Mortgage Procedures and Regulations (MPAR)

Real Estate Settlement and Procedures Act (RESPA) Phase

Sonia Lee Director, Affiliate Financial Service

Today’s goal: Equip participants with working knowledge of federal regulations and best practices to comply with federal laws in the Real Estate Settlement and Procedures Act (RESPA) phase of HFH’s mortgage origination process.

• Preliminary Considerations• Property Due Diligence• Underwriting• Initial Disclosures• Closing• House Pricing • House Financing • Conveyance• Mortgage Fundamentals

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Agenda

• SAFE Act – both LO and Servicing requirements

• Origination • Advertising

• Disclosures

• Language in note or mortgage

• Real Estate contracts

• Residency status

• Community property – property ownership

• Broker definition

Federal Laws vs. State Laws

Where to turn for State Law guidance• Compliance companies • Real Estate Board• State Mortgage Bankers Association• Law Firms• State Bar Association• Foreclosure workout specialists• State regulator website

Other suggestions that you may use?

Federal Laws vs. State Laws

The Mortgage Process

Preliminary Considerations

•State vs Federal Laws

•Loan Originator (SAFE

Act/TILA)

•BSA/AML

•GLBA

•E-Sign

•UDAAP

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ECOA Phase RESPA Phase

Remember: MPAR University on My.Habitat!

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Preparing for

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•Property Due

Diligence

•Underwriting

• Initial Disclosures

•Closing

Mortgage

Fundamentals

•House Pricing

•House

Financing

•Shared Equity

Models

•Documentation

Remember: MPAR University on My.Habitat!

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RESPA Phase

The Mortgage ProcessP

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Mortgage Fundamentals

•House Pricing

•House Financing

•Equity Protections

•Documentation

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Remember: MPAR University on My.Habitat!

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Policy 22

• Sales price = Fair Market Value (FMV) • Independent third party valuation

• Unless funding program requires different methodology (e.g., SHOP)

• The first mortgage amount = the lesser of FMV or affordability index.

• A second mortgage must be used to protect equity up to the FMV of the home at closing.

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House Pricing

What is the “sale price”?• Total Consideration paid by or on behalf of the Homebuyer

• Not necessarily the amount the homeowner will pay

• Financing structure addresses affordability.

• Listed on Line 101 of HUD-1 or, on Line 01 of Section K (Summaries of Transactions) of the Closing Disclosure

• Sales Price =1st mortgage

+ Down payment paid on behalf of homebuyer (i.e., DPA)

+ Down payment paid by homebuyer

+ Subordinate (soft second)

mortgage(s)

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House Pricing

House Pricing

Determine the Sale Price

Step 1: Determine FMV• Obtain independent third party appraisal

• No appraiser conflicts of interest. Do not use staff or board members.

• Donated appraisals are allowed (per verbal authorization from CFPB and currently seeking statutory exemption).

• Sales Price does not exceed FMV.

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House Financing

Step 2: Determine Affordability of monthly payment:

• 30/43 Debt To Income (DTI) – ≤ 30% of applicant’s gross income can go towards housing expenses and ≤ 43% on their total debts; exceptions are permitted only if a formal approval process is in place.• Household income might not be the same as borrower income (needed for

ability to pay determination). • Make sure legally obligated borrower satisfies your affiliate’s ability to pay

requirements.

• Front-end: principal, property taxes, hazard insurance, flood insurance (if applicable). • where applicable, mortgage insurance and loan servicing fees.

• Term of mortgage: consider limiting to 30 years, but policy allows terms up to 40 years to make affordable for homebuyer.

• Combined loan to value (CLTV) should not exceed 100% unless it is due to reasonable closing costs that are financed

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Income GuidelinesNeed

• Household

• Threshold eligibility for program: “all reasonable efforts to serve < 60% of AMI”

• Ask: does this household need the program to provide a safe, decent, affordable home?

• AMI shows how this household’s need compares to the need of others in the community

• Current housing cost-burden may be factor

Ability to Pay

• Borrower

• Underwriting decision based on income, debts and credit history of the borrower

• Ask: Can this borrower repay this loan?

• AMI is not relevant

• New loan should not result in housing cost-burden

Remember…

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House Financing

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Example: $27,000 Annual Income Example: $27,000 Annual Income; less debt

House Financing: ExamplesAffordable Mortgage Calculator

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Example: 30 year Term Example: 20 year Term

House Financing: ExamplesAffordable Mortgage Calculator

House Pricing - TDC

Should you still calculate “total development cost” of house?

