Know Before You Owe RESPA TILA Reform Again by jolinmilioncherie


									Maryland Association of Mortgage
   Critical Issues Facing Mortgage Lenders and Brokers
                       March 29, 2012

     Jack Konyk , Weiner Brodsky Sidman Kider PC
      Ken Markison, Mortgage Bankers Association
           Today’s topics-
           •   CFPB and Activities to Date and Regulatory Agenda
           •   CFPB Examination Guidelines
           •   QM Ability to Repay Proposals and QRM Risk Retention
           •   Know Before Your Owe - Real Estate Settlement and
               Procedure Act (RESPA) and the Truth in Lending Act (TILA)
           •   HUD’s Disparate Impact Proposal
           •   LO Compensation

CFPB Activities To Date

              •   On July 21, 2011, CFPB issued final list of rules of other federal agencies
                  that are transferred to and will be enforced by CFPB See 76 Fed. Reg.
                  43569 (Jul. 21, 2011)
              •   May to present – RESPA/TILA prototypes
              •   August and September – FOIA and State notice rules
              •   August – Interagency Memoranda with the States
              •   October - Supervision and Examination Manual
              •   December – Mortgage complaint system
              •   December – Several interim rules to establish CFPB responsibility for
                  example including RESPA, TILA, HMDA, FCRA, SAFE with comments
                  due in February
              •   January 4 - Appointment of Director
              •   January 4 – Letter on protection of privilege
              •   January 5 - Nonbank supervision program announced
              •   January 11- New Mortgage Origination Examination Procedures
              •   February 13 – CFPB Semiannual Regulatory Agenda 77 Fed. Reg. 8034
                  (February 12, 2012)
              •   March 6-SBRRFA Panel                                                          4
CFPB Regulatory Agenda

            •   Numerous pre-rule, proposed and final rules including:
            •   Final Rule - TILA Ability to Repay (Reg Z) 4/12
            •   Proposed Rule - Disclosure Rules and Substantive Protection for Certain
                High Cost Mortgage Loans (Reg Z) 7/12
            •   Proposed Rule - Mortgage Originator Standards (Reg Z) 7/12
            •   Proposed Rule-Mortgage Servicing (Regulation X; Reg Z) 7/12
            •   Proposed Rule - TILA/RESPA Mortgage Disclosure Integration
                (Regulation X; Reg Z) 7/12
            •   Final Rule - Requirements for Escrow Accounts (Reg Z) 9/12
            •   Final Rule - Amendments to TILA and FIRREA Concerning Appraisals
            •   Pre-Rule - Home Mortgage Disclosure Act (Reg C)10/12

CFPB Supervision and Examination Manual

             •   Issued October 13, 2011

             •   Guide to how CFPB will examine providers for

             •   Divided into three parts
                  » Supervision and Examination Process

                  » Examination procedures
                      • General instructions
                      • Specific regulation instructions
                      • Product / line of business instructions

                  » Documentation and reporting of examination

             •   Intended to be continually reevaluated and updated

CFPB Supervision and Examination Manual

             •   Part I – Supervision and Examination Process
                  » General description of exam theory
                  » High-level overview of steps and workflow

             •   Part II – Examination Procedures
                  » Statute-by-Statute
                       • Narrative
                       • Procedures
                       • Checklists / supplemental materials

                  » Product / line of business
                       • Narrative
                       • Focused, activity-targeted
                       • Merged statutes as applicable

                  » Servicing issued initially, followed by others
                       • Origination
                       • Payday lending
                       • SAFE Act
             •   Part III – Examination Process Templates
Mortgage Servicing Examination Procedures

             •   Divided into 9 “Modules”, by discreet activity

             •   Routine Servicing
                   » Module 1 : Servicing transfers, loan ownership
                                transfers, escrow disclosures
                   » Module 2 : Payment processing and account maintenance
                   » Module 3 : Customer inquiries and complaints
                   » Module 4 : Maintenance of escrow accounts and insurance
                   » Module 5 : Credit reporting
                   » Module 6 : Information Sharing and Privacy

             •   Default Servicing
                   » Module 7 : Collections and accounts in bankruptcy
                   » Module 8 : Loss mitigation

