Presentation on theme: "The Impact on Housing Finance How Financial Regulatory Reform Legislation Will Impact Banks ABA Telephone Briefing/Webcast Series Wednesday, July 28, 2010."— Presentation transcript:
The Impact on Housing Finance How Financial Regulatory Reform Legislation Will Impact Banks ABA Telephone Briefing/Webcast Series Wednesday, July 28, 2010 2:00 – 4:00 p.m. ET
Speakers Co-moderators: Robert Davis, American Bankers Association Robert H. Ledig, Dechert LLP Panelists: Oliver I. Ireland, Morrison & Foerster LLP Laurence E. Platt, K&L Gates LLP Andrew L. Sandler, BuckleySandler LLP
Effective Date of Mortgage Reform and Anti- Predatory Lending Act – Title IV of Dodd-Frank Act Rule Making Authority Role of Bureau of Consumer Financial Protection versus Banking Agencies
Loan Origination Prohibition on Steering Incentives No mortgage originator shall receive from any person, and no person shall pay to a mortgage originator, directly or indirectly, compensation that varies based on the terms of the loan (other than the amount of the principal).
Loan Origination Restructuring Of Financing Origination Fee A mortgage originator may not receive from any person other than the consumer any origination fee or charge except bona fide third party charges not retained by the creditor, mortgage originator, or their affiliate. What does that mean?
Loan Origination Mortgage Originator Anti-Steering Prohibitions The Board[/Bureau] shall prescribe regulations to prohibit mortgage originators: –from steering any consumer to a residential mortgage loan that…has predatory characteristics or effects and from a qualified mortgage to a non-qualified mortgage; –from abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender, or age; and –from mischaracterizing the credit history of a consumer, the residential mortgage loans available to a consumer, or the appraised value of the property.
Loan Origination Ability To Repay In accordance with regulations prescribed by the Board/[Bureau], no creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance (including mortgage guarantee insurance), and assessments. Agencies may exempt streamlined refinancings (i.e., non-cash out refinancings) from this new income verification requirement subject to certain requirements.
Loan Origination Ability To Repay(continued) A creditor and any assignee may presume that the loan has met these new ability to repay requirements if the loan is a qualified mortgage: –The regular periodic payments for the loan may not: Result in an increase of the principal balance; or Except for certain balloon loans, allow the consumer to defer repayment of principal; –The terms of the loan do not result in a balloon payment, except under certain circumstances;
Loan Origination Ability To Repay(continued) –The income and financial resources relied upon to qualify the obligors on the loan are verified and documented; –In the case of a fixed rate loan, the underwriting process is based on a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments; –In the case of an adjustable rate loan, the underwriting is based on the maximum rate permitted under the loan during the first 5 years, and a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments;
Loan Origination Ability To Repay (continued) –The loan complies with any guidelines or regulations the Board establishes relating to debt-to-income ratios or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the borrowers income levels and such other factors the Board establishes; –The total points and fees payable in connection with the loan do not exceed 3 percent of the total loan amount (the Board is required to prescribe a points and fees threshold for smaller loans to meet the requirements of this presumption, considering the potential impact on rural areas and other areas where home values are lower); and –The loan term does not exceed 30 years, except as such term may be extended under certain circumstances, such as in high-cost areas.
Loan Origination Restrictions Against Negative Amortization No creditor may make a residential mortgage loan, other than a reverse mortgage, that provides or permits a payment plan that may, at any time over the term of the extension of credit, result in negative amortization unless, before such transaction is consummated, certain disclosures are provided.
Loan Origination Liability and Enforcement –Defense To Foreclosure When a creditor, assignee, or other holder of a residential mortgage loan or anyone acting on behalf of such creditor, assignee, or holder, initiates a judicial or nonjudicial foreclosure of the residential mortgage loan, or any other action to collect the debt in connection with such loan, a consumer may assert a violation by a creditor of the anti-steering compensation and ability to repay provisions as a matter of defense by recoupment or set-off without regard for the statutory time limit on a private action for damages. The amount of recoupment or set-off shall equal the amount to which the consumer would be entitled for damages for a valid claim brought in an original action against the creditor, plus costs.
Loan Origination Liability and Enforcement –Civil Actions Mortgagor can sue for enhanced damages (an amount equal to the sum of all finance charges and fees paid by the consumer) for the new restrictions on mortgage originator compensation and the requirements for determining a consumers ability to repay. (Enhanced damages presently are available under TILA only for violations of HOEPA with respect to high- cost loans and for certain violations in connection with higher-priced mortgage loans.) –Administrative Enforcement by the Bureau
Loan Origination Prohibition on Certain Prepayment Penalties –Prohibits prepayment penalties for non-qualified mortgages. –Limits prepayment penalties for qualified mortgages to an amount equal to 3 percent of the outstanding balance on the loan in the first year, 2 percent in the second year and 1 percent in the third year. –A creditor may not offer a consumer a residential mortgage loan product that has a prepayment penalty without offering a product without a prepayment penalty.
