Compliance

CFPB Adds to Stack of Mortgage Rules

Here’s a six-point overview of the CFPB’s new mortgage lending regulations.

February 28, 2013
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In mid-January, the Consumer Financial Protection Bureau (CFPB) opened the floodgates, and mortgage lending rules began gushing out.

In one day, the CFPB issued an ability-to-repay final rule, an ability-to-repay proposed rule, a mortgage escrow final rule, and high-cost mortgage lending and home ownership counseling final rules.

The following week, the bureau issued a variety of mortgage servicing rules, a mortgage loan originator (MLO) compensation rule, an appraisal rule, and—in conjunction with five other federal agencies—another appraisal rule. The regulatory flood was due to provisions in the Dodd-Frank Act of 2010 that required the

CFPB to issue most mortgage-related regulations by January 2013, with an effective date within 12 months.

CFPB Director Richard Cordray has said repeatedly the bureau recognizes credit unions weren’t the cause of the financial crisis, and CUNA lobbied the agency with some notable success to consider exemptions for credit unions from the new mortgage lending requirements.

Still, a number of requirements will affect credit unions’ mortgage lending programs.

It’s difficult to compress the CFPB’s mortgage lending regulations into a simple but comprehensive summary. But this overview will help you begin to assess the regulations’ impact on your operations.

Six points to know

The new “ability-to-repay” rules, nine new mortgage servicing requirements, and the mortgage loan origination rule are effective Jan. 10, 2014. The new appraisal rules are effective Jan. 18, 2014.

1. Three Regulation Z changes go into effect on June 1, 2013.

Those three provisions are:

The new escrow rule extends the minimum period to maintain a mandatory escrow account for a firstlien “higher-priced mortgage” from the previously required one year to five years. (In very general terms, a “higher-priced mortgage” is a closed-end loan secured by the borrower’s primary residence with an APR that’s 1.5+% over the “prime offer rate” for a first lien and 3.5+% for a subordinate lien.)

The CFPB exempts from this escrow requirement any credit union with less than $2 billion in assets that operates predominantly in a rural or underserved area, that originated 500 or fewer first-lien mortgages during the preceding year, and that does not typically hold escrow accounts.

The new regulation on mortgage loan originator (MLO) standards (see No. 5) includes a provision that prohibits the inclusion of mandatory arbitration clauses in closed-end loans secured by the consumer’s “dwelling” and in home equity lines of credit (HELOC) secured by the consumer’s principal dwelling.

A dwelling includes a one- to four-unit residential structure, condominium or cooperative unit; and a mobile home or a trailer used as a residence.

Next: Mortgage lenders

CFPB Adds to Stack of Mortgage Rules 

Here’s a six-point overview of the CFPB’s new mortgage lending regulations.

In mid-January, the Consumer Financial Protection Bureau (CFPB) opened the floodgates, and mortgage lending rules began gushing out.

In one day, the CFPB issued an ability-to-repay final rule, an ability-to-repay proposed rule, a mortgage escrow final rule, and high-cost mortgage lending and home ownership counseling final rules.

The following week, the bureau issued a variety of mortgage servicing rules, a mortgage loan originator (MLO) compensation rule, an appraisal rule, and—in conjunction with five other federal agencies—another appraisal rule. The regulatory flood was due to provisions in the Dodd-Frank Act of 2010 that required the

CFPB to issue most mortgage-related regulations by January 2013, with an effective date within 12 months. CFPB Director Richard Cordray has said repeatedly the bureau recognizes credit unions weren’t the cause of the financial crisis, and CUNA lobbied the agency with some notable success to consider exemptions for credit unions from the new mortgage lending requirements. Still, a number of requirements will affect credit unions’ mortgage lending programs.

It’s difficult to compress the CFPB’s mortgage lending regulations into a simple but comprehensive summary. But this overview will help you begin to assess the regulations’ impact on your operations.

Six points to know

The new “ability-to-repay” rules, nine new mortgage servicing requirements, and the mortgage loan origination rule are effective Jan. 10, 2014. The new appraisal rules are effective Jan. 18, 2014.

1. Three Regulation Z changes go into effect on June 1, 2013. Those three provisions are: • Maintaining escrow accounts for five years for certain types of mortgages. The new escrow rule extends the minimum period to maintain a mandatory escrow account for a firstlien “higher-priced mortgage” from the previously required one year to five years. (In very general terms, a “higher-priced mortgage” is a closed-end loan secured by the borrower’s primary residence with an APR that’s 1.5+% over the “prime offer rate” for a first lien and 3.5+% for a subordinate lien.) The CFPB exempts from this escrow requirement any credit union with less than $2 billion in assets that operates predominantly in a rural or underserved area, that originated 500 or fewer first-lien mortgages during the preceding year, and that does not typically hold escrow accounts.

