TILA Mortgage Coverage Categories Closed-End Mortgages Secured by Dwelling (DF)

Transcription

1 New Mortgage Rules NCLC Summer Mortgage Conference 2012 Alys Cohen with Peter Carroll, CFPB July 18, 2012 Washington, D.C. TILA Mortgage Coverage Categories Closed-End Mortgages Secured by Dwelling (DF) Ability to Pay (QM) for FRB rule, see high cost rule Loan Originator Compensation/Steering FRB rule for apps as of 4/1/11 (same loan scope) Loans Secured by Principal Dwelling (FRB,DF) Appraisal: 10/1/09 eff. FRB; FRB (DF) 4/1/11; CFPB? Servicing (Crediting/Late Fees/Payoff Stmts) 10/1/09 eff. FRB; CFPB (SBREFA)? Higher Priced Mortg. (FRB) applic. as of 10/1/09 HOEPA (DF) Disclosure (MDIA/ TILA-RESPA)

2 Dodd-Frank: Dwelling- Secured Mortgages Ability to Repay/Qualified Mortgage Income Verification Mortgage Originator Compensation Steering Coverage: Residential mortgage loans. No timeshares or open-end. Includes reverse mortgages, manufactured home loans. D-F Qualified Mortgage Proposed rule by FRB. Additional comments to CFPB by July 9, Rule will be issued by CFPB. Senate and House Bills Ability to repay and QM: rebuttable presumption or safe harbor? Product feature limitations and other req ts: No negative amortization or deferred principal repayment (with specified exception); No balloon payment (with specified exception); Verified and documented sources for repayment ability; ARMs: to max rate for first 5 years, fully amortizing over the loan term, and PITI and assessments; Meets regulatory guidelines for DTI or alternative measure Points and fees (defined) = 3% or less, with some carve-outs Max. 30 year term, except as extended by rule Reverse mortgages, QM criteria to be set by rule.

3 QM additional flexibility FRB/CFPB may revise, add to, or subtract from these criteria to assure that responsible, affordable credit is available in a manner consistent with purposes of new 1639B and 1639C, to prevent evasion, or facilitate compliance. HUD, VA, Dept. of Agriculture and Rural Housing service have same mandate to issue rules defining qualified mortgages for specified mortgages that are insured, guaranteed or administered by each of those agencies, in consultation with FRB/CFPB. QM Issues Rebuttable presumption or safe harbor? Broad or narrow? Clear lines or fuzzy? Litigation risk? Credit access? The cap on 3 points and fees: exception for affiliates businesses? Manufactured housing exception?

4 PURPOSE of FRB Originator Compensation Rule Proposed 10/09; finalized 9/10 (75 FR 58509); eff. 4/11 for loan applications received by the creditor on or after 4/1/11 -- possibly delayed a few days by broker suit The rule is not about eliminating fair compensation to originators for fair labor it is simply about eliminating that misaligned reward structure that so distorted the market. By 2009 the broker-originated share had dropped by half from its peak in 2005 If an existential threat exists to Plaintiffs profession, it is the macroeconomic environment. FRB rule ends deceptive creditor pay practices for dwelling secured credit Before consumer unwittingly pays twice through visible upfront cash and or financed fees and also through invisible YSPs. (dual source) Now consumer pays one way only through: increased interest rate or through upfront fees and or financed fees

5 Summary of FRB L.O. Rule Bans loan originator compensation based on terms and conditions of loan, APR, LTV, ppps, etc. (except loan amount), (d)(1) Bans dual source compensation, (d)(2) Whose compensation is affected? Mortgage brokers Loan officers working for creditors or mortgage brokers Creditors if transaction table-funded by another lender If consumer pays, creditor cannot! If creditor pays l.o. and charges consumer through rate no $$ can be accepted from consumer What is compensation? Almost anything paid or given to loan originator Money, gifts, trips, bonuses Will look behind name of fee. OSC (d)(1)-1(ii) Does not include payments for bona fide 3d party charges actually paid to 3d parties appraisals, title insurance, etc, OSC (d)(1)-1(iii) Some play for l.o. here -- if ultimate charges are somewhat less, still not compensation BUT Mark-ups or upcharges of third party charges are compensation. OSC, (d)(1)-1(iii).

6 Which loans are covered? Rule applies to: Closed end loans including closed end reverse mortgages Secured by a dwelling Does not apply to: HELOCs Timeshares Covers purchase and refi transactions No compensation based on terms of transaction What are terms of the transaction? Interest rate Loan to value LTV Prepayment penalty ARM v. FRM NegAM Term of loan how many years? Balloon

7 OSC (d)(1) No variation in compensation based on things that are a proxy for terms and conditions of loan such as credit score, DTI (d)(1) (d)(1)-3 Ok to compensate based on e.g. 1. volume of loans delivered, 2. quality/loan performance 3. Hourly rate for hours worked 4. Delivering new customer 5. Fixed fee per loan originated Creditor can sweeten terms to keep customer but cannot reduce l.o. compensation (d)(1)-5 Comp based on loan amount (d)(1) No compensation based on terms and conditions except: Compensation tied to principal amount of loan can be paid (d)(1)(ii) if based on fixed % and can be subject to ceiling and floor Ex. 1% but not higher than $5,000 or lower than $500 Can t have different % based on loan amount! BUT ban on tying compensation to loan terms is not applicable if compensation is paid directly by the consumer (d)(1)(iii) and (d)(2) Does anti-steering rule undercut l.o. s freedom to charge whatever it wants to consumer?

