Category Archives:Mortgage Loans

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

Risks & Opportunities Facing Financial Services

Comptroller of the Currency Thomas J. Curry recently discussed risks and opportunities facing financial services during remarks before the New England Council in Boston, MA. During his speech, the Comptroller commented on interest rate risk, compliance risk, cybersecurity, and the role collaboration can play in mitigating these risks. He also discussed opportunities to improve business operations as well as service to customers.

More specifically, Curry emphasized that the inevitable rise in interest rates could greatly affect loan quality, particularly loans that were not carefully underwritten to begin with, and that ”loans that are typically refinanced, such as leveraged loans,” would be particularly severely affected. The final and “perhaps the foremost risk facing banks today,” according to Curry, is cyber threats. Curry outlined the agency’s efforts to curtail cyber intrusion in the banking industry, highlighting the June 30 release of its Semiannual Risk Assessment . Curry noted lastly that information-sharing is just as important as self-assessment and supervisory oversight and he strongly recommend that financial institutions of all sizes participate in the Financial Services Information Sharing and Analysis Center, a non-profit information-sharing forum established by financial services industry participants to facilitate the sharing of physical and cyber threat and vulnerability information. Collaboration among banks of all sizes and non-bank providers, Curry stated, can be a “game-changer” in more ways than one.”

Read Curry’s remarks

CFPB Proposes Two-Month Extension of Know Before You Owe Mortgage Rule

The Consumer Financial Protection Bureau (CFPB)has issued a proposed amendment to the Know Before You Owe mortgage disclosure rule, which proposes to move the rule’s effective date from August 1st to October 3, 2015. The rule, also called the TILA-RESPA Integrated Disclosure rule, requires easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The Bureau is issuing the proposal to correct an administrative error that would have delayed the effective date of the rule by at least two weeks, until August 15 at the earliest. The Bureau believes that moving the effective date may benefit both industry and consumers with a smoother transition to the new rules. The Bureau further believes that scheduling the effective date on a Saturday may facilitate implementation by giving industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the original effective date of Saturday, August 1.

The FDIC has revised its interagency examination procedures to reflect the requirements of the TILA/RESPA integrated disclosures (TRID) rule. The revised procedures also reflect the following amendments to other provisions of TILA Regulation Z and RESPA Regulation X:

  1. The alternative definition of the term “small servicer” for certain nonprofit entities in the mortgage servicing rules
  2. The provisions in the ability-to-repay/qualified mortgage rule that give creditors or assignees meeting certain requirements a limited period of time in which to review a transaction and “cure” excess points and fees for purposes of maintaining QM status
  3. Additional exempt transactions under the appraisal rule for higher-priced mortgage loans

The proposal is open for public comment until July 7.


Third Annual Fair Lending Report Released

On April 28, the CFPB published its third annual report to Congress on its fair lending activities. The Bureau’s mission includes ensuring fair, equitable, and nondiscriminatory access to credit for all consumers, and that markets for consumer financial products and services are fair, transparent, and competitive. The Report provides an overview of the work performed by the CFPB and accomplishments made during the past year.

According to the  Report, mortgage lending remains a “key priority” for the Office of Fair Lending in terms of both supervision and enforcement, with the focus being largely on Home Mortgage Disclosure Act (HMDA) data integrity and potential fair lending risks in connection with redlining, underwriting, and pricing. In addition, the indirect auto lending industry is also another critical area of concern and focus identified in the Report and, more particularly, the use of discretionary pricing policies within this industry that have resulted in discrimination against certain minorities in violation of the Equal Credit Opportunity Act (ECOA).  For instance, during the past two years, multiple supervisory reviews by the CFPB have revealed discretionary dealer markup and compensation policies which may discriminate against certain minorities. The report also monitored the credit card market, including enforcement actions against a company for its alleged failure to provide certain consumers who had a Puerto Rico mailing address or preferred to communicate in Spanish with debt relief offers. Lastly, the report noted outlined the rights of a consumer whose income is derived, in part or in whole, from a public assistance program. According to the report, the Bureau’s efforts in 2014 to protect consumers from credit discrimination lead to financial institutions providing approximately $224 million in monetary relief to over 300,000 consumers.

In closing the CFPB noted that they look forward to maintaining a sharp focus on discrimination and ensuring that markets operate fairly and effectively for all market participants in 2015.


Final Rule Issued for Appraisal Management Companies

Six federal financial regulatory agencies issued a final rule on April 30th that implements minimum requirements for state registration and supervision of appraisal management companies (AMCs). An AMC is an entity that provides appraisal management services to lenders or underwriters or other principals in the secondary mortgage markets. These appraisal management services include contracting with licensed and certified appraisers to perform appraisal assignments.

