Are You Ready for the Regulation Z & RESPA Changes Community Bankers Association of Illinois Annual Convention September 26, 2009 Presented by: Young & Associates, Inc. 1 Past, Present & Future Changes FRB amends Z which implements TILA and the Home Ownership and Equity Protection Act (HOEPA) 7/30/08 Reg. Z amended by the Mortgage Disclosure Improvement Act (MDIA) 07/30/08 & 10/3/08 HUD amends RESPA / Reg. X 11/17/08 One is already in effect, another just days away, and the last one in 2010 2 Reasons for Change Protect mortgage loan consumers from unfair, abusive, or deceptive lending Inform consumers through disclosures early in the mortgage loan process Require Corrected TILs when Early TILs become inaccurate on mortgage loans More timely and effective GFE / HUD-1 disclosures Protect consumers from unnecessarily high settlement costs on mortgage loans 3 1
Order of Presentation Details limited to high level overview Discuss requirements and impact of: Reg. Z - July 30, 2009 changes to Early TILs Reg. Z - October 1, 2009 changes to higher-priced mortgages RESPA - January 1, 2010 GFE / HUD and other changes Other regulatory changes related to mortgage loans 4 Timeline of Events July 30, 2008 Federal Reserve Board (FRB) published the final higher-priced mortgage loan rule Would expand scope of loan transactions requiring early TIL disclosures Congress enacted the Housing and Economic Recovery Act of 2008 Included amendments to the Truth in Lending Act (TILA) Known as the Mortgage Disclosure Improvement Act of 2008 (MDIA) October 3, 2008 Congress amended the MDIA in connection with the Emergency Economic Stabilization Act of 2008 (Stabilization Act) December 10, 2008 FRB proposed amendments to Regulation Z May 7, 2009 FRB announced final amendments to the regulation Published May 19, 2009 in the Federal Register 5 Reasons for Change The MDIA broadens and adds to requirements of the FRB s final Regulation Z rule (Higher Priced Mortgage Loans) which becomes effective 10/1/09 The MDIA requires early, transaction-specific disclosures for mortgage loans secured by dwellings other than the consumer s principal dwelling, and Requires waiting periods from time early disclosures are given until consummation Per the MDIA (and final Reg. Z rule), these new requirements became effective July 30, 2009 All largely in response to current and ongoing mortgage crisis 6 2
Primary Focus of the Rule Delivery of early TIL disclosures Eliminates purpose and occupancy criteria of covered transactions Reinforces limitations on imposing application fees Requires additional timing requirements for providing disclosures Requires revised ( Corrected ) TILs if the APR becomes inaccurate and a waiting period before the loan may close in such instances 7 Covered Loan Types in the New Rule A loan with a consumer purpose that is: Subject to RESPA, and Secured by a dwelling owned by the consumer The specific loan purpose is irrelevant (i.e., purchase, refinance, home improvement, other ) A consumer s dwelling is not limited to the consumer s primary residence HELOCs are not covered by this rule 8 Delivery of the Early TIL For covered loan applications, the creditor shall: Make good faith estimates of the TIL disclosure, and Deliver or place them in the mail not later than the third business day after the creditor receives the consumer s written application A business day for this purpose means any day on which the creditor s office are open to the public for carrying on substantially all of its business functions For most institutions, this equates to Monday through Friday No change to this definition for this purpose No requirement to deliver the Early TIL if the application is denied within three-business-days 9 3
More Precise Business Day Definition Added Affects when a fee may be imposed and the waiting periods for closing The more precise definition of business day : All calendar days except Sundays and the legal public holidays, such as New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day Commentary Four holidays are identified by a specific date (i.e., New Year s Day, Independence Day, Veterans Day, & Christmas Day). When one of these holidays (July 4, for example) falls on a Saturday, federal offices and other entities might observe the holiday on the preceding Friday (July 3). In cases where the more precise rule applies, the observed holiday (in the example, July 3) is a business day. 10 Restrictions on Imposing an Upfront Fee May not impose a fee on the consumer before the consumer has received the Early TIL If the disclosures are mailed to the consumer, the consumer is considered to have received them three business days after they are mailed The more precise business day definition is used here A fee for the credit report, however, may be imposed at application time The new RESPA rule has an identical fee imposition restriction 11 Required Waiting Periods to Close Adds two time periods a creditor will have to wait until a covered loan may be closed The seven-business-day rule (from delivery of initial early disclosures) The three-business-day rule (from receipt of corrected early disclosures), if applicable As a result, the earliest a covered loan may close is the 7 th business day following delivery of the Early TIL The more precise business day definition is used for this requirement 12 4
