6/21/2013. Section III. Federal Rules, Regulations and Their Requirements. Federal Regulations. Federal Regulations

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1 Section III Federal Rules, Regulations and Their Requirements Federal Regulations The federal rules, regulations and requirements in this course are complied into 4 categories for analysis: Laws requiring financial disclosures Privacy and identity protection laws Protections from predatory lending Civil rights laws Federal Regulations Laws requiring financial disclosures are: The Real Estate Settlement Procedures Act The Truth in Lending Act The Mortgage Disclosure Improvement Act The Homeowner s Protection Act The Dodd-Frank Act The Equal Credit Opportunity Act 1

2 Federal Regulations The consumer privacy and identity protection laws are: The Fair Credit Reporting Act The Fair and Accurate Credit Transactions Act The Red Flag Rules The Gramm-Leach-Bliley Act The U.S. Patriot Act The National Do Not Call Registry Federal Regulations The consumer protections from predatory lending laws are: Home Ownership Equity Protection Act Federal Reserve Mortgage Loan Originator Compensation Rule Secure and Fair Enforcement Mortgage Licensing Act The civil rights laws are: Equal Credit Opportunity Act Home Mortgage Disclosure Act Community Reinvestment Act Fair Housing Act Federal Regulations 2

3 Laws Requiring Financial Disclosures RESPA = Real Estate Settlement Procedures Act, which provides transparency and information for consumers: Reduce / eliminate improper kickbacks and financing arrangements Consumers can shop for best settlement services for their needs RESPA applies to ALL federally-related residential loans: 1-4 families properties under 25 acres in size RESPA: Application and Purpose Exemptions from RESPA include: Loan conversions Loan assumptions Temporary financing (such as a construction loan) Transfers of property on secondary marketplace Sale of vacant land where NO housing will go Business transactions o Including rental property transactions RESPA and Federal and State Authority RESPA provisions will preempt any state law inconsistent with RESPA: However, a state law not inconsistent with RESPA & more specific in its requirements may not be preempted SO: The law that offers more protection WINS! o As determined by CFPB 3

4 RESPA Applies to Settlement Services Settlement Services include: Mortgage Loan Origination Brokering Mortgages Settlement services at closing RESPA Applies to Settlement Services Settlement Services also include: Third party services: o Title services o Credit report services o Attorney services o Recordation o Notarization RESPA Applies to Settlement Services Services provided by third parties also include: Appraisal services Inspections Mortgage insurance Casualty and property insurance Services involving property taxes on realty 4

5 RESPA: Special Information Booklet Pursuant to RESPA, a lender is required to provide a special information booklet: To anyone receiving /completing application for a nonexempt federally related mortgage loan Delivered / placed in mail no later than 3 business days after receipt of application NOT necessary IF application is denied within 3 days RESPA: Special Information Booklet If open-ended credit plan, the lender / broker must provide brochure : Your Home is on the Line: What You should Know About Home Equity Lines of Credit o Refinancing o Reverse mortgage o Not for 1 to 4 family residential property o Subordinate lien o May be translated RESPA and the Good Faith Estimate The lender is also required to provide to borrower, within 3 business days of receiving application: GFE (The GFE form is included in RESPA and provided as appendix C to Title 12 section ) o Unless application is denied within 3 days A HUD settlement services booklet A Mortgage Servicing Disclosure Statement 5

6 RESPA and the Good Faith Estimate The GFE (Good Faith Estimate) summarizes the borrower s settlement services: All information must stay good / accurate for 10 business days Only credit report fee can be collected before GFE Other origination fees may be collected after the GFE Responsibility to send GFE is lender s Only 1 GFE is required to be sent Before the GFE: no fee except credit report Settlement disclosures must meet GFE tolerances GFE sent within 3 days Other legitimate, bona fide costs are okay, e.g. appraisal GFE terms = good for 10 days Applicant indicates intent to proceed RESPA and the Good Faith Estimate How the GFE is delivered MATTERS because different methods of sending result in different timeframes a mortgage loan originator may presume the GFE has been received! 6

7 RESPA and the Good Faith Estimate These are the assumptions made based upon how the GFE is sent: If mailed, borrower received it 3 business days later If ed, so long as MLO had borrower s permission & received delivery receipt, borrower received it the next day If faxed, MLO must receive signed copy back to confirm receipt If hand delivered it is received that day RESPA and the Good Faith Estimate The TIL (Truth in Lending Statement) and GFE are sent together: Borrower must indicate intent to proceed with the transaction before any fees may be charged other than for credit report RESPA and the Good Faith Estimate The GFE includes the following information: Discusses the purpose of the disclosures being sent Provides a summary of the data Presents the borrower s personal identifying data Includes the following sections: o Key dates o Loan summary o Escrow account information o Summary of settlement charges 7

8 RESPA and the Good Faith Estimate The GFE includes the following information: Origination charges Credit charge or points Required services selected by lender Title services and lender s title insurance Owner s title insurance Requires services the borrower may shop for RESPA and the Good Faith Estimate The GFE includes the following information: Government recording charges Transfer taxes Initial deposit required for the escrow account Daily interest charges Homeowner s insurance RESPA and the Good Faith Estimate Page 3 of the GFE groups categories of charges by fixed and those which may change: Tradeoff table: relationship between settlement charges, interest rate and resulting payment Shopping tools for borrower to compare loans 8

