federal regulations: compliance in...

Federal Regulations: Compliance in Action

Principles of Mortgage Banking – Compliance in Action

Sandra D. GauschMBBA-NH President Elect

June 2017

Proprietary information, do not distribute or use without permission of MBBA-NH.


Just So You Know:This presentation is for informational purposes only

and should not be interpreted as legal advice.

This presentation was compiled by Sandra D. Gausch, Operations Risk Manager

Residential Mortgage Services

[email protected]


Rev. 4.30.2017

mailto:[email protected]

Laws Prohibiting Discrimination

• Civil Rights Act of 1866

• Equal Credit Opportunity Act, (ECOA, Reg. B)

• Fair Housing Act (FHA)

• Home Mortgage Disclosure Act (HMDA, Regulation C)

• CRA


Agenda


Agenda


Laws Prohibiting Predatory Lending

• Unfair Deceptive Acts and Practices (UDAAP)

• HOEPA (Reg. Z, Section 32)

• Loan Originator Compensation Rule (Reg. Z)

• S.A.F.E. Act (Regulation G for Depositories, Regulation H for others)

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Agenda


Laws Protecting Customer Identity & Information

• Fair Credit Reporting Act (FCRA, Regulation V)

• Fair and Accurate Credit Transactions Act (FACTA, Regulation V)

• GLBA Privacy

• Do Not Call Registry

• PATRIOT Act

• BSA Anti Money Laundering/Fraud

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Agenda


Laws Requiring Financial Disclosure

• Homeowners Protection Act (HOPA)

• Homeownership Counseling (RESPA & TILA)

• Real Estate Settlement Procedures Act (RESPA)

• Truth in Lending Act (TILA)

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Module 1


Laws Prohibiting Discrimination

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Civil Rights Act of 1866


• Prohibits public and private discrimination based on race or ancestry in any property transaction in the United States

• Applies to all property—real or personal, residential or commercial, improved or unimproved

• Person unlawfully discriminated against can sue only in federal district court

• Remedies include injunctions, compensatory or punitive damages

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Equal Credit Opportunity Act


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• Key Points for Residential Mortgage Lending:• No Discrimination

• Collection of Information

• Prohibited Actions

• Appraisal Requirements

• Notification Requirements

• Definition of an Application

• Adverse Action Notice

• Notice of Incomplete Application

Unlocking the Mystery!



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• No Discrimination• Race, color, religion, national origin, sex, marital status, or age

(provided the applicant has the capacity to contract); or if

• The applicant’s income derives from a public assistance program; or if

• The applicant has in good faith exercised any right under the Consumer Credit Protection Act.

• Cannot discourage someone from applying for a loan



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• Collection of Information• Establishes the requirement for Lenders to collect government

monitoring information:

• Ethnicity

• Race

• Sex



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• Prohibited Acts• May not require signatures of non-applicant spouse on the application

documents

• May not require personal guarantees on a prohibited basis, ie: women or minority owned business



13


• Appraisal Requirements• Provide a copy of the appraisal to the consumer no later than three

days prior to closing

• No charge for copy of appraisal



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• This information may vary based on your internal policies.

• Notice to Applicants: Pipeline Management• 30 days from “completed application: approve, deny, Suspend (NOIA) (HMDA

Action)

• NOIA: Notice of Incomplete Application – letter detailing outstanding items and if items not received within 60 days, loan will be closed for incompleteness (HMDA Action)

• Adverse Action must be issued within 30 days of decision

• Counter Offer: 90 days, if not closed, then denied based on original terms

• Pre-qualification: 90 days (withdrawn if not denied, no HMDA)

• Pre-approval – 90 days (approved, denied, withdrawn or not accepted –HMDA)



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This information may vary based on your internal policies.

• Definition of an Application SAMPLE Policy• Pre-qualification: When credit report is pulled, that is the application date under

Regulation B• Pre-approval: When credit report is pulled, that is the application date under Regulation B• Application: When 6 items are provided (under TILA/RESPA):

• Address• Loan Amount• Income• Estimate of Value• Name• Social Security Number

• Credit Reports should not be pulled outside of these dates, ie: application date 11/23, credit cannot be pulled before that. For pre-qual and pre-approval, date you pull the report is the application date, and then the loan must be monitored for notice of action taken/decision.



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• Adverse Action Notice• Must be issued to all applicants

• Must include ECOA Notice

• Must be specific reason(s) and easy for the consumer to understand (watch free form wording)

• If denied for credit reasons, must include credit info in compliance with Regulation V (Reporting Agency, scores, reasons for scores, etc…)

• Must include your company’s Regulator under ECOA



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• This information may vary based on your internal

policies.

• Notice of Incomplete Application (NOIA)• Regulation B allows the Lender to provide a Notice of Incomplete

Application with a specified expiration date (usually 60 days) in which the loan can be closed for incompleteness if there is no response from the consumer.