Loan Origination Prohibition Against Single Premium Credit Insurance –Prohibits financing of any credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract.
Loan Origination Prohibition Against Mandatory Arbitration Prohibits loan terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction.
Loan Origination Revision of High Cost Mortgage Loan Thresholds –Amends the definition of high cost loans under HOEPA in three ways: Includes purchase money loans. Total points and fees other than bona fide third party charges not retained by the mortgage originator, creditor, or an affiliate of the creditor or mortgage originator, exceed, in the case of a loan for $20,000 or more, 5 % of loan. Loan documents permit creditor to collect prepayment fees that exceed 2 % of amount prepaid.
Loan Origination Adverse Action Disclosure of Credit Scores If any person takes any adverse action based in whole or in part on any information contained in a consumer report, must provide to the consumer the credit score used in taking the action. If any person uses a consumer report in connection with an application for a loan on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person, based in whole or in part on a consumer report, must inform the consumer of the numerical credit score used in making the credit decision.
Loan Origination Copy of Appraisal At no cost to the applicant, each creditor shall furnish to an applicant a copy of any and all written appraisals and valuations developed in connection with the applicants application for a loan promptly upon completion, but in no case later than 3 days prior to the closing of the loan, whether the creditor grants or denies the applicants request for credit or the application is incomplete or withdrawn.
Loan Origination Home Mortgage Disclosure Act –Adds to HMDA a new data itemization element for age and requires itemization of the number and dollar amount of mortgage loans grouped according to measurements of the total points and fees, an APR spread, the term of any prepayment penalty, and other information as the Bureau may require.
Loan Origination Home Mortgage Disclosure Act (continued) –Requires the itemization of the number and dollar amount of mortgage loans and completed applications grouped according to measurements of property value, any introductory period, the ability to make nonamortizing payments, the loan term, the origination channel, the loan originators unique identifier, the property parcel number, credit score, and other information as the Bureau may require.
Loan Servicing Policy Regarding Acceptance Of Partial Payment A creditor shall disclose prior to settlement or, in the case of a person becoming a creditor with respect to an existing residential mortgage loan, at the time such person becomes a creditor: (1) the creditors policy regarding the acceptance of partial payments; and (2) if partial payments are accepted, how such payments will be applied to such mortgage and if such payments will be placed in escrow.
Loan Servicing Mandatory Escrow/Impound Accounts for First-Lien Closed End Loans –Obligates a creditor on a first lien residential mortgage loan to establish an escrow or impound account for the payment of taxes and hazard insurance, and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums with respect to the property or the loan terms.
Loan Servicing Mandatory Escrow/Impound Accounts for First-Lien Closed End Loans (continued) –Limited to when the escrow account is required by Federal or State law; a loan is made, guaranteed, or insured by a State or Federal governmental lending or insuring agency; the transaction is secured by a first mortgage or lien on the consumers principal dwelling having an original principal obligation amount that does not exceed Freddie Mac conforming loan limits and the APR will exceed the average prime offer rate by 1.5 or more percentage points; or exceeds the Freddie Mac conforming loan limit, and the APR will exceed the average prime offer rate by 2.5 or more percentage points; or so required pursuant to regulation.
Loan Servicing Mandatory Escrow/Impound Accounts for First-Lien Closed End Loans (continued) –The Board may exempt creditors that operate predominantly in rural or underserved areas. –Must remain for a minimum period of 5 years, unless PMI is no longer required; the borrower is delinquent; the borrower otherwise has not complied with the legal obligation, as established by rule; or the underlying mortgage establishing the account is terminated.
Loan Servicing Other – A Servicer Must: –Credit a payment on the date received when a delay in crediting would result in a charge or in the reporting of negative information to a consumer reporting agency. –Deliver an accurate payoff statement within a reasonable time, but in no case more than seven business days of a written request from the borrower or borrowers agent.
Loan Servicing A Servicer Must: –Return to the borrower any balance in an escrow account that is within the servicers control within 20 business days of payoff, or must credit to an escrow account for a new mortgage loan if the mortgage is with the same lender. –Not obtain force-placed insurance, unless there is a reasonable basis to believe the borrower has failed to comply with the loan contracts requirements to maintain property insurance, and the servicer complies with certain statutory requirements.