9 Term Availability, Tolerances and Changed Circumstances Terms must be available 10 business days from when provided to consumer, EXCEPT FOR: Interest rate Charges in terms dependent upon interest rate Charge / credit for chosen interest rate Adjusted origination charges Per diem interest Originator may extend availability period of terms Term Availability, Tolerances and Changed Circumstances The lender must be able to collect all necessary information: But lender may NOT require applicant to submit supplemental documentation to verify information on application before providing GFE Same time frames, restrictions and delivery requirements apply to broker / originator taking application Terms may change up to 60 days before closing as long as it is so disclosed on original GFE Otherwise, original GFE applies regardless The G F E: Tolerances There are 3 categories of tolerances with regard to amounts on the GFE: Charges which may not change Those which may change by not more than 10% Those which may change at settlement 9

10 The G F E: Tolerances The charges at settlement may not exceed the amount included on the GFE for the following: Origination charge Credit / charge for interest rate chosen / adjusted origination charge while rate lock is in effect Transfer taxes The G F E: Tolerances The charges at settlement may not be greater than 10% of the amount included on the GFE are the following: Lender-required 3rd party services Lender-required title services and title insurance o Owners title insurance, should owner use provider identified by loan originator Government recording charges All other settlement services on GFE may change at settlement The G F E: Tolerances Case study: GFE mailed November 1 and faxed on October 31 Loan won t close until 3 months Error discovered ($1000 wrong. $1200 correct) 1 week later (November 7), rate goes from 3.5% to 3.75% November 11 wants to proceed What can be done? 10

11 The G F E: Tolerances Case study discussion: Assume received 3 days after sent via mail (November 3 midnight) o Because no confirmation of fax Response in 10 days = terms good Typically rate and charges stand, but since 60 days out: o IF disclosed, charge may change No rate lock = rate can change Time for a new GFE no change origination charge transfer taxes credit or charge for interest rate during rate lock lender required < 10% services government recording charges may change anything else The GFE: Curing Tolerance Violations IF charges exceed tolerances, originator may CURE: Reimburse overage amount at settlement OR Within 30 calendar days after settlement o IF funds placed in mail within 30 days, then cured 11

12 The GFE: Curing Tolerance Violations Originator is bound to tolerance on GFE, UNLESS: Revised GFE is provided not later than 3 business days before settlement o Per accordance with requirements The GFE: Curing Tolerance Violations At closing the charges and tolerances from GFE are carried over to closing statement (HUD-1): Any tolerance violations are credited to borrower Remember: Credits can affect APR (under MDIA) The GFE: Curing Tolerance Violations IF there is a revised GFE: Signed copies must be kept for at least 3 years after closing Reason for revision must be included o Can include changed circumstances 12

13 The GFE: Curing Tolerance Violations Changed Circumstances include: Acts of God Inaccuracies in information used New information that would have been used if known Market fluctuations are NOT changed circumstances! The GFE: Curing Tolerance Violations The following are the requirements for submitting a revised GFE: Required charges increase beyond tolerances change in specific loan terms identified in GFE Borrower requests changes to mortgage which affect terms / charges GFE expires if borrower doesn t respond to the positive within 10 days Unlocked interest rate changes / expires The GFE: Curing Tolerance Violations The following are the requirements for submitting a revised GFE: Must be provided to borrower within 3 business days when impact on costs is known GFE may only increase to actual extent of changes which resulted Originator cannot freely redo charges and terms in original GFE 13

14 The GFE: Curing Tolerance Violations IF new construction involved where closing will occur >60 calendar days from GFE issue, a disclosure should be included: Originator may include clear and conspicuous disclosure: any time up to 60 calendar days before closing, revised GFE may be issued If no disclosure, then no revised GFE can be issued, except: o Acceptable change in circumstances o Expired GFE The GFE: Curing Tolerance Violations NOTE: For open equity lines of credit, a lender who has complied with the disclosure requirements of regulation Z as specified under title 12 section at the time the borrower has applied for the loan does not need to comply with this section just explained regarding the GFE. HUD-1 Settlement Statements HUD-1 must be completed on the back end of transaction by settlement agent: HUD-1 must include actual amounts All participants must be identified with contact information Forms must be kept for at least 5 years after 14

15 HUD-1 Settlement Statements A HUD-1 settlement statement is required when transaction involves federally-related mortgage loan with a borrower and a seller: No fee for preparing form IF refinance, etc. with no seller: HUD-1 / HUD-1A may be used It is the Originator s responsibility to convey information for HUD form to settlement agent. HUD-1 Settlement Statements General HUD instructions are as follows: May use typewriter, handwriting, computer / any other legible means Settlement agent must complete form to itemize all charges imposed upon the borrower &seller Origination and title services charges should not be itemized except as provided Itemize services with name of person ultimately receiving payment & total amount HUD-1 Settlement Statements General HUD instructions are as follows: Charges to buyer and seller must appear in their appropriate columns, EXCEPT: o List any charges seller must pay on buyer s GFE, but offset with listed credits to buyer column & charges to seller column o List any charges others must pay on buyer s GFE, but offset with listed credits identifying who paid charges 15

