EXPLOSION OF NEW MORTGAGE REGULATION

EXPLOSION OF NEW MORTGAGE REGULATIONECOA Appraisal Rule; HOEPA Regulations;Appraisals for High-Priced Mortgage Rule;

Escrow RuleMortgage Regulation Teleseminar Series

March 7, 2013FINANCIAL SERVICES REGULATORY GROUP

Leonard A. Bernstein · [email protected] M. Jaworski · [email protected]

Travis P. Nelson · [email protected]

HOEPA Regulations Escrow Rule ECOA Appraisal

Rule

TILA HPML Appraisal Rule

TILA/RESPA Counseling

Rules

CFPB Examinations

and Investigations

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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.

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Penalties – Civil ActionsTILA 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.

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Penalties – Civil ActionsECOA

• 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).5

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

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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)

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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 account opened

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• “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

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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)

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HOEPA Regulations3-Day “Cooling Off” Notice (§1026.32(c))

• Additional Content (Closed-end):• Amount of regular monthly payment and

any balloon payment

• Amount borrowed

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HOEPA Regulations3-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 limit13


• 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

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• 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)

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HOEPA RegulationsNew 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

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HOEPA RegulationsNew 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

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HOEPA RegulationsNew 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

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• 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

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• 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

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• 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

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HOEPA RegulationsNew “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, under certain conditions) (was 1 year)

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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)

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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)

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• 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.

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• 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)

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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

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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

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• 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

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• 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

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• 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)

• Includes a “broker price opinion” prepared by realtor 31



• 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

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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.

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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

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• 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

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• 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

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• 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

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• 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 satisfies the rule

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• 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

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• 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

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TILA Counseling Rule (§1026.36(k))


• 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

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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.”

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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!!!

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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/

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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 Services Attorneys

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[email protected]

215 851 8143Philadelphia, PA

609 520 6005Princeton, 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

• Developed and taught courses on federal and state laws and regulations affecting mortgage bankers, brokers, and servicers 46

[email protected]


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

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[email protected]


212 549 0236New York, NY

EXPLOSION OF NEW MORTGAGE REGULATION

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