2/4/2014. Consumer Financial Protection Bureau Update A New Era of Regulation Begins. A Quick Overview of the CFPB. CFPB Overview (cont.

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1 Consumer Financial Protection Bureau Update A New Era of Regulation Begins A Quick Overview of the CFPB The CFPB was created by Title X of the Dodd-Frank Act and became operational on July 21, 2011 Independent agency within the Federal Reserve System Independent director (Confirmed by the Senate) Independent budget ($500 million paid by Federal Reserve System) Independent rulemaking, research, congressional testimony, enforcement, litigation 2 CFPB Overview (cont.) Broad consumer-protection mandate Objective to have a single federal agency to receive, manage and respond to consumer financial complaints Ensure consumers are protected from unfair, deceptive or abusive acts and practices and from discrimination Guided by Title X mandate that the markets should be fair, transparent, and competitive 3 1

2 CFPB Supervision, Enforcement & Rulemaking Authority CFPB has supervisory and enforcement authority over Very large depository institutions and credit unions with over $10 billion in assets Non-bank financial institutions Limited authority over smaller institutions & credit unions Rulemaking Authority 19 Enumerated Consumer Laws Title X: Unfair, Deceptive and Abusive Acts or Practices 4 Authority for enforcement of 19 Consumer Protection Laws was transferred to CFPB on July 21, 2011 The Home Mortgage Disclosure Act of 1975; The Home Ownership and Equity Protection Act of 1994; The Real Estate Settlement Procedures Act (RESPA) of 1974; The S.A.F.E. Mortgage Licensing Act of 2008; The Truth in Lending Act (TILA); The Equal Credit Opportunity Act; The Fair Credit Reporting Act The Homeowners Protection Act of 1998; The Fair Debt Collection Practices Act; Alternative Mortgage Transaction Parity Act; The Interstate Land Sales Full Disclosure Act; and Most provisions of the Mortgage Reform and Anti-Predatory Lending Act, which was enacted as Title XIV of Dodd-Frank. And 7 other Consumer Protection Laws not directly related to Real Estate. 5 CFPB Has Broad Investigatory & Enforcement Powers CFPB can issue: Subpoenas Civil Investigative Demands (CIDs) Must state nature of conduct constituting the alleged violation and applicable provision of law Subject can petition CFPB to modify or set aside CFPB can petition Federal district court to enforce Cease & Desist Orders (C&D Orders) 2

3 CFPB Investigatory & Enforcement Powers CFPB can commence: Civil Actions CFPB litigates on its own behalf; it does not need the Administration s permission Administrative Proceedings (based on C&D Orders) Administrative hearing with appeal to Court of Appeals CFPB can issue temporary C&D where violation is likely to cause the person to be insolvent or otherwise prejudice the interests of consumers before the completion of the proceedings CFPB can enforce FTC regulations defining unfair/deceptive practices CFPB Enforcement Powers In Taking Enforcement Actions, CFPB can require: Rescission or reformation of contracts Refund of moneys Return of real property Restitution Disgorgement of profits Compensation for unjust enrichment Damages Public notification of violations (with costs to be borne by the violator) Limits on activities or functions, including suspension & termination Civil money penalties Up to $5,000/day (any violation) Up to $25,000/day (reckless) Up to $1 million/day (knowing) CFPB s New Rules Effective January 2014 The Equal Credit Opportunity Act (ECOA) Valuations Rule: Effective 1/18/2014 The TILA Higher-Priced Mortgage Loans Appraisal Rule: Effective 1/18/2014 The 2013 RESPA and TILA Mortgage Servicing Final Rules: Effective 1/10/2014 The 2013 Home Ownership and Equity Protection Act (HOEPA) Rule: Effective 1/10/2014 The 2013 Loan Originator Rule: Effective 1/1/2014 The Ability to Repay and Qualified Mortgage Rule: Effective 1/10/2014 3

