2013 Financial Institutions Forum.

Full text

(1)

2013 Financial

Institutions Forum

(2)

by

Compliance Update

Session Two

Annette Evans, CPA, CRCM and Martha Gallardo, CPA

(3)

Agenda

• ECOA Valuations Rule

• Higher-Priced Mortgage Loans (HPML) Appraisal

Rule

• Loan Originator Rule

• Mortgage Servicing Rules

• Regulation E

• Things to Watch

(4)

ECOA Valuations Rule

• In 2010, the Dodd-Frank Act amended the Equal Credit Opportunity Act to provide guarantees that applicants receive certain information about their home value estimates.

• The Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under the Equal Credit Opportunity

(Regulation B) Rule

ECOA Valuations Rule

• Amends Regulation B (Equal Credit Opportunity Act – ECOA)

• Final rule issued 1/18/2013

• Effective date 1/18/2014

(5)

ECOA Valuations Rule – Copies of Appraisals

Main Requirement - 12 CFR 1002.14(a)(1)

“A creditor shall provide an applicant a copy of all appraisals and

other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to

consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier.”

(6)

ECOA Valuations Rule – Coverage

Coverage

― Closed-end and open-end loans secured by a first lien on a dwelling

― Including:

Loans for business or consumer purposes

Loss-mitigation transactions (e.g. loan modifications, short-sales), if they are covered by Regulation B

Loans secured by mobile or manufactured homes

Reverse mortgages

Time-share loans if they are covered under Regulation B

(7)

ECOA Valuations Rule – Compliance

To comply with the ECOA Valuations Rule, the creditor must:

Notify a consumer in writing, within 3 business days of receipt of the consumer’s application, of the right to receive a copy of all written appraisals developed in connection with the application

For applications that were not originally to be secured by a first lien on a dwelling, if it is later determined it will be secured by a first lien on a dwelling, the creditor has 3 business days after the change is

determined to have occurred

Deliver copies of appraisals “promptly upon completion”, or 3 business days prior to:

Consummation, for closed end loans; or

Account opening, for open-end loans, whichever is earlier

(8)

ECOA Valuations Rule – Compliance

(Continued)

To comply with the ECOA Valuations Rule, the creditor must:

Not charge the applicant for copies of any appraisal or written valuation provided

Can, however, charge a reasonable fee to reimburse the cost of the appraisal or other valuations unless otherwise prohibited

― Deliver copies of appraisals at, or prior to, consummation or

account opening, for applicants who waive the right to receive the copies at least 3 business days before consummation or account opening

(9)

ECOA Valuations Rule – “Business Day”

• No definition under this rule for “business day” for purposes of

timing of the consumer notice or providing copies

• For loans also covered by the HPML Appraisal Rule, Regulation Z

defines “business day” as when

― The creditor’s offices are open to the public for carrying on substantially all its business functions

• For other loans, CFPB guide recommends to use own reasonable definition

which may include counting Saturdays as for Regulation Z

(10)

ECOA Valuations Rule – Disclosure and Denials

• Disclosure notice

― Sample Notification Form C-9, Appendix C to Regulation B

• Withdrawn, denied or incomplete applications

Still have to provide applicant a copy of appraisal and other written valuation “promptly upon completion.” If applicant waived that deadline, 30 days after it is determined transaction will not close.

(11)

HPML Appraisal Rule

• In 2010, the Truth In Lending Act (TILA) was amended by the

Dodd-Frank Act to require rules for appraisals on principal

residences securing higher-priced mortgage loans.

• The Higher-Priced Mortgage Loans (HPML) Appraisal Rule

― Interagency: CFPB, FRB, FDIC, FHFA, NCUA, OCC

• Amends Regulation Z (Truth in Lending Act – TILA)

• Final rule issued 1/18/2013

• Effective date 1/18/2014

(12)

HPML Appraisal Rule – Written Appraisal

Main Requirement – 12 CFR 1026.35(c)(3)(i)

“A creditor shall not extend a higher-priced mortgage loan to a consumer without obtaining, prior to consummation, a written appraisal of the property to be mortgaged. The appraisal must be

performed by a certified or licensed appraiser who conducts a physical visit of the interior of the property that will secure the transaction.”