             •   Foreclosure
                   » Module 9 : Foreclosures                             8
Mortgage Origination Examination Procedures

             •   Divided into 7 “Modules”, by discreet area / activity

                   » Module 1 : Company Business Model
                                • Products, channels, funding method, QC/controls
                   » Module 2 : Advertising and Marketing
                                • Content, clarity, accuracy, fairness
                   » Module 3 : Loan Disclosures and Terms
                                • Content, clarity, timing, lock validity, genuineness
                   » Module 4 : Underwriting, Appraisals and Originator
                                • Consistency, compliance, variability, protectiveness
                   » Module 5 : Closing
                                • Process, documentation, compliance
                   » Module 6 : Fair Lending
                                • Approval and pricing disparities, disparate impact
                   » Module 7 : Privacy
                                • Information protection, data security
   Ability to Repay – QM
Credit Risk Retention – QRM
QRM and QM

             •       Ability to Repay/QM and Credit Risk Retention/QRM
                 •    Two most significant mortgage-related rules that will come out of
                 •    Both already proposed and comments submitted July 22
                      and August 1, 2011
                 •    CFPB had announced QM Rule will be issued in first part of 2012
                      (probably in late second quarter) presumably in final
                 •    QRM to be issued by several regulators, incubation time is unclear
                      and so is matter of whether it will be reproposed
                 •    Both seek to align interests of lenders and borrowers to assure more
                      sustainable loans.
                 •    QRM cannot be broader than QM

QM Is Not a QRM

                  •   QM:
                      •   Fed issued proposal, CFPB may finalize in
                          second quarter of 2012
                      •   Means of complying with ability to repay
                          requirement under Title XIV of Dodd-Frank
                      •   Applies to virtually all loans
                      •   Proposed rule includes product and
                          underwriting standards to meet QM but not
                          numerical requirements, for down payment,
                          LTV, DTI although some numerical
                          requirements have been suggested
                      •   Will affect credit availability and affordability

QRM Is Not a QM

                  •   QRM
                      •   Proposal issued by six agencies, final rule
                          likely after QM
                      •   Exception to 5% risk retention requirement
                          under Title IX of Dodd-Frank
                      •   Applies to securitized loans
                      •   Proposed hard-wired numerical 20 percent
                          down payment, 80 percent LTV for
                          purchase (75 and 70 for refis) and 28 and
                          36 DTI requirements
                      •   As proposed will substantially restrict credit
                          availability and affordability

Four Ways to Comply with Ability to Repay Under
Proposed Rule Including QM
             1. Originating mortgage loan after considering and verifying eight
                factors including consumer’s:

                  (a) Current or reasonably expected income
                  (b) Employment status, if creditor relies on income from consumer’s
                  (c) monthly payment on mortgage based on fully indexed rate and
                  amortizing payments that are substantially equal
                  (d) monthly payment on any simultaneous loan creditor knows or has
              .   reason to know will be made
                  (e) consumer’s monthly payment for mortgage-related obligations;
                  (f) consumer’s current debt obligations
                  (g) consumer’s monthly DTI ratio, or residual income
                  (h) consumer’s credit history

QM Safe Harbor Alternative in Proposal

               2.   Originating “Qualified Mortgage” (QM). Proposes alternative
                    definitions of QM with different degrees of protection from liability:

                    Alternative A.- Legal Safe Harbor – To qualify as QM a loan must
                    not have certain product features including:
                     (a) negative amortization, interest-only or balloon payments, or
                    loan term exceeding 30 years
                    (b) total points and fees exceeding 3% of loan amount (with
                        alternative thresholds proposed for smaller loans)
                    and must be underwritten:
                    (c) based on maximum interest rate in first five years
                    (d) using payment schedule that fully amortizes loan over loan term
                    (e) taking into account any mortgage-related obligations.