4 The Equal Credit Opportunity Act (ECOA) Valuations Rule Effective for applications received on or after January 18, Requires creditors to disclose to applicants within 3 days of application, that they have the right to receive copies of appraisals and written valuations. Requires that the creditor automatically send a free copy of all appraisals and all other written valuations (not just appraisals) i.e. AVMs, broker price opinions, etc. promptly upon completion or no later than 3 days prior to consummation (whichever occurs first), regardless of whether credit is extended, denied, incomplete or withdrawn. 10 The Equal Credit Opportunity Act (ECOA) Valuations Rule (Cont.) Permits charging the applicant a reasonable fee to cover the cost of preparing appraisals and other written valuations (unless otherwise prohibited or restricted by applicable law) Prohibits charging for copies of those appraisals or other written valuations even if the permitted fee has not been paid. Prohibits the up charging of consumers by adding fees to the cost of preparing the appraisal or other written valuations. 11 The TILA Higher-Priced Mortgage Loans (HPML) Appraisal Rule Effective for applications received on or after 1/18/2014 Sets forth additional appraisal requirements for Higher-Priced Mortgage Loans (HPML) and the appraisers performing such appraisals. It discusses the overlap between the ECOA Valuations Rule and the TILA HPML Appraisal Rule. Requires that an additional appraisal be ordered if the property is a flip being purchased with a covered HPML Defines when a property is considered a flip Further specifies that the consumer cannot be charged for the additional appraisal. 12 4

5 The 2013 RESPA and TILA Mortgage Servicing Final Rules Effective January 10, The rules set forth minimum requirements for: Error resolution and information requests (Timeframes and requirements for responses, prohibitions on fees) Limits on Force-placed insurance General servicing policies, procedures and requirements Accessing and providing timely and accurate information Properly evaluating loss mitigation applications Facilitation oversight of and compliance by, service providers Facilitating transfer of information during servicing transfers Record retention requirements Servicing file maintenance and production requirements 13 The 2013 RESPA and TILA Mortgage Servicing Final Rules (Cont.) Early intervention with delinquent consumers Live customer contact requirements and timeframes Requirements to provide loss mitigation options Continuity of contact with delinquent consumers (Single point of contact) Requirements for continuity of contact personnel Timeframes for assignment of personnel to delinquent consumer account Scope of capabilities of continuity of contact personnel 14 The 2013 RESPA and TILA Mortgage Servicing Final Rules (Cont.) Loss mitigation Requirements and Timeframes for acknowledging and evaluating Loss Mitigation Options Requirements for responding to consumers on incomplete loss mitigation applications Requirements for Appeals process Prohibitions and limitations on dual tracking Limitations on beginning or completing the foreclosure process 15 5

6 The 2013 RESPA and TILA Mortgage Servicing Final Rules (Cont.) Interest rate adjustment notices for ARMs Prompt crediting of mortgage payments and responses to requests for payoff amounts Periodic statement requirements for mortgage loans The servicing rules contain an exemption for small servicers (servicing under 5,000 loans) from certain portions of the servicing rules. 16 The 2013 Home Ownership and Equity Protection Act (HOEPA) Rule Effective with loan applications taken on or after 1/10/2014 Lowers the previous thresholds for defining a High Cost Mortgage Includes HELOCs as potential High Cost Mortgages Requires additional disclosures Prohibits certain loan terms Requires that the consumer receive additional protections including homeownership counseling. Note: the rule also requires that all loan applicants for federallyrelated mortgage loans (not just High Cost Mortgages) receive a list of housing counselors in their area. Defines what must be included when calculating points and fees for HOEPA coverage as well as what loan origination compensation must be included in the points and fees calculations. Adds a prepayment penalty coverage test. The 2013 Loan Originator Rule Effective January 1, 2014 for loans consummated on or after January 1st and where the loan originator receives compensation on or after January 1, Prohibits the use of mandatory arbitration clauses and waivers of federal claims in loan agreements with borrowers effective June 1, Prohibits the financing of credit insurance Requires the use of the NMLS ID number for both individual loan originators and loan originator organizations on the loan application, note and security instrument effective January 10, Expands the definition of who is considered a loan originator 6

