2 Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations and the American Bankers Association, and articles in banking and compliance publications. Amy is the Director of Regulatory Compliance for the TCS BaNCS system at Tata Consultancy Services. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she has supported software products for financial institutions and engaged in lobbying efforts in Congress as well as with the FDIC, CFPB, and NCUA. She was previously the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In- Chief for the renowned “Big Orange Book” compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC. Amy Avitable, JD, CPA
4 What Can You Do? 1.Understand The New Rules 2.Identify Your Areas of Risk 3.Make Policy Decisions About Your Risk Tolerance 4.Mitigate Your Risk 5.Implement the New Regulatory Requirements
5 Understand the New Rules January 2013 Regulation Z and RESPA Final Rules CFPB Bulletin 2013-01 on Mortgage Servicing Servicemembers Civil Relief Act Revisions Biggert-Waters Flood Insurance Reform Act
6 New Rules: January 2013 Mortgage Reform 1.Homeownership Counseling Disclosure 2.Homeownership Counseling for Negative Am Loans 3.Ability to Repay and Qualified Mortgage Standards 4.Disclosure and Delivery Requirements for Copies of Appraisals and Valuations 5.Appraisals for Higher-Priced Mortgage Loans 6.Escrow Requirements 7.High-Cost Mortgage Requirements 8.Mortgage Servicing 9.Loan Originator Compensation Application Loan Processing Closing Post-Closing
7 Ability to Repay and Qualified Mortgage Standards Effective January 10, 2014
8 Legal Risks TILA Section 129C has special remedies under Dodd-Frank –Special statutory damages All finance charges and fees paid by the consumer Do not apply if the creditor can show that the violation was immaterial –Actual damages –Statutory damages in individual and class action lawsuit –Court costs and attorneys fees –Recoupment or setoff in foreclosure action If special statutory damages claimed, setoff limited to 3 years of finance charges and fees Statute of limitations for civil liability – Extended to 3 years
9 General Rule For closed end consumer loans that are secured by a dwelling, the creditor must make a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms
10 Ability to Repay Subject to Rule –Consumer loans secured by a dwelling (1-4), including real property attached to a dwelling Including Qualified Mortgages Not Subject to Rule –Loans not subject to Regulation Z –Change to existing loan that is not a refinancing (e.g., modification) –Home equity lines of credit –Mortgages secured by a timeshare –Reverse mortgages –12 month or shorter temporary or “bridge” loans –Refinancings of non-standard mortgages into standard mortgages
11 Is the Loan a Higher Priced Covered Transaction? If no, you are deemed compliant and such safe harbor cannot be rebutted. If yes, you receive a presumption of compliance but it can be rebutted. Is the Loan a Qualified Mortgage? If no, apply the Ability to Repay rule without a presumption of compliance. If yes, continue to next step. Does the Ability to Repay Rule Apply? If an exception is met, No. If an exception is not met, Yes. Continue to next step. Overview of Rule
12 Ability to Repay Must consider eight factors in determining if consumer has “reasonable ability to repay” 1.Current or reasonably expected income or assets 2.If income relied on, current employment status 3.Monthly payment on the covered transaction 4.Monthly payment on simultaneous loan that the lender knows or has reason to know will be made 5.Monthly payment for mortgage-related obligations 6.Current debt obligations, alimony and child support 7.Monthly debt to income ratio or residual income 8.Credit history Must also verify using reasonably reliable third party records
13 You May Be Reasonable and In Good Faith If: Customer was able to make timely payments without modification or accommodation for a significant period of time after consummation or recast Underwriting standards have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions Underwriting standards based on empirically derived, demonstrably and statistically sound models
14 You May Not Be Reasonable and In Good Faith If: Customer defaulted a short time after consummation or recast Underwriting standards have historically resulted in comparatively high levels of delinquency and default during adverse economic conditions Underwriting standards inconsistently applied Different underwriting standards used for similar loans without reasonable justification Creditor disregarded evidence that: –Underwriting standards are not effective at determining repayment ability –Consumer may have insufficient residual income to cover other recurring obligations and expenses –Consumer could only repay if subsequently refinanced the loan or sold the collateral
15 What is a Qualified Mortgage? Three possible scenarios: 1.Regular Qualified Mortgage 2.Qualified Mortgage during transition period 3.Qualified Mortgage with a balloon payment for creditors that operate in rural or underserved areas Protection for a Qualified Mortgage If not a higher priced covered transaction – Safe harbor of compliance If a higher priced covered transaction – Rebuttable presumption of compliance