                    Also requires creditor must:
                    (f) consider and verify income or assets of consumer

QM Rebuttable Presumption and Other Alternatives in

                     Alternative B - “Rebuttable presumption of compliance” – To
                     qualify as QM must meet requirements in Alternative 1 and creditor
                     also must consider and verify consumer’s
                     (g) employment status
                     (h) monthly payment for any simultaneous mortgage
                     (i) current debt obligations
                     (j) monthly debt-to-income ratio or residual income, and
                     (k) credit history
               .3.   Originating “Balloon Payment” QM

               4. Moving borrower from standard to non-standard product

Significant Liability for Failing to Meet Ability to Repay

                     •    Sec. 1411 of Dodd-Frank - Prohibits creditors
                          from making mortgage loan without reasonable
                          and good faith determination of consumer’s ability
                          to repay loan
                     •    Sec. 1412 - Allows creditor to presume loan
                          meets ability to repay requirement if loan is QM
                     •    Sec. 1413 – Allows consumer to assert violation
                          of ability to repay by creditor in foreclosure action
                          by creditor, assignee or other mortgage holder
                      •   Also under TILA - Mortgage creditor who fails
                          to comply with the ability to repay requirements
                          may be liable for (1) actual damages; (2) up to
                          three years of finance charges; and (3) court
                          costs and reasonable attorneys’ fees

QM Includes Three Percent Limit on Points and
               •Limit: QM’s “points and fees” may not be in excess of 3 percent of
               the loan amount. As currently drafted, in addition to fees to lenders
               and mortgage brokers, points and fees may include:

               (1) Charges to title companies affiliated with lenders and others

               (2) Possibly salaries paid to loan originators

               (3) Possibly amounts of insurance and taxes held in escrow
               •Smaller loans: Proposal would also increase points and fees for
               smaller loans defined as those under $75,000 up to five percent on a
               sliding scale with 5 percent limit for loans under $15,000

How QM is Structured is Key

               •   Main issues –
                    » Broad v. Narrow QM
                    » Safe harbor v. rebuttable presumption – both provide
                      court remedy
                    » Bright line v. Subjective

               •   QM liability means there will be little if any lending
                   outside of QM
               •   QM liability also means there will be even less
                   lending within QM if the standards are blurry

Inclusion of Affiliate Fees and LO Comp In 3 Percent QM
Limit Hurts Borrowers and Market
                » Lenders and others have affiliated settlement service providers
                  - 26 percent market share in 2006
                » Affiliate arrangements add efficiencies to loan process including
                  by providing dependable service providers
                » Consumers like one stop shopping
                » Under RESPA, affiliate relationships must be disclosed to
                  consumer and use may not be required
                » Lenders have little room to augment fees through affiliates
                    • Title insurance rates are filed or regulated at state level
                » Based on Kansas experience, title rates will climb if affiliates
                  excluded and consumers will be harmed
                » All third party fees should be treated the same to avoid market
                » Inclusion of lo comp is double counting in many cases and will
                  undermine loan availability

Going Forward - How QM is Established Will Determine
Credit Availability and Affordability for Families

    Without bright line safe harbor, lenders may retreat to the
    perceived safety of the QRM box

Wrong QM Choices Would Further Stress Government

                                       •FHA and other
                                       programs may
                                       establish their own
                                       QM standards but
                                       have not yet
                                       •Without workable
                                       QM standards
                                       under this or other
                                       rules, there will be
                                       even more
                                       pressure for FHA
                                       to fill the needs of
Lesson for QM – Access to Credit Has Dropped for Many
Consumers After Unclear Boundaries

           •The Federal Reserve has
           implemented new rules for
           “higher priced lending” - for first
           mortgages, 150 bps over the
           Average Prime Offer Rate

           •These rules establish
           “rebuttable presumption” that
           ability to repay is satisfied for
           loans if certain requirements are

           Before the rules were issued,
           share of higher-priced lending
           peaked above 25 percent in
           2006, but has since fallen to well
           below 5 percent


                                                 Source: Avery et al, 2010, Federal Reserve Bulletin.
Rebuttable Presumption v. Safe Harbor

              Costs associated with a QM presumption v. safe harbor:
                      Illustration of Costs Associated with Proposed Penalties Under QM Rule
                                                                      Mortgage A      Mortgage B
              1    Initial Home Value                                     $212,000        $212,000
              2    Initial Mortgage Balance                               $201,400        $201,400
              3    Mortgage Rate                                               4.5%            8%

