EXPLOSION OF NEW MORTGAGE REGULATION
ECOA Appraisal Rule; HOEPA Regulations;
Appraisals for High-Priced Mortgage Rule;
Escrow Rule
Mortgage Regulation Teleseminar Series
March 7, 2013
FINANCIAL SERVICES REGULATORY GROUP Leonard A. Bernstein · lbernstein@reedsmith.com
Robert M. Jaworski · rjaworski@reedsmith.com Travis P. Nelson · tnelson@reedsmith.com
HOEPA
Regulations Escrow Rule ECOA Appraisal
Rule
TILA HPML
Appraisal Rule
TILA/RESPA
Counseling
Rules
CFPB
Examinations
Investigations and
What We Will Be Discussing
• “Any creditor who fails to comply” is subject to:
• Actual damages.
• Statutory damages (individual actions, $400-$4,000; class action, up to the lesser of $1 million or 1% of creditor’s net worth).
• Attorney’s fees and court costs.
• 60-day “cure” provision; bona fide error defense.
• 1-year statute of limitations.
• Limits on assignee liability.
• Enhanced HOEPA damages: Sum of all finance charges and fees paid by the consumer, unless violation is immaterial.
Penalties – Civil Actions
TILA Sections 130, 131
• Actual damages.
• Punitive damages.
• Individual action: Capped at $10,000.
• Class action: Lesser of $500,000 or 1% of creditor’s net worth.
• Injunctive relief.
Penalties – Civil Actions
ECOA
• Who has jurisdiction?
• Prudential bank regulators: Compliance with TILA, RESPA, and ECOA by depository institutions with $10 billion or less in assets.
• CFPB: Consumer mortgage lending activities performed by depository institutions with over $10 billion in assets, and non-bank covered entities, i.e., non-bank
mortgage lenders.
• Agencies can undertake lengthy investigations.
• Role of state attorneys general.
• Agencies must refer pattern or practice of ECOA violations to Justice Department.
• Available relief.
• Permanent and temporary cease and desist orders.
• Agencies can order a variety of remedial actions.
• Fines.
• Prohibition from working in the banking industry (prudential regulators).
Penalties – Administrative Actions
• Effective Date: January 10, 2014.
• New name: “High Cost Mortgages” (“HCMs”) - no longer
“HOEPA loans” or “Section 32” loans
• Broader Scope: Loans secured by consumer’s principal dwelling, including purchase money and open-end loans
• Before Dodd-Frank: Only applied to refinancings and closed-end non-purchase money mortgages
• Exemptions: Reverse mortgage and construction loans
HOEPA Regulations
“High-cost mortgage”: Expanded Coverage (§1026.32(a)/(b))
• APR Trigger (Lowered): Loan is HCM if APR > “average prime offer rate” (“APOR”) (new index) as of date interest rate is set by:
• 6.5 percentage points for first-lien loans (new - was 8)
• 8.5 percentage points for first-lien loans if the dwelling is
personal property and the loan amount is $50,000 or less (new trigger)
• 8.5 percentage points for subordinate-lien loans (new – was 10)
• Note: APR must be based on: (1) for fixed-rate loans, the fixed rate; (2) for ARMs, greater of
index value on date rate set + maximum margin, or introductory rate; (3) for step-rate loans,
maximum rate possible (last two are new)
HOEPA Regulations
“High-cost mortgage”: Expanded Coverage (Continued)
• Points and Fees Trigger (Lowered): Loan is HCM if total
“points and fees” >
• 5% of “total loan amount” for loans ≥ $20,000 (new – was 8%), or
• Lesser of 8% of “total loan amount” or $1,000 for loans <
$20,000 (replaces flat fee trigger)
• “Total loan amount” means:
• For closed-end loans: Amount financed minus certain financed points and fees
• For open-end loans: Credit limit when
HOEPA Regulations
“High-cost mortgage”: Expanded Coverage (Continued)
• “Points and fees” (only if known at or before closing) =
• Finance charges (except interest, gov’t MI/PMI, 3rd-party charges NOT retained by creditor or affiliate, up to 1 or 2 “bona fide discount points”) LO Comp attributable to transaction (when interest rate set)
• Real estate-related (4(c)(7)) fees paid to affiliate
• Credit life premiums paid at or before closing
• Maximum prepayment penalty chargeable on loan
• Prepayment penalty paid on “own” loan being refinanced
HOEPA Regulations
“High-cost mortgage”: Expanded Coverage (Continued)
HOEPA Regulations
“High-cost mortgage”: Expanded Coverage (Continued)
• Prepayment Trigger (New): Loan is HCM if
• prepayment penalty is payable more than 36 months after consummation or account opening, or
• prepayment penalty can exceed 2% of amount prepaid
• Content (both open- and closed-end):
• “You are not required to complete this agreement….”