16 HUD-1 Settlement Statements General HUD instructions are as follows: Any charge paid outside of settlement must be included on HUD form but should be marked P.O.C. Meaning paid outside of closing : Paying party must be identified in parenthesis Not included in total Indirect payments from lender to broker must be included as credits. HUD-1 Settlement Statements The settlement agent shall provide the appropriate form to the borrower: To borrower for inspection: o At least on day (24 hours) prior to settlement or within 24 hours of borrower request Unless right to review waived Must be kept by lender for 5 years after settlement CFPB has right to review anytime HUD-1 Settlement Statements Accurate charges must be on appropriate HUD form: Must be itemized as required NO amount received can exceed what is stated on HUD form 16

17 HUD-1 Statements: Curing Violations The only means of curing a violation resulting under this section is: Inadvertent or technical errors Must be cured within 30 days following settlement Common practice to correct at closing If errors discovered later o Must be cured by borrower being compensated within 30 calendar days HUD-1 Statements: Modifications of Appearance The appropriate HUD form may be modified with regard to section A: Business names, logos, addresses of agents Lines and spaces may be added Colors, fonts, size of page, general appearance ANY deviation from the substance of the form requires CFPB approval Servicing Disclosure Statements A servicing disclosure statement must be provided at time of application / within 3 days after: States whether servicing may / will not be transferred IF transferred, notices required: > / = 15 days before, by entity transferring (or both entities) < / = 15 days after, by receiving entity < / = 30 days following for atypical reason o Must have new servicer contact info 17

18 Kickbacks, Fee-splitting and Unearned Fees RESPA says: No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Kickbacks, Fee-splitting and Unearned Fees RESPA says: Any referral of a settlement service is not a compensable service. The company may not pay any company or the employees of any other company for the referral of settlement service business. (Pens, balloons, etc. OK!) Kickbacks, Fee-splitting and Unearned Fees RESPA also prohibits splitting charges where: NO splitting charges where someone who performed no services gets money Fees may never be duplicative No unearned fees This is to keep charges accurate, fair and reasonable 18

19 Kickbacks, Fee-splitting and Unearned Fees A thing of value is broadly defined: Money Discounts Salaries Commissions Fees Charges Stock Kickbacks, Fee-splitting and Unearned Fees A thing of value is broadly defined: Dividends Distributions of profits Franchise royalties Credits against monies which might be due in future Opportunity to participate in money-making program Increased equity Special account / deposit Kickbacks, Fee-splitting and Unearned Fees A thing of value is broadly defined: Special / unusual banking terms Services of all types at special / free rates Lease / rental payments based upon business referred Trips Payment of another person s expenses Reduction of existing obligation Gifts 19

20 Kickbacks, Fee-splitting and Unearned Fees Lenders may not require the use of specific service providers: FEW exceptions exist (Must be disclosed): Attorney Credit reporting agency Real estate appraiser Kickbacks, Fee-splitting and Unearned Fees Patterns of practice in business dealings may reveal improper agreements / understandings of referral: Whether or not written or consciously understood Kickback agreement can be inferred from exchange of things of value for business referred Kickbacks, Fee-splitting and Unearned Fees An improper referral also occurs: Improper referral also = borrower required to use specific provider Proper to pay fees for services actually performed BUT remember: Such fees can only be incurred at the proper time (closing) 20

21 Kickbacks, Fee-splitting and Unearned Fees An employer may pay employees for proper referral activities inhouse: Fees appearing as high may be investigated by the CFPB as possible violation Kickbacks, Fee-splitting and Unearned Fees Remember that ALL FEES must be accurate and actually earned: Sellers may never select the buyer s title insurer. If they do, buyers may sue for 3 times the total cost of title insurance and all associated charges. Affiliated Business Arrangements (AFBAS) Affiliate relationship = relationship among business entities where one entity has effective control over the other by virtue of a partnership or other agreement or is under common control with the other by a third entity or where an entity is a corporation related to another corporation as parent to subsidiary by an identity of stock ownership. 21

22 Affiliated Business Arrangements (AFBAS) Affiliated business arrangements (AFBAs) are not violations IF: Properly disclosed o Affiliated Business Arrangement Disclosure Statement No person required to use referred service provider Disclosure explains relationship and charges related to affiliate provider Affiliated Business Arrangements (AFBAS) Affiliated business arrangements (AFBAs) are not violations IF: Disclosure provided with GFE A disclosure if not specifically ABAD statement contains same required information When failure to comply, can show genuine error Escrow Account Requirements An escrow account is any account that a loan servicer establishes or control on behalf of the borrower to ensure that taxes and insurance premiums including flood insurance are paid on time. 22