8 Affiliates, (d)(3) Affiliates are treated as single entity for antisteering rule. OSC example if parent has two mortgage subsidiaries, both must compensate broker $$ amount the same for same loan -- OSC (d)(3)-1 Former National City was parent of National City Mortgage and First Franklin Financial. NCM could not pay broker more $$ than FFF would based on terms of loan or proxies for terms. FFF must pay same for loan at 8% as NCM for loan at 7% Anti-Steering Provision (e) Bans steering to product that provides more compensation to l.o. (unless product is in borrower s interest see safe harbor) Safe harbor: Obtain loan options from sig. number (3+) of creditors; Options for each type of loan borrower seeks (and borrower likely qualifies not real offers); and Options presented must include: lowest interest rate (fully indexed if ARM < 5 years fixed) lowest rate & standard non-risky loan terms, and lowest dollar amt for origination & discount points or fees.

9 Dodd Frank Steering Goes beyond FRB rule; CFPB rules will harmonize. D-F bans steering: To loans with no reasonable ability to repay; To loans with predatory characteristics; From QM to non-qm loans; To loans that promote disparities based only on race, gender, ethnicity or age; By mischaracterizing (or suborning) applicant s credit history, loans available or appraised property value; By discouraging shopping for cheaper loan by qualified consumer where originator doesn t offer that. REMEDIES FOR VIOLATING FRB ORIGINATOR COMPENSATION RULE Regulatory enforcement Private enforcement v. broker/loan officers be creative use UDAP or similar claims But v. creditor, should have statutory and HOEPA damages and actual damages claims under if creditor pays broker or its own employee and homeowner also pays upfront originator comp. Look for non bona fide markups of 3d party fees if the creditor disburses to the broker for these fees And v. assignee if payments are on HUD-1 e.g. $2000 POC to broker and upfront fee to broker from proceeds

10 REMEDIES FOR VIOLATING FRB ANTI-STEERING RULE Regulatory enforcement Private enforcement under TIL unclear Could creditor could be on the hook if it offers only less favorable loan products (risky terms/higher rates) and is aware that its compensation to brokers for these loans is higher than the comp of other lenders who offer better loans should this creditor have mechanism to ensure broker makes the correct offers to consumer? Dodd-Frank remedies differ Actual and statutory damages; atty fees. Includes mortgage originator as creditor. No clarification re: servicers. AG authority for many provisions. Enhanced damages for ability to repay and compensation with cap. Mortgage originator violation of compensation or steering rule: great of actual or 3x orig. compensation. Ability to repay and compensation rules: 3 years (although there is a right to recoupment).

11 Dodd-Frank TILA - Statutory Damages Range of statutory damages for non-mortgage, non-student closed-end loan violations increased to $200 - $2,000 (currently $100 - $1,000) Class action cap increased from $500,000 to $1 mil. TILA coverage expanded only leases and nonmortgage, non-student loans over $50,000 are exempt (currently $25,000) effective on transfer date (note ECOA SOL extended to 5 years) Loan Secured by Principal Dwelling Appraisals Servicing ----> FRB rule and Dodd Frank Question re. enforcement against brokers and servicers UDAP or other theory Attribute to creditor

12 Appraisal Regulations-FRB Prohibition on coercion Obvious things, like withholding payment, conditioning future use, or suggesting either of those Less obvious coercion, like providing appraiser with minimum value of home needed for consummation or conditioning payment on consummation Attribute to creditor? Creditors cannot approve a loan if they know of appraiser coercion, unless they get a second appraisal Dodd-Frank codified and slightly expanded on these restrictions. Effective date April 1, Crediting Payments-FRB Effective date, October 1, No delayed posting of payments, unless No charge to consumer and No negative credit reporting; or Homeowner doesn t follow instructions about how to pay No pyramiding of late fees Same as FTC Credit Practices Rule Dodd-Frank requires prompt crediting and provision of periodic statements.

13 Payoff Statements-FRB Effective date, Oct. 1, 2009 Payoff statements should be provided within 5 business days Period starts running when homeowner s representative provides authorization information Dodd-Frank requires provision 7 business days after receipt of written request CFPB SBREFA Process on Servicing Force-placed insurance Periodic statements Crediting and payoff statements Error resolution Failure to suspend a foreclosure where consumer is performing on a mod or otherwise performing.