(13)

HPML Appraisal Rule – Coverage

Coverage

― Higher-priced mortgage loans not otherwise exempt under the rule

Higher-Priced Mortgage Loan Definition – 12 CFR 1026.35(a)(1)

First-lien or subordinate-lien closed-end loans secured by the

consumer’s principal dwelling, in which the annual percentage rate (APR) exceeds the Average Prime Offer Rate (APOR) at the time the APR is set:

By 1.5 or more percentage points, for a loan secured by a first lien that is not a jumbo loan

By 2.5 or more percentage points, for a loan secured by a first lien jumbo loan

By 3.5 or more percentage points, for a loan secured by a subordinate

(14)

Mortgage Origination Rules: Transaction Coverage and Exemptions1

Transaction Type Ability-to-Repay (Reg Z)²

HOEPA (Reg Z)

Pre-loan counseling list (Reg X, per HOEPA Rule)

Escrows (Reg Z)

Appraisals (Reg Z)

Valuations (Reg B)

Purchase mortgages, refinancings, home equity loans

Covered if secured by a dwelling

[§1026.43(a)]

Covered if secured by principal dwelling [§1026.32(a)]

Covered

[§1024.20(a)] Covered if secured by first lien on principal dwelling and exceed certain rate thresholds [§1026.35(b)]

Covered if non-QM and not otherwise exempt [§1026.35(a)- (c))]

Covered if secured by first lien on a dwelling [§1002.14(a)]

HELOCs Exempt

[§1026.43(a)(1)] Covered [§1026.32(a)] Covered [§1024.20(b)] Exempt [§1026.35(a)] Exempt [§1026.35(a)] Covered if secured by first lien on a dwelling [§1002.14(a)] Manufactured housing

Loans

Covered

[§1026.43(a)] Covered [§1026.32(a)] Covered [§1024.20(a)] Covered if secured by first lien on principal dwelling and exceed certain rate thresholds [§1026.35(b)]

Subject to limited exemptions

[§1026.35(c)(2)(ii) and (iii)]

Covered if secured by first lien on a dwelling [§1002.14(a)]

Construction Loans (Initial Construction)

Exempt

[§1026.43(a)(3)(ii)-(iii)] Exempt [§1026.32(b)(2)] Exempt to the extent not federally related mortgage loans [§1024.20(a)]

Exempt

[§1026.35(b)(2)(i)(B)] Exempt [§1026.35(c)(2)(iv)] Covered if secured by first lien on a dwelling [§1002.14(a)]

Loans Made by Small Creditors

Predominantly Serving Rural or Underserved Areas

QM balloon loans permitted if other criteria met2 [§1026.43(f)]

Exempt from balloon prohibition if other criteria met

[§1026.32(d)(1)(i)(C)]

Covered

[§1024.20(a)] Exempt from escrow requirement if other criteria met

[§1026.35(b)(2)(iii)-(v)]

Covered

[§1026.35(a)] Covered if secured by first lien on a dwelling [§1002.14(a)]

Bridge Loans (12 months or less)

Exempt

[§1026.43(a)(3)(ii)] Exempt from balloon prohibition [§1026.32 (d)(1)]

Exempt to the extent not federally related mortgage loans [§1024.20(a)]

Exempt

[§1026.35(b)(2)(i)(C)] Exempt [§1026.35(c)(2)(v)] Covered if secured by first lien on a dwelling [§1002.14(a)]

Timeshares Exempt

[§1026.43(a)(2)] Exempt to the extent not principal dwellings [§1026.32(a)]

Exempt

[§1024.20(c)(2)] Exempt to the extent not principal dwellings [§1026.35(a)]

Exempt to the extent not principal dwellings [§1026.35(a)]

Covered if secured by first lien on a dwelling [§1002.14(a)]

(15)

Mortgage Origination Rules: Transaction Coverage and Exemptions1

Published August 6, 2013

1 Note: This chart only contains information concerning general coverage and exemption of the above-referenced loan products for the Bureau’s 2013 Ability–to-Repay, HOEPA, Escrows, Appraisals, and Valuations Final Rules (also note that the cited sections of the regulations apply after the applicable effective dates). It does not contain information regarding the Loan Originator Compensation or Servicing Final Rules and does not discuss all exemptions and exclusions under the Title XIV Rules. This chart is intended only to act as a quick reference and not as a substitute for the rules. Always consult the regulation text and official commentary concerning coverage or exemption of the above or any other mortgage products for any of the above-referenced rules.

