Residential Mortgage Lending: Principles and Practices, 6e Chapter 11 Compliance

Objectives After completing this chapter, you should be able to: List the major rules and regulations impacting mortgage lending. Discuss the nine prohibited bases of ECOA and discuss discrimination in lending. Discuss the usage of adverse action. Understand the impact of recent federal regulations on lenders, consumers, and the industry. Explain how the Right to Rescind (Cancel) works. Understand how compliance regulations impact lender behavior and activity. Become familiar with the forms as demonstrated in the chapter.

Rules & Regulations Fair Housing Act (FHA). Equal Credit Opportunity Act (ECOA). Truth in Lending Act (TILA) Home Ownership and Equity Protection Act of 1994 (HOEPA) Home Equity Consumer Loan Protection Act Real Estate Settlement Procedures Act (RESPA) Mortgage Disclosure Improvement Act (MDIA) Flood Disaster Protection Act (FDPA) Homeowners Protection Act of 1998 (HPA) Fair Debt Collection Practices Act (FDCPA) Home Mortgage Disclosure Act (HMDA) Community Reinvestment Act (CRA) Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE) Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA)

ECOA “Naughty Nine” 1. Sex 2. Marital Status 3. Age 4. Race 5. Color 6. Religion 7. National Origin 8. Receipt of income from a public assistance program 9. Good faith exercise of any right the applicant has under the Consumer Credit Protection Act (or applicable state law).

FAIR CREDIT REPORTING ACT Regulates the activities of consumer reporting agencies and users of consumer credit reports, and is enforced by the Federal Trade Commission. Also describes how a lender must communicate with a consumer if an application is denied or adversely affected because of information on a credit report or from another source.

TRUTH IN LENDING ACT The basic purpose of this legislation is to provide consumers with an easily understandable means of comparing the credit offerings of various lenders. The desired result is that consumers will then shop for the most favorable credit terms.

Finance Charges Interest adjustments (odd days interest) Loan discounts Origination fee Mortgage insurance premiums Underwriting fee Fees for determining current tax lien status Fees for determining flood insurance requirements Borrower paid mortgage broker fees Any other service, transaction, activity or carrying charge

REAL ESTATE SETTLEMENT PROCEDURES ACT Ensures consumers are provided with full disclosure of the costs involved in the real estate settlement process.

HUD-1 Settlement Statement Itemizes all charges involved in the mortgage loan transaction. RESPA requires that the lender complete a HUD-1 form if a buyer and seller are involved, and allows the lender to use either a HUD-1 or a HUD-1A if only a mortgagor is involved (refinance). The mortgage lender (or other organization that will conduct the loan closing: closing attorney, title company, escrow agent) prepares the Settlement Statement.

Homeowners Protection Act (HPA) of 1998 Outlines conditions under which mortgage insurance must or can be cancelled on an outstanding mortgage. HPA is enforced by the various federal financial institution regulatory agencies.

Disclosure Requirements For a fixed-rate mortgage—to request MI cancellation once the LTV reaches 80 percent and to request MI automatic termination once the LTV reaches 78 percent. For an adjustable-rate mortgage—to request MI cancellation once the LTV reaches 80 percent and that the lender notify the borrower when that date is reached and to request automatic termination once the LTV reaches 78 percent.

Home Mortgage Disclosure Act Criteria for a depository lender include: Assets of $39 million or more (for 2009 lending activity) Federally insured or regulated Operate a home or branch office in a Metropolitan Statistical Area (MSA) Made at least one one- to four-family first mortgage in the calendar year reported Have mortgage loan(s) that involve a federal agency insurance, guarantee, or supplement, or are intended for sale by Fannie Mae or Freddie Mac Requirements for a non-depository mortgage lender include: A for-profit institution Operate a home or branch office in an MSA, or make at least five one- to four-family mortgage loans in the calendar year reported Originate home purchase loans (including refinance of home purchase loans) that represent either at least 10 percent of the total amount of loan originations or at least $25 million in the calendar year reported Assets of at least $10 million or make at least 100 home purchase loans (including refinance of home purchase loans) in the calendar year reported

SAFE Act Part of the Housing and Economic Recovery Act of 2008 (HERA). Enforced by and interpreted by HUD, its objectives are to enhance consumer protection and to reduce mortgage fraud. Allows consumers to review a company’s or MLO’s individual NMLSR record for employment history and for any information on “publicly adjudicated disciplinary and enforcement actions.” Encourages each state to pass legislation to implement its MLO requirements for licensing and registration.

SAFE Act-(continued) The SAFE Act also sets minimum licensing standards for all MLOs and creates two classes of MLOs: Federally Registered MLOs—employees of agency-regulated financial institutions. These MLOs are regulated by their respective federal agency (FDIC, OCC, OTS, NCUA, FCA), depending on the financial institution for which they work. The Agency Registry became active February 1, 2011. State Licensed MLOs—employees (or 1099 contractors) of mortgage brokers, mortgage bankers, and Credit Union Service Organizations (CUSOs). These MLOs are regulated by their appropriate state department. There are still implementation issues in many states.

Federally Registered MLO Requirements Register with NMLSR online: http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx Furnish fingerprints for criminal history background check Provide personal history and experience Authorize NMLSR to obtain credit report

State Licensed MLO Requirements Steps 1–4 listed above for Federally Registered MLOs, PLUS Complete a total of 20 hours of NMLS-approved pre-licensing education (PE), which can be taken in different combinations. NMLS-approved course topics include: a. PE Federal Law 3 hours b. PE Ethics 3 hours c. PE Nontraditional Mortgage 2 hours d. PE Elective (mortgage origination) 12 hours Pass a federal test at an NMLS-approved test center, consisting of: a. A national component (100 questions) b. A state component (55–65 questions) for each state in which the MLO wants to be licensed. 4. On an annual basis, take eight hours of NMLS-approved Continuing Education (CE) programs, which can be taken in different combinations. NMLS-approved course topics include: a. CE Federal Law 3 hours b. CE Ethics 2 hours c. CE Nontraditional Mortgage 2 hours d. CE Elective (Mortgage Origination) 1 hour e. Cannot take the same course in successive years

What Do You Think? ECOA (Regulation B) prohibits discrimination based upon what factors? If a mortgage lender declines an application for a mortgage loan, what must the lender do? How is it done?

What Do You Think? Are business loans covered by Truth In Lending? What is covered? What items are included in the Annual Percentage Rate? What is excluded?

What Do You Think? What is the Right of Rescission (Right to Cancel)? What is required of a mortgage lender? What does “life of loan coverage” mean? Why is this important to a mortgage lender?

What Do You Think? What three categories of fees does the revised RESPA rule create? List three important areas of mortgage lending that the Dodd-Frank Act impacts and how. How has the process of creating and enforcing a consumer compliance regulation evolved? What is the impact on mortgage originators, lenders, and consumers?

Check Your Understanding Fair Lending provisions come from the Equal Credit Opportunity Act solely. “Redlining” is the practice of some mortgage lenders to refuse to lend to Indians. Whenever an applicant is turned down for a loan that person must receive a notice of adverse action. The “effects test” applies when a practice that is not discriminatory on its face results in an adverse impact on protected applicants. The Equal Housing Poster only needs to be displayed in advertisements for mortgage loans.

Check Your Understanding ECOA prohibits all discrimination tests or qualifications in mortgage lending. Truth-in-Lending applies to all mortgage loans. Mortgage lenders must ensure that flood insurance is in effect for the life of the loan. If an applicant(s) refuses to provide the government-monitoring information the lender must leave the space on the application blank. The Right to Rescind (Cancel) applies to all mortgage transactions.