1. 4 Webinars, 4 Perspectives Implications of Dodd-Frank Act PART 1: ANTI-STEERING & LOAN OFFICER COMPENSATION PART 2: IMPACT TO HEDGING PART 3: IMPLICATIONS FOR DOCUMENT COMPLIANCE PART 4: IMPACT TO YOUR LOS December 21

2. Implications of Dodd-Frank Act Part 4: Impact to your Loan Origination Software What you should be asking – and telling – your LOS Vendor December 21, 2010 December 2, 2010

3. Ask Questions 3

4. 4 www.dmdinc.com Serving mortgage bankers since 1991 End-to-end solutions for mortgage origination activities Leading provider of mortgage banking software

5. 5 Mark Todd has over 18 years of mortgage banking experience, 8 of those years at the C-level of mid-sized mortgage lenders. Mark has a specialty for creating competitive advantage through technology, and has consulted various mid-sized lenders on building scalable operations that support growth. Much of his experience has specifically focused on the use of technology to assure loan quality and compliance standards. Among his duties as Product Marketing Manager for DMD, Mark gathers market information and provides analysis to the DMD product team. Mark graduated magna cum laude with a Bachelor of Business Administration from Abilene Christian University, in Abilene, Texas in 1992. Mark Todd DMD – Del Mar DataTrac Product Marketing Manager mtodd@dmdinc.com

6. 6

7. 7 The attorneys said I should say: Mark, well intentioned though he may be, is not a licensed attorney in this state (or any state), and nothing he says should be construed as legal advice. When making decisions impacting your compliance efforts, it’s always a good idea to seek the advice of legal counsel.

8. 8 Special thanks to Google

9. 9

10. 10

11. 11

12. 12 Jim’s focuses on federal and state regulatory compliance matters related to the financial services industry. He represents and advises mortgage companies, consumer finance companies, financial institutions and secondary market investors, and their settlement service provider vendors, on issues such as: JIM MILANO WBSK James M. Milano Weiner Brodsky Sidman Kider PC Washington, DC 202-628-2000 milano@wbsk.com State mortgage licensing and S.A.F.E. Act related compliance FHA lending programs, rules and guidelines Responding to federal and state regulatory audits and administrative enforcement actions State laws and regulations concerning loan disclosures, allowable fees, and prohibited practices Federal preemption of state lending laws Federal laws and regulations including, but not limited to TILA, RESPA, ECOA, FDCPA, HMDA, FCRA, GLBA Implementation of the Dodd-Frank Act

13. 13 Salvation or Devastation?

14. 14 Confused? Dodd-Frank Act? …or is it TILA / Reg Z? Some provisions already in place & others not yet in force… …what does & does not apply? The Barney Frank enigma

15. 15

16. 16 3 goals Dodd-Frank overview relative to mortgage origination Identify what you should be working on Help you prepare for the road ahead

17. 17 What is Dodd-Frank? Effects various segments of financial services industry; not just mortgage 2300+ pages No actionable compliance Basically a big “to-do” list

18. 18 What does Dodd-Frank do? Consolidates certain agencies and agency responsibilities Creates new agencies Sets timeframes for agencies to accomplish directives Grants agencies certain flexibilities in implementing provisions

19. 19

20. 20

21. 21 Skip to the good part… Title IX Title X Title XIV Risk retention for mortgage lenders There’s a new sheriff in town “Tweaks” to mortgage industry practices

22. 22

23. 23 Title IX: Risk Retention For Mortgage Lenders Establishes enforcement agency & provides for the regulation of credit ratings agencies Requires lenders who securitize loans to retain 5% capital risk Possible “sharing” of 5% risk retention between originators and securitizer

24. 24 Potential exemptions from risk retention Existence of mortgage insurance coverage Government-insured loans (FHA, VA, USDA) “Qualified” mortgages to be defined based on: - DTI ratio benchmarks; calculation standards - Documentation standards - Opportunity for payment shock - Loan attributes that contribute to mortgage risk