2 On June 12, 2013, the Bureau published a final rule amending the Ability-to-Repay Rule (78 FR 35430). Among other things, the final rule adopted §1026.43(e)(6), which provides a two-year transition period during which small creditors as defined by § 1026.43(e)(5) can originate balloon-payment qualified mortgages even if they do not operate predominantly in rural or underserved areas. The final rule also created exemptions from the Ability-to-Repay requirements for extensions of credit made by community-focused creditors with certain designations and by certain nonprofits, as well as for credit extended pursuant to a program administered by a housing finance agency or pursuant to an Emergency Economic Stability Act program.

(16)

HPML Appraisal Rule – Exemptions

Coverage Exemptions – 12 CFR 1026.35 (c)(2)

― Qualified mortgages, as defined in Regulation Z – 12 CFR 1026.43(e)

― Reverse mortgages

― Bridge loans (12 months or less and intended for acquiring a new principal dwelling)

― Loans for initial construction of a dwelling (not limited to loans of 12 months or less)

― Loans secured by manufactured homes

― Loans secured by boats, trailers, and mobile homes

(17)

HPML Appraisal Rule – Compliance

When the creditor originates a covered HPML, it must:

Disclose to consumers, within 3 business days of receipt of the consumers’ applications, their right to a free copy of any appraisal the creditor orders, and their right to hire their own appraiser at their own expense for their own use

Obtain a written appraisal performed by a certified or licensed appraiser in conformity with USPAP and FIRREA

Have the appraiser visit the interior or the property and provide a written report

Give consumers free copies of the appraisal reports obtained no later than 3 business days before consummation

Additional requirements when it is a flip

(18)

HPML Appraisal Rule – Safe Harbor

Safe Harbor - 12 CFR 1026.35(c)(3)(ii)

― Rule includes “safe harbor” protection

― The rule is considered satisfied when the creditor:

Orders the appraiser to perform the appraisal in conformity with USPAP and FIRREA (and any implementing regulations)

Verifies through the National Register that the appraiser was a

certified or licensed appraiser in the property state as of the date the appraisal is signed

Confirms that nine elements are addressed in written appraisal (Appendix N to Part 1026)

Has no actual knowledge contrary to facts or certifications contained in appraisal

(19)

HPML Appraisal Rule – Flips

Additional appraisal for flips – 12 CFR 1026.35(c)(4)(ii)-(iv)

― Additional appraisal required when HPML is used to buy a property that is being resold within 90-180 days of its acquisition by the

seller, if:

The price on the consumer’s purchase agreement exceeds the seller’s acquisition price by more than 10 percent, if the seller acquired

property in the past 90 days; or

The price on the consumer’s purchase agreement exceeds the seller’s acquisition price by more than 20 percent, if the seller acquired

property in the past 91 to 180 days;

― Must be from different certified or licensed appraiser

― Both appraisals must meet requirements

(20)

HPML Appraisal Rule – Flips

(Continued)

― No charge for additional appraisal

― Additional appraisal must analyze

 Difference in original sales price and the subsequent sales price

 Changes in market conditions

 Property improvements the seller made

― Cannot use appraisal from the seller’s acquisition to satisfy

requirement

― Certain exemptions apply

(21)

HPML Appraisal Rule – Overlap with Reg B

• For first lien HPMLs that are covered by the HPML Appraisal

Rule, the disclosure requirements overlap with the ECOA

Valuations Rule

― The disclosure under the ECOA Valuations Rule satisfy the HPML Appraisal Rule requirements

― Different deadline structure

Comply with the earlier deadline

(22)

Regulation Z – Loan Originator Rule Coverage

• Coverage

― Compensation limitations and recordkeeping requirements

― Qualifications

― Identification information on documents

― Policies and procedures

― Contract restrictions

― Financing of single-premium credit insurance

• Effective January 10, 2014

• 12 CFR 1026.36(h) effective June 1, 2013

(23)