• Benefit is not having to follow up and document loan file

• HMDA Reportable

Fair Housing Act


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• Key Points for Residential Mortgage Lending:• No Discrimination

• Terms & Conditions

• Purchasing Loans

• Third Party Service Providers

• Title VII of the Civil Rights Act of 1968 (Fair Housing Act)


Fair Housing Act


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• No Discrimination• Race

• Color

• Religion

• Sex

• National origin

• Disability

• Familial status (which is defined as children under 18 living with a parent or legal guardian, pregnant women, and people securing custody of children under 18).

Fair Housing Act


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• Terms & Conditions• Cannot use different policies, practices or procedures in evaluating or

in determining creditworthiness of any person on the basis of race, color, religion, sex, handicap, familial status, or national origin; and

• Cannot determine the type of loan or other financial assistance to be provided with respect to a dwelling, or fixing the amount, interest rate, duration or other terms for a loan or other financial assistance for a dwelling or which is secured by residential real estate, because of race, color, religion, sex, handicap, familial status, or national origin.

Fair Housing Act


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• Third Party Service Providers• Lenders must manage vendors to ensure they do not violate the Fair

Housing Act

• Includes Appraisers

• Real Estate Agents must comply with the Fair Housing Act

Home Mortgage Disclosure Act


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• Key Points for Residential Mortgage Lending:• Objective

• Role of Loan Officer

• Data and Reporting

• Pre-Approval Program

• New Rules




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• Objective• To help determine whether financial institutions are serving the

housing needs of their communities;

• To assist public officials in distributing public-sector investment so as to attract private investment to areas where it is needed; and

• To assist in identifying possible discriminatory lending patterns and enforcing anti-discriminatory statutes.



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• Role of Loan Officer• It is critical that the Loan

Officer be diligent and thorough in the collection of the government monitoring information

• Ethnicity, Race and Sex

• Visual Observation• When taking an application in

person, if the applicant does not want to provide the information, you must complete it and indicate in the interview section “BVO or By Visual Observation”

• Applications taken in other manners do not require the Loan Officer to make a Visual Observation



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• Data and Reporting• HMDA Reporters submit HMDA

Data to the Federal Reserve or HUD

• The HMDA reviews must be done at least quarterly and all loans for the previous quarter must be reviewed by the end of the first week of the new quarter – this is required because Regulators may come in and ask for that quarters complete HMDA Data

• All home purchase, home improvement and refinancing transactions must be reported. See FFIEC website HMDA Getting it Right for details.

• Data collected consists of: • Application/Loan Number

• Date of Application

• Loan Type

• Loan Purpose

• Request for Pre-Approval

• Result of Pre-Approval Request

• Loan Amount

• Action Taken Type

• Date of Action Taken

• Type of Purchaser of Loan

• Rate Spread (HPML)

• HOEPA Status (High Cost)

• Lien Status

• Reasons for Denial



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• This information may vary based on your internal policies.

• Pre-Approval Program• Regulators today primarily only permit pre-approvals only if they comply with

the HMDA Pre-approval program rules:

• No subject property

• Must be completely underwritten

• Must result in a Denial or Commitment

• Cannot be subject to any credit, income or asset conditions

• Is Reportable

• Is considered an application under Regulation B/ECOA

• Once a property is identified, it becomes an application under REG X/Z –RESPA/TILA and must be fully disclosed within three business days



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• New Rules• On October 15, 2015, the CFPB finalized the new HMDA regulations

• Effective dates vary:

• First additional data collection begins on January 1, 2018, reportable March 2019

• In 2017 certain smaller institutions will be exempt



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• Current Fields Reported• Institution Identifier Number • Application/Loan Number• Date of Application• Loan Type• Loan Purpose• Property Census Tract/Geocode• Request for Pre-Approval

• Result of Pre-Approval Request• Loan Amount• Income• Construction Method• Occupancy Type• Action Taken Type• Date of Action Taken• Type of Purchaser of Loan• Rate Spread (HPML)• HOEPA Status (High Cost)• Lien Status• Reasons for Denial• Govt. monitoring info

• New Fields Reported• Property Address• Age• Credit Score• Total Loan Costs or Points and Fees• Origination Charges• Discount Points• Lender Credits• Interest Rate• Prepayment Penalty Term• Debt-to-Income Ratio• Combined Loan-to-Value Ratio• Loan Term• Introductory Rate Period• Non-Amortizing Features• Property Value• Manufactured Home Secured Property Type• Manufactured Home Land Property Interest• Total Units• Multifamily Affordable Units• Application Channel• Originator NMLS ID (Loan Officer)• Automated Underwriting System• Reverse Mortgage• HELOC• Commercial

Discriminatory Practices


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• Blockbusting: Inducing owners to sell homes by suggesting the ethnic or racial composition of the neighborhood is changing, implying property values will decline (also called panic selling)

• Steering: Channeling prospective buyers/tenants to neighborhoods based on race, religion, or ethnic background

• Redlining: Refusing to make loans on property located in a particular neighborhood for discriminatory reasons

Role of the FFIEC


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• Supervisory agencies, through the Federal Financial Institutions Examination Council (FFIEC), compile HMDA data for each institution

• Produces other aggregate reports that show lending patterns by home age and property location