23 Escrow Account Requirements An escrow account analysis is provided by servicer to determine: Appropriate target balance To calculate monthly payments Deposit needed to maintain account To determine shortages / surpluses Escrow Account Requirements Escrow analysis is required: To ensure no more than 1/12 of yearly required funds are deposited monthly No more than 2 months deposit can be required as initial deposit Excesses more than $50 must be returned to borrower Escrow Account Requirements Escrow Account Analysis MUST be conducted before account established: After complete, initial account statement to borrower Required annually Computation year begins with loan term and extends for 12 months following 23

24 Escrow Account Requirements If there is a deficiency, a servicer may: Allow to exist Require borrower to pay within 30 days o Unless more than 1 month s payment Require borrower to pay in more than 2 equal monthly payments Escrow Account Requirements If there is a deficiency, a servicer MUST: Notify borrower more than once during computation year Initial escrow statement required: At settlement / within 45 calendar days Escrow Account Requirements The initial escrow account statement must include: Borrower s monthly mortgage payment amount Portion of payment going into escrow account Itemization of estimated taxes Itemization of insurance Itemization of any other charges reasonably anticipated to be paid from escrow account during computation year 24

25 Escrow Account Requirements The initial escrow account statement must include: Anticipated disbursement date of all charges Anticipated balance in escrow account at end of period Explanation of how surplus is handled by servicer Explanation of how shortage / deficiency is paid by borrower Escrow Account Requirements The initial escrow account statement may be incorporated into the appropriate HUD form provided to the borrower. If this is not done, the servicer must provide the initial escrow account statement on the proper form in accordance with title 12 section The initial escrow account statement does not need to identify specific payees by name provided there is sufficient information to identify the use of the funds. In other words the funds may be designated to pay hazard insurance, home association dues, or property taxes. Escrow Account Requirements Escrow analysis is not required IF: Borrower in default / foreclosure / bankrupt However, once the borrower becomes current, the servicer must provide a history of the account since the last annual statement was provided within 90 days of the account becoming current. 25

26 Escrow Account Requirements Loan servicers are required to make timely payments from escrow account for the obligations covered by the account. They must keep adequate records for a period of 5 years following the last service on the account. The Truth in Lending Act (TILA) TILA was the first piece of federal legislation to require the disclosure of the costs associated with consumer credit transactions. The purpose of TILA is to promote the informed use of consumer credit by requiring accurate timely disclosures of the credit terms in its total comprehensive cost. The Truth in Lending Act (TILA) TILA (1968) also gives to consumers: Right to cancel (rescind) Means for timely resolution of credit disputes Restrictions on advertising 3/7/3 rule 26

27 The Truth in Lending Act (TILA) TILA requires: For variable-rate APR loan secured by primary residence Max. interest rate stated up front Does NOT govern cost of credit / establish max. charges The Truth in Lending Act (TILA) TILA applies to extension of credit IF: Credit offered to consumer Business, person or entity offers credit regularly (more than 25 times generally or more than five times for transactions secured by dwelling) Credit payable in more than four installments Credit primarily for personal, family or household purposes TILA: Important Definitions Business day: means a day on which the creditor s offices to the public for carrying on substantially all of its business function. Typically, the term means every calendar day with the exception of Sunday and all legal public holidays. 27

28 TILA: Important Definitions Credit: means the right to defer payment of debt or to incur debt and defer payment. Periodic rate: finance charge imposed on a balance of principal by the day, week, month, or other subdivision of the year (such as a quarter). TILA: Important Definitions Residential mortgage transaction: means a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the customer s principal dwelling to finance the acquisition or initial construction of that dwelling. TILA: Important Definitions Security interest: an interest in property that ensures performance of the consumer credit application that is recognized by state or federal law. Finance Charge: cost to consumer of credit in a dollar amount inclusive of all charges and fees by the creditor, including settlement service provider charges ONLY WHEN the creditor requires use of that settlement service provider. 28

29 TILA: Finance Charge Provisions Finance charges include: Interest Points Loan fees Assumption fees Finder s fees Appraisal TILA: Finance Charge Provisions Finance charges include: Investigation Credit report Insurance premiums Discounts Charges paid for debt cancellation in conjunction with a credit TILA: Finance Charge Provisions Finance charges do NOT include: Application fees charged to all applicants Late payment charges Over limit charges Charges resulting from a default of delinquency Fee charged for participating in a credit plan Seller s points 29

30 TILA: Finance Charge Provisions Finance charges do NOT include: Bona fide real estate fees Title preparation fees Property survey Notary fees Amounts required to be paid into escrow TILA: Finance Charge Provisions Finance charges do NOT include: Voluntary debt suspension or cancellation of coverage fees if: o Not required by lender o Terms are fully disclosed o Customer signs written request for such coverage following disclosures TILA: Finance Charge Provisions Transactions Exempt from TILA are as follows: Business credit Agricultural credit Credit extended to an entity other than a person Annual adjustments to credit 30