7 The 2013 Loan Originator Rule (Cont.) Prohibits compensation to an originator based on terms of the loan or a proxy for a transaction term. The rule is applicable to compensation both paid and received Establishes certain categories of permissible retirement or bonus profit based compensation plans Defines who may pay the loan originator compensation and under what circumstances Sets forth the qualification rules for individuals to be loan originators Establishes requirements for Loan Originator employing organizations Establishes record keeping requirements. 19 The Ability To Repay/Qualified Mortgage (QM) Rule Effective with all new loan applications taken January 10, 2014 or after. The rule requires that a creditor make a reasonable, good faith determination before or when consummating a mortgage loan that the consumer has a reasonable ability to repay the loan Provides standards for determining the borrower s ability to repay Establishes a category of loans (called the Qualified Mortgage or QM ) where the creditor is presumed to have complied with the Ability to Repay rule if the loan originated meets the QM standard. Ability to Repay Rule (ATR)(Cont.) The QM definition introduces: A 3 point cap on fees Maximum 43% debt to income ratio The concept of safe harbor QMs Rebuttable presumption QMs (for HPMLs) Temporary QMs Small Creditor QMs 7

8 Ability to Repay Rule (ATR) (Cont.) The rule sets forth penalties for failure to comply Expands the time frame borrowers have to assert a violations under TILA and RESPA from 1 to 3 years In the case of defending against a foreclosure, removes the time limits for a borrower to assert a violation of the ability to repay rule altogether. Note: Dodd-Frank also prohibits a loan originator from steering a borrower to a loan where the borrower does not have the ability to repay the loan. Loan Originators could be subject to personal liability for up to 3 times the amount of their earnings on the loan in question for steering a borrower to a loan where it is ultimately determined that the borrower did not have the ability to repay the loan. Seller or Private Financing Seller or Private Financing can be impacted by: The Truth-in-Lending Act (TILA) The Ability to Repay Rule The 2013 Home Ownership and Equity Protection Act (HOEPA) Rule The 2013 Loan Originator Rule. 23 Seller or Private Financing (Cont.) The Colorado Real Estate Commission has changed the standard Real Estate Contract to Buy and Sell Real Estate (Residential) to include the following language effective January 1, 2014: 4.7. Seller or Private Financing. WARNING: Unless the transaction is exempt, federal and state laws impose licensing, other requirements and restrictions on sellers and private financiers. Contract provisions on financing and financing documents, unless exempt, should be prepared by a licensed Colorado attorney or licensed mortgage loan originator. Brokers should not prepare or advise the parties on the specifics of financing, including whether or not a party is exempt from the law. 24 8

9 Penalties and Potential Liability There may be considerable liability for errors in failing to properly advise sellers, buyers or Real Estate Brokers involved in Seller Financing. Licensed Real Estate Brokers and Mortgage Loan Originators would be well advised to refer such requests to a licensed Colorado attorney knowledgeable in the areas of Seller Financing, The Ability to Repay Rule, The Loan Officer Compensation Rule, the Truth in Lending Act and the Home Equity Protection Act (HOEPA). Penalties for violation of the Truth In Lending Act and Regulation Z (which includes the Ability to Repay Rule and the 2013 Loan Originator Rule) include: The buyer/borrower may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the buyer/borrower in addition to actual damages (which could include the buyer/borrower s down payment), statutory damages, court costs and attorney s fees for a period up to 3 years from the date of the violation. Further, in a defense raised by the buyer/borrower in a foreclosure action in recoupment or setoff, there is no time limit on the consumer s ability to assert violation of the Ability to Repay rule (although the buyer/borrower cannot recover more than the first 3 years of finance charges and fees plus actual damages and reasonable attorney fees.) 25 Penalties and Potential Liability (Cont.) Should a buyer sue a seller for failure to consider ability to repay properly, it is likely that any advisor (such as a licensed Real Estate Broker or Mortgage Loan Originator) who participated in the origination of the loan, or who advised the seller, the buyer or the real estate broker would be named in the lawsuit as well. Just as an example, the liability of a seller who failed to properly consider the buyer/borrower s Ability to Repay on a $200,000 seller financed loan at 4% could easily run into the high 5 figures: 4% interest on $200,000 for 3 years: $23,371 5% down payment: $10,000 Buyers Attorney Fees: $50,000 Total: $83,371 Should the Seller incur or face incurring that kind of loss it is reasonable to assume that any advisor to the seller would likely either be named in the original lawsuit or be sued separately by the seller. 26 Considerations under Federal Law & Regulation A Seller carrying back a Seller Financed Transaction will likely fall under the Truth in Lending Act (TILA) and thus Ability to Repay in one of two ways: In the most likely circumstance, the Seller will fall under TILA as a Loan Originator (thus the concern with the 2013 Loan Originator Rule); or The Seller may fall under TILA as a Creditor under certain circumstances. A Seller carrying back Seller Financing on a residential property would be considered a Loan Originator if they meet the definition of a Loan Originator under the 2013 Loan Originator rule. 27 9