• Data analysis helps determine compliance of with ECOA, fair lending laws

• Reg. C requires notice about availability of HMDA data to be posted in lobbies of lending institutions

CRA


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• Enacted by Congress in 1977 to encourage financial institutions to help meet the credit needs of their respective communities

• Requires each insured depository institution’s record be evaluated periodically

• Depositories must define “Assessment Area”

• In Massachusetts, these requirements have been extended to non-depository mortgage lenders

Module 2


Laws Prohibiting Predatory Lending• UDAAP

• HOEPA

• Loan Originator Compensation

• SAFE Act

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UDAAP


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• Unfair Deceptive Abusive Acts and Practices

• FTC Act and Dodd Frank Act Primary Regulations

• UDAAP references appear in many laws and regulations

• All Regulators (State and Federal) enforce

UDAAP


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• Three Categories

• Unfair Act or Practices

• Deceptive Acts or Practices

• Abusive Acts or Practices

UDAAP


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• Unfair Acts or Practices

• The standard for fairness in the DFA is that an act or practice is unfair when:• (1) It causes or is likely to cause substantial injury to consumers;

• (2) The injury is not reasonably avoidable by consumers; and

• (3) The injury is not outweighed by countervailing benefits to consumers or to competition.

UDAAP


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• Deceptive Acts or Practices

• A representation, omission, actor practice is deceptive when:• (1) The representation, omission, act, or practice misleads or is likely

to mislead the consumer;

• (2) The Consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstance; and

• The misleading representation, omission, act or practice is material.

UDAAP


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• Abusive Act or Practices

• The DFA makes it unlawful for any covered person or service provider to engage in an abusive act or practice. An abusive act or practice:• Materially interferes with the ability of a consumer to understand a

term or condition of a consumer financial product or service or

• Takes unreasonable advantage of:

• A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

• The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or

• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

UDAAP


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• The Role of Consumer Complaints in your company and Third Party Service Providers:

• Consumer complaints play a key role in the detection of UDAAPs

• As a general matter, consumer complaints can indicate weaknesses in elements of the institutions Compliance Management System, such as monitoring, internal controls and training

• In addition to having thorough complaint management policy for internal monitoring, Lenders must also properly vet and monitor third party service providers (Vendor Management)

HOEPA: High Cost Loans


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• Section 32 of Truth in Lending Act, Regulation Z

• APR exceeds rates in Treasury securities:

• For a first mortgage, by more than 6.5%

• For a second mortgage, by more than 8.5%

• Total finance charge paid by the consumer exceeds the larger of:

• 5% of loan amount

• HOEPA Loans require stringent compliance with several requirements: In New England it is rare that a lender originates HOEPA Loans

Loan Originator Compensation


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• Amendment to Regulation Z• Applies to closed-end credit on principal dwelling• Applies to all “loan originators,” including mortgage brokers,

employees, and those employed by depository institutions• “Loan originator:” includes individuals and entities that

perform loan origination activities for compensation, such as taking an application, offering credit terms, negotiating credit terms on behalf of a consumer, obtaining an extension of credit for a consumer, or referring a consumer to a loan originator or creditor.

• Prohibits creditors from compensating MLOs based on loan’s interest rate or other loan terms

• Allows other types of compensation, such as hourly, flat fee• Anti-Steering provisions

S.A.F.E. Act


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• Key Points for Residential Mortgage Lending:• Purpose

• Unique Identifier

• Difference between depositories and non-depositories


S.A.F.E. Act


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• Purpose• The S.A.F.E. Act provides that the objectives of licensing and

registration include aggregating and improving the flow of information to and between regulators;

• providing increased accountability and tracking of mortgage loan originators;

• enhancing consumer protections; supporting ant-fraud measures;

• and providing consumers with easily accessible information at no charge regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, mortgage loan originators

S.A.F.E. Act


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• Unique Identifier• The Unique Identifier must be displayed on business cards and all

advertising including the Bank’s website, and applicable correspondence

• The NMLS ID should generally appear right below or next to the Loan Originator’s name

• The Unique identifier permanently identifies the Loan Originator and is used to electronically track Loan Originators and cannot be used for any other purpose other than that provided within the S.A.F.E. Act

• The S.A.F.E. Act specifies that the Unique Identifier should be provided to a consumer: (1) upon request; (2) before acting as a Mortgage Loan Originator; and (3) through the Originator’s initial written communication with a consumer, if any, whether on paper or electronically

S.A.F.E. Act


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• Differences between Depositories & Non-Depositories

• Depositories only need register Loan Originators

• Loan Originators that are employed by Non- Depository Lenders and Brokers must be licensed; initially a 20 hour licensing course must be completed and passed, annually a minimum of 8 hours continuing education is required in addition to any state specific education required

• Fingerprints, Background Checks and Credit Reports are now required for both

• Consumer Access NMLS is reflected for both

Module 3


Laws Protecting

Consumer Identity & Information• FCRA

• FACTA

• GLBA

• DNC

• USA PATRIOT ACT

• BSA/AML45


Fair Credit Reporting Act


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• Key Points for Residential Mortgage Lending:• Consumer Reporting Agencies

& Responsibility

• Adverse Action

• Solicitations

• Affiliate Marketing

• ID Theft

• Risk Based Pricing Notice




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• Consumer Reporting Agencies & Responsibility• Permissible Purpose for providing credit report:

• In response to a court order

• At the instruction of the consumer

• Release to a person which it believes:• Intends to use the information to extend credit

• Intends to use the information for employment purposes

• Intends to use the information for underwriting insurance

• Intends to use the information in connection with a government job or related responsibility

• Intends to use the information as a potential investor, servicer or insurer

• Otherwise has a legitimate business need/business credit

• An employee of a company is prohibited from accessing a credit report for friend, family or anyone else unless it is for the sole purpose of applying for a loan with the company.