Loan Servicing A Servicer Must: –Not fail to take timely action to respond to a borrowers requests to correct errors relating to allocation of payments, final balances for purposes of paying off the loan, or avoiding foreclosure, or other standard servicers duties. –Acknowledge receipt of a QWR within 5 days of receipt.
Loan Servicing A Servicer Must: –Not charge fees for responding to valid QWRs (as defined in regulations that the Bureau shall prescribe). –Not fail to respond within 10 business days to a request from a borrower to provide the identity, address, and other relevant contact information about the owner or assignee of the loan.
Appraisals –Sunsets the HVCC when FRB issues interim final regulations on appraiser independence within 90 days. –Does not restrict lenders use of appraisals from a mortgage broker, loan originator, or other interested party or from an AMC.
Appraisals –Prohibits a person with an interest in the underlying transaction from compensating, coercing, extorting, colluding, instructing, inducing, bribing, or intimidating a person, appraisal management company, firm or other entity conducting or involved in an appraisal for the purpose of causing the appraised value to the property to be based on any factor other than the independent judgment of the appraiser.
Appraisals –Requires any mortgage lender, mortgage broker, mortgage banker, real estate broker, AMC, employee of an AMC, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe that an appraiser has failed to comply with the Uniform Standards of Professional Appraisal Practice (USPAP), is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct to report the matter to the applicable state appraisal boards.
Appraisals –Requires lenders and their agents to compensate fee appraisers (as opposed to staff appraisers) at a customary and reasonable rate for appraisal services in the market area of the property being appraised, without regard to AMC rates. –Effectively prohibits BPOs or AVMs for the origination of a higher-risk mortgage by requiring a licensed or certified appraiser to conduct an appraisal by visiting the interior of the mortgage property. –Amends FIRREA to provide that in conjunction with the purchase of a consumers principal dwelling, BPOs may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property.
Appraisals –Amends FIRREA to obligate the federal agencies, in consultation with the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation to promulgate regulations to implement the quality control standards for AVMs. Such standards must, at a minimum: (i) achieve a high level of confidence in the estimates produced by AVMs; (ii) protect against the manipulation of data; (iii) seek to avoid conflicts of interest; and (iv) require random sample testing and reviews of AVMs (but the sampling does not expressly have to be carried out by a certified or licensed appraiser).
Risk Retention –Mandates a rulemaking process to require that securitizers retain at least a five percent economic interest in a portion of the credit risk in each asset held in a securitization, subject to certain exclusions and exceptions. –Permits regulators to allocate retained risk between securitizers and originators that deliver into securitizations for particular categories of assets, as determined with reference to the credit risk of the assets, the characteristics of securitization transactions involving those assets (e.g., form and volume), and the potential impact of a risk retention requirement on the availability of credit to consumers and businesses.
Risk Retention –Generally prohibits securitizers and originators from hedging any retained risk directly or indirectly, subject to regulatory exemptions. –Excludes from risk-retention requirements single-tranche securitizations of pools consisting solely of qualified residential mortgages, which will be defined by the SEC, the Bank Regulators, HUD and FHFA, but which may be no broader than the definition of qualified mortgage under the Mortgage Reform Act.
Risk Retention –Provides that the definition of qualified residential mortgages in applicable regulations must take into account underwriting and product features that historical loan performance data indicate result in a lower risk of default and also requires regulators to restrict or prohibit in qualified residential mortgages any feature demonstrated to exhibit a higher risk of borrower default. –Exempts securitizations of assets issued or guaranteed by the United States, any state, or any agency of the foregoing (e.g., FHA-insured or VA-guaranteed). For purposes of these exemptions, neither Fannie Mae nor Freddie Mac is considered an agency of the United States, although conforming loans separately may be exempt as qualified residential mortgages.
Risk Retention –Regulators will have broad authority to grant any other exemptions for classes of institutions or assets from the risk retention requirements or the prohibitions on hedging retained risk, so long as those exemptions help ensure high underwriting standards and encourage appropriate risk management practices by securitizers and originators. –For securitizations in which risk retention is required, regulations must specify permissible forms of risk retention and the minimum duration of that risk retention.
Risk Retention –With respect to commercial mortgages, authorizes regulators to allow a securitizer of commercial mortgage loans to transfer the first loss position retained risk subject to certain conditions. More specifically, regulations promulgated under the Act would require any transferee of the first loss position in a commercial mortgage securitization to: (1) hold adequate financial resources; (2) provide due diligence on all individual assets in the pool prior to securitization; and (3) meet the same standards for risk retention as the securitizer. Additional requirements on commercial mortgage securitizations would include a determination by the SEC and the Bank Regulators that the underwriting standards and controls for the asset are adequate, and specifications for representations, warranties, and remedies for breach thereof.