Loan Originator

• Definition is broader than one under S.A.F.E. Act

• Refer to Commentary for 12 CFR 1026.36(a) for explanation of

origination activities

(24)

Compensation Limitations

• Compensation includes salaries, commissions, bonuses, and

awards of merchandise, services, trips, and similar prizes

• Designed to protect consumers by reducing incentives to steer

consumers

(25)

Compensation Limitations

(Continued)

• Prohibits compensation based on transaction terms

― Term of single transaction

― Terms of multiple transactions conducted by single loan originator

― Terms of multiple transactions conducted by multiple

originators, taken in the aggregate (profits-based compensation plans)

(26)

Compensation Limitations

(Continued)

• Prohibits compensation based on transaction terms

― Interest rate

― APR

― Collateral type

― Existence of prepayment penalty

― Origination points or fees

― Fees for creditor-required title insurance

(27)

Compensation Limitations

(Continued)

• Prohibited compensation examples

― Receiving 2% of loan amount if interest rate is > 6% and 1% if rate is 6% or less

― Receiving higher compensation based on whether note contains prepayment penalty

― Receiving higher compensation for closing 10 transactions per month with rates > 6%

― Additional compensation if consumer buys title insurance from originator’s bank or affiliate rather than from third party

(28)

Safe Compensation Methods

• Volume – dollar amount of credit extended or number of transactions originated

• Long-term performance of loans

• Hourly pay rate based on hours worked

• New customers vs. existing customers

• Advance fixed payment for every loan arranged

• Percentage of applications closed

• Quality of loan files (documentation accuracy and completeness)

(29)

Profit-Based Compensation Plans

• Profit-based compensation plans

Generally may not receive compensation based on profits from mortgage-related business

― Contributions to certain Qualified Plans allowed

Qualified profit sharing, 401(k), and ESOPs

Designated tax-advantaged plans (defined contribution and defined benefit plans)

See 12 CFR 1026.36(d)(1)(i) and (ii)

(30)

Compensation Recordkeeping Requirements

• Compensation paid to loan originators

 Nature and amount

Payee

Timing

• Compensation agreements that govern payments

 Agreement between creditor and mortgage broker

 Employment contracts between creditor and loan originator

• Maintain for 3 years

(31)

Qualification Rules for Loan Originators

• Creditors to ensure loan originators are licensed or registered,

as applicable, under the S.A.F.E. Act

• For loan originator employees not required to be licensed, rule

requires employees:

― Meet character, fitness, and criminal background standards similar to S.A.F.E. Act

― Receive training appropriate with employee’s origination activities

(32)

Information on Loan Documents

• Documents affected

― Credit application

― Note

― Security instrument

• Required information

Bank name and NMLSR ID

― Loan originator name and NMLSR ID

(33)

Policies and Procedures

• Designed to monitor compliance with provisions on

compensation, qualifications, identification, and steering

• Appropriate to nature, size, complexity, and scope of mortgage-

lending activities

(34)

Contract Restrictions

• Closed end consumer credit transactions secured by dwelling

and HELOCs secured by principal dwelling

• No arbitration clauses or other non-judicial procedures to

resolve disputes

• May not bar a consumer from bringing claim in court asserting

violation of federal law

• Effective as of June 1, 2013

(35)

Financing of Single-Premium Credit Insurance

• Closed end consumer credit transactions secured by dwelling

and HELOCs secured by principal dwelling

• May not finance single-premium credit insurance

• Does not apply to insurance paid on monthly basis

(36)

Implementation Considerations

• Develop written policies and procedures

• Review compensation practices for loan originators

• Develop compensation recordkeeping method

• Update documents to reflect NMLSR identification information

• Review contracts for prohibited language (should be completed

by now)

• Training

(37)

Regulations X and Z – Mortgage Servicing Rules

• Coverage

― Regulation X Rules

― Regulation Z Rules

― Small Servicer Exemption

― Interest Rate Adjustment Notices

― Prompt Payment Crediting and Payoff Statements

― Force-Placed Insurance

― Error Resolution and Information Requests

― Loss Mitigation Provisions

(38)