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• Adverse Action• If the company denies credit in whole or part from information

contained in a credit report, the company must include the following information in the Adverse Action Notice:

• Name, address, phone number of credit reporting agency

• Statement that the credit reporting agency did not make the decision

• Statement that the consumer is entitled to a free copy of the consumer reporting agency report

• Statement that the consumer may dispute the accuracy of the information in the credit report



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• Solicitations• Credit Reporting Agencies offer “pre-screened” information to

creditors to solicit consumers

• Consumers can opt out of “pre-screened” solicitations

• The consumer has the right to prohibit information contained in the report from being used in a pre-screen solicitation from a creditor or insurance company

• Consumer can call the reporting agencies toll free number

• These are referred to as “Trigger Leads” – some states prohibit trigger leads or highly regulate them



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• Affiliate Marketing• If the Bank or Lender should use information from an affiliate to

market the consumer:

• Clearly and conspicuously disclose to the consumer in writing, or if the consumer agrees, electronically, that it may use eligibility information about that consumer received from an affiliate to make solicitations for marketing purposes to the consumer;

• Provide the consumer with a reasonable opportunity and a reasonable and simple method to “opt out” or prohibit the bank/lender from using eligibility information to make solicitations for marketing purposes to the consumer.



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• ID Theft• Alerts on the Credit Report: If a consumer report obtained by your

company indicates an alert regarding identity theft or an address discrepancy, you must investigate and form a reasonable belief that the consumer report relates to the consumer about whom it has requested the report.

• Typically the company’s Underwriters document the credit report as to their investigation/actions and results



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• Risk Based Pricing Notice• All residential mortgage loans require a Risk Based Pricing Disclosure

• Informs the consumer of the following information:

• What is a credit report?

• How did we use the credit report?

• What if there are mistakes on your credit report?

• How can you obtain a copy of your credit report?

• How can you get more information about your credit report?

• Your Score

• Understanding your score

• How we used your credit score

• The range of credit scores

• How your score compares to others

• Key Factors that adversely affect your credit score

• How you can get more information

Fair and Accurate Credit Transactions Act


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• Key Points for Residential Mortgage Lending:• ID Theft/Red Flags

• Credit Score Disclosure

• Fraud Alerts

• Disposal of Consumer Reports and Records




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• ID Theft/Red Flags• One of the most important aspects of FACTA (amended under FCRA)

is the “Red Flags Rule”

• Guides Lenders on how to proactively prevent identity theft by identifying red flags that require additional investigation or intervention prior to opening new accounts.

• Identify

• Detect

• Respond

• Update

• Everyone involved in the transaction should be aware of issues, but especially Underwriters must be diligent to identify red flag issues



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• Credit Score Disclosure• Along with the Risk Based Pricing Notice as mandated under FCRA,

FCTA requires the lender to provide the consumer with a Credit Score Notice

• The notice provides the contact information for all consumer reporting agencies used in the transaction

• The notice provides a generic description of what a credit score is and how the score may be used by the Lender



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• Fraud Alerts • The credit report contains Fraud Alerts and Active Duty Alerts

• The Underwriters must review the alerts and ensure any requirements are adhered to or provide investigation if needed

• In the case of a fraud alert, additional verifications must be undertaken to ensure that the consumer’s information is not being fraudulently used. If a telephone number is provided in the alert, the Underwriter must contact the consumer using that telephone number or take reasonable steps to verify the consumer’s identity and confirm that the application is not the result of identity theft.

• In the case of an active duty alert, confirmation from the active serviceman must be obtained prior to granting credit. If a telephone number is provided in the alert, the same procedures must be followed as noted above.



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• Disposal of Consumer Reports and Records• The FACT Act amended FCRA to require secure disposal of consumer

report information and records.

• Check with your company regarding your policy of disposal of all sensitive and non-public personal information.