The Three-Day Waiting Period Rule A Corrected TIL is required if: The final APR becomes inaccurate as compared to the early APR Generally, this means a difference of more than 1/8 th of 1 percent on regular transactions and ¼ of 1 percent on irregular transactions most covered loans are regular transactions The consumer must receive the corrected disclosures no later than three business days before consummation The more precise business day definition is used for this requirement If final APR is lower than early APR, the 3-day waiting period is not required, but a corrected or final TIL is required before consummation 13 Consumer Waiver of 7-Day and/or 3-Day Waiting Periods If the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency, the consumer may modify or waive the waiting periods after receiving the TIL disclosures To modify or waive a waiting period, the consumer shall give the creditor a dated written statement that: describes the emergency specifically modifies or waives the waiting period, and bears the signature of all the consumers who are primarily liable on the legal obligation. Printed forms for this purpose are prohibited. 14 Overall Illustration August 2009 Sun Mon Tue Wed Thu Fri Sat 1 2 9 16 3 10 17 May collect fee (if TIL mailed) / Receipt of corrected TIL 4 11 18 5 12 TIL Must be Delivered / Mailed 19 6 13 Corrected TIL mailed 20 7-day & 3-day rules expire Loan may close 7 Application Rec d 14 21 8 15 22 15 5
New Verbiage on TILs Early and Corrected TILs shall contain the following statement: You are not required to complete this agreement merely because you have received these disclosures or signed a loan application. This notice disclosure shall be grouped together with the early or corrected disclosures, as applicable. 16 Impact on Operations Train staff on identifying covered loans Modify loan documentation system templates / checklists Train staff on when fees, other than the credit report fee, may be imposed Train staff on calculating proper waiting periods Document loan files when corrected early disclosures are delivered / mailed Proper documentation of instances when a consumer waives a waiting period Establishing procedures to determine final APR before consummation to assure compliance with the rule s waiting period requirements 17 Issued 7/15/08 by the Federal Reserve Board Effective date Most parts are effective on October 1, 2009 Mandatory escrow sections are effective in 2010 18 6
Protections on Higher-Priced Mortgage Loans Prohibit creditors from extending credit without regard to a consumer s ability to repay from sources other than the collateral itself Require creditors to verify income and assets they rely upon to determine repayment ability Prohibit prepayment penalties except under certain conditions, and Require creditors to establish escrow accounts for taxes and insurance Creditors permitted to allow borrowers to cancel escrows 12 months after loan consummation Need to consider the above for covered loan applications received on or after October 1, 2009 19 The Higher-Priced Mortgage Loan (HPML) Definition The index definition uses average offer rates for the lowest-risk prime mortgages, termed average prime offer rates The Fed has created a rate table Based on Freddie Mac Primary Mortgage Market Survey (PMMS) Found at http://www.ffiec.gov/ratespread/newcalc.aspx The threshold is set at: 1.5 percentage points above the average prime offer rate on a comparable transaction for first-lien loans, and 3.5 percentage points for subordinate-lien loans. 20 Rate Spread Calculator Partial Screen Print 21 7