• APR
• If variable-rate –
• statement that interest rate and monthly payment may increase,
• amount of maximum monthly payment (based on maximum rate during loan term)
HOEPA Regulations
3-Day “Cooling Off” Notice (§1026.32(c))
• Additional Content (Closed-end):
• Amount of regular monthly payment and any balloon payment
• Amount borrowed
HOEPA Regulations
3-Day “Cooling Off” Notice (Continued)
• Additional Content (Open-end):
• Initial minimum payment for draw period and repayment period, balance outstanding at
beginning of repayment period, and amount of any balloon payment, assuming full credit limit borrowed at account
opening/consumer makes only minimum payments/APR does not change
• Statement of assumptions on which above payments are based, and that amounts shown are not consumer’s actual payments, which will depend on circumstances
• Credit limit
HOEPA Regulations
3-Day “Cooling Off” Notice (Continued)
• Timing:
• Creditor must furnish at least 3 business days prior to consummation or account opening
• If creditor changes terms making disclosure inaccurate, new disclosure + additional 3-day waiting period required
• New disclosure by phone OK under limited circumstances
• Waiting period may be waived for bona fide personal financial emergency
HOEPA Regulations
3-Day “Cooling Off” Notice (Continued)
• No balloon payments (except seasonal payment
adjustments, “bridge” loans, QMs, initial payment of
repayment period) – previously only balloon payments within first 5 years prohibited
• No prepayment penalties (previously permitted under certain circumstances)
HOEPA Regulations
New Limitations (§1026.32(d))
• Ability to Repay: Creditor may not make HCM
(except “bridge loans”) without regard to consumer’s ability to repay
• For closed-end – must comply with new Ability to Repay Rule (§1026.43)
• For open-end –
• must consider consumer’s income, employment, assets, and current obligations (including mortgage-related obligations required by terms of another loan secured by same property)
• must verify income or assets, and current obligations
• presumption of compliance under certain conditions
HOEPA Regulations
New Prohibitions (§1026.34(a))
• Pre-loan Counseling: Creditor may not make
HCM (but may process) absent written certification from HUD-approved counselor
• Consumer must receive initial GFE or open-end plan disclosure before counseling
• Counselor must not be affiliated with creditor
• Certification must state that (1) consumer counseled on
loan advisability based on terms in GFE, and (2) counselor verified consumer’s receipt of required HOEPA 3-day
“cooling off” notice or RESPA disclosures
HOEPA Regulations
New Prohibitions (§1026.34(a)) (Continued)
• Pre-loan Counseling (continued):
• Creditor may not “steer” consumers to a particular counselor
• Creditor may pay for counseling, but may not condition payment on extension of credit
• Creditor may finance (bona fide 3rd party) counselor fee paid by consumer
HOEPA Regulations
New Prohibitions (§1026.34(a)) (Continued)
• Creditor may not
• Recommend or encourage default on existing loan
• Charge modification or deferral fee
• Charge late fees > 4% of past due amount or sooner than 15 days past due date (or 30 days, if interest paid in
advance)
• Pyramid late fees
HOEPA Regulations
New Prohibitions (§1026.34(a)) (Continued)
• Creditor may not
• Charge for first 4 payoff quotes in calendar year, but may charge fax or courier fee to deliver (subject to disclosure requirement)
• Quote must be provided within 5 business days after receipt of request – tighter than Servicing Rule
• Finance “points and fees”
• Credit insurance premiums or debt cancellation/suspension fees required to be included in “points and fees” not
considered “financed” when calculated and paid on a monthly basis
• Structure transaction to evade requirements of the rule
HOEPA Regulations
New Prohibitions (§1026.34(a)) (Continued)
• No liability for violations of HCM Rule if creditor, before commencement of legal action, AND:
• within 30 days of consummation or account opening, where the consumer is notified of or discovers the violation, or
• within 60 days of the creditor’s discovery of a bona fide
