dodd frank act: mortgage rules mortgage rules.pdf · the following is a summary of the cfpb rules...

Karen M. Neeley

Dodd Frank Act: Mortgage Rules

© 2012, Cox Smith Matthews Incorporated 1

The following is a summary of the CFPB rules implementing Dodd Frank Act mortgage requirements.

The IBAT Lending Compliance Summit will review these issues in more depth.

Mark your calendars for August 15-16!

Save the date!


CFPB has issued essential rules. DFA made effective date January 21, 2013 UNLESS

rules were adopted prior to that date. DFA can only adopt rules IF it has a director in place. Director Cordray’s appointment is in question due to

issues relating to “recess” appointment. So, the following material is subject to change!

Mortgage Reform and Anti-Predatory Lending Act


Mandatory pre-dispute arbitration is prohibited in mortgages secured by dwelling and HELOC.

Financing single premium credit insurance on mortgage secured by dwelling is prohibited. Monthly premium credit insurance is okay.

Escrow requirement for HPML is extended from one year to five. Exemption for rural and underserved areas…as

narrowly defined in the rule

Rules effective June 1, 2013


Effective date: January 10, 2014 Scope expanded to all types of mortgage loans secured

by principal dwelling (including HEL and HELOC) Exemptions for loans to finance initial construction,

loans originated by Housing Finance Agencies and USDA Rural Housing Service Direct Loan Program

HOEPA Changes


First lien: more than APOR + 6.5% First lien, manufactured housing and less than $50K:

APOR + 8.5% Junior liens: more than APOR + 8.5% Points & fees exceed 5% of total transaction; loan below

$20K, lesser of 8% or $1,000 Prepayment penalty more than 36 months after closing

or that exceed 2% of amount prepaid

HOEPA Coverage Tests


No balloons unless due to seasonal or irregular income of borrower, part of short-term bridge loan, or lender operates in rural or underserved areas

No prepayment penalties Can’t finance points and fees Late fees restricted to 4% of past due payment Fees for payoff statements are restricted Fees for loan mod or deferral are banned

Restrictions on Loan Terms


Creditor must assess consumers’ ability to repay for HELOCs (rule already required for closed end)

Can’t recommend or encourage consumer to default on a loan to be refinanced by a high-cost mortgage

Proof of counseling required before making loan Certified or approved counselor

More Restrictions


List of approved counselors must be provided to consumers w/in 3 business days after applying for any mortgage loan List of counselors from CFPB or HUD

First-time borrower must receive counseling before a loan that includes negative amortization is made. Recommendation: Don’t do negative am!

Homeownership Counseling


Effective January 18, 2014 HPML only permitted if written appraisal from certified or

licensed appraiser is received and appraiser conducts physical property visit of the interior of the property.

Notice to applicant including: Purpose of appraisal Applicant will receive copy Creditor may charge for appraisal Applicant may choose to have separate appraisal at own

expense.

Appraisal Rules


HPML lender must obtain second written appraisal at no cost to borrower for certain “flipped” properties

Required when: Seller acquired home w/in 180 days before

consumer’s purchase agreement Price exceeds seller’s price by 10% (w/in 90 days) or

20% (w/in 91 and 180 days earlier)

Appraisal Rules for Flipped Properties


Reverse mortgages Loans for initial construction of dwelling Temporary bridge loans (12 months or less) Loans secured by new manufactured home Transactions secured by mobile home, boat or trailer HELOC

Exemptions from HPML Appraisal Rules


Effective January 18, 2014 Notice to applicants w/in 3 business days of right to

receive copy of appraisals Automatically provide copies upon completion or 3

business days before consummation/account opening Applicants can waive timing but must be given copy at or

prior to consummation or not later than 30 days after creditor decides against transaction

No fee for the copy, but can charge for the cost of the appraisal!