              4    Lender Fees (1% of mortgage balance)                   $2,014           $2,014
              5    Mortgage Payment (P+I on 30-year loan)                 $1,020           $1,478
              6    Mortgage Interest Paid Over First 3 Years             $26,535          $47,723
              7    Down Payment                                          $10,600          $10,600
                   Attorney Fees under Safe Harbor ($300/hour, 100
              8    hours)                                                $30,000          $30,000
                   Attorney Fees under Presumption ($300/hour, 167
              9    hours)                                                $50,000          $50,000

                   Potential Costs for Violation of ATR* Standard
              9    under Safe Harbor (4+6+7+8)                           $69,149          $90,337
                   Potential Damages for Violation of ATR*
              10   Standard under Presumption (4+6+7+9)                  $89,149         $110,337

                   Average Production Profit per Loan in 2010 per
              11   MBA Performance Report                                 $1,054           $1,054

Another Lesson for QM - High Cost or HOEPA Loans
Barely Exist
                                           •High cost or
                                           HOEPA loans
                                           expose lenders
                                           and assignees to
                                           considerable legal
                                           and financial risks
                                           •These loans have
                                           accounted for less
                                           than 0.1 percent of
                                           the market
                                           •The severity of
                                           the ATR penalties
                                           would have a
                                           similar impact
                                           •Lenders will be
                                           unable to serve
                                           many borrowers
                                           unless there are
                                           bright line
                                           protections such
                                           as in a bright line
                                           safe harbor

Nearly Half of Loans are Under $150,000 and QM 3 Percent
Limit Should Be Adjusted Accordingly

                                        •More than 43 percent of
                                        purchase loans in the
                                        first half of 2011 had
                                        balances below $150K
                                        •Only 12 percent had
                                        balances below $75K
                                        •Under the proposed
                                        rule, loans of up to
                                        $200K could be
                                        adversely impacted by
                                        the 3 percent limit while
                                        only loans <$75K would
                                        gain any relief

Recent Steps
                   •Several large lenders met with the Bureau recently accompanied by
                   consumer representatives. They proposed:
                   1. New ARM and additional verification requirements points and fees
                   greater of 3 percent or $3000
                   2. Establishment of a waterfall to meet QM:
                   • TDTI -Borrower’s total debt-to-income ratio (“TDTI”) is 43 percent or less
                   (with a bona fide error cushion), If TDTI is more than 43 percent, the
                   following tests could be applied:
                   •– Front-End Ratio: Borrower’s housing debt-to-income ratio 31 percent or
                   less of the borrower’s gross monthly income and is TDTI 50 percent or less
               .   – Previous Housing Payments. Borrower has had stable income for the
                   past six months and made timely mortgage or rental payments over a
                   specified period of time (TBD), and new monthly housing obligations will be
                   no more than 5 percent higher than her current housing expenses
                   – Reserves. Does the borrower meet one of the following tests: 1) at least 6
                   months of liquid financial reserves available to meet mortgage-related
                   obligations and a TDTI of 50% or less; or greater than 18 months in liquid
                   financial reserves (i.e., no TDTI cap required)? (Only 60 percent of any
                   reserves with a withdrawal penalty would be allowed to count.)
                   Some degree of seasoning should be required but do not have a specific
                   3. Narrowing rebuttal of presumption to mainly showing that lender did not
                   consider or properly consider information from borrower
QRM Awaits

             •Dodd-Frank required QRM first which made no sense in retrospect
             •QRM must be no greater than QM
             •Now the QRM team appears to be awaiting QM

QRM Proposal

 Know Before You Owe –
RESPA TILA Reform Again
Know Before You Owe - RESPA-TILA Reform
            •   Within one year after transfer date under Dodd-Frank or July
                21, 2012, CFPB must propose combined and integrated
                RESPA/TILA disclosure
            •   Loan estimate combining the GFE and early TILA disclosure
                has been developed through iterative comment process
            •   Nine rounds of loan estimate prototypes for comment ahead
                of proposed rule
            •   MBA continues to offer general and specific comments
                •   Line edits
                •   Technological concerns
                •   Tradeoffs between brevity - accuracy
                •   Most importantly, asking what rules apply, TILA or