GLBA/Financial Privacy Rule


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• Governs collection of nonpublic personal information, for example, from• Application

• Credit bureau or other source

• Transactions, such as balance, purchases

• Restricts when information may be disclosed to affiliates and nonaffiliated third parties

• Requires Consumer Privacy Notice

• Provides opt-out opportunity

GLBA/Financial Privacy Rule


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• Consumer: Individual who obtains or has obtained a financial product or service• Consumer Privacy Notice before personal data is disclosed to

nonaffiliated third party

• Customer: Consumer with a continuing relationship with a financial institution• Consumers Privacy Notice annually during financial

relationship

GLBA Safeguarding Privacy


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• Requires financial institutions to design, implement, and maintain safeguards to protect and control consumer data

• Written Safeguards Policy:

• Ensure security and confidentiality

• Protect against anticipated threats or hazards

• Protect against unauthorized access that could harm or inconvenience consumers

• Pretexting provisions:

• Protects consumers from individuals and companies that obtain their personal financial information under false, fictitious, or fraudulent pretenses

National Do Not Call


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• Prohibits sales calls to consumers who register on the FTC website (still get political, survey and charitable donation calls)

• Managed by the FTC, the FCC, and states• Applies to marketing via interstate phone calls• Allows consumers to file complaints with FTC• Fines up to $16,000 per incident• Established business relationship (EBR)

• Allows calls for up to 18 months from last transaction• Allows calls up to 3 months from inquiry or application• Consumer on internal list cannot be called even if EBR

(unless in reference to current relationship)

US Patriot Act


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• Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (2001)

• Eases restrictions on law enforcement for information gathering• Requires lenders and banks to create and maintain customer

identification programs (CIPs)• Prevent financing of terrorist operations/money laundering• Institutions must verify ID customers entering into formal

relationship• Minimum information required when opening new account:

• Name

• Date of birth

• Address

• Tax ID number or similar verification

BSA/AML


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• Minimum requirements to comply consist of:• Detecting Fraud

• Filing SARs (Suspicious Activity Reports)

• The Four Pillars of a BSA Program:1. Development of internal policies, procedures, and controls.

2. Designation of a compliance officer.

3. Ongoing employee training program.

4. Independent audit function to test for compliance.

Anti Money Laundering


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• Anti-Money Laundering Program and Suspicious Activity

• The Currency and Foreign Transactions Reporting Act of 1970 (commonly referred to as the “Bank Secrecy Act” or “BSA”) requires U.S. financial institutions to assist U.S. government agencies to detect and prevent money laundering. Report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA is sometimes referred to as an “anti-money laundering” law (“AML”) or jointly as “BSA/AML.” Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA.

• Originally the rule did not apply to Non-bank residential mortgage lenders and originators RMLOs, mortgage companies and mortgage brokers in the residential mortgage business sector. Compliance Date was August 13, 2012.

• The Internal Revenue Service (‘‘IRS’’) has been delegated the authority, under this regulation, to examine for compliance with FinCEN’s regulations those financial institutions that are not examined by a Federal functional regulator.

• FinCEN may delegate exam authority to the CFPB by giving public notice of that fact

Detecting Fraud


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• Red flags are signals of potentially unusual or suspicious transactions or other activities that should raise the level of suspicion and may call for further escalation.

• The mere presence of a red flag is not necessarily evidence of money laundering or terrorist financing activity. However, it does indicate that further review should be performed before proceeding to determine if the activity in question has a reasonable or legitimate purpose.

• If a reasonable explanation is not determined, the suspicious transactions or other activities should be escalated for further investigation

Penalties for Noncompliance


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• Violations of BSA requirements may result in civil penalties:

• Civil penalties of $1,000 per day for each day of noncompliance.

• Willful violations may result in civil penalties for the RMLO or its employees, officers, or owners in an amount of the transaction (up to $100,000) or $25,000, whichever is greater.

• Civil penalties of up to $500 may be imposed for negligent violations, but if the RMLO engages in a pattern of negligent violations, then civil penalty could go up to $50,000.

• Criminal penalties also are possible.

Mortgage Fraud


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• According to FinCEN, the following activities are considered suspicious and possibly fraudulent and must be reported:• Occupancy Fraud

• Income Fraud

• Employment Fraud

• Hiding Liabilities

• Appraisal Fraud

• Foreclosure Scams/predatory practices

• Types of fraud categories according to Freddie Mac:• Fraud for Housing

• Fraud for Profit

• Fraud for Criminal Enterprise

SAR Filing


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• A SAR must be filed no later than 30 days after initial detection by the RMLO of facts that may constitute a basis for filing a SAR

• If no suspect is identified on the date of such initial detection, RMLO may delay filing a SAR for an additional 30 days to identify a suspect, but in no case may reporting be delayed more than 60 days after the date of initial detection

• A SAR filing must not be disclosed

Confidentiality of SARs


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• A SAR, and any information that would reveal the existence of a SAR, are confidential and shall not be disclosed except to FinCEN, federal, State, or local law enforcement agencies, and regulatory agencies.

Examinations


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• Overall authority for enforcement and compliance of the rule is with FinCEN.

• FinCEN can further delegate this authority, and it plans to work with “relevant regulatory agencies” to develop consistent compliance exam procedures. So, who will conduct examinations of RMLOs? It could include:

• FinCEN

• IRS

• State Regulatory Agencies

• CFPB

• Federal Banking Agencies

Failure to Comply…


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• Failure to comply with the AML Requirements is a violation of the regulations and of the Bank Secrecy Act and could lead to criminal penalties and large fines.

