Financial Reform
Minimum Underwriting Standards
XIV
and other Key TILA Provisions of Title XIV,
“Mortgage Reform and
Anti-Predatory Lending Act”
Carol Dubie
Wells Fargo Law Department
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TILA Changes in Title XIV – Conceptual Approach
Nature of TILA Changes in Reform Act and Title XIV
• Moving language currently in the TILA regulations
into the Statute
• Spreading HOEPA High-Cost Mortgage
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provisions/concepts over broader categories of
loans
• Continuing trend of tightening requirements,
including i h Reg h
i l di since the 2009 R Z changes
• Significant authority given to BCFP over TILA,
including to deviate from, or reshape, the statutory
requirements
• More than ever, the statutory language is just a
starting point 2
TILA Changes in Title XIV - Increased Complexity and
Layering
• Today
» High-Cost Mortgage
» Higher-Priced Mortgage
» Other Mortgages
• Future
» High-Cost Mortgages (some changes) (Sec 1431)
» Higher-Priced Mortgage (minor changes)
» Higher-Risk Mortgages (different appraisal
requirements) (Sec 1471)
» Mortgages requiring escrows (Sec 1461)
» Residential Mortgage Loans (Sec 1401, 1402-3, 1411,
Steering and Ability to Repay)
g g (Sec 1412 definition, for rebuttable
» Qualified Mortgage (
presumption and risk retention baseline)
» Qualified Mortgage (Sec 1414 definition, for PPP
eligibility)
» Qualified Residential Mortgage (Title IX risk retention
exemption) 3
TILA Changes in Title XIV – Relationship to New Rules
and Proposals
Examples of provisions of the Act that overlap with
Proposed and Final Regulations
• Subtitle A – Residential Mortgage Loan Origination
Standards
» Loan Originator Comp and Anti-Steering – Topic
partially addressed by new Final Rule (Federal
Register, 9/24/2010, 58509), more to come
• Subtitle C – High-Cost Mortgages
New,
» New lower APR Threshold – Will APR continue
to be used as the measuring test for HCMs, or
would the “transaction coverage rate”, proposed
in the new Proposed Rule to identify Higher-
Priced Mortgages (Federal Register 9/24/2010,
58539), be applied to HCMs as well?
• Very dynamic environment makes advising clients a
challenge 4
Some of the Major TILA Changes in Title XIV
• Subtitle A, RML Origination Standards
» 1402, 1403 -- Additional Compensation and
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Steering Requirements
• Subtitle B, Minimum Standards for Mortgages
» 1411 -- Ability to Repay
» 1412 -- “Safe Harbor” and Presumption of Ability
to Repay (Qualified Mortgage)
» 1413 -- “Defense” to Foreclosure
• Subtitle C
» 1431 -- Definition of High-Cost Mortgage
• Subtitle F – Appraisal Activities
» 1472 -- Appraiser Independence Regulations
5
Title XIV, Subtitle A, RML Origination Standards
• Sections 1401,1402, 1403 - Additional Mortgage
Originator Requirements beyond new Final Rule
• Amend TILA Section 103; add Section 129B
» “Mortgage Originator” (“MO”) definition in Act is
slightly different than Final Rule
» Additional requirement in Act that MO can
receive an origination fee or charge from a
person other than the consumer only if:
• MO does not receive any compensation
directly from the consumer AND
• Consumer “does not make an upfront
payment of discount points, origination
points, fees,
points or fees however denominated (other
than bona fide third party charges not
retained by the mortgage originator, creditor
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or affiliate of the creditor or originator)”
• So, implement Final Rule; await further instruction 6
Title XIV, Subtitle A, RML Origination Standards
• Additional Mortgage Originator Requirements (cont.)
