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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

(2)

HOEPA

Regulations Escrow Rule ECOA Appraisal

Rule

TILA HPML

Appraisal Rule

TILA/RESPA

Counseling

Rules

CFPB

Examinations

Investigations and

What We Will Be Discussing

(3)

“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

(4)

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

(5)

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

(6)

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))

(7)

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)

(8)

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)

(9)

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)

(10)

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

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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))

(12)

Additional Content (Closed-end):

Amount of regular monthly payment and any balloon payment

Amount borrowed

HOEPA Regulations

3-Day “Cooling Off” Notice (Continued)

(13)

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)

(14)

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)

(15)

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))

(16)

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))

(17)

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)

(18)

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)

(19)

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)

(20)

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)

(21)

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))

(22)

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))

(23)

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)

(24)

“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)

(25)

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)

(26)

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)

(27)

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)

(28)

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)

(29)

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)

(30)

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)

(31)

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)

(32)

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)

(33)

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)

(34)

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)

(35)

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)

(36)

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)

(37)

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)

(38)

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)

(39)

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)

(40)

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))

(41)

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)

(42)

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

(43)

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!!!

(44)

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/

(45)

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

(46)

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

(47)

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

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