• FinCEN has designated the IRS to perform audits to check for compliance – this designee may change in the future.

Module 4


Laws Requiring Financial Disclosure

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Homeowners Protection Act


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• Key Points for Residential Mortgage Lending:• Automatic Cancellation of

PMI

• Borrower Request for Cancellation

• Disclosures




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• Applies to Owner Occupied single family homes (not multi-families)

• Automatic Cancellation of PMI• Once the loan reaches 78% LTV based on the amortization schedule at

the time the loan was made, the PMI will be terminated

• Note: this regulation pertains only to Private Mortgage Insurance, not any government insured or guaranteed program.



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• Borrower Request for Cancellation• A Borrower can request cancelation of PMI earlier than when the 78%

LTV is hit:

• Request must be made when value is at least 80% LTV

• Or Value of home has increased

• Servicer may require an official/formal appraisal

• The request must be in writing, the loan must be current, and the loan must have a good payment history



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• Disclosures• Disclosure is required at application if the loan is a Lender Paid MI loan

(LPMI)

• Disclosure is required at closing if the loan has monthly PMI

• During Servicing of a PMI loan, the Servicer must send an annual PMI statement that disclosures the right to cancel or terminate PMI and how to do it

• During Servicing of a PMI, once the PMI is terminated, the Servicer must send the Borrower a notice stating so

Homeownership Counseling


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• Key Points for Residential Mortgage Lending:• Notice Requirements

• Notice Content




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• Notice Requirements – required in 1. Effective 1/10/2014 under RESPA, a written list of homeownership

counseling organizations must be provided within 3 business days of the application

2. If a loan is High Cost you must provide the list

3. If a loan becomes delinquent, you must provide the list no later than 45 days after the loan becomes delinquent



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• Notice Content• Must provide at least 10 providers

• Must be closest providers to the Borrower’s home address

• Include Agency name, phone number, street address, website, email, services provided, languages spoken

Real Estate Settlement Procedures Act


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• Key Points for Residential Mortgage Lending:• Prohibition against Kickbacks

• Unearned Fees

• Special Information Booklet

• Definition of an Application

• Service Providers

• Affiliated Business Arrangement

• Servicing Transfers

• Escrows

• Integrated Disclosures “TRID”




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• Prohibition Against Kickbacks• Section 8 of RESPA

• “No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to an agreement or understanding that is business incident to or a part of a real estate settlement service involving a federally related mortgage”

• Examples:• Below market rates for pool insurance• Incidental benefits to provider but not borrower• Duplicate fees• Defraying of provider fees• Volume based compensation• Payment of education fees for provider• Gifts• Referral fees• Waived fees• Tickets to events• Other incentives



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• Unearned Fees/Duplicate Fees• Cannot charge a borrower twice for a fee or service, for example, if the

servicer is charging a recording release fee for the loan being paid off, the settlement agent cannot charge for it too.

• Fee splitting is prohibited for any charge made or received for the performance of a settlement service except for services actually performed



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• Special Information Booklet• OLD School – “Settlement Cost Booklet”

• In 2011 the CFPB took this over as a part of RESPA oversight, the booklet was changed to “Shopping for a Home Loan” then in 2015 with TRID implementation, it is now “Your Home Loan Toolkit”

• http://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf

http://files.consumerfinance.gov/f/201503_cfpb_your-home-loan-toolkit-web.pdf



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• Definition of an Application• Once you have the following 6 pieces of information, you have an

application under RESPA/TILA and must provide full disclosure within three business days:

• Address

• Loan Amount

• Income

• Estimate of Value

• Name

• Social Security Number



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• Service Providers• Must provide the borrower with a “Shopping List” of providers at

application if you permit the borrower to shop for a required service

• The lender may provide an additional list of service providers the borrower is not permitted to shop for

• Tolerance thresholds apply when the borrower is not permitted to shop

• Affiliated Service Providers fall into a zero tolerance category



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• Affiliated Business Arrangement • If an affiliate provider is used,

and Affiliated Business Arrangement disclosure must be provided to the borrower at application

NO STEERING !



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• Servicing Transfers• A servicing Transfer disclosure must be provided within three business

days of application. This previously was a stand alone disclosure, but is now integrated into the Loan Estimate

• At the time of closing, the lender must provide a notice to the borrower that the loan is being sold, with the new lender’s contact information and payment processing information.

• The Transferor must provide the notice not less than 15 days before the transfer date

• The Transferee must provide notice not more than 15 days after the transfer

• If both notices are combined, must be no less than 15 days before the transfer



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• Escrows• At loan closing, the borrower is provided with an Aggregate Analysis of

their new escrow account

• RESPA has several requirements pertaining to loan servicing and escrow accounts, see your companies “Escrow Policy”



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• TILA/RESPA Integrated Disclosures “TRID”• Refer to TRID Guide

Truth in Lending Act


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• Key Points for Residential Mortgage Lending:• Ability to Repay “ATR”

• Qualified Mortgage “QM”

• Higher Priced Mortgage Loans

• Integrated Disclosures “TRID”

• Multiple Borrowers

• Finance Charge & APR

• Finance Charge (APR) Tolerances

• Disclosure Time Frames

• Right of Rescission




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• Ability to Repay “ATR”• The Ability to Repay (ATR) requirement, and standard for underwriting. A reasonable,

good faith determination of ability to repay is expected to be completed on all loans. The CFPB provides “Appendix Q” as a guide to underwriting that meets the expectations of determining an ability to repay the loan. All verification of income, assets, and liabilities must be done through third party verifications.