10 Loan Originator Definition The Loan Originator Rule defines a Loan Originator as any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain takes a residential mortgage loan application; assists a consumer in obtaining or applying to obtain a residential mortgage loan; or offers or negotiates terms of a residential mortgage loan... (Note: This definition of Loan Originator would also likely cover a Real Estate Broker who offered terms of a loan to a buyer on behalf of a seller, or who participated in the negotiation of rates, fees, loan terms etc.) 28 Exemptions for Certain Sellers under the 2013 Loan Originator Rule The Loan Officer Compensation Rule provides two exemptions from being defined as a Loan Originator under the rule, for sellers carrying back Seller Financing. 1. Seller Financiers; one property. [12CFR (a)(5] 2. Seller Financiers; three properties. [12CFR (a)(4)] Exemption: One Property in a 12 Month Period Seller Financiers; one property. [12CFR (a)(5] A natural person, estate, or trust that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section: The natural person, estate, or trust provides seller financing for the sale of only one property in any 12 month period to purchasers of such property, which is owned by the natural person, estate or trust and serves as security for the financing. The natural person, estate, or trust has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person. The natural person, estate, or trust provides seller financing that meets the following requirements: The financing has a repayment schedule that does not result in negative amortization. (Note: Balloon Payments are permissible under this exemption) 10

11 Exemption: One Property in a 12 Month Period The financing has a fixed rate or an adjustable rate that is adjustable after five or more years If an adjustable rate, subject to reasonable annual and lifetime limitations on interest rate increases (2% annual and 6 % lifetime caps). If an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR Therefore, under the Seller Financiers; one property exemption, a seller financier is not covered by: The Truth in Lending Act, The Ability to Repay Rule or, The 2013 Loan Originator Rule So long as they and the financing they carry back meet all of the requirements of the Seller Financiers; one property exemption. 31 Exemption: Up to 3 properties in a 12 Month Period Seller Financiers; three properties [12CFR (a)(4)] A person (as defined in (a)(22)) that meets all of the following criteria is not a loan originator under paragraph (a)(1) of this section: The person provides seller financing for the sale of three or fewer properties in any 12 month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing. The person has not constructed, or acted as a contractor for the construction of a residence on the property in the ordinary course of business of the person. The person provides seller financing that meets the following requirements: The financing is fully amortizing (Note: Balloon Payments are not permissible under this three properties exemption.) The financing is one that the person determines in good faith the consumer has a reasonable ability to repay. 32 Exemption: Up to 3 Properties in a 12 Month Period (Cont.) The financing has a fixed rate or an adjustable rate that is adjustable after five or more years If an adjustable rate, subject to reasonable annual and lifetime limitations on interest rate increases (2% annual and 6 % lifetime caps). If an adjustable rate, the rate is determined by the addition of a margin to an index rate and is subject to reasonable rate adjustment limitations. The index the adjustable rate is based on is a widely available index such as indices for U.S. Treasury securities or LIBOR Under the Seller Financiers; three properties exemption, sellers can carry back loans on up to three properties in a 12 month period and still be exempt from being considered a Loan Originator so long as they comply with all of the requirements of the Seller Financiers; three properties exemption including determining that the buyer/borrower has the reasonable ability to repay the loan

