6/21/2013. Section I. Purpose of Course. History and Overview of Mortgage Law, Regulation and Requirements

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1 20 Hour Mortgage Loan Originator Certification Course Purpose of Course Gain historical perspective of mortgage lending Understand contemporary mortgage loan origination process Examine federal rules, regulations and requirements Look at non-traditional lending and other considerations Study legal concepts related to real estate Understand mortgage fraud Section I History and Overview of Mortgage Law, Regulation and Requirements 1

2 The American Residence These events were significant during the Pre-1920s: Most lenders were individuals Mortgage companies o 50% down and balloon payments o Fully settled at term s end Federally-chartered: real estate loans o Federal Reserve Act 1913 The American Residence Risk ruled in the Roaring 20s: Residential lending due to increased demand for farm lending Little regulation Consider : Loan products with similar features Over-valuation & risk Loan default would eventually occur Banks quit making loans in both cases The Great Depression and Regulation Mortgage lending suffered due to the market crash: Real estate suffered early on o Post crash: values fell to less than 50% from previous year Ability to pay interest suffered: o Unemployment o Challenged economy Liquidity crisis 2

3 The Great Depression and Regulation Mortgage lending became difficult: Real estate was liquidated Foreclosures and tax sales rose Lenders could not: o Lend o Offer refinances Savings withdrawn and foreclosures: o Thrifts & banks failed National Housing Act of 1934 These were established to jump-start the economy: Federal Housing Administration (FHA) Federal Deposit Insurance Corporation (FDIC) Federal Savings & Loan Insurance Corporation (FSLIC) National Housing Act of 1934 Residential lending was changed by the National Housing Act: Monthly amortization Monthly insurance Tax escrows Borrower s pay insurance Down payments reduced Rates fixed Terms extended 3

4 Federal Deposit Insurance Corporation (FDIC) FDIC offered government insurance on deposits: More people saving Insurance against debt & deposit Restarted economy Away from the depression Spurred economic growth Problems Still Existed Mortgage holders still refused to refinance loans: After decline of property values New security measures not enough Banks hesitant: Required too much money Set up as long term investments Fannie Mae Fannie May initiated the secondary mortgage market: (Federal National Mortgage Association) Response to decrease of liquidity Government-sponsored bonds o To reinstate mortgages in default Encourage more home ownership More funds for lending 4

5 What does Fannie do? Imagine that Fannie Mae is a lady that makes pies. What does Fannie do? Imagine that Fannie Mae is a lady that makes pies. Fannie is known for making the highest quality pies in the land. What does Fannie do? Imagine that Fannie Mae is a lady that makes pies. Fannie is known for making the highest quality pies in the land. The pies that Fannie makes are the highest quality because Fannie is very particular about the ingredients 5

6 What does Fannie do? Imagine that Fannie Mae is a lady that makes pies. Fannie is known for making the highest quality pies in the land. The pies that Fannie makes are the highest quality because Fannie is very particular about the ingredients Fannie only uses the best apples (mortgages) in her pies. In fact, they must CONFORM to her high standards. What does Fannie do? As an investor, you don t have to purchase the entire pie. You can buy it by the slice (tranche) End of World War II Servicemen s Readjustment Act in 1944 was established: Veterans Administration (VA) Demand for housing No down payment for qualified vets Housing construction boom 6

7 Post World War II The National Mortgage Association Charter Act of 1954 began transition of Fannie Mae to a government-sponsored enterprise (GSE). A Government-Sponsored Enterprise (GSE) is backed by the government and serves a public purpose, but it is privately held / owned. Fannie Mae Fannie Mae was started as government agency in 1938: To open secondary market for FHA loans Partially privatized in 1954 Fully privatized in 1968 o Ginnie Mae off-shoot Authorized in 1970 to deal in conventional loans Mortgage-backed securities program begun in 1980s Freddie Mac Freddie Mac was established in 1970 by Congress as a secondary market for Savings and Loans: Federal home loan mortgage association Secondary market for savings and loans Introduced first pass-through security in 1971 o Access new markets for mortgage credit 7