31 TILA: Finance Charge Provisions Transactions Exempt from TILA are as follows: Credit for public utilities (water, sewer, electricity, etc.) and home fuel budget plans Securities or commodities accounts Student loan programs Employer-sponsored retirement plans TILA Disclosure Requirements General disclosure requirements for TILA are as follows: Must be more clearly and conspicuously stated than other terms: o Finance Charge o Annual Percentage Rate o Actual interest rate o Notice of right to cancel Must reflect the terms and legal obligations existing between parties TILA Disclosure Requirements General disclosure requirements for TILA are as follows: Must be made more than 3 business days prior to closing o Consumer may waive this requirement Use of estimates is okay if: o Necessary information is unknown o Disclosure based on best information reasonably available at time disclosure is provided o States clearly that disclosure = estimate 31

32 TILA Disclosure Requirements Curing inaccuracies: If a disclosure becomes inaccurate because of an event that occurs after the creditor delivers the required disclosures, the inaccuracy is not a violation although new disclosures may be required and should be sent as soon as possible but not later than 3 days prior to closing. TILA Disclosure Requirements The annual percentage rate (APR) will be considered accurate IF accurate according to the requirements and within required tolerances. Records must be kept for 2 years from the date of last action unless otherwise stated. TILA Disclosure Requirements The following must be disclosed for closed-end credit transactions (Including mortgages): Cash price / principal loan amount Total sale price Finance charge APR, and IF it may go up after closing: o Circumstances under which rate may increase o Any limitations on the increase o The effect of an increase 32

33 TILA Disclosure Requirements The following must be disclosed for closed-end credit transactions (Including mortgages): Terms of repayment Identity of creditor making disclosures Amount financed calculated by: o Determining principal loan amount / cash price (minus any down payment) o Adding any other amounts that are financed by creditor & are not part of finance charge o Minus any prepaid finance charge TILA Disclosure Requirements Finance charges are accurate IF amount: Is understated by no more than $100 OR Is greater than the amount required to be disclosed TILA Disclosure Requirements Adjustable-rate mortgage: means a transaction secured by real property or a dwelling for which the annual percentage rate may increase after consummation. Step-rate mortgage: means a transaction secured by real property or a dwelling for which the interest rate will change after consummation, and the rates that will apply and the periods for which they will apply are known at consummation. 33

34 TILA Disclosure Requirements Interest-only: means that, under the terms of the legal obligation, one or more of the periodic payments may be applied solely to accrued interest and not to loan principal; an "interest-only loan" is a loan that permits interest-only payments. Amortizing loan: means a loan in which payment of the periodic payments does not result in an increase in the principal balance under the terms of the legal obligation. TILA Disclosure Requirements Negative amortization: means payment of periodic payments that will result in an increase in the principal balance under the terms of the legal obligation; a loan, other than a reverse mortgage, that provides for a minimum periodic payment that covers only a portion of the accrued interest, resulting in negative amortization. Fully-indexed rate: means the interest rate calculated using the index value and margin at the time of consummation. TILA Disclosure Requirements A Billing Rights Notice Model Form must also be provided. This form was created under TILA and outlines: What steps a consumer may take to correct errors in a bill How inquiries about account related to billing may be made 34

35 TILA Disclosure Requirements Reverse Mortgage: credit transaction where a security interest is created in the borrower s principal residence in exchange for credit. Principal, interest, equity are due and payable upon: Default Following death of consumer Following transfer of property used as security interest When property ceases to serve as principal residence of borrower Refinancing, Assumption and Other Considerations When existing credit obligation is satisfied & replaced with a new credit obligation for the same consumer, refinancing has occurred: New transaction Requires new disclosures New finance charge o Includes any unearned portion of old charge not credited to existing obligation Refinancing, Assumption and Other Considerations For a refinance, the disclosed amount shall be considered accurate if the disclosed finance charge: Is understated by < / = ½ of 1% of face amount of note / $100, whichever is greater for refinance with SAME creditor Is understated by < / = 1% of face amount of note / $100, whichever is greater for refinance with NEW creditor Is greater than amount required to be disclosed 35

36 Refinancing, Assumption and Other Considerations When a creditor expressly agrees in writing with a subsequent consumer to accept that consumer as a primary obligor on an existing residential mortgage transaction, a mortgage may be assumed: Before loan is assumed: o New disclosures required To subsequent consumer Based on remaining obligation Refinancing, Assumption and Other Considerations Disclosures must be delivered per rate adjustments: At least once a year in which adjustment occurs o Without payment change At least 25, but no more than 120 calendar days before payment at new rate is due Refinancing, Assumption and Other Considerations These disclosures must be delivered per rate adjustments: Current and prior interest rates Corresponding index values Extent to which creditor has foregone any increase in interest rate Contractual effects of adjustment, including: o Payment due after adjustment o Statement of loan balance New fully-amortizing payment 36

37 Refinancing, Assumption and Other Considerations If there is a credit on borrower s account, the creditor must do one of the following;: Credit amount of balance to consumer's account Refund remaining credit balance upon written request of consumer Make good faith effort to refund credit balance remaining in account for less than 6 months, unless borrower s current location cannot be found Refinancing, Assumption and Other Considerations Annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate, that correlates the amount and timing of value received by the consumer to the amount and timing of payments made. Appendix to TILA includes explanations, equations & instructions to determine Refinancing, Assumption and Other Considerations Generally, the APR is accurate IF: Not more than 1/8th of 1% above or below APR disclosed IF Irregular transaction the tolerance is increased to 1/4th of 1% Miscalculated charges with these tolerances are considered accurate Regulation Z provides APR tables to determine 37