» Final Rule focuses on confirming consumer is
not steered to particular loan product
» Steering prohibitions in the Act address
additional, broader issues
• Steering to a RML consumer lacks ability to
repay or that has predatory characteristics
• Steering from a Qualified Mortgage to non-
Qualified Mortgage
Practices that promote disparities among
• P ti th t t di iti
consumers of equal creditor worthiness but
different race, ethnicity, gender, or age
• Mischaracterizing credit history of consumer
or loans available to consumer
• Mischaracterizing or inducing another to
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mischaracterize the appraised value of
property securing the loan 7
Title XIV, Subtitle A, RML Origination Standards
Additional/Different Penalties under the Act re:
Compensation and Steering provisions
• Under the Final Rule
» Enhanced TILA penalties under TILA Section
130(a)(4)
• Under the Act
» Section 1404 – Section 130 Penalties are
applied to the Mortgage Originator; Mortgage
Originator is responsible for the greater of actual
damages or 3 times the total compensation to
MO plus costs to consumer, including attorney’s
fees
» Section 1413 -- Violation of Section 1403
compensation and steering provisions can be
Defense
asserted under Section 1413 “Defense to
Foreclosure”, entitling consumer to recoupment 8
or set-off
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay - Overview
Ability to Repay – Sections 1411, 1412
• Add new TILA Sections 129C(a) and 129C(b)
• “Residential Mortgage Loans” (closed-end, dwelling
Residential Loans (closed end, dwelling-
secured loans) will be subject to an Ability to Repay
(“ATR”) test and to Minimum Underwriting
Standards
• Loans that meet additional Qualified Mortgage (QM)
criteria are presumed to meet the ATR Test
» QM requirements in the Act are placeholders –
BCFP ultimately decides
» QM criteria will remain unclear until regulations
are adopted
The ti id
» Th presumption may provide some relief f li f from
Section 1413 “defense to foreclosure” provisions
• Loans that meet the QM criteria and are also
Qualified Mortgages
“Qualified Residential Mortgages” = exempt from
9
Risk Retention
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay – General Rule
Ability to Repay – Section 1411
• Adds new TILA Section 129C(a)
• In
General Rule: “In accordance with regulations prescribed
by the Board, no creditor may make a residential
mortgage loan unless the creditor makes a reasonable
d d f ith d t i ti based on verified and
and good faith determination b d ifi d d
documented information that, at the time the loan is
consummated, the consumer has a reasonable ability to
repay the loan, according to its terms, and all
applicable taxes, insurance (including mortgage
guarantee insurance), and assessments.”
• Ability to repay must be determined using a payment
schedule that fully amortizes the loan over its term
• property,
Where multiple loans to be secured by same property
creditor must determine ATR with respect to ALL loans 10
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay - Underwriting
• Determination of ATR to include consideration of:
» Consumer’s credit history
» Current income and expected income the consumer
is reasonably assured of receiving
» Current obligations
» Debt-to-income ratio or residual income the
p y g g g
consumer will have after paying non-mortgage debt
and mortgage-related obligations
» Employment status
» Other financial resources other than the consumer’s
equity in the dwelling or real property that secures
repayment of the loan
» Seasonality and irregularity of income, including from
a small business
• What does the “expected income” language mean?
» Is it intended to be expansive, or limiting?
» Concern over fair lending claims
• Residual income may be a new area for many 11
underwriters
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay - Verification
• Income and assets relied upon must be verified:
“A creditor making a residential mortgage loan shall
verify amounts of income or assets that such creditor
li to d t i t bilit including
relies on t determine repayment ability, i l di
expected income or assets, by reviewing the consumer’s
Internal Revenue Service Form W–2, tax returns,
payroll receipts, financial institution records, or other third
party documents that provide reasonably reliable
evidence of the consumer’s income or assets. In order to
safeguard against fraudulent reporting, any consideration
of a consumer’s income history in making a determination
under this subsection shall include the verification of such
income by the use of—
I t lR S i transcripts of tax
(A) Internal Revenue Service t i t ft
returns; or
(B) a method that quickly and effectively verifies
income documentation by a third party subject to rules
prescribed by the Board.” 12
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay – Comments and Questions
Comments and Questions on Section 1411
• Essentially prohibits no-doc or stated-income loans
• Appears to prohibit reduced documentation of
rate/term refinance loans – only a limited carve-out
for certain FHA, VA, USDA, RHS refinances
• Where multiple loans, the standard is “creditor has
reason to know” – difficult with 3rd party seconds
• date,
Reliance on IRS records – can be out of date and
are not fraud-proof either
• Requirement of “third p y documents” -- what
q party
about banking records a lending institution
maintains in the ordinary course of business?
• “Subject to rules prescribed by the Board/Bureau” –
13
looking forward to clarification!
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Non-Standard and Hybrid Loans
• Additional rules for “Non-Standard” Loans
» ARM Loans that defer repayment of principal or
interest, Interest Only Loans, Neg Am loans
• Additional rules for refinance of Hybrid Loans by
“same creditor” into a “standard loan”
standard loan” Fixed,
» What is a “standard loan – Fixed fully amortizing?
» Who is “same creditor”? What if “creditor” is gone?
» Creditor can consider factors such as payment record
a d avoidance of e y default o ate eset ee
and a o da ce o likely de au t on rate reset where
lower payment on new loan and the mortgagor has
not been delinquent on the hybrid loan
» Focus is on hybrid loans that will “reset”. What about
rate increases when loan indices start to rise?
