Notice Regarding Updated Regulations and Summary of Recent CFPB Mortgage Rules

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1 April 23, 2012 Notice Regarding Updated Regulations and Summary of Recent CFPB Mortgage Rules The Consumer Financial Protection Bureau ( CFPB or Bureau ) recently issued final rules related to mortgage lending. This notice summarizes those rules and directs NMLS-approved course providers to materials that may be used as a resource in updating currently approved courses and/or to prepare new courses. DISCLAIMER: This document is not a legal interpretation of the final rules as promulgated by the CFPB nor does it serve as official policy guidance from CSBS, NMLS, or the CFPB. Any individual or organization delivering education or engaging in any loan origination and/or servicing activities is responsible for knowing all the information contained in the regulations. Republished Regulations In 2011 the CFPB republished a number of regulations that were formerly under the jurisdiction of other federal agencies. SUBSEQUENTLY A NUMBER OF THOSE REGULATIONS HAVE BEEN REVISED BY THE CFPB WITH VARIOUS EFFECTIVE DATES FOR SUCH CHANGES. Course providers are required to ensure citations in courses make reference to the correct AND CURRENT regulation. The CFPB maintains a list of regulations and links to federal registry on their web site at: A limited number of examples are listed below: Regulation B: Equal Credit Opportunity (12 CFR 1002) Regulation C: Home Mortgage Disclosure (12 CFR 1003) Regulation F: Fair Debt Collection Practices Act (12 CFR 1006) Regulation G: S.A.F.E. Mortgage Licensing Act Federal Registration of Residential Mortgage Loan Originators (12 CFR 1007) Regulation H: S.A.F.E. Mortgage Licensing Act State Compliance and Bureau Registration System (12 CFR 1008) Regulation N: Mortgage Acts and Practices-Advertising (12 CFR 1014) Regulation O: Mortgage Assistance Relief Services (12 CFR 1015) Regulation P: Privacy of Consumer Financial Information (12 CFR 1016) Regulation V: Fair Credit Reporting (12 CFR 1022) Regulation X: Real Estate Settlement Procedures Act (12 CFR 1024) Regulation Z: Truth in Lending (12 CFR 1026) Please closely review all course materials to add citations and update old citations. All federal and state laws and any content that is not your own must be properly cited. Also ensure that you have the appropriate permissions to use that material. We strongly encourage all course providers to th Street, N.W. Ninth Floor Washington, DC FAX

2 utilize the Reference Guide: Citing Sources and Regulations in Course Materials which outlines NMLS expectations for citing sources, laws and regulations. Compliance Guides: On May 10, 2013, the CFPB published the Small entity Compliance Guide for the Ability-to-Repay and Qualified Mortgage Rules. In the Bureau s own words, the goal of the guide is to provide a comprehensive rule summary in plain language and FAQ format with the intent of making the content more accessible and consumable to a board range of constituents. A pdf version of the compliance guide may be accessed here: A comparison chart which compares the general Ability-to-Repay requirements with the requirements for originating Qualified Mortgage Loans may be accessed here: Notice Updated CFPB Regulations and Final Rules Page 2

3 ESCROW REQUIREMENTS 12 CFR TILA (REGULATION Z) June 1, 2013 Effective Date THIS REGULATION HAS TWO EFFECTIVE DATES (SEE 12 CFR ) Link to an amendment published at 78 FR 4753, Jan. 22, Link to an amendment published at 78 FR 10442, Jan. 13, Amendment(s) published January 22, 2013, in 78 FR 4753 EFFECTIVE DATES: June 1, Section is revised to read as follows: Requirements for higher-priced mortgage loans. Rule A creditor may not extend a higher-priced mortgage loan secured by a first lien on a consumer s principal dwelling unless an escrow account is established before consummation for payment of property taxes and premiums for mortgage-related insurance required by the creditor.... Exceptions Creditors that: o Extend 50% or more of their mortgages in counties designated rural or underserved by the CFPB o Originate 500 or fewer mortgages o Have $2 billion or less in assets o Do not already provide escrow services Cooperative shares Initial construction transactions Bridge loans of 12 months or less Reverse mortgages Insurance escrow account where home owners association has a master insurance policy condominiums and PUDs but also to any OR other type of property ownership arrangement that has a governing association with an obligation to maintain a master insurance policy. Definitions Average Prime Offer Rate (APOR): annual percentage rate published at least weekly by the CFPB and FFIEC derived from average interest rates, points, and other loan pricing terms offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. SEE Notice Updated CFPB Regulations and Final Rules Page 3