YES

• Total development cost is still important for affiliates’ budgeting and subsidy analysis, but does not factor into the sales price of the house or the amount of the homebuyer’s first mortgage.

Land (cost or donated value, including acquisition costs)

+ Infrastructure

+ Direct construction costs

+ Value of in-kind material donations (construction materials, appliances, etc.)

+ Value of donated professional labor

+ Allocated costs of construction staff

+ Soft costs (permits, professional fees, etc.)

+ Admin expenses (up to 10% of all of the above)

= TOTAL DEVELOPMENT COSTS (TDC)

Note: value of unskilled volunteer labor and sweat equity is never included

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• Policy 23 requires that affiliates secure the difference between FMV and the 1st mortgage with one or more forgivable or deferred subordinate mortgages.

• Subordinate mortgages may be in favor of Habitat or third partyfunder (e.g., FHLB grant or other down payment assistance programsbetween homebuyer and housing agency).

• Must ensure homebuyers understand how payment may be triggered– consider additional disclosure. Supplemental Subordinate Disclosure - forgivable or

deferred

• Subordinate liens can be forgivable or recaptured

• Forgiveness can be scheduled over time or all at once, as determined by Affiliate policy.

• Affiliates do have options to recapture all or a portion of the principal, but must have a policy for determining how any payment will be affordable to the homeowner.

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House Financing:Equity Protection/Subordinate Mortgages

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Preparing for Sale

•Property Due Diligence

•Underwriting

• Initial Disclosures

•Closing Serv

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Remember: MPAR University on My.Habitat!

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Preparing for SaleProperty Due Diligence

• Order Title Exam• Get to know your property – review all title encumbrances or

use restrictions that could interfere with partner family’s use.

• You need marketable title to convey marketable title (Policy 22 ).

• Best Practice: Order Title Insurance (owner’s vs. lender’s policy)• provides coverage for future claims or future losses due to

hazards and defects already existing in the title at time of purchase.

• Verify Schedule A details

• Title insurance covers:Mistakes in title examination, Property or title claims of third parties, Gap between closing and time of recording the documents, Helps protect Affiliate and Homeowner

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Preparing for SaleProperty Due Diligence cont’d

Property Valuation• Obtain Appraisal* (ECOA /TILA)

• Policy 22 requires appraisal • No conflicts of interest: Do not use staff or board member.• Appraiser independence: no attempt to cause the value assigned to the

property to be based on any factor other than the independent judgment of the person that prepares valuations

• Donated appraisals are allowed (per CFPB verbal approval; consider other regulators)

• May collect actual cost of appraisal (check state law), but no charge for copy

• Disclose (ECOA) • Right to Receive Copy of Appraisal Disclosure Notice

• 3 days after application (Partnership assessment phase)• Copy of property valuation(s) associated with transaction

• “Promptly” upon completion but not later than 3 days before loan closing

• Determine Sales Price• Sales Price = FMV

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Preparing for SaleFlood Disaster Protection Act (FDPA)

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• Best practice, but required when using Federal Funds, loan is insured by or sold to a GSE or a Federal Agency.

• Flood Insurance required when:1. Lender originates or renews any loan(s) secured by improved property;2. Property is located in a “special flood hazard area” as identified by FEMA; &3. The community participates in the National Flood Insurance Program (NFIP).

Requirement Disclosure

In Special Flood Hazard Area that participates in the NFIP

• Provide Notice of Special Flood Hazard Area• Two notices, delivered within “reasonable time”• Advise that flood insurance must be purchased from NFIP.• Borrower must acknowledge notice and return to lender.• Lender must obtain proof of flood insurance prior to closing• Notice to servicer (where applicable)

In Special Flood Hazard Area that DOES NOT participate in the NFIP

• Provide notice as above• Advise that the area although in a federally identified flood

zone, NFIP is not available.• Borrower must acknowledge notice and return to lender• Strongly recommend that borrower purchase private flood

insurance – Apply policy consistently!

Preparing for SaleFinal Underwriting

• Prior to closing, update creditworthiness determination:• Re-verify all ability to pay factors based on Affiliate’s policy

• Re-verify other factors as required by Affiliate’s policy

• Extend timelines if appropriate

• Apply Affiliate policies consistently

• Determine financing:• First mortgage calculation

• Affordability Index (not more than 30% of gross applicant(s) income)

• Determine other financing if required (soft second)

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Preparing for SaleFinal Underwriting cont’d

REMINDER

• De-selection/Denial: If you deselect/deny a partner family at any time during this process:• Send Adverse Action Notice.

• Must be ECOA and FCRA compliant!