• Prohibiting arbitration clauses in residential mortgage loan documents. The new regulation on mortgage loan originator (MLO) standards (see No. 5) includes a provision that prohibits the inclusion of mandatory arbitration clauses in closed-end loans secured by the consumer’s “dwelling” and in home equity lines of credit (HELOC) secured by the consumer’s principal dwelling. A dwelling includes a one- to four-unit residential structure, condominium or cooperative unit; and a mobile home or a trailer used as a residence.

• Prohibiting the financing of credit insurance. The MLO regulation also prohibits the financing of any premiums or fees for credit insurance (such as credit life or disability insurance) in connection with a closed-end consumer lending transaction secured by a dwelling or a HELOC secured by the consumer’s principal dwelling. 

2. Mortgage lenders must comply with new “ability-to-repay” requirements. This new section of Regulation Z (Truth in Lending Act) will require credit unions to obtain and verify specific pieces of financial information about the applicant to consider when determining whether the borrower can repay the loan over the long term, including: income or assets; employment status; proposed and current monthly mortgage payments; other current debt obligations including alimony and child support; monthly debt-to-income (DTI) ratio or residual income; and credit history. This rule applies to any closed-end first-lien or subordinatelien loan secured by a dwelling (both the borrower’s primary residence or second home).

A credit union will be presumed to have complied if it makes a “qualified mortgage” that requires: no excessive up-front points and fees (more than 3% of the loan amount); no “toxic provisions” (such as interest-only, negative amortization, or a maturity longer than 30 years); generally no balloon payment (but with an exception for most credit unions in rural areas); and generally not more than a 43% debt-to-income ratio (but with an exception for loans meeting certain government affordability standards). There are also restrictions of prepayment penalties.

Qualified mortgages for higher-priced loans (typically for consumers with insufficient or weak credit histories) allow borrowers to later challenge whether the lender properly assessed their ability to repay the loan (a “rebuttable presumption” of compliance). Qualified mortgages for lower-priced loans cannot be successfully challenged for compliance with the ability-to-repay rules, providing a compliance “safe harbor.” It’s difficult to assess how this different legal treatment on evaluating lenders’ assessment of an applicant’s ability to repay a loan might affect the mortgage market in the future.

CFPB is considering whether to include another category of “qualified mortgages” that would cover certain loans originated by credit unions with $2 billion or less in assets that originate 500 or fewer first-lien transactions annually and that are held in portfolio for at least three years. All requirements other than the 43% debt-to-income ratio would have to be met. The comment period on the CFPB proposal closed at the end of February, and the bureau expects to make a decision this spring. 

3. New mandates exist on how to service consumer mortgages, but some requirements exempt “small servicers.” Consistent with the CFPB’s acknowledgment that smaller institutions didn’t cause the financial crisis, the bureau includes in its new mortgage servicing regulations a “small servicer” exemption. A credit union that services 5,000 or fewer mortgages where it’s the creditor or assignee will be exempt from certain (not all) of the requirements (as noted in the following). But if a credit union servicing 5,000 or fewer loans uses a subservicer that services more than 5,000 mortgages, the subservicer must comply with all the requirements and the credit union is liable if the subservicer doesn’t comply.

The mortgage servicing rule generally applies to closed-end consumer loans secured by a dwelling. The rules address the following mortgage servicing requirements under both Regulations Z and X: Reg Z:

• Periodic billing statements: Until now, only openend loans have required periodic statements. CFPB has expanded this requirement to cover most closedend mortgages, unless the lender provides a coupon book that contains very extensive information specified in the regulation. Small servicers are exempt.

• Interest-rate adjustment notices for ARMs: Currently, lenders are required to provide disclosures to borrowers with variable-rate mortgages each time an adjustment results in a corresponding payment change and at least once each year during which an interest-rate adjustment is implemented without a corresponding payment change. The new regulation amends the format and content of rate adjustment disclosures and requires earlier disclosures, such as seven to eight months before the first payment is due aft er the initial rate adjustment. Lenders, assignees, and servicers also must provide a notice between two to four months before payment at a new level is due when a rate adjustment causes the payment to change. All servicers are subject to this requirement.

• Prompt crediting of mortgage payments and providing payoff balance statements: For closedend mortgages and HELOCs, all servicers must promptly credit payments from borrowers, generally on the day of receipt, and the regulation dictates how to handle partial payments. Also, servicers must send an accurate payoff balance to a borrower within seven business days aft er receipt of a written request from the borrower.

Reg X—Real Estate Settlement Procedures Act (RESPA):

• Forced-placed insurance: This provision adds detailed notice requirements before credit unions can charge the borrower for adding forced-placed insurance to the mortgage aft er they receive notice that a borrower failed to maintain hazard insurance on the property. Small servicers receive a restricted exemption, depending on the cost of the forcedplaced insurance.