16 Regular Qualified Mortgage Six Required Components 1.Regular periodic payments that are substantially equal 2.Term no longer than 30 years 3.Total points and fees don’t exceed specified limit 4.Specially calculated monthly payments for mortgage-related obligations are taken into account in underwriting 5.Income, assets, current debt obligations, alimony, and child support are verified under Appendix Q of Regulation Z 6.At closing, total monthly debt / total month income does not exceed 43%
17 Qualified Mortgage In Transition Period Four Required Components 1.Regular periodic payments that are substantially equal 2.Term no longer than 30 years 3.Total points and fees don’t exceed specified limit 4.Must be eligible for one of the following: To be purchased or guaranteed by Fannie or Freddie, or by any successor agency To be insured by HUD To be guaranteed by VA, USDA or Rural Housing Service First 3 requirements from QM definition PLUS one
18 Transition Period Agencies expected to issue their own QM definition –Once issued, those QM requirements supersede transition QM No matter what, will expire on January 10, 2021
19 Balloon Payments for Rural or Underserved A creditor can make a loan with a balloon payment if: –Creditor meets certain requirements and –Loan meets certain requirements Requirements for Creditor: –In prior calendar year, made more than 50% of first- lien covered loans on properties located in “rural” or “underserved” counties CFPB will publish a list annually –In prior year, creditor and affiliates originated 500 or fewer first-lien covered loans –As of end of prior year, had assets that do not exceed CFPB’s asset threshold $2B in 2013 All Must Be Met
20 Requirements for Balloon Loan 1.Regular, periodic, substantially equal payments 2.Loan term of 5-30 years 3.Fixed rate 4.Points and fees don’t exceed QM limit 5.DTI, residual income, and income asset and debt verification must meet certain requirements 6.Not subject to commitment to be acquired –Exception: Can be acquired by another creditor that meets the rural or underserved requirement 7.Creditor determines at or before closing that consumer can make all scheduled payments and mortgage-related obligations: –Consumer can make all scheduled payments + monthly mortgage- related obligations –Ignoring balloon payment –Can be covered by consumer’s current or reasonably expected income or assets (other than dwelling and underlying land) All must be met
21 Consumer’s Rebuttal of Presumption At the time of consummation, no ability to repay because of insufficient residual income Income - debt obligations - alimony - child support - monthly loan and mortgage-related obligation payments insufficient residual income or assets (other than the dwelling and underlying land) to meet living expenses Determination based on information available to the creditor –If the creditor did not know about an item, it will not be held responsible for it
22 High-Cost Mortgage Requirements Effective January 10, 2014
23 Definition of Section 32 High Cost Mortgages New Thresholds Open or closed-end Secured by principal dwelling and Threshold met: APR exceeds APOR by specified amount or Total points and fees exceed specified amount or Prepayment penalty: Can be charged more than 36 months after closing or Can exceed more than 2% of amount prepaid New Exceptions Reverse mortgage Loan to finance initial construction of dwelling Loans originated by Housing Finance Agency Agency is the creditor Loan originated under USDA’s Rural Development Section 502 Direct Loan Program HELOCs and home purchase loans may now be treated as high cost mortgages!
24 APR Test Will be a high cost mortgage if APR exceeds the APOR by more than: 1 st lien loans 6.5% 1 st lien loans where dwelling is personal property and loan amount is less than $50,000 Subordinate lien loans 8.5%
25 Points and Fees Test Will be a high cost mortgage if total points and fees exceed: 5% of total loan amount Loan amount = $20,000 or More Lesser of: 8% of total loan amount or $1,000 Loan amount < $20,000 *$20,000 and $1,000 will be adjusted annually
26 Requirements for High Cost Mortgages Many of the same rules and limitations as current HOEPA requirements, such as: – Not allowed to refinance into another high cost mortgage within 12 months – Notice to assignee Plus new requirements and prohibitions – Underwriting requirements for HELOCs – Disclosure required 3 days before closing – Mandatory homeownership counseling – Limits on late fees, balloon payments and demand clauses –Requirements for providing payoff statements
27 Prohibitions for High Cost Mortgages Prepayment penalties Recommending or encouraging default of a current mortgage to refinance all or a portion into a high cost mortgage Charging any fees to modify, renew, extend, or amend a high cost mortgage or defer a payment Financing points and fees
28 Mortgage Servicing Under RESPA Effective January 10, 2014
29 Overview of RESPA Revisions New requirements for all mortgage servicers: 1.Refunding escrows after payoff 2.Escrowing for hazard insurance 3.Force placement of hazard insurance 4.Error resolution 5.Handling information requests New requirements for certain mortgage servicers 1.General servicing policies and procedures 2.Early intervention for delinquent borrowers 3.Continuity of contact 4.Loss mitigation procedures Not Applicable to “Small Servicer” 5,000 or fewer mortgage loans and Servicer or affiliate was creditor