25. 25 Title X: Meet the new boss CFPB to be created by July 21, 2011 Rule Making Entity responsible for implementing mortgage-related provisions of Dodd-Frank Consolidates & streamlines responsibilities of various agencies Responsible for examination & enforcement for mortgage lending activity

26. 26 To protect consumers from abusive practices Truth in Lending Act (TILA) Home Ownership and Equity Protection Act (HOEPA) Truth in Savings Act Real Estate Settlement Procedures Act (RESPA) Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) Interstate Land Sales Full Disclosure Act Telemarketing and Consumer Fraud and Abuse Prevention Act Inspector General Act Privacy Act Alternative Mortgage Transaction Parity Act (AMTPA) Electronic Fund Transfer Act (EFTA) Equal Credit Opportunity Act (ECOA) Expedited Funds Availability Act Fair Credit Billing Act Fair Credit Reporting Act (FCRA) Fair Debt Collection Practices Act Federal Deposit Insurance Act (FDIA) Federal Financial Institutions Examination Council Act Federal Trade Commission Act Gramm-Leach Bliley Act (GLB) Omnibus Appropriations Act, 2009 Right to Financial Privacy Act Agencies to transfer over-lapping responsibilities: FRB FTC OCC OTS FDIC NCUA HUD

27. 27 Same as the old boss? Examination & enforcement exception for depository institutions with less than $10BB in assets Will continue to have same examination & enforcement regulator CFPB is, nonetheless, the new rule-maker, but enforced by their examiner for purposes of consolidated auditing

28. 28 Title IX & X: “Nothing to see here…”

29. 29 Title XIV, Subtitles A thru H

30. 30 Title XIV Subtitles Subtitle A – Loan Origination Standards Subtitle B – Minimum Mortgage Standards Subtitle C – High-cost mortgages Subtitle D – Office of Housing Counseling Subtitle E – Mortgage Servicing Subtitle F – Appraisal Activities Subtitle G – Mortgage Resolution & Modification Subtitle H – Misc. Provisions

31. 31 Title XIV Subtitles Subtitle A – Loan Origination Standards Subtitle B – Minimum Mortgage Standards Subtitle C – High-cost mortgages Subtitle D – Office of Housing Counseling Subtitle E – Mortgage Servicing Subtitle F – Appraisal Activities Subtitle G – Mortgage Resolution & Modification Subtitle H – Misc. Provisions

32. 32 Title XIV, Subtitle A Loan Origination Standards Requires loan officer licensing Elimination of loan officer “overage” compensation Prohibition against steering for higher lender-paid compensation Prohibition against broker comp paid by borrower AND others

33. 33 Title XIV, Subtitle B Minimum Mortgage Standards New TILA disclosure requirements; seeks to create consolidated RESPA /TILA disclosure Must establish borrowers ability to repay -Maximum DTI’s -DTI calculation standards -Determination of qualifying payments -Define acceptable documentation -“Safe harbor” provision PPP Restrictions: maximum PPP terms & loans ineligible for PPP (risky attributes to be defined…such as neg-am)

34. 34 Foreclosure defense Subtitle A “steering” infractions Subtitle B “ability to repay” infractions

35. 35 Title XIV, Subtitle C High-Cost Mortgages Amends HOEPA as follows: Expands coverage to include purchase mortgages Lowers APR trigger to 6.5% over APOR (8.5% for < $50k & subordinates liens) Lowers Points & Fees trigger to 5% (8% or $1000 for < $20,000) Expands definition of “points & fees” No Balloon or PPP features for high-cost loans

36. 36 Title XIV, Subtitle E Mortgage Servicing Mandatory impounds for higher-cost loans & loans above a certain LTV (TBD… 78%?) Disclosure of impound setup information 3 days prior to closing Impounded taxes are to be based off of improved tax rates (if new construction) Disclosure for non-escrowed loans

37. 37 Stay calm… CFPB to be created by 7/21/2011 Final Title XIV rules by 1/21/2013 Effective date by 1/21/2014

38. 38 Wake me up in 2014?