• This is not that different from how we do things today. • In order to complete a base line analysis of ATR, we must adhere to eight basic

underwriting factors:1. Current or reasonably expected income or assets2. Current employment status3. The monthly payment on the covered transaction4. The monthly payment on any simultaneous loan5. The monthly payment for mortgage related obligations6. Current debt obligations, alimony, and child support7. The monthly debt to income ratio or residual income8. Credit History

• If the Loan is a General QM, Appendix Q must be used



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• Qualified Mortgage “QM”• There are three categories of Qualified Mortgages under the CFPB

Jurisdiction. A fourth category is the FHA QM definition under HUD’s jurisdiction. A fifth category is the VA QM definition under VA’s jurisdiction. The Rural Development Housing program follows the CFPB definitions. Most companies originate General or Temporary QM loans (CFPB), and FHA and VA QM loans.

• Jumbo loans typically do not fall under the QM definition, however, your company may make jumbo loans as long as the ability to repay standards are met and there is an investor to whom the company can sell the loan servicing released.



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General

All Creditors

▪ 8 Underwriting Factors

▪ Appendix Q – strict adherence

▪ Strict 43% DTI

▪ ARMS: UW based on one of two methods, using the most conservative

approach: 1) the fully amortized schedule using the max rate permitted

during the first five years after the date of the first periodic payment, or 2)

the max fully indexed rate or initial note rate whichever is higher. This

analysis includes 7 and 10-year ARM loans.

▪ No neg am, IO, term over 30, most balloons, cap on points and fees

Temporary

All Creditors

*This temporary

category is

available through

2021 or the sooner

of the GSE’s coming

out of

conservatorship, or

for Govt. loans, the

Agencies coming

out with their own

definition of QM

▪ 8 Underwriting Factors

▪ Appendix Q – Recommended considerations

▪ 43% DTI is waived for temporary QM requirements

▪ VA, RD (HUD has issued its own definition of QM, refer to specific QM

requirements for FHA Loans later in this section)

▪ State Housing

▪ FNMA & FHLMC as long as in conservatorship or Jan. 10, 2021 whichever comes

first

▪ ARMS: UW based on one of two methods, using the most conservative

approach: 1) the fully amortized schedule using the max rate permitted during

the first five years after the date of the first periodic payment, or 2) the max

fully indexed rate or initial note rate whichever is higher

This analysis includes 7 and 10-year ARM loans.

▪ No neg am, IO, term over 30, most balloons, cap on points and fees

Small Creditor &

Balloon Payment

QM’s Small Creditor

Only

▪ If small creditors are selling loans to large creditors, they have to comply with

general and/or temporary rule.

▪ Small creditors in rural areas (CFPB published designated counties)

▪ Make less than 500 loans per year

▪ Have less than 2 billion dollars in assets



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Presumption of

Compliance

Conclusive PRESUMPTION OF COMPLIANCE (safe harbor)

▪ Ability to repay requirements have been met for QM

▪ QM that is not higher priced mortgage loan (HPML)

▪ The consumer could attempt to show that the loan is not a QM (for example, under the General QM definition that the DTI ratio was miscalculated and exceeds 43 percent), and therefore is not presumed to comply with the ATR requirements. However, if the loan is indeed a QM and is not higher-priced, the consumer has no recourse under this regulation.

Rebuttable

Presumption of

Compliance

▪ HPML transactions that meet the QM definition

▪ APR exceeds APOR as of date rate is set by 1.5% for 1st lien, 3.5% for subordinate lien

▪ Under a rebuttable presumption, if a court finds that a mortgage you originated was a

higher-priced QM, a consumer can argue that you violated the ATR rule. However, to

prevail on that argument, the consumer must show that based on the information

available to you at the time the mortgage was made, the consumer did not have

enough residual income left to meet living expenses after paying their mortgage and

other debts.

» Qualified Mortgage Safe Harbor



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• High Priced Mortgage Loans (Section 35 Reg. Z)• Determination

• Based on the date the interest rate is set (locked or re-locked) you must compare the APR with the APOR index. The loan will be considered a higher-priced mortgage loan if the APR exceeds the index by:

• 1.5 or more percentage points for loans secured by a (conforming) First Lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;

• 2.5 or more percentage points for loans secured by a (jumbo) first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or

• 3.5 or more percentage points on a Subordinate Lien



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• High Priced Mortgage Loans• Escrow Requirements

• Required for all HPML Loans for a minimum of five years. Cannot be waived.

