Massachusetts Bankers Association Consumer Mortgage ......15 HMDA / Regulation C ¾Changes to...

Massachusetts Bankers Association Consumer Mortgage Lending

Annual Review 2003

Stanley V. RagalevskyStephen E. MooreSean P. Mahoney

617.261.3100www.kl.com

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ECOA and Regulation BMandatory Compliance Date – April 15, 2004

Notice of Adverse Action is required unless substantially all of the bank’s customers for the loan product are affected by the bank’s actionPre-approvals constitute an application when the bank receives sufficient information to make a decision on the request for pre-approval for a loanGathering of information with respect to a customer’s race, national origin, etc. is now permitted for non-mortgage credit if the bank is using it to self-test its compliance

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Mandatory Compliance Date – April 15, 2004

ECOA and Regulation B

Effective January 1, 2004, when gathering information for a home mortgage/home equity loan, bank must use the term “ethnicity” when asking for the national origin or race of the applicantFNMA/FHLMC Uniform Residential Loan Application has been changed to conform to this requirementBanks must retain records with respect to pre-screened programs for twenty five months Any disclosure or information required to be provided in writing must be made in a clear and conspicuous manner and, with a few exceptions, in a form that the applicant may retain

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ECOA and Regulation B

Effective May, 2004Impact of same sex marriages on rules prohibiting discrimination based on marital status• Creditors must not take into account the fact that

applicants who have married may be of the same sex in Massachusetts

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HMDA / Regulation C

Regulation C was amended in 2002 to make a number of significant changes in reporting and data collection obligationsThe 2002 Regulation C Amendments were originally scheduled to take effect on January 1, 2003 but implementation was delayed until January 1, 2004

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HMDA / Regulation C

New January 1, 2004 reporting requirements should have been included in reports submitted to federal supervisory agency by March 1, 2004FFIEC has finally posted 2004 Preliminary Census Data which reflect 2002 Census information and new OMB census tracts

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HMDA / Regulation C

Covered LendersNonbank lender volume test• Nonbank lender (i.e., mortgage company) is now

subject to Regulation C reporting if their home mortgage originations exceeded 10% of their total loan originations or $25,000,000 in the prior year

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HMDA / Regulation C

New Data Reporting RequirementsRate Spread• HMDA lenders must report the spread between a

loan’s APR and the yield on U.S. Treasury securities with a comparable maturity if the spread exceeds

• 3 percentage points on first mortgages• 5 percentage points on subordinate mortgages

• Applies to originated mortgage loans• Does not apply to purchased loans or non-

mortgage loans

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New Data Reporting Requirements

HMDA / Regulation C

HOEPA Status• Home Ownership Equity Protection Act of 1994

(HOEPA) covers certain high cost mortgages whose APRs are more than 8 points over comparable Treasury Securities yields on a first mortgage and 10 points on a second, or points and fees exceed the greater of 8% of total loan amount or $499

• Lenders must now report whether a loan is subject to HOEPA

• Applies to both originated and purchased loans

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HMDA / Regulation C

Lien Status• Old rules required lender to identify whether a

loan was secured by a lien• New rules require lenders to identify on the loan

application register whether a loan is secured by a first lien or second lien

• Applies only to originated loans

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HMDA / Regulation C

Manufactured Home Status• Lenders must identify on the loan application

register whether a loan involves a manufactured home (i.e., choices are 1-4 family, manufactured housing or multi-family dwelling)

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HMDA / Regulation C

Pre-approval Requests as ApplicationsUnder pre-January 1, 2004 rules pre-approvals were not reportedNow pre-approvals may be subject to reportingDifference between “pre-approval” and “pre-qualification ”• Pre-qualification (no binding obligation)• Pre-approval (binding obligation to lend up to

specified amount made after credit underwriting)

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Pre-approval Requests as Applications

HMDA / Regulation C

Pre-approvals on home purchase loans are now reportableLenders now required to identify home purchase loans where a pre-approval request was involvedDenials of pre-approval requests must be reported like a denial of an applicationOptional reporting of pre-approval requests approved by a lender but not accepted by the applicant

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HMDA / Regulation CBorrower Information ChangesApplicant Information — Race and Ethnicity

Race and national origin categories simplified to conform to revised OMB GuidelinesNew “ethnicity” category addedHispanic or Latino“Hispanic” and “other” deleted from race categoriesPacific Islanders and Native Hawaiians differentiated from “Asians”Applicant can select more than one race

