Compliance Essentials/CMCP: Overview of Consumer Protection Compliance The Dodd Frank Rules Sunday, September 17, 2017 Panelists: Kris D. Kully, Partner, Mayer Brown LLP R. Colgate Selden, Partner, Alston & Bird LLP Maria B. Earley, Partner, Reed Smith LLP
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Ability to Repay/ Qualified Mortgages September 17, 2017 Presented by Kris Kully Partner Mayer Brown LLP
Ability to Repay/ Qualified Mortgages
Ability to Repay / Qualified Mortgages Ability to Repay: Historically applicable only to higher-priced mortgage loans. Dodd Frank Act amended Truth in Lending Act (TILA). General Rule: A creditor must make 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. Applies to most closed-end, consumer-purpose, dwelling-secured loans. Effective for applications received on or after January 10, 2014. 12 C.F.R. 1026.43
Ability to Repay / Qualified Mortgages Loans not subject to the ATR/QM Rule: Business-purpose loans or loans to organizations Modifications (that are not TILA refinancings) HELOCs Temporary or bridge loans (12 mos. or less) Construction phase of 12 mos. or less of construction-to-permanent loan Reverse mortgages Time share plans Loans extended by certain creditors, including CDFIs, CHDOs, Downpayment Assistance providers, and certain non-profit organizations Loans extended pursuant to certain HFA or similar programs Nonstandard-to-Standard Refinancings separately exempted Limited! 12 C.F.R. 1026.43
Ability to Repay / Qualified Mortgages Creditors may comply with ATR by originating a QM. Several definitions: General QM Temporary Fannie/Freddie-Eligible QMs (until Jan. 10, 2021 or end of conservatorship) The Patch FHA-Insured QMs (look to HUD regs 24 C.F.R. 203.19) VA-Guaranteed QMs (look to VA regs 38 C.F.R. 36.4300) USDA/RHS-Guaranteed QMs (look to RHS regs 7 C.F.R. 3555.109) Small Creditor Portfolio QM Small Creditor Rural/Underserved Balloon Portfolio QM 12 C.F.R. 1026.43
Ability to Repay / Qualified Mortgages A General QM is a covered loan that: Provides for regular periodic payments that are substantially equal (except for the effect of an adjustable-rate or step-rate feature) and does not have certain risky loan features such as negative amortization, interest-only periods, or balloon payments Has a term no longer than 30 years Has points and fees not exceeding 3% (for loans of $100,000 or more) subject to temporary cure provision Is underwritten based on a monthly payment amount determined using the maximum interest rate that may apply during the first five years after the date on which the first regular periodic payment will be due Is underwritten to the income and debt underwriting and verification standards of Appendix Q Has a DTI not exceeding 43% 12 C.F.R. 1026.43
Ability to Repay / Qualified Mortgages Why Make QMs? Safe Harbor: For QMs that are not higher-priced, the creditor is deemed to have complied with ATR. Rebuttable Presumption: For QMs that are higherpriced, the creditor is presumed to have complied with ATR (subject to rebuttal, by showing that insufficient residual income to meet living expenses) 12 C.F.R. 1026.43
Ability to Repay / Non-Qualified Mortgages More Flexibility! Less Certainty! Creditor must consider all of the following eight factors: 1. Current or reasonably expected income or assets (other than the value of the secured dwelling or any real property attached to the dwelling) 2. Current employment status (if relying on income from employment) 3. Monthly payment on the transaction (using greater of fully indexed or intro rate and monthly amortizing payments) 4. Monthly payment on simultaneous loan (if known), including a HELOC 12 C.F.R. 1026.43
Ability to Repay / Non-Qualified Mortgages More Flexibility! Less Certainty! Creditor must consider all of the following eight factors: 5. Monthly payment for mortgage-related obligations (taxes, insurance), including for simultaneous loan 6. Current debt obligations, alimony, and child support 7. Monthly DTI ratio or residual income (considering total monthly debts and income) 8. Credit history 12 C.F.R. 1026.43
Ability to Repay / Non-Qualified Mortgages More Flexibility! Less Certainty! Creditor must verify information on which it relies using reasonably reliable third-party records. Whether considering income or consumer s assets, must still consider DTI ratio or residual income, so must still verify the income used for that purpose! Not sufficient to rely on estimates of income based on aggregated employer data (zip code, job title, years in occupation). Cannot rely solely on downpayment. 12 C.F.R. 1026.43
Ability to Repay / Qualified Mortgages CFPB Five-Year Assessment / Report: Dodd-Frank Act requires for all significant rules Must publish report within 5 years of effective date (so, by Jan. 10, 2019) Seeking public comment (deadline was July 31, 2017) Must consider goals and effects of the rule MBA Letter: Consider the Patch, Appendix Q, 43% DTI Establish permanent cure/correction process for nonmaterial errors Increase points-and-fees limit for smaller loans, and exclude amounts paid to affiliates Expand Safe Harbor QMs Data analysis re: rule s impact on types of loans to borrowers of various incomes, credit scores, other demographics Etc. 12 C.F.R. 1026.43