• Ability to Repay

• Must meet all ATR Requirements



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• High Priced Mortgage Loans• -Appraisal Requirements• A second appraisal is required if:

• The seller acquired the property 90 or fewer days prior to the date of the Consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceed the seller’s acquisition price by more than 10%; or

• The seller acquired the property 91 to 180 days prior to the date of the consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceeds the seller’s acquisition price by more than 20%.

• Second Appraisal Exemptions:• Qualified Mortgage Loans (temporary, general and FHA, VA) are exempt from

the second appraisal requirement, however, if the loan is an FHA loan, it is still subject to HUD’s “Flipping” policy.



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• TILA/RESPA Integrated Disclosures “TRID”• Refer to TRID Guide



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• Multiple Borrowers• If there is more than one borrower, the disclosures may be made to

any borrower who is primarily liable on the obligation.

• If the transaction is rescindable, however, the disclosures must be made to each consumer who has the right to rescind.



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• Finance Charge & APR• The finance charge is a measure of the cost of consumer credit

represented in dollars and cents.

• Examples include any fees paid directly to the lender: Administrative Fees, Processing Fee, Secondary Market Fee, Doc Prep, etc.

• The APR is a measure of the total cost of credit, expressed as a nominal yearly rate.



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• Finance Charge (APR) Tolerances• As a general rule, the annual percentage rate is considered accurate if

it not more than:

• .125 percent (1/8 of 1percent) above or below actual APR for a regular transaction (fixed rate)

• .250 percent (1/4 of 1 percent) above or below the actual APR for an irregular transaction (ARM)



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• Disclosure Time Frames• Same as RESPA for initial disclosure: Three business days from the date

of the application

• The Closing Disclosure must be received by the borrower no later than three business days prior to closing

• A loan can never close in less than seven days from the date of the application



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• Right of Rescission• A Borrower has the right to rescind/cancel a credit plan in which a

security interest is or will be retained on the consumer’s principal dwelling.

• Must deliver two copies of a Notice of Right to Rescind to each consumer entitled to rescind the transaction. The consumer has until midnight of the third business day to rescind. For this purpose, a business day includes Saturdays. The rescission period does not begin until all consumers receive the Notice of Right to Rescind and all other required disclosures.

Federal Regulations:


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Advertising

Supplemental Slides

105

• Requires clear and conspicuous disclosure of terms• Any specific loan terms shown in an ad must be actually available• Triggering terms include:

• Interest rate• Amount of any payment• Number of payments• Period of repayment• Amount of any finance charge

• Required disclosures with triggering term include:• APR• Amount or percentage of down payment• Terms of repayment• Annual percentage rate, using that term spelled out in full• Whether the note rate may increase

• If ad contains only APR, additional disclosures not required

TILA: Advertising


Triggering Terms

(require disclosure)

Non-Triggering Terms

(do not require disclosure)

Pay only $700 per month

Only 360 monthly payments

30-year financing available

1% finance charge

5% APR loan available here

Easy monthly payments

FHA financing available

100% VA financing available

Terms to fit your budget

TILA: Advertising Triggering Terms


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If Ad Includes: Must Disclose:

Rate •Each simple rate (current margin and index if more will apply)

•Period of time each rate applies

•APR for the loan

Payment

amount

•Amount of each over life of loan

•Period of time each payment will apply

Payment and

rate comparison

*

•Prominent statement that payment/rate subject to adjustment

•Time period when first adjustment occurs

Term “fixed”

when rate or

payment can

change

•Adjustable, variable, or ARM must appear before and as

large as term “fixed”

•Clear description of what’s fixed (payment and/or rate)

•Statement that rate/payment can increase as appropriate

* if variable rate based on index/margin

TILA: Advertising Closed-End


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Tax implications:• Cannot be misleading• Consumers must be advised to consult a tax adviser

Misrepresentations are prohibited, for example:• Loan product being endorsed or sponsored by

government• Misleading use of the current lender’s name • Misleading claims of debt elimination • Use of “counselor” to reference for-profit mortgage

broker or mortgage creditor• Making some required disclosures only in English in

otherwise foreign language ads

Clear and conspicuous standard

TILA: Other Advertising Provisions


109

Other Advertising Requirements



RESPA Section 8

• No exchange of a “thing of value” for a referral

• Joint advertising cost must be proportional to the amount of exposure the LO is receiving (i.e. if real estate agent portion is ¾ of the page and loan officer is ¼, then the LO can only pay ¼ of the cost)

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Other Advertising Requirements



FTC• Telemarketing Rule prohibits mortgage lenders from soliciting

consumers who are registered with the FTC “Do Not Call” registry.

• You may call a customer who closed a loan with you in the past 18 months (except VT where you need an opt- in)

• You may call a consumer up to three months after they made inquiry with you

• You may call a consumer if you have permission from them, but strongly suggest getting the permission in writing for your records

• If telemarketing consumers not in the DNC registry you must follow FTC requirements for solicitation, i.e. only call between 8AM – 9PM, Identify yourself, company, address and phone, make appropriate disclosures as applicable – think TILA)

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This presentation was compiled by Sandra D. Gausch, Operations Risk Manager

Residential Mortgage Services [email protected]

mailto:[email protected]

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