Regulation X Coverage

• Error resolution and information requests

• Force-placed insurance

• General servicing policies, procedures, and requirements

• Early intervention with delinquent customers

• Continuity of contract with delinquent customers

• Loss mitigation

(39)

Regulation Z Coverage

• Interest rate adjustment notices for ARMs

• Prompt crediting of mortgage payments

• Responding to requests for payoff amounts

• Periodic statements for mortgage loans

• Effective January 10, 2014

• Generally applies to closed end consumer mortgage loans secured

by dwelling

(40)

Small Servicer Exemption

• General

― Service 5,000 or fewer mortgage loans

― If own mortgage servicing rights for loan not originated or owned, do not qualify for exemption, even if service 5,000 or fewer loans overall

― Exemption determined each calendar year based on loans serviced as of January 1 for remainder of year

(41)

Small Servicer Exemption

• Exempt from following provisions:

― Periodic statements

― General servicing policies, procedures, and requirements

― Early intervention with delinquent customers

― Continuity of contract with delinquent customers

― Some loss mitigation provisions

(42)

Small Servicer Exemption

• Must follow provisions:

― ARM disclosures

― Prompt crediting of mortgage payments

― Responding to requests for payoff amounts

― Force-placed insurance

― Error resolution and information requests

― Some loss mitigation provisions

(43)

Interest Rate Adjustment Notices

• General

― Applies to notices for ARMs secured by principal dwelling

― New initial interest rate adjustment disclosure notice

― Eliminate annual notice but requires ongoing interest rate adjustment disclosure when rate adjustment causes payment change

― Modify timing of both notices

(44)

Interest Rate Adjustment Notices

• Overview of Forms

Item Initial Notice Ongoing Notice

Required First time rate adjusts When payment amount changes

Timing 210 to 240 days 60 to 120 days

Estimate Estimate allowed Exact information Formatting 1026.20(d)(3) 1026.20(c)(3)

Sample form H-4(D)(4) H-4(D)(2)

Model form H-4(D)(3) H-4(D)(1)

Delivery Separate document Segregated from other information

(45)

Prompt Payment Crediting and Payoff Statements

• Clarifies handling of partial payments

― Credit to account

― Return to customer

― Hold in suspense and apply when full payment received

• Payoff statement changes

― Applies to transactions secured by any dwelling (not just principal dwelling)

― Expands response deadline to 7 business days

― Applies only to written request

(46)

Force-Placed Insurance

• Limits use of force-placed insurance

• Applies to hazard insurance (not flood)

• Applies to federally related mortgage loans as defined under

RESPA

(47)

Force-Placed Insurance

(Continued)

• General Requirements

― Reasonable basis to believe customer failed to maintain insurance before charging for force-placed insurance

― Notice requirements met before charges allowed

― Cancel force-placed insurance within 15 days of receiving evidence that insurance in place and refund charges for periods of

overlapping coverage

(48)

Force-Placed Insurance

(Continued)

• Overview of Notices

First Notice Reminder Notice Renewal Notice Timing 45 days before fee

assessed 30 days after first notice and 15 days before fee assessed

Once annually prior to anniversary of force- placed insurance Content 1024.37(c)(2) 1024.37(d)(2) 1024.37(e)(2) Format 1024.37(c)(3) 1024.37(d)(3) 1024.37(e)(3)

Forms Appendix MS-3 (A) Appendix MS-3 (B) to (C) Appendix MS-3 (D)

(49)

Error Resolution and Information Requests

• General Requirements

― Applies to federally related mortgage loans as defined under RESPA

― Acknowledge request or error notice within 5 days

― Errors – correct and provide notice of correction within 30 to 45 days

― Information requests – Provide information or conduct reasonable search for requested information within 30 to 45 days

(50)

Error Resolution and Information Requests

(Continued)

• Examples of Errors

― Loan payment not appropriately applied to principal, interest, escrow, or other charges

― Failure to credit loan payment to account timely

― Failure to pay escrow amounts timely

― Fee or charge erroneously imposed (late payment fee)

― Several others listed under 12 CFR 1024.35(b)