error/unintentional violation and the consumer is notified of the violation,
• makes appropriate restitution within reasonable time thereafter, and
• makes adjustments so that loan is (a) compliant with HCM Rule, or (b) no longer an HCM
HOEPA Regulations
New “Cure” Provisions (§1026.31(h))
• Effective Date: June 1, 2013
• Scope: All first-lien “higher-priced mortgage loans” (“HPMLs”). HPML = closed-end loans secured by principal dwelling with APR >
• APOR + 1.5 percentage points for 1st lien conforming
• APOR + 2.5 percentage points for 1st lien jumbo
• APOR + 3.5 percentage points for subordinate lien
• General HPML Escrow Rule:
• No closing without escrow account for taxes and insurance
• Escrow account must be maintained for 5 years (or longer,
Escrow Rule (§1026.35(b))
• Exemptions:
• Co-op loans
• Construction loans (permanent take-out financing not exempt)
• “Bridge loans” with terms ≤ 12 months
• Reverse mortgages
• Loans by creditors in “rural or underserved” counties, not
subject to forward purchase commitment from ineligible investor (see next slide)
• Partial Exemption: may only escrow for taxes on loans
secured by condos, PUDs, etc. (whose governing associations must maintain master insurance policies)
Escrow Rule
(Continued)• “Rural or underserved” exemption: To qualify, creditors must have
• made > 50% of their first-lien dwelling-secured loans
during preceding calendar year in “rural” or “underserved” counties
• together with affiliates, made ≤ 500 first-lien dwelling- secured loans during preceding calendar year
• total assets in preceding calendar year < $2 billion (adjusted for inflation), AND
• not maintained an escrow account on any dwelling-
secured loan that they service (with limited exceptions)
Escrow Rule
(Continued)• Cancellation of escrow account: Account may be canceled upon the EARLIER of ̶
• Termination of underlying debt obligation, or
• Receipt after 5 years of consumer request to cancel but only if:
• Unpaid principal balance < 80% of original value of property, and
• Consumer not delinquent or in default.
Escrow Rule
(Continued)• Effective Date: January 18, 2014
• Scope:
• First lien, dwelling-secured – includes HELOC’s
• Dodd Frank narrowed scope to “first lien”
• Business purpose loans within above scope covered
• Renewals – if a new appraisal developed, rule applies
• Loss mitigation – application for HAMP modification can be application for credit (Reg B guidance)
ECOA Appraisal Rule (§1002.14)
• Requirement to Provide Written Copy
• Change from prior rule – formerly, only upon request
• Must provide “appraisal or other written evaluation”; used or unused
• Includes hard copies and electronically-transmitted copies
ECOA Appraisal Rule
(Continued)• Timing: Must “deliver” to consumer EARLIER
of (a) “promptly upon completion”, or (b) 3 business days prior to consummation
• “Delivery” occurs EARLIER of (a) 3 business days after mailing, or (b) evidence of actual receipt. Don’t want receipt after closing!
• “Promptly upon completion” is when last version received; can include period for review/revision
• Deadline still applies if appraisal not yet “complete”
• Copy must be provided even if loan not consummated
ECOA Appraisal Rule
(Continued)• Waiver of Delivery Timing Requirement
• By waiving, consumer agrees to receive at or before consummation
• Waiver must be obtained at least 3 business days before consummation or account opening
• If parties decide not to proceed, creditor must provide copies no later than 30 days after determination not to close
• Waiver can be oral or written
• If waiver within 3 business days before closing, can only pertain to new version containing only clerical changes, and new
version must be given prior to consummation
ECOA Appraisal Rule
(Continued)• Disclosure Requirement
• Timing: Not later than 3rd business day after application
• Contents: Right to receive copy of all written appraisals:
• SAMPLE: “WE MAY ORDER AN APPRAISAL TO
DETERMINE THE PROPERTY’S VALUE AND CHARGE YOU FOR THIS APPRAISAL. WE WILL PROMPTLY GIVE YOU A COPY OF ANY APPRAISAL, EVEN IF YOUR LOAN DOES NOT CLOSE. YOU CAN PAY FOR AN ADDITIONAL APPRAISAL FOR YOUR OWN USE AT YOUR OWN COST.”