4 Higher-Priced Mortgage: Mortgage Type Percentage Points Above APOR Conforming +1.5% Non-Conforming +2.5% Subordinate Lien +3.5% Notice Updated CFPB Regulations and Final Rules Page 4

5 LOAN ORIGINATOR COMPENSATION REQUIREMENTS 12 CFR , TILA (REGULATION Z) Multiple Effective Dates: Amendments to (h) and (i) are effective on June 1, All other provisions of the rule are effective January 10, PLEASE DOCUMENT THE EFFECTIVE DATE OF JUNE ALL OF THE AMENDMENTS INSERTED INTO 12 CFR INDICATE AN EFFECTIVE DATE IN JAN 2014 Link to an amendment published at 78 FR 6966, Jan. 31, Link to an amendment published at 78 FR 11006, Feb. 14, Link to an amendment published at 78 FR 11410, Feb. 15, Rules (1) A loan originator organization, shall maintain records sufficient to evidence all compensation it receives from a creditor, a consumer, or another person, all compensation it receives from a creditor, a consumer, or another person; all compensation it pays to any individual loan originator, and the compensation agreement that governs each such receipt or payment for three years after the date of each such receipt or payment. (2) In connection with a consumer credit transaction secured by a dwelling, no loan originator (LO) shall receive and no person shall pay to a LO, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual LO, or the terms of multiple transactions by multiple individual LO s. (3) Term of a transaction is any right or obligation of the parties to a credit transaction. The amount of credit extended is not a term of a transaction or a proxy for a term of a transaction, provided that compensation received by or paid to a LO, is based on a fixed percentage of the amount of credit extended. (4) An individual LO may receive, and a person may pay an individual LO compensation in the form of a contribution to a defined contribution plan that is a designated tax-advantaged plan or a benefit under a defined benefit plan that is designated tax-advantaged plan. (5) The compensation paid to an individual LO does not, in the aggregate, exceed 10 percent of the individual LO s total compensation corresponding to the time period for which the compensation under the non-deferred profits-based compensation plan is paid. (6) Dual Compensation no LO shall receive compensation, from any person other than the consumer in connection with the transaction, and no person who knows or has reason to know of the consumer-paid compensation to the LO shall pay any compensation to an LO in connection with the transaction. Exemptions (1) Section 1403 of the Dodd-Frank Act (DFA) contains a section that would generally have prohibited consumers from paying upfront points or fees on transactions in which the loan originator compensation is paid by a person other than the consumer. The Bureau had proposed to waive the ban so that creditors could charge upfront points and fees in connection with a mortgage loan, so long as they made available to consumers an alternative loan that did not include upfront points and fees. The Bureau has decided instead to issue a complete exemption to the prohibition on upfront points and fees pursuant to its exemption authority under section 1403 while it scrutinizes several crucial Notice Updated CFPB Regulations and Final Rules Page 5

6 Definitions issues relating to the proposal s design, operation, and possible effects in a mortgage market undergoing regulatory overhaul. (1) Loan Originator: a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities. The term includes an employee, agent, or contractor of the creditor or loan originator organization if the employee, agent, or contractor meets this definition. (2) Compensation: Includes salaries, commissions, and any financial or similar incentive. Exceptions to definition of LO: A person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities. An employee of a manufactured home retailer who does not take a consumer credit application, offer or negotiate credit terms available from a creditor, or advise a consumer on credit terms available from a creditor. A person that performs only real estate brokerage activities and is licensed or registered in accordance with applicable state law, unless such person is compensated by a creditor or loan originator for a particular consumer credit transaction subject to this section. A servicer or servicers employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments or have a reasonable likelihood of defaulting or falling behind. Additional LO Qualification Requirements LO must be registered and licensed in accordance with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), and State SAFE Act implementing law. LO organizations must ensure that each LO who works for the organization is registered or licensed in accordance with the above laws. All applicable NMLS requirements. Notice Updated CFPB Regulations and Final Rules Page 6

