REGULATION Z –
MORTGAGE LENDING
CHANGES
FDIC Kansas City Regional Conference
Call
December 16, 2009
Today’s Presenters
Richard Acord, Compliance
Supervisory Examiner, St. Louis, MO
Territory
Lance Jameson, Compliance Review
Examiner, Minneapolis, MN Territory
Karen Bertrand, Compliance Review
Examiner, Sioux Falls, SD Territory
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Topics of Discussion
Early Disclosure Requirements
Rules Affecting Higher-Priced
Mortgage Loans
Prohibitions on Appraiser Coercion
Rules on Mortgage Servicing
Best Practices
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Purpose of Amendments
To protect consumers against unfair,
abusive, or deceptive mortgage lending and
servicing practices while preserving
responsible lending and sustainable
homeownership
To provide consumers transaction-specific
disclosures early enough to use while
shopping for a mortgage
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Mortgage Disclosure Improvement
Act (MDIA)
Expands the Types of Loans Requiring Early
Disclosures Under §226.19
Expands Coverage
Mortgage transactions subject to RESPA (other than open-
end) and secured by the “dwelling of a consumer”
Includes:
Home Purchase Loans
Home Refinance Loans (New)
Home Equity loans – Closed-End (New)
Dwellings other than the consumer’s principal dwelling
(i.e.; vacation and/or second homes) (New)
Effective date
Applications received on or after July 30, 2009
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Early Disclosures
Timing Rules and Waiting Periods
Early TILA disclosures must be delivered or
mailed within 3 business days of application, and
prior to collecting any fees other than a bona fide
and reasonable credit report fee
Must wait 7 business days after providing early
disclosures before closing loan
Must provide new disclosures and wait an additional
3 business days before closing loan, if the APR
provided in early disclosures changes and is not
considered accurate under §226.22 §226.19(a)(2)
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Early Disclosures
Other MDIA Rules
Consumer waiver of waiting periods –
226.19(a)(3)
Consumer can waive both the 3 & 7 day waiting periods
Bona fide personal financial emergency
Disclosure notice rule – 226.19(a)(4)
The following statement must be included in the early and
corrected disclosures:
“You are not required to complete this agreement
merely because you have received these
disclosures or signed a loan application.”
Must be grouped with required disclosures under 226.18
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“3-7-3” Timing Rules
Sunday Monday Tuesday Wednesday Thursday Friday Saturday
Oct 29 Oct 30 Oct 31
Application Business Day 1 Business Day 2
Received (open for
business)
Nov 1 Nov 2 Nov 3 Nov 4 Nov 5 Nov 6 Nov 7
Business Day Business Day 1 Business Day 2 Business Day 3 Business Day 4 Business Day 5
3
X Initial
Mailed initial
disclosures
disclosures considered
mailed received & may
collect fees
Nov 8 Nov 9 Nov 10 Nov 11 Nov 12 Nov 13 Nov 14
Business Day Business Day 7
6 Mailed
X
Veteran’s Day corrected
Consummat ion
Corrected date if no disclosures
disclosures
mailed
corrected
disclosure X considered
received
required
Nov 15 Nov 16 Nov 17 Nov 18
Consummat ion
X based upon
corrected
disclosure
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Higher-Priced Mortgage
Loans
§226.35
A New Category of Mortgage Loan
Definition: Closed-end consumer credit transaction
secured by the consumer’s principal dwelling
APR Triggers
First-lien: On the “rate-lock” date, the APR on the loan
exceeds the APOR by 1.5 or more percentage points
Subordinate-lien: On the “rate-lock” date, the APR on the
loan exceeds the APOR by 3.5 or more percentage
points
Effective Date: Requirements apply to applications
received on or after October 1, 2009
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Covered Transactions
§226.35
Covered Loans:
Home Purchase
Home Refinance
Closed-End Home Equity Loans
Excluded Loans:
HELOCs
Reverse Mortgages
Construction-Only
Bridge Loans
Loans for real estate investment purposes
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Index for Determining
Higher-Priced Mortgage
Loans
§226.35
Average Prime Offer Rate (APOR): The APOR is an APR
that is derived from average interest rates, points, and other
loan pricing terms offered to consumers by a sample of
creditors for mortgage transactions that have low-risk pricing
characteristics
Calculated (or derived) and published by the Board at
least weekly and can be found on the FFIEC website at
www.ffiec.gov
Based on data obtained from the Freddie Mac Primary
Mortgage Market Survey®
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New FFIEC Rate Spread Calculator
Generates Spread Between the APR and the APOR
http://ffiec.gov/ratespread/newcalc.aspx
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Rules for Higher Priced
Mortgage Loans
Must Evaluate a Borrower’s
Repayment Ability
Limits Prepayment Penalties
Requires Escrow Accounts
Prohibits Evasion Tactics/Strategies to
Avoid Regulation
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Ability to Repay
§226.34(a)4 and §226.35(b)1
Creditors must take into account consumer’s
repayment ability
Ability to repay is determined by:
Current and reasonably expected income
Employment
Assets other than the collateral
Current obligations
Mortgage related obligations
• Expected property taxes
• Insurance premiums required by the creditor, such as
property insurance or PMI
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Verification of Repayment Ability
§226.34(a)4 and §226.35(b)1
Creditor must verify repayment ability
Verification of income and assets require third
party documentation, oral information does not
satisfy this requirement:
IRS Form W-2
Tax returns
Payroll receipts
Financial institution records
Check-cashing or remittance receipts
Written statement from the consumer’s employer
Other third party documents
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Why so Much Focus on
Repayment Ability?