8 Ginnie Mae Ginnie Mae was created to make credit available and monitor qualification for: Subsidized veteran s loan programs (VA loans) Mortgages by Farmer s Home Administration Does not buy and sell loans, rather it guarantees the payment of principal and interest on residential mortgage backed securities backed by government loans. Consumer Protection Era Housing and Urban Development Act (1965) centralized control of federal housing agencies Under Department Of Housing & Urban Development (HUD) Fair Housing Act (1968) forbade discrimination Race, ethnicity, religion, color and national origin Consumer Credit Protection Act The CCPA set forth requirements for disclosures: Truth-in-Lending Act (TILA) Fair Credit Reporting Act Designed to eliminate inequity marketplace by protecting consumers in dealings with creditors 8

9 Consumer Credit Protection Act Truth-in-Lending Act (TILA) sets forth requirements: Disclosure of finance charges Calculation of annual percentage rates (APR) What the loan is going to cost Consumer Credit Protection Act The Fair Credit Reporting Act deals with disclosure requirements for consumer credit: Disclosure requirements important to consumer Nature of information & how used o Determining the granting /denial of loan Bank Secrecy Act / Anti-Money Laundering (BSA / AML) 1970 Institutions must help government agencies prevent money laundering: Customer identification programs and due diligence to report suspicious activity Amended by Patriot Act of 2001 o Check and verify ID 9

10 RESPA (1974) Real Estate Settlement Procedures Act The goals of RESPA are: Greater consumer protection Further reduce inequity Because of: Undisclosed kickbacks Inflated costs Bait and switch tactics RESPA Bait and Switch: is an advertising tactic where a certain appealing product is advertised as available, but when a customer contacts the company, they are either steered into a less appealing product or learn that the advertised product is no longer available, or, in some cases, was never available. RESPA RESPA requires lenders to provide to borrowers: Advanced disclosure of settlement costs Prohibits kickbacks for referral of business Good faith estimate (GFE) of settlement costs HUD information (HUD-1 uniform settlement statement) Disclosures of subordinate financing Breakdown of costs of loan 10

11 ECOA (1974) Equal Credit Opportunity Act ECOA makes it unlawful to discriminate race, color, religion, national origin, sex, age and marital status: Notice be given upon denial of applications adverse actions o Opportunity to rehabilitate credit / correct errors Regulations apply to people and businesses involved in credit decisions Fair allocation of credit Overall credit availability can be monitored Compliance can be maintained Home Mortgage Disclosure Act (1975) (HMDA) HMDA requires lenders to disclose geographic distribution of loans and applications: To track whether financial institutions are serving housing needs of their communities To reveal any discriminatory lending patterns Rule-writing now under consumer financial protection bureau (CFPB) Home Mortgage Disclosure Act (HMDA) Disparate impact is a type of discrimination: Actual profile of loans in lender s portfolio can be unbalanced People in certain neighborhoods were unable to secure credit 11

12 Home Ownership & Equity Protection Act (HOEPA) 1994 HOEPA amended TILA: Greater protection for high rate mortgages o Additional regulations and required disclosures Addressed deceptive / unfair practices o Balloon-type payments o Prepayment penalties for high rate loans G.L.B. Act and Privacy Protection Period of the 1990s was relatively calm: Growth Reduced deficits Lower interest rates Desire for deregulation to allow greater consolidation of financial institutions G.L.B. Act and Privacy Protection Gramm-Leach-Bliley Act (GLB Act) was passed in 1999: Privacy protections Notice of information sharing Opportunity to control release of information o Choosing to opt-in / out 12