12 Ability to Repay: Alternative Criteria for Seller Financiers The 2013 Loan Originator Rule provides a relaxed version of the requirements for the Seller to properly consider the buyer/borrower s Ability to Repay (The Alternative Criteria) The alternative criteria in new comment 36(a)(4)-1 explain how a seller could consider the borrower s income in making the good faith determination of ability to repay: If the borrower intends to make payments from income, the seller considers evidence of the borrower s current or reasonably expected income, i.e. payroll statements, earnings statements, IRS form W-2s, similar IRS forms used for reporting wages or tax withholding or Military Leave and Earnings Statements. If the borrower intends to make payments from other income, the seller considers the borrower s income from sources such as from a Federal, State, or local Government agency providing benefits and entitlements. 34 Ability to Repay: Alternative Criteria for Seller Financiers (Cont.) If the borrower intends to make payments from income earned from assets, the seller considers income from the relevant assets, such as funds held in accounts with financial institutions, equity ownership interests, or rental property. The CFPB does state that: In considering these and other potential sources of income to determine in good faith that the borrower has the reasonable ability to repay the obligation, the person making that determination may rely on copies of tax returns the borrower filed with the IRS or a State taxing authority. The comment does make clear however that the value of the dwelling that secures the financing does not constitute evidence of the borrower s ability to repay. 35 Ability to Repay: Alternative Criteria for Seller Financiers (Cont.) Should a seller financier (up to 3 properties) choose to use the alternative criteria and not retain documentation: Seller should consider how they will present their case to a judge in the event the borrower asserts that the seller did not properly determine in good faith, that the borrower had the ability to repay the obligation. The borrower can assert these claims in a lawsuit within the first three years of the loan in question or as a defense and a recoupment in a foreclosure proceeding at some point in the future

13 Additional Considerations Under Federal Law for Sellers Carrying Back Loans Other Federal Considerations for Sellers carrying back seller financing under The Truth in Lending Act (TILA) and the Home Equity Protection Act (HOEPA). TILA exempts any person making 5 or fewer loans per year from its definition of a Creditor and thus exempts such persons from both TILA and the Ability to Repay Rule. However there are circumstances, when a Seller carrying back just one or two loans, if they are High Cost Mortgage Loans as defined in HOEPA, would fall under the definition of a Creditor, and under those circumstances subject themselves to the requirements of TILA, the full requirements of the Ability to Repay Rule (not the Alternative Criteria discussed earlier), the Loan Originator Compensation Rule and HOEPA. A person would be included in the definition of a Creditor under TILA if, in any 12 month period, the person originated more than one credit transaction that is subject to the requirements of (High Cost Mortgages) or one or more such credit extensions through a mortgage broker. [12 CFR (a)(17)(v)]. 37 Considerations under Colorado Law and Regulation Just as the Truth in Lending Act involves sellers carrying back loans through the definition of a mortgage loan originator; so too does Colorado Law. In Colorado an individual who takes a mortgage loan application; or offers or negotiates terms of a residential mortgage loan is a mortgage loan originator [CRS (6)(a)(I)&(2)] Note: under Colorado law, there is no requirement for direct or indirect compensation or gain, or the expectation of direct or indirect compensation or gain as in the Federal definition of a Loan Originator. 38 Considerations under Colorado Law and Regulation (Cont.) There is an exemption for sellers (a person, estate or trust) carrying back up to three loans in any twelve month period. [CRS (1)(b)]; however CRS Prohibited conduct fraud- misrepresentation conflict of interest rules requires that a mortgage loan originator, including a mortgage loan originator otherwise exempted from this part 9 by section (1)(b) is nevertheless required to comply with the requirements set out in requires compliance with all of the Federal Lending laws as well as with CRS Written Disclosure of fees and costs contents limits on fees lock in agreement terms rules which contains disclosure requirements specific to Colorado law