Under the rule, states may elect to register and supervise AMCs. The AMC minimum requirements in the final rule apply to states that elect to register and supervise AMCs, as AMCs are defined in the rule. The final rule does not compel a state to establish an AMC registration and supervision program, and no penalty is imposed on a state that does not establish a regulatory structure for AMCs. However, in states that have not established a regulatory structure after 36 months from the effective date of this final rule, any non-federally regulated AMC is barred by section 1124 of Title XI from providing appraisal management services for federally related transactions. A state may adopt a regulatory structure for AMCs after this 36-month period, which would lift this restriction.

Under the final rule, participating states must apply certain minimum requirements in the registration and supervision of appraisal management companies. An AMC that is a subsidiary of an insured depository institution and is regulated by a federal financial institution regulatory agency (a federally regulated AMC) must meet the same minimum requirements as state-regulated AMCs except for the requirement to register with a state.

This final rule will become effective 60 days after publication in the Federal Register. The compliance date for federally regulated AMCs is no later than 12 months from the effective date of this rule. A participating state will specify the compliance deadline for state-regulated AMCs.

Banking Regulatory Round Up April 2015

The U.S. House of Representatives this week passed five regulatory relief bills that help community banks.

The bills are:
Helping Expand Lending Practices in Rural Communities Act (H.R. 1259)
Reps. Andy Barr (R-KY) and Ruben Hinojosa (D-TX) have reintroduced this legislation that passed the full House in the last Congress. The bill would direct the CFPB to establish an application process under which a person who lives or does business in a state may apply to have an area designated as a rural area if it has not already been designated as such by the Bureau.

Eliminate Privacy Notice Confusion Act (H.R. 601)
This bill by Rep. Blaine Luetkemeyer (R-MO) would eliminate the annual privacy notice disclosure requirement for institutions that haven’t changed their policies.

Bureau Advisory Commission Transparency Act (H.R. 1265)
This bill by Rep. Sean Duffy (R-WI), would increase transparency in CFPB advisory council meetings.

SAFE Act Confidentiality and Privilege Enhancement Act (H.R. 1480)
This bill by Rep. Robert Dold (R-IL) would protect the confidentiality of information banks share with state regulators.

Mortgage Choice Act (H.R. 685)
This bill by Rep. Bill Huizenga (R-MI) would provide needed clarifications on the Qualified Mortgage rule’s points and fees test.

All of the bills were supported by the American Bankers Association.

CFPB Amending 2013 Mortgage Rules

The Consumer Financial Protection Bureau (CFPB) is amending certain mortgage rules issued in 2013 that took effect in January 2014. The final rule provides an alternative small servicer definition for nonprofit entities that meet certain requirements and amends the existing exemption from the ability-to-repay rule for nonprofit entities that meet certain requirements. The final rule also provides a cure mechanism for the points and fees limit that applies to qualified mortgages.

Defining nonprofit small servicers: Certain small servicers are exempt from some of the Bureau’s new mortgage servicing rules, so long as they—together with their affiliates—service 5,000 or fewer mortgage loans and meet other requirements. But the Bureau learned that some nonprofit organizations may service loans, for a fee, from other associated nonprofit lenders. Because of their unique structure, these organizations may not be able to consolidate their servicing activities and still meet the current requirements for the small servicer exemption. The changes finalized today provide an alternative definition of a small servicer applicable to certain 501(c)(3) nonprofit organizations so that they can consolidate their servicing activities while maintaining their exemption from some of the servicing rules.

Nonprofit Ability-to-Repay exemption amendment: Certain 501(c)(3) nonprofit organizations that lend to low- and moderate-income consumers were already exempt from the Ability-to-Repay rule if the organization makes no more than 200 mortgages a year, among other limitations. The adjustments finalized today include an amendment to this provision so that certain nonprofit groups, such as Habitat for Humanity, can continue to extend certain interest-free, forgivable loans, also known as “soft seconds,” without regard to the 200-mortgage loan limit.

Refunding excess points and fees: Under the Ability-to-Repay rule, certain loans called Qualified Mortgages are subject to certain requirements that protect consumers. The points and fees charged to a consumer on a Qualified Mortgage generally cannot exceed 3 percent of the loan principal at the time the loan is made. Under the amendments finalized today, if a lender discovers after the loan has closed that it has exceeded the 3 percent cap, there are limited circumstances where lenders can pay a refund of the excess amount with interest to the consumer, to have the loan still meet the legal requirements of a Qualified Mortgage. The refund must occur within 210 days after the loan is made. The creditor must also maintain and follow policies and procedures for reviewing points and fees and providing refunds to consumers. The provision also allows secondary market participants to provide these refunds. The change is designed to encourage lenders to provide access to credit to consumers seeking loans that are at or near the points and fees limit. This provision will expire on January 10, 2021.