This Rule is intended to ensure that creditors do not
assess repayment ability using overstated incomes
or understated obligations when evaluating higher-
priced or HOEPA loans (creates unaffordable or
irresponsible lending practices)
Therefore, the Rule explicitly requires creditors to
verify consumer income and assets using reliable
3rd party docs when making a higher-priced or
HOEPA loan
A creditor can no longer rely on an income
statement from the borrower as sufficient evidence
of repayment ability for a higher-priced or HOEPA
loan
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Ability to Repay
Presumption of Compliance
§226.34(a)4 and §226.35(b)1
A creditor is presumed to be in compliance if all
three of the following requirements are satisfied:
Verification of repayment ability through use of 3 rd party
docs
Determines repayment ability using the largest principal
and interest payment scheduled in the first 7 years
following consummation and taking into account current
obligations and mortgage-related obligations (i.e. property
tax, insurance)
Takes into account at least one of the following:
• A ratio of total debt obligations to income, or
• Consumer’s available income after paying debt
(residual income)
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Presumption of Compliance
(Continued)
There is no presumption of compliance for a
balloon payment loan with a term shorter
than 7 years
If the term is at least 7 years, the creditor that
underwrites the loan based upon regular
payments (not the balloon payment) retains
presumption of compliance
If the term is less than 7 years, compliance is
determined on the basis of all the facts and
circumstances, including consideration of how
the balloon payment is going to be made
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Prepayment Penalty
§226.35(b)(2)
Prepayment penalty is allowed on higher-priced
mortgage loans provided:
Principal and Interest payment may not change
during first four years of loan
Penalty can only apply for a maximum of two
years following consummation
Penalty cannot apply if source of funds of
prepayment is refinancing by same creditor or an
affiliate
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Escrow for Taxes and Insurance
§226.35(b)(3)
Escrow required for payment of property taxes and
homeowners insurance for higher cost mortgage loans
secured by a first lien on a principal dwelling
Creditors may allow a consumer to cancel escrow accounts
but no sooner than 12 months after consummation
Effective Dates
Non-manufactured housing: Applications received on
or after April 1, 2010
Manufactured housing: Applications received on or after
October 1, 2010
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Prohibited Acts or Practices
§226.36(b)
Appraisal
Prohibits any creditor or mortgage broker from
directly or indirectly coercing, influencing, or
otherwise encouraging an appraiser to
misrepresent or misstate the value of a
consumer’s principal dwelling
Regulation lists examples of acts or practices that
would and would not violate the regulation.
ILLUSTRATIVE ONLY
Prohibits a creditor from extending credit if knows
before or at consummation of a violation of this
section
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Prohibited Acts or Practices
§226.36(c)
Servicing
Prohibits mortgage servicing
abuses
Failing to credit a payment to an account
as of the date received
Pyramiding of late fees
Failing to provide within a reasonable
time of a request, a payoff statement
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CMS Best Practices
Review and provide training regarding early
TIL disclosure procedures for coverage,
timeliness, and delivery
Develop procedures to identify Higher-
Priced Mortgage Loans early in the
application process
For Higher-Priced Mortgage Loans, ensure
loan underwriting procedures include an
evaluation of the borrower’s ability to repay
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CMS Best Practices
Review timing of fees charged on
residential mortgage loans
Review mortgage servicing practices
For Higher-Priced Mortgage Loans,
review mortgage loan documents and
contracts for any prepayment
penalties, including minimum interest
charges
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CMS Best Practices
Expand audit coverage
Be aware of escrow accounting rules
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CMS Recommendation
If your institution is considering new
products or different contract
language as a result of these
amendments, be sure to conduct
proper due diligence, such as
discussions with legal counsel,
software providers, servicing company,
and other third party providers before
implementing any changes
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Additional Changes
Be aware of recent and forthcoming
changes to Regulation Z
Closed- and open-end credit advertising
rules effective October 1, 2009
Credit CARD Act amendments, some
effective August 20, 2009
Proposed changes, dated August 26,
2009, currently out for public comment
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Resources
FIL-134-2008 (12/2/08) – Reg Z and
Reg C: Amendments to the Regulations
FIL-26-2009 (6/1/09) – Reg Z Early
Disclosure Requirements
FIL-44-2009 (8/6/09) – Reg Z Open-end
Consumer Credit Changes Notice of
Immediate and 90-Day Changes
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Resources
FDIC’s Summer 2009 Supervisory
Insights Journal
http://www.fdic.gov/regulations/examinations/su
pervisory/insights/sisum09/si_sum09.pdf
For proposed Reg Z changes see the
following Federal Register citations
http://edocket.access.gpo.gov/2009/pdf/E9-
18119.pdf
http://edocket.access.gpo.gov/2009/pdf/E9-
18121.pdf
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