14 Higher-Cost Mortgage Rules Effective for loan applications received on or after October 1, 2009 (except where otherwise specified) Intended to apply to subprime market APOR trigger No points and fees trigger `Substantive provisions Ability to repay Prepayment penalty Escrow requirements Only covers closed-end mortgages (not construction or bridge loans), but as with HOEPA, spurious open-end credit is a violation Remedies include actual, stat., enhanced damages, atty fees/costs (rescission for ppp rule) What Is the APOR? Average prime offer rate Based on Freddie Mac Weekly Survey Rate Different trigger from HOEPA Assumptions depend on loan term How much of a spread do you need? 1.5 percentage points higher for first liens 3.5 percentage points higher for second liens

15 Ability to Repay Rules Same standards as HOEPA rules No hard lines, can rely on either DTI or residual income No safe harbor if negative amortization or balloon payment < 7 years Income as of consummation Must be documented unless undocumented income not materially greater than actual income Can include reasonably expected income (income and its verification broadly defined) Expenses as of consummation Payments measured seven years out by fully-indexed rate Includes current obligations Taxes and property insurance, and PMI No pattern and practice requirement Ability to Repay: Rebuttable Presumption Presumption of compliance if creditor meets three conditions. Verify repayment ability as required. Use the largest fully-indexed payment for first seven years Use either a debt to income ratio (on total debt) or residual income. Not available if neg. am or balloon in first seven years. Rebuttable presumption based on all circumstances: e.g., very high dti, low residual income, etc.

16 Prepayment Penalty Rules Four part test Penalty otherwise permitted by law Penalty applies for no more than 2 years Penalty does not apply if refinanced by creditor or affiliate of creditor Payment and interest fixed for 4 years Loans that violate these rules may be rescinded Eff. Date Oct. 1, 2009 Unlike HOEPA rules, no 50% DTI requirement DF: QM and nonqm rules. Ban for ARMs/highercost loans. Phase-out approach for other QMs (with none after 3 years). Escrow Requirements First liens only Remain in place for life of loan Consumer may cancel, in writing, one year after consummation Effective for loans after Apr. 1, 2010 Different effective date for manufactured housing, Oct. 1, 2010 Jumbo loans have higher APR trigger, with eff. date Apr. 1, Dodd-Frank requires escrow accounts for first five years/ duration of mortgage insurance. Proposed rule comments due May, 2011; no final rule yet.

17 HOEPA New trigger based on timing and amount of prepayment penalties Covers open-end mortgages Lowers triggers 6.5/8.5 points for APR trigger 5 points for points and fees trigger/8 if <20k (remember this includes prepayment penalties) Ban on balloon payments Limitations on late fees amt and timing Pre-loan counseling required CFPB proposed rule is out: comments due Sept. 7, Disclosure Changes Under TILA Early disclosures under TILA, effective July 30, 2009 Maximum payment disclosures and disappearance of the payment schedule, effective January 30, 2011 Transfer notice by holder, effective January 1, 2011 Under RESPA Changes to GFE and HUD-1, effective January 1, 2010 CFPB has proposed rule on combined form; APR.

18 Early Disclosures (MDIA) On all closed-end mortgage loans, effective July 30, 2009 (measured by date of application) Provided within 3 days of application and at least 7 days before closing If APR changes beyond tolerances from early disclosures to closing, new disclosures must be provided at least 3 business days before closing No More Payment Schedule Effective 1/30/2011, no more payment schedule for all closed-end mortgage loans Instead, the original payment, maximum payment within first five years, and maximum payment ever must be disclosed Balloon payments must be separately disclosed Neg am disclosed, but only for POARMs If there is an escrow, taxes and insurance must be included Mortgage insurance must be included

19 TILA RESPA new disclosure 1099 pages HUD is now early too Focuses too much on closing costs APR buried; maximum payment buried. Will people choose loans on closing costs? COMMENTS DUE: Nov. 6, 2012; And Sept. 7, Link: es/consumer-financial-protection-bureauproposes-know-before-you-owe-mortgageforms/ RESPA Changes New GFE and HUD-1, effective January 1, 2010 Disclosures are binding (to an extent) No limit on interest rate dependent fees No change permitted for non-interest dependent origination fees 10% cap on most other fees Disclosure of loan terms Many fees bundled Average charge pricing permitted Required use rules tightened Servicing disclosures enhanced

20 Average Charge Pricing Requirements: Defined class of borrowers 30 days to 6 months Same geographical area Same loan type All borrowers charged actual average price, without any markup Records maintained for 3 years Means that an overcharged fee could still be bona fide and reasonable, so long as it is an actual average charge Careful discovery needed for internal pricing TIL Statutory Damages Closed-end mortgage violations, $4K, effective July 30, 2009 Applies to violations occurring on or after that date Mortgages closed after that date Rescission violations Also new section of 1639(m) Makes violations of rule making a violation of FTC udap rules May be helpful in establishing UDAP, other claims based on non-listed violations

21 CFPB Regulatory Agenda See latest from Spring 2012 Lists current rulemakings at every phase COMMENT EARLY AND OFTEN.