Penalties for ATR/QM Violation
ATR/QM: Penalties for Violation CFPB - Authority to issue cease-and-desist orders and impose civil monetary penalties Private Right of Action Affirmative action for actual damages, up to $4K in statutory damages (individual and class actions), costs and attorney fees, and special damages equal to all finance charges and fees (unless failure not material) 3-year statute of limitations No arbitration Foreclosure defense - By recoupment or set off No 3-year statute of limitations TILA damages, but special statutory damages limited to no more than 3 years of finance charges and fees Applies to assignees that seek to foreclose
Compliance Essentials Dodd Frank Overview: Loan Originator Compensation September 17, 2017 Presented by Maria Earley Partner Reed Smith LLP
Overview Original LO Comp Rule issued by Federal Reserve effective April 2011 amends Regulation (Regulation Z). Revised CFPB rule is based on the Dodd-Frank Act and became effective January 2014. Rule adopted based on TILA unfair/deceptive acts authority, has three main components related to loan originator compensation: Prohibits LO compensation based on a transaction term or a proxy for a transaction term. Prohibits loan originators ( LO ) form being compensated by both the consumer and another person, such as a creditor. Permits certain methods of compensation using bonuses, retirement plans, and other compensation plans based on mortgage-related profits. Liability for violating compensation prohibitions is the same as the ATR-QM Rule: First 3 Years Finance Charges; Defense to Foreclosure plus statutory damages, costs of the action & reasonable attorneys fees; However, it adds individual LO liability (treble damages).
Overview, Con t. The Rule also covers the following areas: Clarifies definition of loan originator Extends recordkeeping requirements ( 1026.25) concerning LO comp to creditors and entities that hire LOs, such as mortgage brokers, and lengthens time such records must be kept to 3 years. Requires LOs to be licensed and registered. Companies that hire LOs are responsible for ensuring proper licensing/registration, receive appropriate training, and pass background and fitness checks. LO identification must be included on loan documents. Mandates policies and procedures for depository institutions to comply with new and existing LO comp rules. Restricts use of arbitration waivers. Restrict creditors from financing certain credit insurace fees /premiums
Scope Applies to dwelling secured loans Primary or secondary dwelling including MH First or second liens Closed-end reverse mortgages Transactions Excluded Open-end credit Lot/vacant land loans Timeshare loans Loan modifications that are not refinances Applicability to Persons Loan originator individuals (retail and broker individuals) & loan originator organizations ( LOO or broker entities) Creditors for certain aspects of the Rule but not compensation
Who is a Loan Originator Under the Rule? You may be an LO if you are an organization or individual that performs the following activities for compensation: Takes an application Arranges a credit transaction Assists a consumer in obtaining or applying for credit Offers or negotiates credit terms Makes an extension of credit Refers a consumer to a loan originator or creditor Represents to the public that such person can or will perform any of these activities
LO Definition Exclusions Application-related administrative and clerical tasks Employees of the LOO or creditor Excluded if do not discuss credit terms particular to consumer or refer based on the consumer s financial characteristics. Loan processing activity. Underwriting, credit approval and credit pricing activity are excluded counteroffers must be communicated through an LO. Specifically excluded from the definition of loan originator, certain: Manufactured Home Retail Employees Servicers Real Estate Brokers Non-producing Managers
Prohibition on compensation based on a proxy for a transaction term A factor that is not itself a term of a transaction is a proxy for a term of a transaction: If the factor consistently varies with a term or terms of the transaction over a significant number of transactions, and The loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction. A term of a transaction is any right or obligation of the parties to a credit transaction Rights and obligations in the note or other credit contract and in the security instrument (and any document incorporated by reference) Any LO or creditor fees or charges imposed on the consumer for the credit or for any product or service provided by the LO or creditor and related to the credit Any fees or charges for any product or service required to be obtained or performed as a condition of the extension of credit But limited to fees or charges required to be disclosed in either the Loan Estimate or Closing Disclosure (GFE or HUD-1/HUD-1A)