38 Servicing Requirements Servicing Requirements include the following: Servicers must credit payments in a timely manner NO late fees when delinquency attributable to past due prior payment (i.e. creating a serial late payment / pyramiding late fees) Late fees may not exceed 4% Servicers must provide timely statements to borrowers when borrower sends written request, including payoff statements Servicing Requirements Servicing Requirements include the following: 4 free payoff statements must me made available per year Payments must be credited as of the date received Servicers who accept a payment by means which they normally do not must credit that payment within 5 days (i.e. electronic when prohibited) Prohibited Acts for Mortgages: General Prohibited Payments to Loan Originators include: No payment to MLOs based on terms / conditions o To prevent choosing of loans not in borrower s best interest No payment to MLO except from consumer o MLO cannot represent both lender and consumer MLOs cannot steer borrower to products from which MLO stands to gain 38

39 Adequate Options for Borrowers MLOs must obtain options from different creditors to present to borrower, for each type of transaction desired: Must be chosen in good faith of borrower s ability to qualify Must include: Loan with lowest interest rate Mortgage Transfer Disclosures Covered person: means any person, as defined by applicable law, that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation, whether through a purchase, assignment or other transfer, and who acquires more than one mortgage loan in any twelve-month period. Rescission A borrower whose ownership interest will be subject to the security interest has the right to rescind the transaction, unless exempt from rescission, as follows: To rescind, consumer must notify creditor of rescission: In writing any time until midnight of 3rd business day following the later of: o Closing o Delivery of notice of right to rescind (2 copies to each borrower with right to rescind) o Or delivery of all material disclosures 39

40 Rescission IF notice of rescission is not delivered, the right to rescind expires 3 years after closing: (Unless borrower transfers interest / sells property) IF 1 consumer rescinds, rescission is effective for all other consumers involved When more than 1 consumer has right to rescind: Exercise of right effects all consumers Rescission Notice The notice shall be on a separate document that identifies the transaction and shall clearly and conspicuously disclose the following: Transaction results in security interest / lien on principal dwelling Consumer has right to rescind How consumer may rescind, with form provided which shows address of creditor's place of business Effects of rescission must be explained Date rescission period expires must be provided Rescission Notice Unless consumer waives right to rescind: No money disbursed other than in escrow No services performed No materials may be delivered until rescission period has expired 40

41 Rescission Notice If the consumer does rescind the transaction: No finance charges Transaction is void Creditor must return money and property to borrower within 20 days Rescission The right to rescind does not apply to the following: When a state agency is a creditor Residential transaction for anything other than principal dwelling Refinancing / consolidation secured by principal dwelling, EXCEPT rescission APPLIES: o New amount financed exceeds unpaid principal Earned unpaid finance charge included Costs of refinance included Foreclosure Considerations and Rescission Even after foreclosure, the right to rescind exists IF: Broker fee that should have been included in finance charge was not OR Creditor did not provide properly completed appropriate model form in appendix H of Regulation Z /other acceptable notice of rescission 41

42 Foreclosure Considerations and Rescission After foreclosure is initiated: Finance charge & related disclosures (APR, etc.) are considered accurate IF disclosed finance charge: o Is understated by no more than $35 o Is greater than amount required to be disclosed TILA Advertising Requirements Advertisements must be clear and accurate: Not mislead Include company clearly identified Radio & TV ads must be clear and conspicuous TILA Advertising Requirements Advertisement information must be accurate: Ads with specific credit term must include term actually offered by creditor Finance charge must be stated as APR using annual percentage rate and must include whether or not it may increase No other rates, except for simple annual rate with APR 42

43 TILA Advertising Requirements Some terms require additional disclosures if included. If any of these terms are used, the following disclosures must be made for ANY of the terms used: Disclosures: (It is important to remember that all disclosures must be made even if only one triggering term appears) Use one term = must include them all TILA Advertising Requirements If any of these terms are used, the following disclosures must be made for ANY of the terms used: Amount or percentage of down payment All terms of repayment, reflecting repayment over full term of loan, including any balloon payment o If an actual amount of payment is provided, terms of loan related to amount must be disclosed TILA Advertising Requirements The terms of repayment should also include: IF 1st lien mortgage, must state: payment amount does NOT include required tax and insurance amounts IF loan exceeds FMV (fair market value) of property, must state if in print: interest on amount in excess of FMV may not be tax deductible 43

44 TILA Advertising Requirements The terms of repayment should also include: The "annual percentage rate," and if the rate may be increased after closing o For variable rates, additional information is required: The rates which will apply The index or margin used When adjustment will occur TILA Advertising Requirements The triggering terms which might be included in an advertisement requiring the previous disclosures are: Amount or percentage of any down payment Number of payments or period of repayment Amount of any payment Amount of any finance charge number of payments or term amount of any finance charge any specific payment amount amount of down payment The amount or percentage of the down payment. The terms of repayment For a first lien = that the payment amount does NOT include required amounts for taxes and insurance If > than FMV (fair market value) = that interest on the amount in excess of FMV may not be tax deductible The "annual percentage rate" If the rate may increase If variable-rate: The rates which will apply The index or margin used When adjustment will occur 44