(51)

Loss Mitigation Provisions

• Applies to federally related mortgage loans as defined under

RESPA that are secured by principal dwelling

• Only 2 provisions apply to small servicers

― Cannot make first notice or filing required to foreclose unless loan is > 120 days past due

― Cannot move for foreclosure judgment or order of sale if customer is performing in accordance with terms of loss mitigation

agreement

(52)

Implementation Considerations

• Determine if small servicer exemption applies

• Develop written policies and procedures

• Verify core system and/or loan platform systems produce

applicable disclosures and notices

• Training

(53)

Regulation E

• Coverage

― ATM Disclosures

― Remittance Transfer Rule

(54)

Regulation E – ATM Disclosures

• Amends regulation

― Deletes requirement that fee notice be posted “on or at” ATM

― Only have to provide the on-screen or paper disclosure

Includes amount of the fee to be charged

Provided before the consumer is committed to transaction

• Effective March 26, 2013

(55)

Regulation E – Wire Remittance Rules

• Coverage

Key Questions

― Remittance Transfer

― Remittance Transfer Provider

― Disclosure Obligations

― Cancellation, Refund, and Error Resolution Rights

• Effective October 28, 2013

(56)

Regulation E – Wire Remittance Rules

(Continued)

• Key Questions

― Do you offer consumers method to send money abroad?

― Are transfers you provide remittance transfers?

― Are you a remittance transfer provider?

• If answer to all are “yes”, then rules apply

(57)

Regulation E – Wire Remittance Rules

(Continued)

• Remittance Transfer

Consumer in U.S. who sends money electronically to consumers or businesses in foreign countries

• Examples

― Cash-to-cash transfers

― Cash-to-account transfers

― International wire transfers

― International ACH transfers

― Certain prepaid card transactions

(58)

Regulation E – Wire Remittance Rules

(Continued)

• Exception

Transfers of $15 or less

(59)

Regulation E – Wire Remittance Rules

(Continued)

• Remittance Transfer Provider

― Provides remittance transfers for a consumer in normal course of business, regardless of whether consumer holds account at

institution

― Exempt if 100 or fewer remittance transfers in calendar year

(60)

Regulation E – Wire Remittance Rules

(Continued)

• Disclosure Obligations

• Model disclosures available in Appendix A

Pre-Payment Disclosure Receipt

Prior to payment When payment made

Transfer amount Information from pre-payment disclosure Front-end fees and taxes Date of availability

Exchange rate Recipient contact information

Covered third party fees Error resolution/cancellation rights Total amount to be received Remittance transfer provider contact

information Disclaimer regarding non-covered

third party fees and foreign taxes State regulator and CFPB contact information

(61)

Regulation E – Wire Remittance Rules

(Continued)

• Cancellation, Refund, and Error Resolution Rights

― Sender can cancel transfer up to 30 minutes after payment made (oral or written)

― Refund to sender within 3 business days of request

(62)

Regulation E – Wire Remittance Rules

(Continued)

• Cancellation, Refund, and Error Resolution Rights

― Error Resolution Process

Sender reports within 180 days of disclosed date of availability of transfer

Provider investigates and makes determination within 90 days of notice

Provider reports results to sender within 3 business days after completing investigation

Provider corrects error within 1 business day

(63)

Regulation E – Wire Remittance Rules

(Continued)

• Implementation Considerations

Determine if exemption applies

― Develop written policies and procedures

― Verify system can produce applicable disclosures

― Training

(64)

Things to Watch

• Amendments/clarifications to mortgage loan regulations

• Integrated mortgage disclosures under RESPA

• Examinations for compliance with Servicemembers Civil Relief Act

(65)

Questions

(66)

Contact Information

Martha Gallardo Massing, CPA

Annette Evans, CPA, CRCM

Padgett, Stratemann & Co., L.L.P.

SAN ANTONIO

100 NE Loop 410, Suite 1100 San Antonio, Texas 78216-4704 210.828.6281

Martha.Gallardo@Padgett-CPA.com

Annette.Evans@Padgett-CPA.com

AUSTIN

811 Barton Springs, Suite 550 Austin, Texas 78704-1149 512.476.0717

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