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HMDA / Regulation C

Changes to DefinitionsRefinancing• Refinancings of home purchase and home

improvement loans are reportable• Pre-January 1, 2004 refinancing was a loan that

satisfied and replaced an existing loan from the same borrower

• Effective January 1, 2004, the definition of what is a refinancing narrows by requiring that both the original and the new loans be secured by a dwelling

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Changes to Definitions

HMDA / Regulation C

Home Improvement Loan• Prior to January 1, 2004, a “home improvement

loan” for Regulation C purposes was a loan to improve a dwelling which was classified by the lender as a home improvement loan

• Effective January 1, 2004, a loan which is to improve a dwelling and is secured by a mortgage lien must be reported on the loan application register even if the lender does not classify it as a home improvement loan

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FNMA / FHLMC Changes

Effective January 1, 2004, FNMA and FHLMC amended the Uniform Residential Loan Application (Form 1003)

2004 changes reflect• Section 326 of USA PATRIOT Act Customer

Information Program Modifications• Date of birth, not age• Mailing address

• Various HMDA changes

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FNMA / FHLMC Changes

FHLMC / FNMA Loan Limits for 2004 increased to:

$333,700 – 1 Family$427,150 – 2 Family$516,300 – 3 Family$641,650 – 4 Family

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FCRA and the FACT Act of 2003Effective 12/31/03 FCRA was amended to preempt state laws regulating information sharing among affiliated companiesFCRA will prohibit the sharing of consumer information with affiliates for marketing purposes unless the consumer has been given notice and an opportunity to opt outLenders will be required to provide “Risk-Based Pricing Notices” to consumers who receive materially less favorable credit terms based on information in a consumer report

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FCRA and the FACT Act of 2003Banks will be required to disclose credit scores to residential mortgage loan applicantsNew policies and procedures will be imposed on banks that furnish information to consumer reporting agenciesOnce a bank has been notified that a debt was created through identity theft:

it will be restricted from selling or transferring such debtit is not permitted to report such information to third parties including consumer reporting agencies

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FCRA and the FACT Act of 2003

Banks will be required to furnish a notice to consumers whenever the bank reports negative information about the consumer to nationwide consumer reporting agenciesFCRA will prohibit banks from obtaining or using medical information for determining a consumer’s eligibility for credit

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FCRA and the FACT Act of 2003Most provisions will not become effective until regulations have been issued by the Federal Trade Commission and Federal Reserve BoardRecently the Agencies set the effective date for the preemption rules at December 31, 2003, March 31, 2004 for certain rules that do not require new policies and procedures and December 1, 2004 for all other rulesIt is expected, however, that some of the regulations will set a later effective date for certain requirements

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TILA and Regulation ZChanges to official commentary effective April 1, 2003 with compliance date of October 1, 2003

Fees for expediting a single payment on a credit account are not finance charges, nor “other charges”Fees for expediting delivery of a credit card are not finance charges nor “other charges”The issuance of more than one card when a credit card expires is permitted but conditions on issuance of more than one renewal credit card are imposed

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Changes to official commentary effective April 1, 2003 with compliance date of October 1, 2003

TILA and Regulation Z

Mortgage guaranty insurance payments must be set forth in the payment schedule for closed-end loansClarifying language relating to the applicable treasury security rate for determining whether a loan is a high cost loan subject to the provisions of HOEPA

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Servicemembers Civil Relief Act of 2003

Servicemembers Civil Relief Act of 2003 (“SCRA”)

Public Law 108 – 189 (50 USC App. 501-596)Revises Soldiers’ and Sailors’ Civil Relief Act of 1940 (“SSCRA”)Took effect December 19, 2003Generally broadens protections of SSCRA

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Persons Protected by SCRAServicemembers called to active duty Members of U.S. armed forces (Army, Navy, Air Force, Marines, Coast Guard, Public Health Service)Members of National Guard called to active service• For more than 30 consecutive days• To respond to certain national emergencies• Certain protections granted to “dependents” (i.e, spouses

and children) of servicemembers • Some protections available to persons secondarily liable on

servicemember obligations

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Period of ProtectionGenerally during and shortly after the period of military service

Waiver of ProtectionServicemember can waive any rights under SCRA• The waiver must be in writing and refer to the legal

instrument to which it applies Persons secondarily liable for a servicemember’s obligations can waiveMust be in writing and be separate from the obligations to which the waiver applies