7 ABILITY TO REPAY 12 CFR (C) TILA (REGULATION Z) January 10, 2014 Effective Date Rule A creditor shall not make a loan... unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms. Basis for Determining Ability to Repay Current or reasonably expected income Current employment status Monthly mortgage payment Monthly payment on simultaneous loans Monthly payment for mortgage-related obligations Current debt obligations, alimony, and child support Monthly debt-to-income ratio or residual income Credit history Notice Updated CFPB Regulations and Final Rules Page 7

8 QUALIFIED MORTGAGE 12 CFR (e) TILA (REGULATION Z) January 10, 2014 Effective Date Rules (1) A creditor that originates a qualified mortgage that is not a higher-priced transaction complies with the ability to repay requirements. (2) A creditor that originates a qualified mortgage that is a higher-priced transaction is presumed to comply with the ability to repay requirements. Qualified Mortgage Definition Regular periodic payments that are substantially equal Loan term does not exceed 30 years Total points and fees do not exceed 3% for loans over $100,000 Underwritten using: o Maximum interest rate that may apply during first five years OF FULLY AMORTIZING PAYMENTS, and o Periodic payments that repay the loan amount over the term, including any reset to the highest rate possible Creditor considers and verifies: o Current or reasonably expected income or assets other than the value of the dwelling o Current debt obligations, alimony, and child support Total monthly debt to income does not exceed 43% (Back-End) 1. Special Rules any loan eligible for GSE, FHA, VA, USDA, or RHS purchase or guarantee will be considered a QM. This special rule will expire at the earlier of any of these agencies defining QM or SEE U.S. Department of Agriculture Notice Updated CFPB Regulations and Final Rules Page 8

9 BALLOON PAYMENT QUALIFIED MORTGAGE 12 CFR (f) TILA (REGULATION Z) January 10, 2014 Effective Date Rule a balloon loan can be a qualified mortgage if: The creditor is in a rural or underserved area o Rural: any county that is neither a metropolitan statistical area nor in a micropolitan statistical area that is adjacent to a metropolitan statistical area. Creditors may rely on a list of counties published by the Bureau. o Underserved: any county where no more than 2 creditors extended more than 5 mortgages in the previous calendar year. The creditor originates fewer than 500 mortgages annually The creditor has fewer than $2 billion in assets The consumer can make all the scheduled payments under the terms together with the consumer s monthly payments for all mortgage-related obligations excluding the balloon payment from the consumer s current income or assets No increase in principal balance 30 year term or less Maximum 3% points and fees if loan exceeds $100,000 Income and debt obligations considered and verified Creditor considers monthly front end debt-to-income ratio and verifies income and debt obligations, excluding the balloon payment The loan is not transferred to another person for at least 3 years Notice Updated CFPB Regulations and Final Rules Page 9

10 HIGH COST MORTGAGES 12 CFR RESPA (REGULATION X) 12 CFR , , , TILA (REGULATION Z) January 10, 2014 Effective Date Expanded Scope of HOEPA coverage The following types of mortgages are now potentially subject to HOEPA coverage effective January 2014: Purchase-money mortgages Refinances Closed-end home-equity loans Open-end home-equity loans (HELOCs) Exemptions Loans to finance the initial construction of a dwelling Loans originated and financed by Housing Finance Agencies Loans originated through the USDA Rural Housing Service 502 Direct Loan Program Reverse mortgages Revised HOEPA Coverage Tests The following loans will be covered by HOEPA: APR exceeds APOR by 6.5% for first lien mortgages, or 8.5%for a first lien mortgage if the dwelling is personal property and the transaction is under $50,000 The APR exceeds the applicable APOR by more than 8.5% for subordinate and junior liens Points and fees exceed 5% of the total transaction amount or, for loans less than $20,000, the lesser 8% of transaction amount or $1,000 (adjusted annually for inflation) The creditor is permitted to charge or collect a prepayment penalty more than 36 months after closing or permit such fees or penalties to exceed, in the aggregate, more than 2% of the amount prepaid Restrictions on Loan Terms for HOEPA Covered Loans Balloon payments, except for those that account for seasonal or irregular borrower income, short-term bridge loans, made by specialized and approved creditors that may operate in rural or underserved areas Prepayment penalties and financing points and fees Late fees may not exceed 4% of past due payment Payoff statement fees Loan modification fees Creditors originating HELOCs must assess the consumers ability to repay Creditors cannot recommend or encourage a consumer to default on a loan or debt to be refinanced by a high cost mortgage Home Ownership Counseling Requirements for HOEPA loans: Lenders must provide a list of homeownership counseling organizations to consumers within three business days after they apply for a mortgage loan Lender must obtain a list from a website that will be developed by the Bureau or data that will be made available by the Bureau and HUD Creditors must obtain confirmation a first time buyer has received homeownership counseling from a federally certified or approved homeownership counselor or organization before making a loan that has any negative amortization features Notice Updated CFPB Regulations and Final Rules Page 10