Loan Estimate

                •   Loan Estimate – 3 page form includes:
                     First page -
                        a. Identifying information for borrower and loan
                        b. Loan terms, amount, payments and rate. particular loan
                           features such as prepayment penalties and balloons.
                        c. Projected payments showing any increases
                        d. Costs to close and settlement fees
                     Second page -
                         a. Some detail on settlement fees and settlement costs
                          b. Detail on settlement costs includes escrows and down
                          c. Breakdown implies tolerances
                     Third page -
                          a. Disclosures include payments over five years, APR and
                          Total Interest Payment
                          b. Several other disclosures including appraisal availability,
                          assumption, homeowner’s insurance, late payment, can’t
                          guarantee refinancing, transfer of servicing

Current Version Loan Estimate Prototype

Current Version Loan Estimate Prototype

Current Version Loan Estimate Prototype

Current Version Final Disclosure Prototype

Current Version Final Disclosure Prototype

Current Version Final Disclosure Prototype

Current Version Final Disclosure Prototype

Current Version Final Disclosure Prototype

Final Disclosure and Rules

             •   Current prototypes - 5 page form
                  » First page generally same as first page of early disclosure
                  » Second or third pages include disaggregation of costs and
                     summary of real estate transaction
                  » Remaining pages try to list all other loan disclosures, for example,
                     late payment, negative amortization, partial payment policy as
                     well as new disclosures APR, Total Interest Percentage as a rate
                     over loan, Lender Cost of Funds
                   » Prototypes raise the question of how much and how best to
                     disaggregate costs?
                   » Implicates finance charge calculation requirements

Clue to Rules

                Documentation for Small Business Regulatory Enforcement Fairness Act
                    (SBRFA) panel convened by CFPB provided clue to CFPB’s thinking
                    on RESPA-TILA rules
                •   Model forms v. standard forms
                •   Provision of loan estimate – final disclosure
                •   Definition of application – six items only?
                •   Preapplication estimates
                •   Tolerances – zero to more charges – affiliates? listed providers?
                •   Reissuance of GFE – Only if 10% overall exceeded?
                •   Consistent terminology
                •   FAQs into Regs and Commentary
                •   Provision of the settlement disclosure 3 days? Current timing , e.g.,
                    TIL 3 days before closing if tolerance exceeded, RESPA 1 day if
                    borrower requests inspection
Clue to Rules - Issues (cont’d)

              •   Responsibility for delivering Settlement Disclosure – Lender only or
                  lender for TILA and Settlement agent for RESPA (3 days before
                  closing) even settlement agent only
              •   New data retention requirements for Loan Estimate and Settlement
              •   Revising the finance charge to include more charges - title services,
                  closing agent, appraisal, credit report

Fair Lending

               •   HUD has issued proposed rule that would apply disparate
                   impact theory to claims under Fair Housing Act
               •   Disparate impact,” as distinguished from differential
                   treatment, describes different results that arise from
                   “practices that are facially neutral in their treatment of
                   different groups” but that may “fall more harshly on one
                   group than another.”
               •   MBA strongly supports efforts to promote fair lending for all
                   borrowers and root out disparate treatment. MBA believes-
                    •   Disparate impact theory not supported by Act
                    •   Burden of proof articulated inconsistent with case law
               •   Threat of disparate-impact challenge and attendant
                   reputational risk encourages efforts to assure outcomes
               •   Such efforts may lead to quotas and disparate treatment,
                   very conduct Act intended to eliminate
               •   Department should at least revise burden of proof and
                   create safe harbor or exemption from QM and QRM and
                   similar initiatives
And LO Comp

              •Last year’s loan originator compensation rule was very bad
              experience for the industry. No matter whether you might agree or
              disagree with its restrictions on originator compensation, the
              implementation process was extremely frustrating.

              •MBA spent very considerable energy seeking clarification from
              the Fed and in providing training and guidance to MBA members,
              in far too short an implementation period.

              •Dodd-Frank requires additional loan officer provisions including
              broader anti-steering restrictions.

              •The CFPB is scheduled to issue a proposed rule implementing
              these provisions in July, 2012

              •MBA hopes the rulemaking process will be an opportunity to seek
              reconsideration of key provisions of the Fed’s rule. We will also
              insist on a rational implementation process when the new
              provisions are finalized.

Thank You and Questions

             Jack Konyk

             Ken Markison,


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