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ProtectionsMaximum interest rate (50 USC App. 527)Capped at 6% per year on obligations incurred before period of military serviceExtends though period of military serviceApplied only to obligations incurred solely byservicemember or jointly with spouseInterest in excess of 6% must be forgivenand payments reduced by amount of forgiven interest

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Protections


Servicemember must provide lender with written notice and copy of orders to military service within 180 days after release from military service to get benefit of statuteCreditor can petition court to allow it to accrue interest at a rate in excess of 6% per year if the servicemember’s ability to pay interest in excess of 6% is not materially affected by his/her military service

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No Penalty for Exercising SCRA RightsLender cannot punish a servicemember for exercising his/her SCRA rights as a basis• To deny credit to him in the future• To issue adverse credit report in the future• To note he/she is a member of the National

Guard or reserves in his/her credit record

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Default JudgmentsDefault judgments for nonpayment of debts in civil actions against servicemembers who do not make an appearance are more difficult to obtainAffidavits as to military status requiredCourt must appoint attorney for a defendant who “appears” to be a servicememberNon-appearing defendant also has right to stay an action or to reopen any adverse judgment

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Stay of Pending ActionsA servicemember with notice of a civil proceeding can have it stayed until after his/her period of military service is over

Fines and Penalties under ContractsLate charges, default interest and other penalties for non-performance under contracts are prohibited during any period of time an action against a servicemember has been stayed

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Stay an Enforcement of JudgmentCourt can stay the execution of a judgment or an attachment against a servicemember if his/her ability to comply with the judgment is materially affected by his/her military service

EvictionsCourt order is required to evict a servicemember or his/her dependents during the period of military service if the premises are a primary residence with a rent of less than $2,400 per month

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Installment ContractsTerminating a contract for the sale or lease of personal property during a servicemember’s period of military service is generally prohibitedRepossession of auto loan collateral is prohibitedBenefit of protection extends to dependents if their ability to comply with an obligation is materially affected by servicemember's military serviceCourt can allow three disinterested parties to appraise the value of any collateral and order the creditors to pay any equity to servicemember or his/her dependents

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MortgagesCreditor cannot foreclose a mortgage of a servicemember during the period of military service or within 90 days thereafter without a court order or waiver agreementCriminal penalties for any creditor who knowingly violates this prohibition

Co-defendantsAllows creditors to pursue co-borrowers who are not servicemembersShould only be done with the approval of court

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Statute of LimitationsStatutes of Limitations against servicemembers are tolled during period of military service

Further Relief“Catch all” provision allows servicemember to apply to a court anytime during the period of military service or within 180 days thereafter for relief from any obligation or liability incurred before the period of military service

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Do Not Call Registry

New FTC regulations may not apply to banks, but identical FCC regulations do apply to banksRegulations being challenged in court by telemarketing industrySignificant exception for persons with whom the bank has an existing business relationship

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Federal Flood Insurance

Temporary reauthorization to March 31, 2004

Effects of sunset uncertainIncrease limit of liability under Coverage D to $30,000

Coverage for mitigation costs above normal cost of repairAmended 44 CFR Part 61Effective May 1, 2003

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Federal Flood Insurance

Change in premiums for Pre-FIRM buildings

Increase in ratesElimination of “Expense Constant”Amended 44 CFR Chapter 1 and Part 61.Effective May 1, 2003

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RESPA and Regulations

No changes in the last year to the Real Estate Settlement Procedures ActOne change to the RESPA Regulation

increase civil penalties for failure to provide an initial or annual escrow account statement from $55 to $65 for each violationmaximum amount against any one servicer in any twelve-month period increased from $110,000 to $120,000

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RESPA and Regulations

RESPA Reform 2002 HUD proposed changes to the RESPA regulationHUD indicated that it will continue to press forward on proposed changes which are• Disclosures with respect to mortgage brokers

fees and yield spread premiums• Certain types of guaranteed mortgage packages

would be allowed and exempt from the anti-kickback rules of RESPA

• Changes to good faith estimates to provide clearer disclosures and limitations on changes

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RESPA Litigation

Upcharges of FeesIssue is whether a lender can charge more for a service than the provider of the service chargesCases decided in 2003 in the 7th and 11th