Appraisal Notice: First Lien Dwelling Loans


Effective date: January 10, 2014 Reg Z already prohibits comp based on term of

transaction Term = interest rate or steering to affiliated title

company Can’t base comp on “proxy” for term of transaction Can’t reduce comp due to pricing concession

MLO Compensation


Can’t be based on profitability Exception for qualified retirement plans Exception for plans that don’t exceed 10% of total

compensation Prohibition on dual comp—consumer and creditor

Exception for brokers to pay employees commissions if not based on loan terms

DFA prohibition on consumer payment of upfront points & fees was waived. Study to follow!

More MLO rules


Comply with SAFE Mortgage Act If officers not licensed (just registered), must :

Apply character, fitness & criminal background standards similar to SAFE Act licensing requirements

Credit report and admin findings (post 1/14/14) Provide training

NMLSR unique identifier & name required on loan docs: credit app, note, and deed of trust

MLO Qualifications and ID Requirements


Effective January 10, 2014 Exemption for small servicers:

Service 5,000 or fewer Service only in-portfolio loans

Most community banks should be exempt…really!

Mortgage Servicing Rules


Periodic billing statements prescribed ARM adjustment notices 210 and 240 days before

adjustment plus notice 60 to 120 days before new payment

Prompt payment crediting and payoff statements Force-placed insurance requirements

Similar to Texas Finance Code ch. 307 but must wait 45 days before charging

Mortgage Servicing Requirements


Error resolution and info requests: specific address identified to borrowers

Acknowledge w/in 5 days; correct or investigate and report w/in 30 to 45 days.

Establish servicing policies and procedures Delinquent borrower: early intervention and contact Loss mitigation procedures

More Servicing Requirements


Effective date January 10, 2014 No negative amortization Can defer repayment of principal except for certain

balloon notes Income and financial resources must be verified Comply with DTI ratios required by regs Total points and fees can’t exceed 3% of total loan Term doesn’t exceed 30 years (certain exceptions) Underwriting criteria

“Qualified Mortgage” Criteria


Monthly payments calculated on highest payment in first 5 years of loan

Consumer have a total (“back-end”) DTI less than or equal to 43%

Appendix Q provides standards for determining monthly debt and income

Underwriting Criteria


Eligible loans must have term of at least 5 years, fixed interest rate, meet basic underwriting standards; DTI considered but NOT subject to 43% criteria

“Rural” and “underserved” counties will be designated by CFPB each year.

Lender must have less than $2B in assets and originate no more than 500 first lien mortgages/year.

Hold in-portfolio at least 3 years

Rural Balloon-Payment QM


No particular underwriting model, but must consider eight factors: Current or reasonably expected income, assets Current employment status Monthly payment on covered transaction Monthly payment on any simultaneous loan Monthly payment for mortgage related obligations Current debt obligations, alimony and child support Monthly DTI ratio or residual income Credit history

Repayment Ability


Prohibited on non-Qualified Loans Phase out for Qualified Loans

1st year – 3% 2nd year – 2% 3rd year – 1% 4th year and beyond – no prepayment penalty

Must offer option with no prepayment penalty

Prepayment Penalties


If not HPML and QM satisfied, safe harbor Defense against assertion of “inability to repay” as

foreclosure defense Rebuttable presumption for HPML

Qualified Mortgage Safe Harbor?


Risk Retention--QRM

Banks selling loans must keep some “skin in the game”

Retain 5% UNLESS mortgage is qualified one.

SEC will issue rules. Not out yet.


Will coordinate with other federal regulators Publish plain-language guides Publish updates to official interpretations Publish readiness guides Educate consumers

CFPB Implementation Plan


Questions?


Karen M. Neeley Cox Smith Matthews Incorporated

Financial Institutions Practice Group

512.703.6315

[email protected]

www.coxsmith.com

29 © 2012, Cox Smith Matthews Incorporated

dodd frank act: mortgage rules mortgage rules.pdf · the following is a summary of the cfpb rules...

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