30 Handling Hazard Insurance Escrowing for hazard insurance –Cannot fail to make hazard insurance premium payment merely because of insufficient funds in escrow account Must advance funds to escrow account, make timely premium payments, and then seek repayment of advanced funds –May only force place hazard insurance that has been escrowed where: Borrower’s hazard insurance has been canceled or was not renewed for reasons other than nonpayment of premium charges or Property is vacant Obtaining, renewing or replacing force placed hazard insurance –Must provide 45 day notice, certain other notices and wait until expiration of 45 day period before you can charge the borrower
31 Handling Hazard Insurance Cancelling force placed insurance –Within 15 days after receiving evidence that borrower has had hazard insurance coverage in place that meets loan agreement requirements, must do all of the following: 1.Cancel force placed insurance purchased by servicer 2.Refund to borrower all force placed insurance premium charges and related fees paid by borrower for any period of overlapping insurance coverage 3.Remove from borrower’s account all force placed insurance charges and related fees assessed for overlapping period
32 Additional Servicing Requirements Certain servicers must also: –Develop extensive policies and procedures for servicing –Maintain information to produce servicing file –“Intervene early” with delinquent borrowers Live contact Required notice –Provide “continuity of contact” Assign personnel to delinquent borrower Personnel have list of responsibilities and must have easy access to information about borrower, loan, requests for loss mitigation, etc. –Maintain loss mitigation processes Requirements for receiving, reviewing, evaluating and making a determination on a request Appeals process
33 New Rules: CFPB Bulletin 2013-01 CFPB is focusing today on servicers with significant servicing transfers Concerns: –RESPA servicing transfer disclosures –Accuracy and integrity of information reported to credit bureaus under Fair Credit Reporting Act –Proper disclosures and communications with consumers under Fair Debt Collection Practices Act –Unfair, deceptive or abusive acts or practices Detailed and specific areas of focus –Roles and responsibilities of transferor and transferee servicer –How the servicers handled requests for loss mitigation Effective Now!
34 Written Plans for Servicing Transfers CFPB Bulletin 2013-1 is “advance notice” to servicers that the CFPB may request a written plan detailing servicer’s management of consumer risks –CFPB not required to “approve” transfers but CFPB will use plans to “inform further examination planning” Information generally expected to be requested: –Number of loans to be transferred –Total servicing volume (in unpaid principal balance) being transferred –Names about servicers’ servicing systems and info about compatibility –Detailed description of transaction and system testing –Description of processes for identifying and correcting errors –Customer-service plan for assisting with loss mitigation requests –Training plan Effective Now!
35 New Rules: Revisions to Servicemembers Civil Relief Act Veterans’ Benefits Act of 2010 –Provides private cause of action for servicemembers to enforce their rights –Expands civil penalties to cover all provisions of SCRA Consequential and punitive damages Civil penalties of $55,000 for the first violation and $110,000 for subsequent violations National Defense Authorization Act for Fiscal Year 2013 –“Talent Amendment” portion made technical amendments and revised the definition of “dependent” Effective Now!
36 More SCRA Revisions Honoring America’s Veterans and Caring for Camp Lejuene Families Act of 2012 –Extends period of relief from foreclosure, sale or seizure of property on loans secured by real or personal property owned by the servicemember From February 2, 2013 – December 31, 2014 - Extended for one year after period of military service Beginning on January 1, 2015 - Extended to 90 days after period of military service Revised SCRA Notice – 2/2/2013 Federal Reserve’s Consumer Compliance Outlook – 1 st Quarter 2013 –Various clarifications, including reiterating that SCRA is not limited to consumer loans Effective Now!
37 New Rules: Biggert Waters Flood Insurance Reform Act Biggert-Waters Act enacted on July 6, 2012 –Extends National Flood Insurance Program to September 30, 2017 –Increases penalties to $2,000 and removes limit on penalties –Makes additional changes to policies and pricing that may impact borrower premiums Guidance will be published by FEMA or CFPB to: –Increase maximum flood insurance coverage for residential structures with 5+ units to $500,000 –Require mandatory escrow for flood insurance Exception for certain financial institutions with less than $1 billion in assets –Provide borrowers with notices about availability of flood insurance, including private insurance
38 More Biggert-Waters Requirements When servicer that has force placed flood insurance is notified that the borrower has obtained an adequate policy, it must do all of the following: 1.Accept as confirmation of adequate coverage a declarations page with: 1.Existing flood insurance policy number 2.Identity and contact info for insurance company or agent 2.Cancel force placed policy within 30 days 3.Reimburse the borrower for force placed premiums paid while the borrower’s policy was also in effect On March 29, 2013, the agencies published the Interagency Statement on the Impact of Biggert-Waters Act and determined that these requirements became effective immediately upon enactment! Effective Now!