Circuits hold that the lender can upcharge if • lender provides services and• the charge is reasonable based on the services

providedIf the lender provides no service, the fee would violate RESPA

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RESPA Litigation

Yield Spread PremiumsIssue is whether the payment of yield spread premiums violates the anti-kickback rules of RESPAIssue has not been resolved• 11th Circuit ruled last April that yield spread

premiums did not violate RESPA• Other cases are yet to be decided and the issue

not yet resolved

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Community Reinvestment Act

On February 6, 2004, the federal bank regulatory agencies proposed revisions to their CRA regulations

Proposal 1 — Regulatory Burden Relief• Amend the definition of “small institution”

• Increase Eligibility for Streamlined CRA Exam from banks with $250 million in assets to banks with $500 million in assets

• If adopted, 1,100 additional banks would qualify for the streamlined “small bank” CRA examination

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Community Reinvestment Act

Proposal 2 — Predatory Lending• Require examiners to consider whether a bank is

engaged in “predatory lending” when determining its CRA grade (discriminatory, illegal or abusive credit practices or making of loans that the borrower cannot be expected to pay)

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On February 6, 2004, the federal bank regulatory agencies proposed revisions to their CRA regulations

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Appraiser Independence GuidelinesIn general

October 27, 2003 — Bank supervisory agencies issued an “interagency guidance” on the independence of appraisal functions (FDIC FIL –84-2003)This “guidance” supplements the Interagency Appraisal and Evaluation Guidelines issued on October 27, 1994 (FDIC FIL-74-94)Guidance is intended to clarify what is required for an appraisal program to have the requisite independence

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Appraiser Independence Guidelines

Appraiser SelectionA bank cannot allow a borrower to select an appraiser (even from a bank approved appraiser list)A bank cannot use readdressed appraisals (i.e., appraisal done for the borrower or other party and “readdressed” to the bank)

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Appraisal Independence within the BankLoan officer may not • select or retain the appraiser – appraiser must be

hired by someone independent of the loan approval function

• perform in-house evaluations Completed appraisals must be reviewed by someone independent of the loan approval processLoan officers should review appraisals but there must be an independent review

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Small Bank RuleIn small banks, it is often impossible to separate the appraisal and loan approval processesWhen this happens, anyone involved with the appraisal of a loan should abstain from voting on that loan

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Effective Real Estate Appraisal and Evaluation Program

The Board is required to establish an effective real estate appraisal and evaluation program that contains• Appraiser selection and evaluation procedures• Procedures for appraiser independence• Criteria for appraisals• Timely receipt of appraisal• Internal controls

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New Standards for Notaries in MA

Executive Order 455 signed December 19, 2003Effective April 19, 2004 (originally February 19)Motivation

Fear of fraud by “Notario Publico”National security immigration concerns

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New Standards for Notaries in MAMajor Changes

Satisfactory evidence of identity requiredNotary journalAttorney present at all real estate closings

CriticismJournal error could invalidate mortgagesConflicting regulatory and statutory requirementsInspection of journals may lead to identity theft

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New Standards for Notaries in MA

Worst-Case ScenarioBank takes mortgage on propertyMortgage is notarized and filedSome time later (less than 10 years) debtor goes bankruptTrustee discovers improper recording of mortgage notarization in notary journalTrustee challenges validity of mortgage filing

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USA PATRIOT Act

Part 326 Customer Identification Program Regulations

Effective October 1, 2003Require financial institutions to have customer identification programCIP requirements apply to loan customersCIP Regulations require banks to slightly modify their data collection on loans

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Part 326 Customer Identification Program Regulations

USA PATRIOT Act

Must collect date of birth information, not ageMust collect a mailing address if different, from the present address PATRIOT Act changes have been picked up in the standard FHLMC / FNMA Form 1003 (Uniform Residential Loan Application)

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Predatory Lending/High Cost Loans

Fairbanks Capital Holding Corp. settlement with FTC and HUD

$40 million dollarsNew concept of “predatory servicing”• Failing to post payments on time• Charging inappropriate late fees• Inappropriately force-placing property insurance

on mortgaged property

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HOEPA updateApplicability trigger of total points and closing costs raised from $488 to $499 (or 8% of loan, if greater)Regulation C revised to clarify identification of Treasury Security to determine applicable rate for whether a loan is a HOEPA loan

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New OCC regulations on debt cancellation/suspension agreements

Disclosures requiredMust give consumer option of paying per month rather than single premium to be added to amount financedEither DCA allows consumer to terminate at will or bank must offer similar product that gives consumer this option