Transaction Terms Prohibited Prohibition applies to compensation paid by creditor, borrower or anyone else Applies to individual LOs and LOOs (i.e., mortgage brokers) With borrower-paid compensation to LOOs, rule permits organization to pay individual loan originator in connection with the transaction Prohibition generally applies to increases or decreases in compensation Limited exception permits LO to decrease compensation to address unforeseen charge or increase in charge Prohibition expressly applies to a single transaction and multiple transactions of one or more LOs Pooled compensation also prohibited Objective determination. Intent does not matter. Compensation based on compliant P&Ps then permissible even if appears to be based on transaction terms or proxy for transaction terms.
Dual Compensation & Anti-Steering Mortgage Brokers LO cannot receive compensation from both consumer & creditor If an LO receives compensation from a consumer for a transaction, the LO is not allowed to receive compensation from the creditor or any other person Mortgage brokerage firms paid by the consumer may pay commissions to their individual LOs, as long as commission is not based on transaction terms Consumer paid compensation is subject to compensation prohibitions Anti-Steering LOs are prohibited from steering a consumer to consummate a transaction when the LO will receive greater compensation than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer s interest. Safe Harbor: Present loan options for each type of transaction in which the consumer expressed an interest:
Compensation Includes salaries, commissions and any financial or similar incentive Periodic bonuses and awards of merchandise, service trips or similar prizes included Includes amounts retained by originator Name of compensation or fee is not determinative Third party charges not included Amounts for non-loan originator activities: Distinction between individual loan originator and loan originator organizations
Profit Sharing/Bonuses Generally Prohibited: Compensation based on multiple transactions of multiple loan originators or mortgage profits Exceptions: Designated tax-advantaged plan contributions (e.g., 401k that meets requirements of 401(a), certain annuity and pension plans) Contribution not based on LO s transactions Non-deferred profits-based plans Compensation is not based on terms of individual loan originator s transactions; and Plan compensation capped at 10% total compensation, or De Minimis exception: Individual was loan originator for 10 or fewer covered transactions in prior 12 months
Other Permissible Compensation Methods SAFE Harbors Fixed percentage of loan amount (& min or max) Overall dollar volume or unit volume Long-term loan performance of loans Hourly rate of pay for actual hours worked Existing or new customer Payment fixed in advance for each loan % of applications that result in consummated transactions Quality of loan files per file? Retail vs. Mortgage Broker/Comment 36(d)(1)-7
CFPB Enforcement Castle & Cooke Mortgage (November 2013) Quarterly bonuses awarded to LOs by company officers calculated based on higher interest rates Franklin Loan Corporation (November 2014) Percentage split of gross loan fees (origination fee, discount points, retained premium rebate); expense accounts funded by retained premium rebate with quarterly excess paid to LOs RPM Mortgage, Inc. and its CEO (June 2015) Company would fund LO s expense account if revenue on a closed loan exceeded branch fees and LO s commission LOs increased deposits if steered consumers into more expensive loans Account funds used to pay LO bonuses, supplement increased commission rates, as an illegal point bank to finance pricing concessions Guarantee Mortgage Corporation(June 2015) Compensation to branch managers partly based on the interest rates of the loans they closed
Compliance Essentials/CMCP: Overview of Consumer Protection Compliance: TRID September 17, 2017 Presented by Colgate Selden Partner Alston & Bird LLP
Background TILA (Reg. Z) and RESPA (Reg. X) Historically RESPA/Reg X was interpreted by HUD and TILA/ Reg Z by the Federal Reserve Board. Numerous efforts were made to combine the RESPA and TILA disclosure obligations into one user-friendly notice, but without any real traction. In 2008 HUD overhauled the Good Faith Estimate disclosures effective January 1, 2010. The new three (3) page GFE binds originators to certain settlement terms and changes unless changed circumstances or within tolerance. On July 21, 2010, the Dodd-Frank Act was enacted. Created the Consumer Financial Protection Bureau (CFPB) and directed the CFPB to publish a rule that combines certain disclosures under TILA and sections 4 and 5 of RESPA into a single integrated disclosure for mortgage loans covered by those laws. a single, integrated disclosure for mortgage loan transactions (including real estate settlement cost statements) [which will] facilitate compliance with the disclosure requirements of [TILA] and [RESPA] and aid the borrower in understanding the transaction by utilizing readily understandable language.