• Aug 2010 - LIBOR 1 mo - 0.2755, 12 mo - 0.9436
• Aug 2007 - LIBOR 1 mo - 5.4975, 12 mo - 5.1860
» Overall, statutory language here seems narrow given
14
the goal
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay – Rebuttable Presumption
Section 1412 - Safe Harbor & Rebuttable Presumption
• Adds new TILA Section 129C(b)
• safe harbor
Not really a “safe harbor”
• Creates a rebuttable presumption of ability to repay
for an RML that is a “Qualified Mortgage”:
placeholders,
» QM requirements in the Act are placeholders to
be adjusted by the BCFP “as necessary or
proper to ensure that responsible, affordable
mortgage credit remains available to consumers”
» HUD, VA, USDA and RHS set the QM criteria for
the loans they insure or guarantee
» QM requirements are the baseline for “Qualified
R id ti l M t ” hi h
Residential Mortgages”, which are exempt ft from
Title IX risk retention requirements
15
Title XIV, Subtitle B, Minimum Standards for Mortgages
– Ability to Repay - Qualified Mortgage
• Qualified Mortgage Criteria, as stated in the Act
» Income and financial resources of the borrowers are
verified and documented
» Underwritten using fully amortizing payment, including
taxes, insurance, and assessments
» No negative am, interest only, or balloon features
» If an ARM, underwritten based on the highest rate
permitted during the first 5 years
» Complies with any BCFP rules on DTI/residual income
» Total points and fees do not exceed 3% (points and
fees test is the TILA Section 103(aa)(4) HCM test)
» Term does not exceed 30 years (except in high cost-
of-living
of living areas)
» Act acknowledges possible adjustments for smaller
loans (and balloon loans made by a narrowly defined
p
lender profile))
» Separate test to be prescribed by BCFP for Reverse 16
Title XIV, Subtitle B, Minimum Standards for Mortgages
–Defense to Foreclosure
Section 1413 – “Defense to Foreclosure”
• Adds new TILA Section 130(k)
• Consumer may assert, as a “defense to foreclosure”, a
violation of:
» 129B Compensation and steering provisions, or
» 129C Ability to repay provisions
• Creditor is d t to have violated 129C (ATR)
C dit i presumed not t h i l t d
where consumer received a Qualified Mortgage
• But no parallel presumption for the Section 129B
Compensation/Steering provisions
• Consumer’s remedy is recoupment or set-off equal to the
damages the consumer would otherwise be entitled to
under Section 130 (as amended by the Act) plus costs
and attorney’s fees.
• No time limit on when consumer can assert the defense;
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however, damages are limited to amount computed the
day prior to expiration of the 3 year statute of limitations 17
for an affirmative claim
Title XIV, Subtitle C, High-Cost Mortgages
Section 1431 - High Cost Mortgage Definition
• Amends TILA Section 103(aa), High-Cost Mortgage
definition
• Covers categories of loans that were never tested
before:
» Still limited to principal dwellings
» Adds Purchase loans and HELOCs.
excluded.
» Reverse mortgages are still excluded
• New APR test with lower thresholds
• New points and fees test with new inclusions and
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exclusions
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Title XIV, Subtitle C, High Cost Mortgages
• How will the new HCM test affect the number of
HCM loans?
• segments,
How will the new test impact customer segments
loan amounts, channels? Use of affiliates?
• What would be the impact if the FBR or BCFP
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adopted the “all-in” finance charge proposed in the
2009 Closed-End Proposed Rule?
• What ld be h impact if the FRB or BCFP
Wh would b the i h
proposed to compare the “transaction coverage
rate”, rather than the APR, to the APOR, for HCMs
as has just been proposed for HPMs?
• What will be the impact on measuring loans against
State high cost laws that track TILA language?
19
Title XIV, Servicing and Miscellaneous Requirements
• Other Changes to Products, Processes, Disclosures
» Section 1414 - Limitations on PPP, single premium
insurance, arbitration, neg am requirements, anti-
yp
deficiency protection and p payments p
partial p y y
policy
disclosures
» Section 1419 – new origination disclosures including
ARM escrow, aggregate settlement cost, fees paid to
MOs, total interest paid
• Servicing (Subtitle E)
» New disclosures required; response times significantly
reduced - cost and staffing implications?
» Examples
• New monthly payment, escrow and other
disclosures
• RESPA Qualified Written Request
acknowledgement time reduced from 20 to 5
days; general response reduced from 60 to 30
days, with 15 day extension
• Must send accurate payoff within 7 business days
of receipt of written request; must refund escrow
within 20 days of loan payoff 20
Title XIV, Subtitle F, Appraisal Activities
Appraiser Independence Requirements – Section 1472
• Adds new TILA Section 129E
• Requires appraiser independence interim final regulations
by October 19, 2010
• Expect regulation to reflect HVCC; may also include
customary
requirement that creditor pay the appraiser “customary
and reasonable fee”
» Must be based on objective 3rd party studies
can t
» Fee studies can’t include AMC assignments
» Significant majority of appraisals today are ordered by
AMCs
» Data may not be available today to determine
“customary
“c stomar and reasonable”
• If October regs address, lender must address immediately
• Penalty for violating these requirements is significant -
$10K/day for first violation; $
$ $20K/day for subsequent, in
21
addition to TILA Section 130 penalties