39. 39 I thought this was supposed to take a while? MDIA final rules implement TILA changes - 1/30/2011 Restrictions on Loan Steering & LO Compensation – 4/1/2011

40. 40 MDIA interim final rule for loans with variable payments Amends TILA Directive of MDIA Improves disclosures Model Format Model Clauses Effective January 30, 2011 What does “interim final” even mean?

41. 41 Payment Table “clause” Fixed Rate ARM Neg Am Interest Only

42. 42 Other TILA form model “clauses” Discounted initial rate Balloon loans “No Refinance Guarantee”

43. 43 What you should be asking about your LOS When does my LOS vendor intend to deliver the new TILA form for testing? Do my LOS capabilities & procedures give me high confidence of ARM data accuracy at disclosure?

44. 44 Restrictions on Steering and Loan Officer Compensation Effective 4/1/2001 Elimination of compensation based on overage No compensation from borrower AND another party No steering for higher compensation

45. 45 Loan Officer Compensation Big change for lenders with “wholesale pricing model” Lender indifferent to amount or discretion of LO mark-up New rules imply that buy-up/buy-down should directly impact borrower closing costs

46. 46 Glass is half-full?

47. 47 What you should be asking Can my LOS link loan pricing directly to Discount / Lender credit at closing? If not, have I told my vendor how I’d like that to function?

48. 48 Monitoring Broker Origination Charges Consistent origination charges at the broker level Broker’s standard charge rates not historically monitored Wholesalers to establish tracking methods Brokers to establish standard charges Must be in place 4/1/2011

49. 49 LOS to the rescue? Store charge at the broker level Pre-populate broker fees at the loan level % of loan amount with maximum & minimum Charges can change but not indiscriminately; retain historical record

50. 50 Will it take case law to know? Processing fee plus origination charge? Max/Min $ applies to origination only? Or sum with processing? Could a single broker/branch have geographical differences in pricing within their branch activity? What date determines charge? Broker app? Creditor App? Lock?

51. 51 What you should be asking Can my LOS help me control the consistency of my broker’s charges? If not, have I told them what I would like to see in such a feature?

52. 52 Retail Compliance Concerns Control of commission calculation compliance emerges as concern Common for production to have a hand in commission calcs Now a serious matter of compliance, and such managers might unwittingly place company in jeopardy Mortgage bankers will control the commission process more closely, but this increases back-shop costs Opportunity for LOS vendors to build commission calculation and workflow features

53. 53 What you should be asking Can my LOS help me control compliance relative to commissions without burdening my back shop efficiency?

54. 54 Broker charges paid by borrower AND others Broker must be entirely paid by borrower, or lender, but not both Consumers apparently unable to understand sharing of broker’s charges through direct payment and YSP Does limit options broker is able to present to borrower

55. 55 What you should be asking Can my LOS detect & prevent the simultaneous payment of broker charges paid by borrower and another party?

56. 56 I’ve been wrong before…

57. 57 Reasons to avoid lender-paid comp Broker may have received compensation POC unbeknownst to lender Later determined that improperly retained POC’s for other parties resulted in compensation paid to borrower Steering as a foreclosure defense

58. 58 That’s a big “if”… or is YSP dead? YSP changes to “broker compensation” Today “YSP” paid to broker is a factor of loan buy pricing Broker CAN be paid based on quality, volume, or other acceptable measure LOS’s may need a feature to drive broker comp NOT based on loan pricing

59. 59 What a wholesaler should be asking (a)Do we even want to offer direct compensation to brokers? (b)If so, can my LOS store & deliver that compensation outside the normal “YSP” model (c)If not, have I told my LOS what I need in such a feature?