• Within 30 days of making decision to deselect/deny

• Withdrawal: If a partner family withdraws at any time during this process:• Ensure loan file is properly documented.

• Send confirmation of withdrawal to partner family.

• Notify all parties within affiliate.

• Partner family will need to start process from beginning if they want to be reconsidered for Habitat program.

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Preparing for SaleInitial Disclosures

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Within 3 business days of “completed RESPA application” and at least 7 days prior to closing (includes Saturdays)

Completed RESPA Loan Application =

1. Borrower’s name;

2. Borrower’s monthly income;

3. Borrower’s SSN;

4. Property Address;

5. Estimate of value of property; and

6. Loan amount

Disclosure Changes:TILA/RESPA Integrated Disclosures (TRID)

Applies to affiliates who in the past or currently calendar year originated more than 5 mortgage loans or 25 secured or unsecured loans (secured = mortgages and unsecured = repair loans).

Loan Estimate (LE): disclosures key features, costs, and risks of the mortgage loan (replaces GFE & Initial TIL Statement)

• timing of delivery remains the same – 3 days after RESPA application

• Closing Disclosure (CD): disclosures of all of the costs of the transaction (replaces HUD-1 and Final TIL)• Must be provided 3 business days before consummation

HFHI TRID Recorded Call and TRID Resources

24See CFPB’s Small Entity Compliance Guide

*PLEASE REVIEW*

Preparing for SaleInitial Disclosures cont’d

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Regulation Required Initial Disclosure

Real Estate Settlement Procedures Act(RESPA)

(All Affiliates must comply with RESPA)

• Good Faith Estimate (GFE)• CFPB Settlement Cost Booklet• Mortgage Servicing Disclosure Statement (best

practice)

• Affiliated Business Arrangement Disclosure• List of Homeownership Counseling Organizations

Truth in Lending Act (TILA) • Initial Truth in Lending Disclosure Statement

Equal Credit Opportunity Act (ECOA)

• Actual Appraisal/Property Valuation • “promptly” upon completion

GLBA *Privacy Notice

State Specific Disclosures Know your state laws

Templates for all Initial Disclosures can be found on MPAR U, Initial Disclosures Collection

Affiliates NOT subject to TRID

Preparing for SaleInitial Disclosures cont’d

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Regulation Required Initial Disclosure

Real Estate Settlement Procedures Act(RESPA)

(All Affiliates must comply with RESPA)

• Loan Estimate (LE) which includes the Servicing Disclosure Statement

• Your Home Loan Toolkit• Affiliated Business Arrangement Disclosure • List of Homeownership Counseling Organizations

Truth in Lending Act (TILA) • LE

Equal Credit Opportunity Act (ECOA)

• Actual Appraisal/Property Valuation • “promptly” upon completion

GLBA *Privacy Notice

State Specific Disclosures Know your state laws

Templates for all Initial Disclosures can be found on MPAR U, Initial Disclosures Collection

Affiliates Subject to TRID

Preparing for Sale Closing

• Prepare documentation• Form of Deed; Promissory Note; Form of Security

(Mortgage or Deed of Trust)

• Updates to Initial Disclosures• Limited revisions allowed after initial GFE and TIL

disclosure statement / LE.

• Get it right the first time.

• Timing: Could delay loan closing.

• Obtain Proof of Insurance (incl. flood, where applicable and if not yet obtained)

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Preparing for SaleClosing Disclosures

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• Closing DisclosuresHUD-1 settlement statement (RESPA)

• Make available at least one day prior to closing• HFHI strongly recommends reviewing with homebuyer prior to closing.OR

Closing Disclosure (CD)• Replaces HUD-1 and Final TIL Statement.• Make available at least 3 business days prior to closing.

Initial escrow statement (RESPA)• At closing or no later than 45 calendar days post closing

Right of Rescission (TILA)• Only for repair products when lien is placed on house• 2 copies, to each owner• Borrower (or other title holder)has until midnight of third business day to

rescind loan.

Mortgage FundamentalsConveyance

Deed -- The Conveyance

Affiliates must convey marketable title at closing. Marketable title is

title that includes standard and reasonable exceptions acceptable to

the buyer.

• Warranty Deed - warranty extends back to property origins

and is not limited to time of grantor’s ownership

• Limited Warranty Deed (preferred) - warrants property as free

of all liens and encumbrances made by and through grantor,

subject to a list of exceptions

• Quit-Claim Deed - no warranty / “as-is”

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Mortgage Fundamentals Conveyance

A “right of repurchase” is required by Policy 22.If this right is in the deed or a separate document, it will not disappear when the mortgage is paid off.