• Error resolution and information requests: All servicers must follow specific procedures and timing requirements for responding to written complaints about errors or requests for information.

• Servicing policies and procedures: Large servicers must establish policies and procedures to meet the objective of the new rules, such as providing accurate and timely information to borrowers, evaluating loss mitigation applications, and facilitating the transfer of information during servicing transfers. Small servicers are exempt from this requirement.

• Early intervention with delinquent borrowers: Large servicers must make a good faith effort to establish live contact with borrowers by the 36th day of their delinquency and promptly inform them of available loss mitigation options. And they must provide a written notice with loss mitigation information by the 45th day of the borrower’s delinquency. Small servicers are exempt.

• Continuity of contact for delinquent borrowers: Large servicers must assign personnel to a delinquent borrower by the time the borrower receives an early intervention notice, or by the 45th day of the borrower’s delinquency. The personnel should be accessible by phone to assist the borrower with loss mitigation options and applications. The servicer can determine how to assign staff to comply with this requirement. Small servicers are exempt. 

• Loss mitigation procedures: There are extensive requirements if a borrower applies to the servicer for consideration of a loss mitigation option, such as acknowledging receipt within five days, informing the borrower if information is missing, providing a written decision and reasons if denied, and providing an appeals process. The rule restricts a servicer from simultaneously evaluating a borrower for a loan modification while pursuing foreclosure on the property. Small servicers are exempt from many of the procedural requirements, but can’t initiate the foreclosure process unless a borrower is more than 120 days delinquent or proceed to a foreclosure judgment or sale if the borrower is following the terms of a loan mitigation agreement.

4. Home Ownership and Equity Protection Act (HOEPA) coverage will be expanded in 2014. This rule expands protections for “high-cost mortgages” to include all closed-end mortgages as well as HELOCs. In general terms, high-cost mortgages currently are those with APRs oft en 8% to 10% above the yield on Treasury securities having comparable maturity periods to the loan term, or have high points and fees.

Very few credit unions make any high-cost mortgages today. But this expansion of coverage to include HELOCs might subject more credit union mortgages to HOEPA’s additional disclosure requirements and limitations. Moreover, the CFPB is considering a broader definition of “finance charge” and, if adopted, could mean more loans will be classified as high-cost loans unless adjustments are made to the rate triggers.

5. Additional MLO requirements will be in place. New rules will regulate MLO compensation practices by prohibiting steering incentives and dual compensation (that is, a loan originator cannot be paid by both the consumer and the creditor). The MLO regulation also will impose new SAFE Act (Secure and Fair Enforcement for Mortgage Lending) duties on credit unions, requiring employees involved in loan originations to meet certain character, fitness, and background standards; receive training appropriate for their duties; and include their Nationwide Mortgage Licensing System & Registry (NMLSR) identification numbers on loan documents. 

6. Two new appraisal requirements are effective in 2014. The CFPB has amended Regulation B (Equal Credit Opportunity Act) requiring lenders to notify applicants in writing within three business days of receiving any loan application secured by the borrower’s dwelling that lenders will provide free copies of the appraisal and any written valuations.

The Dodd-Frank Act also requires CFPB, NCUA, and the federal banking agencies to adopt a separate appraisal rule for “higher-priced mortgages.” Starting next year, creditors must obtain an appraisal performed by a certified or licensed appraiser who sees the interior of the property, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used.

What’s missing?

The Dodd-Frank Act requires the CFPB address consumer confusion with the current information in Reg Z’s early disclosures and RESPA’s good faith estimate (GFE) form and the separate RESPA and TILA disclosures provided at closing.

The bureau is designing new forms to replace Reg Z’s early disclosures and RESPA’s GFEs, TILA, and RESPA closing documents with new “loan estimate” and “closing disclosure” forms to help consumers both with comparison shopping and tracking closing costs. The CFPB expects final regulations for these forms in September. The effective date of those new rules is likely late 2014.

COLLEEN KELLY is CUNA’s federal regulatory counsel; MIKE MCLAIN is assistant general counsel; VALERIE MOSS is director of compliance information; and KATHY THOMPSON is senior vice president for compliance. Contact CUNA’s compliance team at cucomply@cuna.com. 

Focus

• The Dodd-Frank Act required the CFPB to issue most mortgage-related regulations by January 2013. 

• CUNA lobbied successfully for exemptions for CUs on many of the regulations.

• Board focus: Provide appropriate staffing and budget resources for your CU’s growing compliance programs.

Resources

• CUNA’s e-Guide to Federal Laws and Regulations: cuna.org (“regulations & compliance”). Refer to “Mortgage Lending Rules—New CFPB Rules Finalized in 2013.” Also, review the new Reg B, Z, and X requirements to determine if your mortgage lending programs comply.

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