• Creditor may add (a) phone number for applicants to call to leave name and address, and (b) notice of cost applicant must pay
ECOA Appraisal Rule
(Continued)• Appraisal fees
• May not charge for copying (new prohibition)
• May charge appraisal fee; may not gross up to cover cost of copying
• May not charge appraisal fee where prohibited by law
• “Other Written Evaluation” (in addition to or in lieu of Appraisal)
• Includes staff prepared document; GSE report of value
• Includes an “automated valuation model” (AVM)
ECOA Appraisal Rule
(Continued)• Effective Date: January 18, 2014
• Scope: Closed end, principal dwelling secured
• HPMLs: APR exceeds “average prime offer rate” at date rate is set:
• By 1.5 or more percentage points for first lien conforming
• By 2.5 or more percentage points for first lien jumbo
• By 3.5 or more percentage points for subordinate lien
• Exemptions: Qualified mortgage, new manufactured
home, mobile home, finance initial construction, bridge loan 12 months or less, reverse mortgage
TILA HPML Appraisal Rule (§1026.35)
• Penalties.
• In addition to typical Section 130 penalties:
• Statutory damages of $2,000 for “willful” failure to obtain a required appraisal.
• No indication of whether class relief is possible.
• No enhanced HOEPA damages.
TILA HPML Appraisal Rule
(Continued)• General HPML Appraisal Requirement -
Creditor must obtain prior to consummation a written
appraisal by certified or licensed appraiser who conducts
“physical visit of the interior”
• “Safe Harbor” – creditor deemed in compliance if:
• Appraisal conforms to USPAP and FIRREA
• Verifies appraiser certified or licensed through Registry
• Verifies that Appendix N elements are addressed, AND
• No actual knowledge contrary to written appraisal
TILA HPML Appraisal Rule
(Continued)• HPML Home Acquisition Loans – Additional Requirements
• Must obtain two written appraisals if:
• Seller acquired property 90 or fewer days prior to consumer’s agreement and price exceeds seller’s acquisition price by more than 10%, OR
• Seller acquired property 91 to 180 days prior to consumer’s agreement and price exceeds seller’s acquisition price by 20%
• Must use two different appraisers
TILA HPML Appraisal Rule
(Continued)• HPML Home Acquisition Loans –
Additional Content – one of two appraisals must include analysis of:
• Difference between seller acquisition price and consumer acquisition price
• Changes in market conditions
• Any improvements made after seller acquired
TILA HPML Appraisal Rule
(Continued)• HPML Home Acquisition Loans - No
need for 2nd appraisal if property located in federal disaster area or “rural” county or if acquisition is from:
• Government agency
• Purchaser at foreclosure sale
• Non-profit that buys property for resale
• Person who acquired thru inheritance
• Relocation agency
• Service member who received change order
TILA HPML Appraisal Rule
(Continued)• HPML Appraisal Disclosure
• In writing, to consumer who applies for an HPML:
• “WE MAY ORDER AN APPRAISAL TO DETERMINE THE PROPERTY’S VALUE AND CHARGE YOU FOR THIS
APPRAISAL. WE WILL GIVE YOU A COPY OF ANY
APPRAISAL, EVEN IF YOUR LOAN DOES NOT CLOSE. YOU CAN PAY FOR AN ADDITIONAL APPRAISAL FOR YOUR OWN USE AT YOUR OWN COST”
• Mailed no later than 3rd business day after HPML application
• Compliance with same disclosure requirement in Reg B
TILA HPML Appraisal Rule
(Continued)• HPML: Delivery of Copies
• Creditor “shall provide” a copy of any written appraisal
• Timing: not later than 3 business days prior to closing; or
• If no closing, no later than 30 days after determination not to close
• Electronic form OK
• No charge for a copy
TILA HPML Appraisal Rule
(Continued)• Effective Date: January 10, 2014
• Scope:
• All dwelling-secured loans
• Only “first-time borrowers”
• Only loans which may result in negative amortization
• Not reverse or time share mortgages
• General rule: No closing (but processing OK) absent written certification from HUD-approved counselor
• Counseling must include information regarding the risks and consequences of negative amortization
• “Steering” to particular counselor prohibited
TILA Counseling Rule (§1026.36(k))
• Effective Date: January 10, 2014
• Scope: All RESPA-covered loans,
except reverse mortgages and time shares
• General Rule: Lender must give consumer list of homeownership
counseling organizations in his/her location within 3 business days after receipt of application
• Broker may give, but lender must ensure list provided
• List must be obtained from CFPB website, ≤ 30 days before delivery to consumer
• Unless otherwise prohibited, list may be combined with other Reg Z or Reg X disclosures
• No private right of action under RESPA for this provision
RESPA Counseling Rule (§1024.20)
• First-day letters.