• Right of first purchase (preferred method):Affiliate is given opportunity to purchase home before

homeowner tries to sell it.

Purchase price is pre-determined.

• Right of first refusal:Affiliate must usually match a third party offer.

Often ignored by other parties.

Many buyers will not make an offer on a home with a right of first refusal.

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Mortgage Fundamentals

The Loan: Promissory Note • Establishes the borrower’s “promise to pay”

• Must have original Promissory Note to enforce debt in court

• Keep it simple – no need for provisions in the note beyond basic legal requirements

Promissory Note should contain:

• Principal amount owed

• Amount of monthly payments (excluding taxes and insurance)

• When and where payments are due

• First and last dates (maturity date) that payments are due

• Define default and set cure period

• Customary disclaimers (notice of presentment, dishonor)

• Borrower’s and Affiliate’s accurate and complete legal name

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Mortgage Fundamentals

The Security: Mortgage/Deed of Trust/Deed to Secure Debt• Secures the payment; provides remedies for default, including

affiliate’s right to foreclose• Must refer to an existing Promissory Note dated on or before the

date of the Deed of Trust. • Must be recorded with proper governmental entity (usually county)• Should accurately state:

Borrower’s namePrincipal amount of Promissory NoteDate of Promissory NoteSome states may require more terms –watch for changing laws!

• Must have a legally sufficient description of the property• Must include express foreclosure or power of sale provision (to

proceed with non-judicial foreclosure)• Include requirement that Habitat home must be homeowner’s

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Mortgage Fundamentals

Most Common Errors with Mortgage Documents:

• Amounts, names or dates do not match on Promissory Note and Mortgage

• Affiliate or homebuyer name is not correct

• Omitting monthly payment amount

• Failing to provide for adjustment of escrow amounts

• Incomplete or otherwise insufficient legal description

• Not including “power of sale” – precludes non-judicial foreclosure

• Improper execution (state specific), including proper witness and notary acknowledgment

• Omitting requirement that the home will be the homebuyer’s primary residence

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Mortgage Fundamentals

Most Common Errors with Mortgage Documents (Continued):

• Not performing full due diligence review when acquiring the property• Title defects, environmental or zoning issues impact ability to convey good title

• Not recording the mortgage immediately, or in wrong order (after the deed)

• Not maintaining original mortgage documents in safe location (and keep copies if outsource servicing)

• Allowing homebuyer to move into the home before the mortgage is executed and delivered (Policy 22, Section 4.2.1; limited exceptions require occupancy agreement and specific date for title transfer)

• For Mortgage Loans for Repair Products: not providing required 3 day right of Rescission

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Affiliate Support Center

• ussupportcenter@habitat.org or 1-877-434-4435

Mortgage Origination Checklist

HFHI Legal Advisory - Mortgage Rules and Regulations

Mortgage Rules and Regulations (MPAR) - Tool Kit

American Bankers Association Trainings on Mortgage Regulations

Guide to MPAR University

Support & Resources

Homeowner Selection AOMChapter 1 – Introduction

PrescreeningRecommended Application Phases

Chapter 2 – Prepare for homeowner selectionCommunity needs assessmentAffiliate as a lender (developing a policy)

• Loan originator• Antidiscrimination laws• Sex offender /criminal / OFAC checks• HFHI application• Homeowner selection criteria• Underwriting guidelines

Chapter 3 – Reach out to familiesBusiness PlanAdvertising (legal considerations) Equal HousingOrientation

Chapter 4 – Perform the application workInformation Sharing (GLBA)ECOA phase – notice of action taken; notice of incompletenessQualification and verification checks

Chapter 5 - Selection the family Final review and recommendation to BoardWaiting List

Chapter 6 – Communicate the decisionNotice of action taken: denial; partnership agreementDe-selection

Chapter 7 – Pre-closing, including final underwriting

Homeowner-Selection-Affiliate-AOM-April-15-2015

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US Policy Handbook

USPolicyHandbook.pdf*New as of July 1, 2015

Policies to focus on for Mortgage Lending

Policy 11 – Homeowner Partner SelectionPolicy 19 – Sexual Offender Registration CheckPolicy 22 – Sale of the Housing Unit*Policy 23 – Mortgage Origination*Policy 24 – Mortgage Servicing*Policy 25 – Family SupportPolicy 26 – Equal Treatment of Habitat

HomebuyersPolicy 29 – Authorized Financing Options

PAFO - Resources includes Former and New Policies 22, 23, & 24

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Questions

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