014 Personal Finance Seminar for Professionals University of Maryland Extension

Major Topics in New Regulations Relating

to Borrowers in Default

• All of the Servicing Rules discussed in this

presentation apply to closed-end/principal residence mortgages

• Rules are effective January 10, 2014

• “Small Servicers” exempt from certain provisions

• Small Servicer definition not the same as Small Servicer for ATR/QM Rule

(22)

Small Servicer Definition

• “Small Servicer” is a servicer that:

o Services, together with any affiliates, 5,000 or fewer mortgage loans, for all of which the servicer (or an affiliate) is the creditor or assignee

o CFPB estimates that exemption covers substantially all of the community banks and credit unions that service mortgages that they own

o A Housing Finance Agency is also treated as a small servicer

Major Topics in New RESPA Mortgage

Servicing Regulations

• RESPA – Regulation X 12 C.F.R. Part 1024

o Borrower payments during transfer of servicing § 1024.33(c)

o Notice of Error § 1024.35

o Requests for Information § 1024.36 o Force-placed insurance § 1024.37

o General servicing policies, procedures, and requirements § 1024.38

o Early intervention with delinquent borrowers § 1024.39 o Continuity of contact with delinquent borrowers § 1024.40 o Loss Mitigation Procedures § 1024.41

(23)

12 C.F.R. § 1024.33

Payments During Transfer of Servicing

• Long standing RESPA rule that it was the responsibility of the transferor servicer to forward a borrower’s payment to the transferee servicer has been changed

• Transferor servicer now shall promptly either: o Transfer the payment to new servicer OR

o Return the payment to borrower and notify borrower of the proper recipient of the payment

12 CFR § 1024.41

Loss Mitigation Procedures

• Loss mitigation procedures apply to mortgage secured by borrower’s principal residence

o Small Servicer exemption for most of this section other than 120 day filing requirement and dual tracking

• Private right of action RESPA § 6(f)

o 12 U.S.C. 2605(f)

• Loss mitigation regulation does not impose duty on Servicer to provide any specific loss mitigation option

(24)

12 CFR § 1024.41

Loss Mitigation Procedures

• Prohibits servicer from initiating foreclosure until a borrower is more than 120 days delinquent

• As of January 10, 2014, rule pre-empts all state foreclosure laws that permit initiating foreclosure earlier than 120 days delinquent

• State laws can provide greater protections but not fewer than in the CFPB mortgage servicing rules

• Prohibits moving for foreclosure judgment or

conducting sale if foreclosure started but complete loss mitigation application received more than 37 days prior to foreclosure sale

12 CFR § 1024.41

Loss Mitigation Procedures

•If a borrower who is more than 120 days delinquent submits a complete application for loss mitigation before Servicer has filed foreclosure complaint, Servicer may not start the foreclosure process unless

(1) Servicer informs the borrower that the borrower is not eligible for any loss mitigation option (and any appeal has been exhausted)

(2) Borrower rejects all loss mitigation offers or

(3) Borrower fails to comply with the terms of a loss mitigation option such as a trial payment plan

(25)

12 CFR § 1024.41

Loss Mitigation Procedures

• Note terminology in § 1024.41

o Loss mitigation application

o Complete loss mitigation application

o Facially complete loss mitigation application

o Notify borrower – regulation refers to a written notice

12 CFR § 1024.41

Loss Mitigation Procedures

• Loss mitigation application received 45 or more days before a foreclosure sale

• Servicer must promptly review to determine if complete o Complete loss mitigation application contains all information

Servicer requires from borrower to evaluate for all available options

• Acknowledge receipt by notifying borrower in writing within 5 business days after receipt of application

• Notice must state whether application is complete or incomplete

(26)

12 CFR § 1024.41

Loss Mitigation Procedures

• Loss mitigation application received 45 or more days before a foreclosure sale

• If incomplete, servicer must identify additional documents and information needed to complete the application and include a “reasonable date” for deadline to submit

• Official Interpretations – “Generally, it would be impracticable for borrower to obtain and submit documents in less than 7 days.”