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The Preemption Debate

IntroductionThe Supremacy Clause of the U.S. Constitution makes federal law the supreme law of the land (U.S. Const. Art. VI, cl. 2)Federal law preempts or supersedes contrary state and local lawsIn deciding whether a state law is preempted by a federal law, the Courts generally follow what they believe to be the intent of Congress – this can be quite complicated

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The Dual Banking System and Preemption

Since the 1860’s the U.S. has had a dual banking system with national banks and federal savings and loan association chartered and regulated by the United States and local banks chartered and regulated by the statesThe financial services marketplace is becoming more nationalized every day

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National banks claim that they are regulated exclusively by federal law, not the laws of the various statesNational banks claim that state laws purporting to regulate their banking activities are preempted and therefore inapplicable to them

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State officials want to enforce state laws of all kinds, including laws designed to protect consumersOTS and OCC have been aggressive and are getting more so about preempting state laws which they say interfere with a federally chartered bank’s rights to operate interstate

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The states, their attorneys general and consumer groups claim that state laws of general application dealing with predatory lending, consumer protection and unfair and deceptive practices should apply to all banks operating within a state

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The Debate EruptsAs states became more aggressive in efforts to subject federally chartered banks to state predatory lending laws, OTS ruled in 2002 that predatory lending laws in Georgia, New Jersey and New York were preemptedOn January 7, 2004, OCC issued a new regulation which asserted its preemption powers over sate laws in the broadest possible terms

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The Debate Erupts


The OCC Preemption regulation allows a national bank to presume that certain categories of state laws which OCC has determined “obstruct, impair or condition” a national bank’s powers granted under federal law are preempted without seeking a prior determination to that effect from OCC

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The Debate Erupts


State officials claim that the OCC Preemption regulation is overreachingStates claim that OCC’s ability to preempt state laws only applied to state laws which significantly obstruct, impair or condition a national bank’s exercise of this powers granted under federal law

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The Debate Erupts


Citing the U.S. Supreme Court’s 1996 opinion in Barnett Bank v. Nelson, state officials assert that their right to enforce state predatory lending laws against national banks does not significantly interfere with their right to function as national banksStates argue there is no compelling reason why national banks should be exempt from having to comply with legitimate state laws –state law does not conflict with federal law

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The Debate Erupts


National banks counter by asserting that lending is a core banking activity for a national bank which only OCC has the right to regulate

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Where does the Preemption Debate Go?It is likely that the OCC will win the preemption debate with the states because the litigation process favors OCCThe only way the states can win is to convince Congress to step in

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Where does the Preemption Debate Go?


Preemption gives federally chartered banks advantages over state chartered banks because the federally chartered banks can ignore many state laws• Important for banks actively doing business in

multiple states• Easier for big players like WAMU to enter new

states — only one national set of consumer mortgage lending laws

• Less of an advantage for banks doing business in a single state

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NY Attorney General Spitzer has brought a test case of OCC preemption powers against a subsidiary of a national bank• Facts are egregious• Lender collected 30 years of payments on a 25

year loan but when consumer objected, lender started foreclosure proceedings

• Why can’t NY enforce its consumer protection laws against the lender?

• OCC’s primary goal is to protect banks not consumers

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OCC generally has no comparable regulations for or track record of protecting consumers from overreaching by national banksCongressional action possible (but not likely)• House Financial Services Committee has

expressed concern

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Possible SolutionsFederal: • Congressional cut back on OCC and OTS

preemption by requiring it to approve preemption of state consumer laws

State: • States can repeal state laws preempted by OCC

or OTS• States can enact “super parity” legislation that

provides either automatic or regulatory override of state laws that do not apply to federally chartered institutions

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Massachusetts Legislation — 2003

No major developmentsNuciforo Banking Recodification Bill (Senate 2045) pending• Rework G.L. c.167E• Loan Policy largely replaces loan powers

Quinn Bill not adopted

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Proposed Quinn Bill (H2732, 2003)

Would limit prepayment fees in the first 24 months of a mortgage loan and prohibit them after that timeWould require disclosures relating to prepayment feesWould limit points and loan fees to 5% of the principal amount of a mortgage loan

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Would prohibit loans made without a determination of the borrower’s ability to repay the loan if the borrower’s income is less than or equal to 120% of the median family income in the relevant metropolitan statistical area

Borrowers would be presumed to have ability to repay loan if the monthly payments would be less than 50% of the borrower’s monthly gross income

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Would prohibit financing credit life or credit disability insurance premiums with the proceeds of a mortgage loanWould prohibit default rates of interest on home mortgage loans

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