Background Know Before You Owe In late 2010, the CFPB began the Know Before You Owe (KBYO) Mortgage Disclosure Project to integrate the disclosures using a user-oriented design process. The CFPB created and tested disclosure prototypes between May 2011 and March 2012. Rulemaking focused on consumer s ability to use and understand disclosures. Created model Loan Estimate and Closing Disclosure forms to replace the GFE/HUD- 1 and the TIL disclosure. Rules for industry to complete the disclosures were drafted after the disclosures were designed. Rules housed within Regulation Z as the TILA-RESPA Integrated Disclosure Rule ( TRID ). The disclosure templates introduced dynamic elements and provided flexibility on the number of fees and fee naming. CFPB TRID disclosure form samples and resources: https://www.consumerfinance.gov/policy-compliance/guidance/implementationguidance/tila-respa-disclosure-rule/
Applicability Applies to most closed-end consumer mortgages secured by real property. Does not apply to HELOCs, reverse mortgages. Applies to credit extended to a natural person (including to certain trusts established for estate planning purposes) primarily for personal, family or household purposes. Applies to construction only loans, lot loans and loans secured by co-ops (new TRID clean-up rule clarifies co-op applicability). Does not apply to certain loans for downpayment or homebuyer assistance, property rehabilitation, energy efficiency and foreclosure avoidance. Does not apply to lenders that make five or fewer non-hoepa dwelling secured mortgages a year.
Loan Estimate Must be delivered or placed in then mail no later than 3 business days after receipt of application but not later than the 7 th business day prior to consummation. Application = name, income, SS#, property address, property value estimate, loan amount sought Must include fee estimates that are in good faith (tolerances vs. best information reasonably available): Estimates of fees paid to creditor, mortgage broker, affiliate of either, or unaffiliated 3rd party (for services for which consumer may not shop), or transfer taxes may not exceed actual charge at closing. Sum of estimates of recording fees and other 3rd party fees (for services for which consumer may shop and selects from creditor/broker list) may not exceed sum of actual charges at closing by > 10%. Estimates of other fees may exceed actual charge at closing by any amount so long as based on best information reasonably available to creditor or broker when LE provided.