12 CFR § 1024.41

Loss Mitigation Procedures

• Facially complete application

• Borrower submits all missing documents and information requested in Servicer’s acknowledgement OR Servicer

previously acknowledged application was complete but later determines that additional documents or corrections are required

• Servicer must promptly request missing/corrected docs and treat application as complete for purposes of denial notices, borrower response times, prohibition on initiating foreclosure or proceeding to judgment or sale while under review

(27)

12 CFR § 1024.41

Loss Mitigation Procedures

• Requirement to complete the review within 30

calendar days refers to date loss mitigation

application was actually complete

• Servicer could be waiting for credit report,

information from condo association, etc.

12 CFR § 1024.41

Loss Mitigation Procedures

• Evaluation of loss mitigation applications

• Complete loss mitigation application received

more than 37 days before a foreclosure sale

o Servicer must evaluate borrower within 30 days of receipt for all loss mitigation options available including loan modification and non-home retention options

(28)

12 CFR § 1024.41

Loss Mitigation Procedures

• Complete application received more than 37 days before a foreclosure sale

• If loss mitigation is offered on complete application received 90 days or more before a scheduled foreclosure sale, must give borrower at least 14 days to accept or reject offer

• If loss mitigation is offered on complete application received less than 90 days but more than 37 days before foreclosure sale, must give borrower at least 7 days to accept or reject offer

12 CFR § 1024.41(h)

Loss Mitigation Procedures

• Borrower may appeal a denial of a loan modification if complete loss mitigation application was received 90 days or more before a scheduled foreclosure sale

• Borrower must be given no less than 14 days to appeal after Servicer informs borrower of denial of loan

modification

• Appeal must be reviewed by different personnel than those who evaluated application

(29)

12 CFR § 1024.41

Loss Mitigation Procedures

• Official Interpretations 1024.41 at ¶41(b)(3)1

o Foreclosure sale not scheduled. If no foreclosure sale has been scheduled as of the date that a complete loss mitigation application is received, the application is considered to have been received more than 90 days before any foreclosure sale.

o “Scheduled” is not defined in rule.

12 CFR § 1024.41(h)

Loss Mitigation Procedures

• Servicer must determine whether to offer loss mitigation within 30 days of borrower making an appeal

• If loss mitigation offered after appeal, Servicer must give borrower at least 14 days to accept or reject offer

• Servicer’s determination of appeal is not subject to any further appeal

(30)

12 CFR § 1024.41(i)

Loss Mitigation Procedures

• Duplicative Requests

o Servicer only required to comply with

requirements of this section for a single

complete loss mitigation application for a

borrower’s mortgage loan account

o Requirements refer to procedural rules

12 CFR § 1024.41(i)

Loss Mitigation Procedures

• Duplicative Requests

o Must review if borrower has change in

circumstances if subsequent review is

required by investor or insurer

o Servicer’s receipt of new complete loss

mitigation application after January 10,

2014 triggers obligation to review

borrower pursuant to new rules

(31)

12 CFR § 1024.41(j)

Loss Mitigation Procedures

• Small Servicer subject to prohibition on initiating foreclosure prior to 120 days delinquency

AND

• Small Servicer shall not file foreclosure and shall not move for foreclosure judgment, or conduct foreclosure sale, if borrower is performing pursuant to the terms of an agreement on a loss mitigation option

RESPA Remedies

• Failure to Comply with RESPA Servicing Rules

• Private Right of Action

o Except for § 1024.38 and § 1024.40 - General Servicing Policies and Continuity of Contact

o Remedies - Actual Damages, Costs and Attorney’s Fees

• Includes Damages for Emotional Distress

o Statutory Damages: Up to $2,000 per violation if “pattern or practice of noncompliance”

o Capped in class actions at $1 million or 1% of Servicer’s net worth, whichever is less

• Must file complaint within three years of violation

(32)