13 G.L.B. Act and Privacy Protection Federal Trade Commission (FTC) issued Safeguards Rule in 2003: Measures in place to keep customer information secure: o Customer names, addresses & phone numbers o Bank & credit card account numbers o Income & credit histories o Social security numbers Do-Not-Call Implementation Act of 2003 The Do-not-call Implementation Act of 2003 establishes a national do not call registry Response to telemarketing abuses Initially, re-enrollment was every 5 years, but: Do-Not-Call Improvement Act of 2007 o Only 1 enrollment at sign-up required o Complaint procedures FTC Red Flags Rule 2011 Financial institutions and creditors must deal with identity theft: Including most securities firms Program to prevent and mitigate identity theft Compliance training Report violations and suspicious activity Suspend lending 13

14 Fair Credit Reporting Act (FCRA) The FCRA was passed in 1970: Basis for consumer protections found in FACTA and GLBA acts Requires disclosure to consumer when credit report used or obtained and information is reported to a bureau National Mortgage Licensing System and Registry (NMLSR) The NMLS(R) is the system of record for licensing and registration: Non-depository, financial services States and territories within the U.S. Sole system for mortgage companies and loan originators (MLOs) : Apply for, amend, renew / surrender license NMLS itself does not grant or deny licenses Secure and Fair Enforcement for Mortgage Licensing Act (SAFE) The SAFE Act sets national standards for licensure: Licensing of mortgage loan originators (MLOs) Participation of state agencies o On the NMLS Greater consumer protection Reduce fraud Minimum and uniform standards for licensing and registration of state-licensed MLOs 14

15 Dodd-Frank Wall Street Reform Act of 2010 Dodd-Frank is a broad piece of legislation which covers oversight of: Credit cards Loans Mortgages Derivatives Hedge funds Credit rating agencies Insurance agencies Dodd-Frank Wall Street Reform Act of 2010 Title XIV includes incentives to protect interests of consumers and provides more protection for borrowers with high cost loans: New disclosure requirements, consumer education initiatives and appraisal reforms More requirements placed upon loans as risk-level increases Dodd-Frank Wall Street Reform Act of 2010 The Consumer Financial Protection Bureau (or CFPB), consolidated oversight authority: Super-entity with broad authority o Including quasi-judicial and quasi-legislative powers, oversight authority for mortgage laws and regulations Streamline oversight and enforcement Allows for more supervision of Federal Reserve 15

16 Consumer Finance Protection Bureau (CFPB) The Consumer Financial Protection Bureau (CFPB) is the agency primarily responsible for regulating: o Financial institutions and their products o Servicing industry All financial institutions under supervisory authority of CFPB o But is mostly concerned with mortgages and student loans Consumer Finance Protection Bureau (CFPB) The CFPB was designed to consolidate employees and responsibilities from a number of other federal regulatory bodies, including: The Federal Reserve The Federal Trade Commission (FTC) The Federal Deposit Insurance Corporation (FDIC) The National Credit Union Administration (NCUA) The Department of Housing and Urban Development (HUD) Consumer Finance Protection Bureau (CFPB) The CFPB has also imposed more requirements to determine ability to repay: Income and assets sufficient to repay loan Borrowers documentation of employment Minimum standards for credit scores (imposed by the federal government) Monthly payments borrower can afford (income allocation rules) 16

17 Consumer Finance Protection Bureau (CFPB) The ability to repay requirements will also include: Other debts associated with property such as home equity loans Must be able pay all home-related expenses such as property taxes not just principal and insurance Lenders must consider borrower's other obligations like student loans, car loans and credit cards under a debt-to-income analysis Mortgage Assistance Relief Services (MARS) The (MARS) Rule was issued to protect distressed homeowners from mortgage relief scams: Advance fee ban o No fees until homeowner actually has an offer in writing from a lender / servicer that homeowner considers acceptable Must disclose: not associated with government Specific false and misleading claims forbidden Protect homeowners from mortgage relief scams Mortgage Act and Practices (MAP) Rule The MAP Rule ensures advertising is fair and accurate: Advertising: Applies only to non-depositories o Such as mortgage brokers & state-chartered financial institutions Specifies deceptive acts and practices Prohibits misrepresentation 17