39 Identify Your Areas of Risk Regulation Z RESPA HMDA Flood Fair Lending UDAAP
40 Fair Lending Risk Contents of your Fair Lending Program –Policy and procedures –Fair lending risk assessment –Training –Board and management reporting Internal review of lending data to identify potential issues: –HMDA data –If you are subject to Community Reinvestment Act, compare lending patterns in CRA assessment area for other kinds of loans
41 Fair Lending Risk Carefully consider FDIC’s common red flags –Lack of clear pricing and underwriting guidance –Discretion in pricing and underwriting with no controls in place –Absence of fair lending training –Complaints –Insufficient documentation regarding lending decisions –Rate sheets without specific criteria for how they are used Don’t forget about third party providers –Consider performing a risk assessment of third party relationships http://www.fdic.gov/news/news/financial/2008/fil08044.html Mortgage brokers Auto and motorcycle financing through dealers Rent-a-BIN relationships (e.g., credit cards)
42 Other FDIC Best Practices Compliance review of all proposed products and services early in development before the product is offered to consumers “Second review” of credit decisions to ensure consistent application of policies and procedures –Careful monitoring of any exceptions or discretionary decisions Avoid discouraging applicants –Refrain from discriminatory comments or opinions about location of a home –Avoid requiring applicant’s social security number and/or pulling their credit report before providing basic loan product info –Avoid inconsistencies in referrals Avoid steering to particular products –If there are multiple options, advise consumer of options and advantages/disadvantages of each
43 UDAAP in Lending Complaint File –Loan file reviews will be weighted toward branches with more complaints –CFPB may even interview consumers to get their point of view –When reviewing complaint files: Include complaints lodged against subsidiaries, affiliates, and third parties regarding your products and services Pay particularly close attention to: Multiple complaints about the same issue Any complaints about misleading or false statements, or missing disclosure information
44 UDAAP in Lending Review loan ads carefully Look for RESPA Section 8 and fair lending violations Be particularly careful about ads with non-traditional mortgage products Review third parties Training and monitoring policies for employees and third parties, including monitoring outbound calls for compliance Regular evaluations of third party performance Review compensation arrangements internally and of third parties Carefully review compensation for cross-sales of associated products, such as credit life CFPB will “interview employees to assess the actual compensation practices”
45 Specific loan products to be reviewed: Hybrid ARMs (defined as having a fixed period prior to adjusting) Interest-only loans Payment option ARMs Simultaneous second liens Alt-A loans Subprime loans Reverse mortgages (including HECMs) HOEPA and higher-priced mortgage loans Loans with an introductory rate that is 200 basis points or more below the fully indexed rate 45 UDAAP in Lending
47 Policy Considerations Product Offerings –Are you going to make loans that are not Qualified Mortgages? –Are you going to make Qualified Mortgages that are Higher- Priced Covered Transactions and only receive a rebuttable presumption of compliance? –What will your investors require? –Do you plan to continue making mortgage loans with balloon payments? –Do you offer ancillary products, such as credit life insurance? Will you continue to offer them?
48 Policy Considerations Pricing and Features –Will you allow mortgages to be made that trigger the higher- priced mortgage loan or high cost mortgage requirements? –If you still have prepayment penalties on mortgage loans, will you continue to in 2014? –Will you retain prepayment penalties on home equity lines of credit? –Will you allow any mortgages to made with high risk characteristics such as interest-only payments or negative amortization? –Do you escrow for mortgage loans? Do you plan to continue? How will these potential changes affect your profit, strategy, and competitive position?
50 Implementation Steps Determine how you will track and manage implementation of changes –Inventory new requirements and affected policies, procedures, products, systems, third party relationships –Identify responsible persons and deadlines –Maintain ongoing record of progress for accountability and management reporting Prioritize your tasks –First steps should be rules that apply now, such as Servicemember Civil Relief Act revisions –Many risks, such as fair lending and UDAAP, can and should be a focus of your compliance efforts today
51 Don’t Wait to Get Started on the New Rules! New mortgage reform regulations apply as early June 1, 2013 Build in plenty of time at end of 2013 for staff training Keep a close eye on the CFPB –Regulation Z and RESPA disclosure rules expected to be published in summer of 2013 –Various proposals issued to assist small creditors and servicers