45 Prohibited Practices in Advertisements Prohibited acts with regard to advertisements include the following: Fixed with variable rate, unless term ARM / variable-rate mortgage appears first and is as visible Misleading comparison Misrepresenting government endorsements, UNLESS: o FHA, VA, USDA etc. Misleading use of lender name Prohibited Practices in Advertisements Prohibited acts with regard to advertisements include the following: Using borrower s lender s name in ad not sent on lender s behalf, UNLESS : o Disclosed statement: Ad is not from borrower s lender Misleading claims about debt elimination Misleading use of the term counselor Misleading foreign language advertisements Independent Appraisal Requirement Using an independent appraiser is required by TILA: NO attempts to influence appraiser: With respect to minimum / maximum value Withhold / threaten to withhold payment Imply future business depends on valuation Exclude from future business due to valuation Condition pay on loan consummation 45

46 Independent Appraisal Requirement Appraisers cannot misrepresent values: Real errors are not misrepresentations No appraisal may be altered to falsify OK to ask appraiser : o To consider comparables o Request detail / explanation / errors be corrected Multiple appraisals OK to get reliable opinion Independent Appraisal Requirement Compensation may be held for: Breach of contract Substandard services Compensation must be in customary and reasonable amount. Independent Appraisal Requirement Use of Broker Price Opinions are now prohibited: The Dodd-Frank Act amended TILA to exclude from valuation the use of Broker Price Opinions as qualifying for an independent valuation. 46

47 Application of State Law State laws are inconsistent if any required actions are contradictory to federal law: If state laws inconsistent with TILA: o Creditor must comply with TILA o States & creditors may request determinations of consistency o If state laws not inconsistent, then creditor may be required to comply with state law Home Ownership and Equity Protection Act (HOEPA) HOEPA identifies triggers which will result in a loan being classified as a high-cost loan, which include: A closed-end loan On primary residence of borrower which resulted from o A refinance o An equity installment transaction (not a line of credit or HELOC) o If rate exceeds a certain rate Triggers do not include high-priced loans used to purchase a home HOEPA: APR Triggers Prior to Dodd-Frank The APR trigger amounts prior to Dodd-Frank were as follows if the above triggering conditions are also met: If interest is greater than yield on treasury securities of comparable maturity on 15th of month prior to loan application by: o 8% on first liens or o 10% for subordinate liens, or o If total points & fees will exceed e greater of: 8% of total loan amount or $400 (as adjusted by consumer price index) 47

48 HOEPA: APR Triggers AFTER to Dodd-Frank A loan is a high cost loan if: For amounts > $20,000; total points & fees exceed 5% of loan amount For amounts < $20,000; total points & fees exceed 8% of loan amount OR For 1st mortgages > $50,000; APR exceed prime by 6.5% For 1st mortgage with < $50,000 in principals & subordinate liens, APR exceeds prime by 8.5% or more HOEPA: APR Triggers AFTER to Dodd-Frank High cost loans require: Additional disclosures Mandatory 3 day cooling off period prior to closing Prohibited practices: o No balloon payments o No negative amortization o No direct payments to contractors HOEPA: Disclosures & Terms The following statement: "You are not required to complete this agreement merely because you have received these disclosures or have signed a loan application. If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan." 48

49 HOEPA: Disclosures and Terms The creditor shall also disclose: Annual percentage rate (APR) Amount of regular monthly (or other periodic) payment Amount of any balloon payment For variable-rate transactions: o Statement that interest rate & monthly payment may increase o Amount of maximum monthly payment HOEPA: Disclosures and Terms The creditor shall also disclose: For a mortgage refinancing: o Total amount consumer will borrow shown on face amount of note o whether or not premiums / credit insurance is included & amount of such items o accuracy must be within $100 HOEPA: Disclosures and Terms A mortgage subject to this section shall NOT include these terms: Balloon payment, IF term of loan is less than 5 years EXCEPT o That a bridge loan with term of less than 1 year may include balloon payment so long as dwelling will be principal residence No negative amortization may result Advance payment of more than 2 periodic payments cannot be required 49

50 HOEPA: Disclosures and Terms A mortgage subject to this section shall NOT include these terms: Interest rate cannot increase upon default No due on demand clauses, UNLESS: o Borrower made a material misrepresentation on loan application o Borrower defaults / harms security interest o There was fraud in connection with loan HOEPA: Disclosures and Terms A mortgage subject to this section shall NOT include these terms: Prepayment penalties are not allowed, UNLESS: o Will not apply after 2 years o Will not apply to refinancing if prior lienholder was same creditor / affiliate o Amount of periodic payment cannot change within first 4 years o Consumer s total monthly debt payments is no more than 50% of gross monthly income at closing HOEPA: Disclosures and Terms A mortgage subject to this section shall NOT include these terms: Rebates of interest arising from loan default & prepayment penalties (where allowed): o Must be calculated by the actuarial method defined by the Housing and Community Development Act of