11 MORTGAGE SERVICING 12 CFR , , , , RESPA (REGULATION X) 12 CFR , , , RESPA (REGULATION Z) January 10, 2014 Effective Date Rules (1) Creditors and servicers must provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and information regarding delinquencies. (2) Creditors and servicers must provide a consumer whose mortgage has an adjustable rate with a notice between 210 and 240 days prior to the first payment due after the rate first adjusts. (3) Servicers must promptly credit periodic payments from borrowers as of the day of receipt. Periodic payments consist of principal, interest and escrow (if applicable). (4) Servicers are prohibited from charging a borrower for force-placed insurance coverage unless the servicer has a reasonable basis to believe the borrower has failed to maintain hazard insurance, and has provided required notices. (5) Servicers are required to meet certain procedural requirements for responding to written information requests or complaints of errors. (6) Servicers are required to establish policies and procedures reasonably designed to achieve objectives specified in the rule. Ex) servicers are required to retain records relating to each mortgage loan until one year after the mortgage loan is discharged or servicing is transferred. (7) Servicers must establish or make good faith efforts to establish live contact with borrowers by the 36 th day of their delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. (8) Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel to assist them with loss mitigation options where applicable. (9) Servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower s principal residence. a. The rule restricts dual tracking where a servicer is simultaneously evaluating a consumer for loan modifications at the same time that it prepares to foreclose. b. Specifically, a servicer is prohibited from making the first notice or filing required for a foreclosure process until a mortgage loan account is more than 120 days delinquent. Exemptions Small servicers (5,000 mortgage loans or less and only service mortgage loans the servicer or an affiliate owns or originated) are exempt but must comply with two requirements 1. A small servicer must not make the first notice required for a foreclosure unless a borrower is more than 120 days delinquent. 2. A small servicer may not proceed to foreclosure judgment or order of sale, or conduct a foreclosure sale, if a borrower is performing pursuant to the terms of a loss mitigation agreement. Notice Updated CFPB Regulations and Final Rules Page 11

12 Reverse Mortgage transactions and timeshare plans are exempt from the periodic statement requirement. ARMs with terms of one year or less are exempt from the ARM disclosure requirements. For RESPA rule, certain exemptions apply for loans on properties of 25 acres or more, business-purpose loans, temporary financing, loans secured by vacant land etc. Open-end lines of credit (home equity plans) are generally exempt from RESPA Servicing Final Rule. Exemptions applicable to small servicers are also being extended to Housing Finance Agencies, without regard to the number of mortgage loans serviced by any such agency. Scope With respect to the 2013 TILA Servicing Final Rule: o Periodic statement and ARM disclosure requirement applies only to closed-end mortgage loans o Requirements for crediting of payments and providing payoff statements apply to both open-end and closed-end mortgage loans. With respect to the 2013 RESPA Servicing Final Rule: o Certain requirements generally apply to federally related mortgage loans that are closed-end. Notice Updated CFPB Regulations and Final Rules Page 12

13 APPRAISAL DISCLOSURE AND DELIVERY REQUIREMENTS 12 CFR ECOA (REGULATION B) January 18 th, 2014 Effective Date Rules (1) Creditors are required to notify applicants within three business days or receiving an application of their right to receive a copy of appraisals developed. (2) Creditors are required to provide applicants a copy of each appraisal and other written valuation promptly upon its completion or three business days before consummation or account opening. (3) Creditors are prohibited from charging for the copy of appraisals and other written valuations, but are permitted to charge applicants reasonable fees for the costs of appraisals or other written valuations unless applicable law provides otherwise. Notice Updated CFPB Regulations and Final Rules Page 13