Covered Loan Types in the New Rule Limited to loans secured by the consumer s principal dwelling Whether real estate is involved is irrelevant Exemptions HELOC Reverse Mortgages Construction-Only Loans Bridge Loans 22 Ability to Repay Requirement Prohibits a creditor from extending any HOEPA loan or higher-priced mortgage loan based on the collateral without regard to repayment ability Governs the process for extending credit Not intended to dictate which types of credit or credit terms are permissible and which are not Provides that the creditor is responsible for assessing repayment ability as of consummation Explicitly requires that the creditor verify income and assets using reliable third-party documents Requires assessing the consumer s ability to pay PITI and similar mortgage-related expenses 23 Income, Assets, and Employment Provides that sources of repayment ability include current and reasonably expected income, employment, and assets A creditor may base its determination of repayment ability on assets other than the collateral, or both Provides broad flexibility as to the types of income, assets, and employment a creditor may rely on 24 8
Obligations Creditor must consider the consumer s current obligations No need to inquire about future obligations Must include simultaneous obligations of which the creditor has knowledge Any additional mortgages that are contemplated as a part of the total new obligation must be included in the obligation category 25 Effect of the Rule Will rarely, if ever, permit a creditor to make even isolated no income, no asset loans in the higherpriced mortgage loan market Will also affect the availability of no income, no asset loans in the prime market Creditors must obtain written verification of income, etc. Oral information from a third-party would not satisfy the rule Not required to verify amounts of income or assets the creditor is not relying on to determine repayment ability 26 Largest Scheduled Payment in 7 Years Must underwrite ability to repay based on largest payment expected in first 7 years of the loan For fixed rate loans, the lender will use the fixed rate and the fixed payment If rate and/or payment can change, a lender has to choose a rate and payment at which to assess repayment ability For ARM loans, a creditor will have a presumption of compliance if the creditor uses the largest scheduled payment of principal and interest in the first seven years 27 9
Prepayment Penalties Prohibits a prepayment penalty with a HPML or HOEPA loan if payments can change during the fouryear period following consummation For all other HMPLs and HOEPA loans whose payments may not change for four years after consummation, the rule limits prepayment penalty periods to a maximum of two years following consummation, provided: the penalty is permitted by other applicable law, and it must not apply in the case of a refinancing by the same creditor or its affiliate. 28 Mandatory Escrow on HPMLs Prohibits a creditor from extending a first-lien HPML secured by a principal dwelling without escrowing property taxes, homeowners insurance, and other insurance obligations required by the creditor Effective Dates for certain loan types Site-built homes for applications on or after April 1, 2010, Manufactured housing applications on or after October 1, 2010 Sets the mandatory period for escrows at 12 months after loan origination, at which point creditors may allow borrowers to opt out of escrow 29 Impact on Operations Train staff on how to identify whether a loan is a HPML If such loans will be made Assure that the ability to repay requirements are met and documented Assure that prepayment penalties, if any, are compliant Assure that an escrow account is established is a first-lien loan 30 10
RESPA Changes - Overview Revised Servicing Disclosure Statement Already in effect as of Jan. 16, 2009 New application definition, among others New Good Faith Estimate (GFE) New HUD Settlement Statement All become effective Jan. 1, 2010 31 RESPA Servicing Disclosure Revised the disclosure in accordance with changes made to RESPA long ago Must be delivered at application or within three business days of application No longer must be given at time of face-to-face application No longer needs to be signed by applicant(s) No longer requires annual updates to transfer percentages Became effective January 16, 2009 32 RESPA Application Definition Submission of borrower s financial information including: Name Monthly income SSN (to enable ordering of credit report) Property address Estimate of value of property Loan amount sought, and Any other information the creditor may deem necessary (your choice) Becomes effective January 1, 2010 33 11