51 HOEPA: Disclosures and Terms Negative amortization: A payment schedule with regular periodic payments that cause the principal balance to increase. HOEPA: Disclosures and Terms Due-on-demand clause: A demand feature that permits the creditor to terminate the loan in advance of the original maturity date and to demand repayment of the entire outstanding balance, except in the following circumstances: HOEPA: Prohibited Acts Section 32 loans shall include: No payments to contractors UNLESS made jointly to borrower / via escrow by request No assignment to another servicer without: o "Notice: This is a mortgage subject to special rules under the federal Truth in Lending Act. Purchasers or assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage that the borrower could assert against the creditor. 51

52 HOEPA: Prohibited Acts Section 32 loans shall: Not be refinanced within 1 yeat UNLESS refinancing is in borrower's interest Not Close without verifying borrower has ability to repay considering : o Consumer's current, reasonably expected income o Employment o Assets other than the collateral o Current obligations HOEPA: Prohibited Acts Section 32 loans shall: Not Close without verifying borrower has ability to repay considering : o Mortgage-related obligations such as: Expected property taxes Premiums for mortgage-related insurance required by creditor Similar expenses HOEPA: Prohibited Acts Section 32 loans shall: Ensure repayment ability: o Consumer's W--2 o Tax returns o Payroll receipts o Financial institution records o Other 3rd party documents that provide evidence of consumer's income and assets 52

53 HOEPA: Prohibited Acts Average prime offer rate: means an annual percentage rate that is derived from average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics. HOEPA: Prohibited Acts A high-priced loan exists if the APR exceeds the average prime offer rate for comparable transactions on the date the interest rate is set by: 1.5 or more percentage points for loans secured by first lien, or 3.5 or more percentage points for loans secured by subordinate lien HOEPA: Prohibited Acts High-priced loans do NOT include: Transaction to finance initial construction Temporary / "bridge" loan with 12 month term or less Reverse-mortgage transaction Home equity line of credit However: high-price loan definition DOES include purchase loans 53

54 Restrictions for High-Priced Loans Higher-priced mortgage loans are subject to the following restrictions: NO prepayment penalties, UNLESS: o Will not apply after 2 years o Will not apply to refinancing if prior lienholder was same creditor / affiliate o Amount of periodic payment cannot change within first 4 years o Consumer s total monthly debt payments no more than 50% of their gross monthly income at closing Restrictions for High-Priced Loans Higher-priced mortgage loans are subject to the following restrictions: Borrower s ability to repay must be verified For first-lien loans: taxes and insurance premiums must be escrowed and may not be cancelled within 1 year of closing o Only by written request of consumer ECOA (Regulation B): Notices and Disclosures The borrower must be notified of approval / denial / further action needed within 30 days of receiving application, UNLESS a longer period is permitted by the CFPB for the specific transaction. 54

55 ECOA (Regulation B): Notices and Disclosures Applications which are denied require of the creditor: Explanation must be given with rejection OR Notice of applicant s right to a Statement of Adverse Action within 30 days of written request by applicant Applicant then has 60 days to request reason for denial o Received from creditor or 3rd party SAFE Act The SAFE Act regulates licensing of mortgage loan originators: Bolster consumer protection and reduce fraud By establishing minimum criteria for licensing and registration at the state level By facilitating establishment of NMLS MLOs must be federally registered and state licensed SAFE Act The purposes of the creation of the NMLS were: Uniform license applications and reporting requirements for MLOs Create comprehensive licensing database Facilitating better flow of information Increasing accountability of originators Streamlining licensing process 55

56 SAFE Act The purposes of the creation of the NMLS were: Enhancing consumer protections Instituting anti-fraud measures Making information easily accessible to consumer Ensuring residential MLOs are required to act in best interests of consumer SAFE Act The purposes of the creation of the NMLS were: Ethical, above-board standards complied with in key essential areas of marketplace: o Subprime mortgage market place Comprehensive training and examination requirements Streamlined mechanism for consumer complaints to be filed and processed and for violations to be reported SAFE Act The SAFE Act does / encourages the following: NMLS participation System for licensing If state fails to meet requirements of SAFE Act: o MLOs must comply with federal standards State standards may be stricter but not less stringent than federal standards 56

57 SAFE Act A mortgage loan originator is an individual who: Takes residential mortgage application Offers / negotiates terms of loan for compensation / gain OR Assists consumer to obtain or apply for residential mortgage loan by: advising consumer about terms (rates, fees, other costs), preparing loan packages and/or collecting information on consumer s behalf SAFE Act The following are NOT loan originators pursuant to the SAFE Act (exempt from licensure): Performers of only administrative or clerical tasks State-licensed to perform brokerage activities Unless compensated by loan originator Loan processor / underwriter, under supervision of state-licensed / registered originator, who doesn t perform origination Involved in time share credit extensions SAFE Act These are exempt under the SAFE Act: Negotiator of terms with or on behalf of family member or on own behalf Attorney negotiating for client as ancillary matter, UNLESS compensated by: Lender, broker, originator or agent of such 57