60. 60 Just that once…

61. 61 Worth the risk? Add to foreclosure risks in this environment? May be a secondary marketing consideration if investors don’t approve? Safer to offer enhanced rate sheets for quality brokers and not pay comp directly to broker? Is there a justifying up-side for lender-paid broker compensation? I’ve been wrong before?

62. 62 Just that once…

63. 63 Anti-steering safe harbor For each type of transaction in which the borrower expresses an interest (fixed, arm, reverse mortgage), originator must present the following scenarios: Lowest total dollar amount for discount points and origination points or fees; and, Lowest interest rate without negative amortization, a prepayment penalty, a balloon payment in the first seven years of the loan term, shared equity or shared appreciation. For a reverse mortgage, a loan without a prepayment penalty, shared equity or shared appreciation. For a loan with an initial rate that is not fixed for at least five years: If the interest rate varies based on changes to an index, the originator shall use the fully-indexed rate that would be in effect at consummation without regard to any initial discount or premium. For a step-rate loan, the originator shall use the highest rate that would apply during the first five years.

64. 64 Safe harbor challenges Not all LOS’s can store & track multiple scenarios Not an easy task to automate among disparate wholesalers Significant time to properly comply Compliance would be documentation-intensive

65. 65 What you should be asking Does my company view the anti-steering harbor as worthy of pursuit? If so, can my LOS store & track disclosure of multiple scenarios?

66. 66 Goals Dodd-Frank overview relative to mortgage origination Identify what you should be working on Help you prepare for the road ahead

67. 67 The road ahead

68. 68 I see opportunities in your future!

69. 69 You want a checklist? Timing of provisions unknown Still awaiting proposed or final rules Flexibilities granted to CFPB lead to unknowns

70. 70 Checklist, anyone? Unhide the following 9 slides for a discussion of future rule-making that is likely to impact your LOS

71. 71 Checklist, anyone? Title IX Ability to identify & flag loans subject to risk retention, if applicable.

72. 72 Checklist, anyone? Title X HMDA data collection and reporting enhancements

73. 73 Checklist, anyone? Title XIV, Subtitle A – Licensing Track licensing of originators and branches; control originations accordingly Add NMLS ID of originator to various forms

74. 74 Checklist, anyone? Title XIV, Subtitle B – Consolidated Disclosures Combined GFE & TIL coming… eventually…

75. 75 Checklist, anyone? Title XIV, Subtitle B – Ability to Repay Assure compliance through native feature, rule, or validation based on DTI calculations, doc types, and automated selection of qualifying payments.

76. 76 Checklist, anyone? Title XIV, Subtitle B – Safe Harbor for “ability to repay” Your LOS, doc prep, and compliance vendors will need to incorporate the 3% fee restriction calc into your existing predatory analysis… if seeking “safe harbor”

77. 77 Checklist, anyone? Title XIV, Subtitle B – Restricted Loan Attributes LOS validations, rules, or feature functionality should restrict PPP’s based on the “higher-cost” threshold.

78. 78 Checklist, anyone? Title XIV, Subtitle C – HOEPA Revisions LOS, doc prep, and compliance vendors to adjust triggers, thresholds, and applicability of coverage.

79. 79 Checklist, anyone? Title XIV, Subtitle E – Required Impound Accounts LOS to recognize certain “higher cost” loans, and loans above a certain LTV, and require impounds. LOS and/or Doc Prep vendors to add PTC impound disclosure and new disclosure for non-escrowed loans.

80. 80 Collaborate with vendors and peers

81. 81 DMD User Group

82. 82 DMD User Group

83. Implications of Dodd-Frank Act Part 4: Impact to your Loan Origination Software What you should be asking – and telling – your LOS Vendor December 21, 2010 December 2, 2010

84. 4 Webinars, 4 Perspectives Implications of Dodd-Frank Act PART 1: ANTI-STEERING & LOAN OFFICER COMPENSATION PART 2: IMPACT TO HEDGING PART 3: IMPLICATIONS FOR DOCUMENT COMPLIANCE PART 4: IMPACT TO YOUR LOS December 21