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The Department of Justice on the March Fair Lending Enforcement top priority; More than 50 Fair Lending investigations commenced since January 2009. 41
Primary jurisdiction for consumer protection for all non-depositories and large banks ( > $10 Billion); Significant examination and enforcement powers and likely budget of $500 million. The BCFP – A New Sheriff
43 State Attorney General mortgage related actions proliferate; Justice outsourced: the use of contingency fee private plaintiffs firms by State Attorneys General. State Attorney Generals Take Aim
Fair Lending and Fair Servicing Key Focus Traditional Fair Lending focus of loan denial disparity rates and redlining returns; Pricing discretion under attack; Fair servicing as new focus: increased scrutiny of default servicing and foreclosure practices.
Focus On Unfair and Deceptive Sales and Collection Practices by BCFP and State Attorneys General Aggressive enforcement of FCRA, FDCPA, HPA, HMDA, RESPA, SAFE Act, TILA, Title XIV and state analogs ahead; Ex post facto enforcement of new rules becoming trend.
Dilution or Loss of Federal Preemption: How will this affect residential mortgage lending?
Overview of CFPA Preemption Conflict preemption –Consumer Financial Protection Bureau (Bureau) rules and regulations prescribed under the Consumer Financial Protection Act of 2010 (CFPA) State law is preempted only if it is inconsistent and only to the extent of the inconsistency State law is not inconsistent if it affords to consumers greater protection –Conflicts between enumerated consumer laws and State law unchanged Charter preemption –Codified preemption standard for conflicts between state consumer financial law and the powers of national banks or federal thrifts Significant procedural changes (e.g., majority-of-state resolutions, case-by-case determinations)
New Preemption Standard Threshold question: is the state law a state consumer financial law? –Does the law directly or indirectly discriminate against national banks, and –Does the law directly and specifically regulate the manner, content, or terms and conditions of any financial transaction... or any account... with respect to a consumer? Directly and specifically likely limits scope to laws that, by their express terms, regulate the manner, etc., of consumer financial transactions and accounts. –For example, state law predatory lending laws would likely directly and specifically regulate a financial transaction. –But, state licensing and registration laws would likely not directly and specifically regulate a financial transaction If the state law is not a state consumer financial law, preemption issues should be governed by existing federal preemption law and precedent
New Preemption Standard If the state law is a state consumer financial law, it is preempted only if: –Application of the state law has a discriminatory effect –The state law prevents or significantly interferes with national bank powers (Barnett Bank standard) –The state law is preempted by other federal law (i.e., other than the CFPA) Barnett Bank Standard –Colloquy between Senators Dodd and Carper: There should be no doubt that the legislation codifies the preemption standard stated by the United States Supreme Court in [the Barnett Bank] case –An example of a state law that would be preempted under the Barnett Bank standard is a state law that purports to prohibit a national bank from making mortgage loans
Case-by-Case Basis Initial preemption determinations under the Barnett Bank standard may made by a court or by the Comptroller on a case-by-case basis –Comptroller cannot prescribe across the board preemption, similar to the non-real estate lending (12 C.F.R. 7.4008(d)(1)) and deposit- taking preemption provisions (12 C.F.R. 7.4007(b)(1)) –Comptroller must consult with the Bureau if other States have laws with substantively equivalent terms –Comptroller must produce substantial evidence to support the specific finding of preemption on the record of the proceeding, which likely invokes Administrative Procedure Act (APA) restrictions, including limits on ex parte communications Comptroller must publish a periodic review of preempted State consumer financial law
Treatment of Operating Subsidiaries Three separate provisions of the CFPA eliminate Federal preemption protection for subsidiaries and affiliates –Rejects the Supreme Courts holding in Watters v. Wachovia Bank –Undercuts OCC operating subsidiaries preemption regulation (12 C.F.R. § 7.4006) Subjecting operating subsidiaries to state consumer financial laws may force national banks to reconsider their organizational structure –Merge operating subsidiary under the bank charter, thereby allowing the business of the operating subsidiary to be conducted in the national bank itself? –Obtain a national bank charter for the operating subsidiary? –Raises a number of issues (e.g., compliance, corporate, tax, personnel, etc.)
Treatment of Operating Subsidiaries (continued) However, national bank operating subsidiaries continue to enjoy exemptions from state law where a separate federal statute expressly preempts the state law For example, 12 U.S.C. § 1701j–3 preempts certain state laws that purport to restrict the exercise of due-on-sale clauses in mortgage documents