• Frequent document request items.
• Evaluate and address customer complaints.
• Possible indicators of compliance problems.
• Have an examination plan in place before the CFPB arrives.
• Separate policy/procedure for handling examinations.
• Designate an “Examination Manager” or
“Examination Liaison.”
Tips on Surviving a CFPB Examination
RS
Surviving a CFPB Investigation/Enforcement Action:
What to do and not do when the gov’t comes calling
• Know the rules: Must be familiar with the examination policies and informal guidelines of the regulators.
• Involve counsel immediately: Comments in exit interview or
supervisory letter. Protection of privilege and document control.
• Review comparable
enforcement actions: What
remedies have the regulators sought in the past? Consider corrective action.
• Do not overreact: Sometimes more regulators/enforcement counsel are brought than are necessary – Shock and Awe!
• Know the players: Learn the relative authority and roles of the supervisory staff. Partner with local examiners to avoid escalation.
• The examiners do not just “go away” – remember their unique role.
• Call Reed Smith!!!
This is the last installment of a Four-Part Teleseminar
Series…
To access an audio recording and presentation slides from our previous teleseminars, please visit the series website:
http://www.reedsmith.com/Financial-Services- Regulatory-Group-Mortgage-Regulation-
Teleseminar-Series/
For regular updates on these topics and more, please visit out blog at:
http://www.FinancialRegulatoryReport.com/
Leonard A. Bernstein
• Founder and chair of the firm's Financial Services Regulatory Group
• Concentrates his practice in the representation of banks, thrifts, mortgage bankers and finance companies in providing
consumer credit compliance advice on federal, Pennsylvania and New Jersey laws and regulations
• The FSR Group addresses credit card, auto finance, deposit, residential mortgage and other retail finance products
• Nationally known for expertise with federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, and similar laws, and works regularly with federal and state financial services
regulators
• Defends class actions and individual claims filed against financial services providers
• Elected to the American College of Consumer Financial
lbernstein@reedsmith.com 215 851 8143
Philadelphia, PA 609 520 6005 Princeton, NJ
Robert M. Jaworski
• Member of the Financial Industry Group and the Financial Services Regulatory Group
• Focuses on consumer credit compliance and other regulatory issues of concern to banks, thrifts, mortgage bankers, secondary mortgage lenders, finance companies and industry-related trade associations
• A frequent speaker on compliance issues before state and national groups, Bob has authored numerous articles on the subject
• Formerly Chief Editor of Pratt’s Mortgage Compliance Letter; Co-Chair of the RESPA/Housing Finance Subcommittee of the ABA Consumer Financial Services Committee; Chair, New Jersey Bar Association Banking Law Section; and Member, Governing Committee of the Conference on Consumer Finance Law
rjaworski@reedsmith.com 609 520 6003
Princeton, NJ
Travis P. Nelson
• Member of the Financial Industry Group and the Financial Services Regulatory Group
• Former Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, Washington, D.C.
• Focuses his practice on financial services regulation, enforcement defense, internal investigations, and litigation matters
• Represents clients before federal law enforcement and regulatory agencies, including the OCC, the CFPB, and HUD, as well as various state authorities across the country
• Adjunct faculty teaching Regulation of Financial Institutions at Villanova University School of Law
• Co-Leader, Reed Smith Financial Institutions Enforcement & Investigations Task Force
• Editor-in-Chief of the Reed Smith Financial Services blog – www.financialregulatoryreport.com
• National President, Office of the Comptroller of the Currency Alumni Association
tnelson@reedsmith.com 609 524 2038 Princeton, NJ
212 549 0236 New York, NY