14 Exemptions for Licensed Real Estate Brokers from being defined as a Loan Originator Real Estate Brokers are not required to be licensed as Mortgage Loan Originators in Colorado solely because they represent a seller who will be carrying back seller financing. This exemption applies to the Real Estate Broker only so long as he or she confines themselves to Real Estate Brokerage Activities If the Real Estate Broker performs any activity that requires them to be licensed as a mortgage loan originator (taking a mortgage loan application, or offering or negotiating the terms of a residential mortgage loan) then they are required to be licensed as a mortgage loan originator There is a similar exemption for Real Estate Brokers in the 2013 Loan Originator rule from being defined as Loan Originators, so long as they perform only real estate brokerage activities and are not compensated by a loan originator or creditor. 40 Attorney Exemptions There is an exemption from mortgage loan originator licensing requirements for attorneys in (d) an attorney who renders services in the course of practice, who is licensed in Colorado, and who is not primarily engaged in the business of negotiating residential mortgage loans. Under the Federal definition of a loan originator, an attorney is not an originator simply because they perform bona fide third party advisory services. However, if an attorney advises a consumer on credit terms offered by either the attorney or the attorney s employer, or the attorney receives, or expects to receive compensation from loan originators or creditors for providing advice on credit terms offered by them, or for referring consumers to them, then the attorney is a loan originator. 41 Recommended Best Practices Licensed Real Estate Brokers or Licensed Mortgage Loan Originators who are approached to assist or advise Sellers or Buyers or other Real Estate Brokers in a Seller Carry Back Financing transaction would be well advised to refer such requests to a licensed Colorado attorney knowledgeable in the areas of Seller Financing, The Ability to Repay Rule, The Loan Officer Compensation Rule, the Truth in Lending Act and the Home Equity Protection Act (HOEPA). For the vast majority of sellers of residential property who have only one property to sell and who are natural persons, estates or trusts, the Seller Financiers; One Property exemption will likely meet their needs and serve them well. Remember that even if a seller is exempt under the one property Federal exemption they are still bound by Colorado disclosure requirements 42 14

15 Recommended Best Practices (Cont.) If the seller (even on a single property) offers terms that would make the loan a High Cost Mortgage, and engages a Mortgage Broker to originate the loan then they will need to evaluate whether those terms and actions will make them a creditor under TILA. If so, they must comply with TILA and with the full ability to repay rule accordingly (The Alternative Criteria set forth above is not available to Creditors or Loan Originators in determining a borrower s Ability to Repay). Be aware that the carrying back of one loan under the Seller Financiers; One Property exemption will preclude the seller from carrying back another loan for 12 months following the closing of the first loan (unless ability to repay was properly considered on the first loan at the time of origination). Absent the good faith determination of ability to repay at origination, any subsequent carry back closing within twelve months would require that both loans meet the ability to repay requirements under the Seller Financier 3 Properties rule. 43 Recommended Best Practices (Cont.) For those sellers who own and desire to sell multiple properties, a decision will need to be made early on whether they will consider carrying more than one loan back in a 12 month period, up to a maximum of three. If so, then all loans should be originated with a good faith determination of ability to repay made at the time of origination of each loan. As before, if more than one of the loans to be carried back are high cost mortgages, or even in the case of one, if a mortgage broker is to be engaged to originate the loan, the seller likely meets the definition of a creditor under TILA and the loan should be originated accordingly. 44 Additional Resources The CFPB Mortgage Rules at a Glance (Links to all of the CFPB s mortgage rules, including rule summaries, plain language compliance guides and videos): The credit bureau Experian has created a way for a consumer to share his or her credit report with a third party such as a Seller Financier. You can find details of this service at: The Attorneys listed below were very helpful in the preparation of this presentation and are available for consultation should you have specific questions about a transaction or circumstance: Rick Accomazzo, Bloom, Murr, Accomazzo and Siler, PC - (303) RAccomazzo@bmas.com Deanne R. Stodden, The Stodden Law Firm, LLC - (303) deanne@stoddenlaw.com 45 15