Defined as: RESPA New GFE Estimate of settlement charges, and Related loan information Intended to serve as a shopping document Commits creditor to fees and terms unless a changed circumstance exists In other words it is binding Must begin using for covered application received on or after January 1, 2010 34 RESPA Changed Circumstance Acts of God, war, disaster, or other emergency; Information particular to the borrower or transaction that was relied on in providing the GFE and that changes or is found to be inaccurate after the GFE has been provided New information particular to the borrower or transaction that was not relied on in providing the GFE; or Other circumstances that are particular to the borrower or transaction, including boundary disputes, the need for flood insurance, or environmental problems 35 RESPA Changed Circumstance Changed circumstances do not include: The borrower s name, the borrower s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE, unless the information changes or is found to be inaccurate after the GFE has been provided; or Market price fluctuations by themselves 36 12
RESPA GFE Delivery No real changes here, except A revised GFE (as a result of a changed circumstance) must be given within three business days of receiving information relating to the circumstance Also, RESPA has a similar rule to FRB s limitation on fee imposition at application Applicant must first receive the GFE before a fee may be imposed, except a credit report fee 37 RESPA GFE Content (Page 1) Important Dates How long quoted interest rate is available How long estimated fees are available When borrower will have to close after rate is locked Time period to lock rate 38 RESPA GFE Content (Page 1) Summary of Loan Terms Loan amount Initial interest rate Initial monthly payment, including PMI if applicable Whether or not loan balance may rise Whether monthly payments may rise Is there a prepayment penalty Is there a balloon payment Escrow payment information, if applicable Total charges broken out by origination and other settlement services 39 13
RESPA GFE Content (Page 2) Origination charges Bank charges lumped together Credit or charge for chosen rate Charges for other settlement services Those lender selects Title insurance Those borrower can shop for Recording / Transfer taxes Escrow Per diem interest Insurance All disclosed charges on GFE must be good for at least 10 business days Only the interest rate dependent charges may change as long as the rate has not been locked Total all charges (carries forward to Page 1) 40 RESPA GFE Content (Page 3) Table identifying which types of charges may change from GFE to HUD Tradeoff table of comparable loans optional for lenders to complete Shopping chart for use by consumer 41 RESPA GFE Fee Tolerances Those that cannot increase Bank s origination charge Credit / Charge for selected rate (after rate has been locked) Transfer taxes No room for error with these! Will require careful planning on lender s part in identifying bank charges 42 14
RESPA GFE Fee Tolerances Those Subject to 10% Tolerance (as a whole) Services the lender selects Title services / title insurance if borrower selects from lender s list Services selected by borrower from lender s list Recording charges The 10% tolerance is for the aggregate of these fees and not individually 43 RESPA GFE Fee Tolerances Those charges that can change by any amount Services (including title services) shopped for by borrower and not selected from the lender s list Escrow deposits Per diem interest amounts Homeowner s insurance 44 RESPA GFE Fee Tolerances If fees on HUD vary from GFE fees outside of permissible tolerances, then Must correct within 30 days of settlement Most likely to change HUD fees to agree to those disclosed on the GFE 45 15
RESPA New HUD Very similar to current form with some changes to conform to the GFE line items Most significant change includes a comparison of GFE and HUD fees Also, not includes a summary of loan terms Banks using settlement agents must give them adequate information so they may complete this portion of the HUD 46 New RESPA Guidance HUD recently issued a list of frequently asked questions (FAQ) May be found on their Web site at http://www.hud.gov/offices/hsg/ramh/res/ resparulefaqs.pdf Helps clarify some confusing issues May want to locate and use in staff training 47 Other Related Regulatory Concerns New Flood FAQs Issued by the Agencies July 21, 2009 Effective September 21, 2009 Found at http://edocket.access.gpo.gov/2009/pdf/e9-17129.pdf No changes to the regulation, simply clarification on numerous requirements 48 16
Other Related Regulatory Concerns S.A.F.E. Act Agencies have issued a proposal June 9, 2009 Found at http://edocket.access.gpo.gov/2009/pdf/e9-13058.pdf When finalized, will require mortgage loan officers to register on national registry Will likely have 180 days from start date of registry 49 The End Questions now? Later bbradley@younginc.com Thank you for your attention Enjoy the rest of the conference! 50 17