Loan Estimate May revise fee estimates on LE if increase is caused by: Changed Circumstances re settlement charges extraordinary event, information inaccurate or changed, or new information not relied on Changed Circumstances affecting eligibility change impacts creditworthiness or value of security which increases fee(s) (e.g., appraised value is lower) Revisions requested by consumer Floating rate must provide revised LE no later than three business days after rate locked, disclosing revised rate, points, lender credits and other interest rate dependent charges. Expiration consumer s failure to indicate intent to proceed within 10 business days after receipt of LE Construction If settlement will occur more than 60 days after LE given and LE states that creditor may revise the LE at any time within that period Must keep records of changed circumstances
Loan Estimate Timing No later than three business days after submission of loan application No later than the seventh business day before consummation Sun Mon Tues Wed Thurs Fri Sat App. Received 1 2 3 LE Delivery 1 2 3 4 CD Delivery 5 6 7 First Eligible Closing Date
Closing Disclosure Must be delivered no later that 3 business days (rule specified days) before consummation (as defined under state law) Waiting periods may be waived for bona fide financial emergency (such as foreclosure sale) Must be provided using model form Creditor, not settlement agent, responsible for issuing May give only to consumer with primary liability, unless loan is rescindable (then to each) If revised CD issued based on changed circumstances, generally no new 3-day waiting period required Creditor may deliver revised CD at or before consummation, but must allow inspection 1 business day before consummation Exceptions that require new 3-day period APR becomes inaccurate Loan product changes Prepayment penalty added
TRID Liability Even though housed within Regulation Z: TILA liability attaches to violations of TRID adopted pursuant to authority provided in TILA. TILA provides for private rights of action and assignee liability. RESPA liability attaches to violations of TRID adopted pursuant to authority provided in RESPA. RESPA provides no private rights of action for TRID provisions adopted under sections 4 (HUD-1) and 5 (GFE) and no assignee liability. Preamble to final rule states: [T]he section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provisions [which t]he Bureau believes provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.
TILA Liability Remedies include: Actual damages (detrimental reliance) Fee descriptions, sort order, fee name consistency, TIP, written provider list, etc. Statutory damages up to $4,000 per violation ( material disclosures *) *Projected Payments, APT, AIR, APR, Finance Charge, TOP, Timing*, etc. Class action damages lesser of $1M or 1% of company value Attorney s fees Administrative enforcement Investors. Uncertainty over potential TILA liability nearly froze market at first. Director Cordray letter to MBA on Dec. 29, 2015: As a general matter... Liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability. We, other regulators, and the GSEs have publicly stated that we are looking, in these early days, for good faith efforts to come into compliance.
CD Page 1 with TILA citations.
CD Page 2 with TILA citations.
CD Page 3 with TILA citations.
CD Page 4 with TILA citations.
CD Page 5 with TILA citations.
TRID Rule Revisions - Examples Final TRID rule clarified numerous ambiguities effective Oct. 1, 2018. Applies to all loans secured by co-ops. TOP does not include specified seller, lender, or paid by other fees as disclosed in the CD. New TOP tolerance based on the finance charge tolerance (overstated TOP is accurate). Percentage disclosures rounded to three places but no trailing zeroes to the right of the decimal point. Extending the LE expiration date requirement if the creditor offers a longer period. No written provider list provided, 10% tolerance applies. Benchmark against the initial LE instead of intervening LEs and CDs for tolerance comparison purposes??!! Bait & Switch? UDAAP, UDAP/Reg. N. Permitted to issue revised LEs every time information is updated, even if there is no changed circumstance. https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201708_cfpb_2017-tila- RESPA-Rule-Detailed-Summary-of-Changes-and-Clarifications.pdf
Black Hole Proposal CFPB simultaneously proposed to address the black hole. Comments were due 60 days after July 7. The black hole, as generally described, arises when lenders have issued an initial CD, a changed circumstance occurs but there are more than three days left before closing. Some interpret the TRID Rule to permit revised CDs (which reset the benchmark for tolerance comparison purposes) to be issued only when the initial CD has been provided within four days of closing (the revised CD may be used to reset tolerances between this initial CD, up to and on the day of closing). Otherwise, there is no permissible fee reset even though the circumstances for the change were valid. Hurricane Harvey, Hurricane Irma, Hurricane.? Delayed closings. Initial CDs now provided well beyond 3 days before actual closing. Re-appraisal, new structural inspections required by lenders? Other additional fee increases and additional fees? These 0% tolerance violations borne by industry? What about borrower requested changes at the last minute? Moral hazard? Courts? The proposal, if finalized as proposed, would permit creditors to use either initial or corrected CDs to reflect changes in costs for purposes of determining if an estimated closing cost was disclosed in good faith, regardless of when the CD is provided relative to consummation.
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