The final rule did not address a possible cure for the debt-to-income ratio limit that applies to certain qualified mortgages and to the credit extension limit that applies to small creditor exemptions and special provisions in certain of the regulations adopted by the Bureau in the 2013 Title XIV Mortgage Rules.

CFPB Aims to Simplify Reporting Process for Financial Institutions

The Consumer Financial Protection Bureau (CFPB) aims to simplify the reporting process for financial institutions by proposing a rule  to improve information reported about the residential mortgage market. The goal of the proposed rule is to shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulations. 

“It is critical that we shed more light on the mortgage market – the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “The Home Mortgage Disclosure Act helps financial regulators and public officials keep a watchful eye on emerging trends and problem areas in the mortgage market. Today’s proposal would help us understand better how to protect consumers’ access to mortgage credit while simplifying the reporting requirements for financial institutions.”

Enacted in 1975, HMDA requires many lenders to report information about the home loans for which they receive applications or that they originate or purchase. The public and regulators can use the information to monitor whether financial institutions are serving the housing needs of their communities and identify possible discriminatory lending patterns. In 2010, the Dodd-Frank Act directed the CFPB to expand the HMDA dataset to include additional information about loans.

In 2012, 7,400 financial institutions reported information about approximately 18.7 million mortgage applications and loans. However, the HMDA dataset has not kept pace with the market’s evolution, such as adjustable-rate mortgages and non-amortizing loans. To rectify this concern, the CFPB proposed rule would expand to include:

  • Improving market information- This new information includes, for example: the property value; term of the loan; total points and fees; the duration of any teaser or introductory interest rates; and the applicant’s or borrower’s age and credit score.
  • Monitoring access to credit

In addition the CFPB  is looking to simplify HMDA reportingt requirements for financial institutions by:

  • Standardizing the reporting threshold
  • Easing reporting requirements for some small banks
  • Aligning reporting requirements with industry data standards
  • Improving the electronic reporting process
  • Improving data access

The proposed rule will be open for public comment through October 22, 2014.

Copy of Proposed Rule

Community Banks Urge CFPB to Review Title XIV Mortgage Rules

The Independent Community Bankers of America (ICBA) and a 45-member coalition of state and regional banking associations submitted a letter to the Consumer Financial Protection Bureau (CFPB) on July 15th urging the agency to review and revise the current ability-to-repay/qualified mortgage (QM) rules and escrow requirements for higher-priced mortgage loans to allow community bank loans held in portfolio for the life of the loan to receive automatic QM safe harbor status and an exemption from the escrow requirements if the loans are higher priced.


Based on the rules’ current requirements, there are community banks that would be considered small financial institutions due to their asset size but that still do not qualify for the small creditor exemption because they exceed the loan volume threshold. A threshold of 500 total first lien originations per year is only 41 first lien mortgages per month, or nine per week, an amount that easily can be exceeded by a smaller creditor. For community banks that wish to grow their mortgage business, this low number is restrictive since some banks will not provide loans that do not have QM safe harbor status, so they stop providing mortgage loans all together after they reach this low threshold.

Also, they believe community bank loans held in portfolio should be exempt from new escrow requirements for higher-priced mortgage loans because portfolio lenders have every incentive to protect their collateral by ensuring the borrower can make tax and insurance payments. For many community banks, establishing and maintaining escrow accounts is expensive and impracticable and, again, will only deter lending to consumers who have no other options.

Lastly, the current exceptions for community banks in the escrow and QM requirements to be pedantic and cumbersome, because community banks must constantly consider their current loan volume and where and to whom they are lending to in order not to lose exemption status, if indeed they qualified for it to begin with.

The coalition asks CFPB to expand small creditor exemptions so they can continue to serve the consumers in their communities by underwriting based on firsthand knowledge of their customers, which is a contrast to how larger financial institutions operate.


CFPB Guidance on Mini-Correspondent Mortgage Lending

There has been an increased interest among mortgage brokers to restructure their business to become mini-correspondent lenders in the possible belief that doing so will alter the applicability of important consumer protections that apply to transactions involving mortgage brokers. These protections include provisions in the Real Estate Settlement Procedures Act (RESPA) and Regulation X and the Truth in Lending Act (TILA) and Regulation Z, as amended by title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The Bureau has implemented the title XIV 2 amendments to RESPA and TILA through final rules amending Regulations X and Z, issued beginning in January 2013. These rules generally took effect in January 2014.

On July 9th, The Consumer Financial Protection Bureau (CFPB) issued Policy Guidance to identify for mortgage industry stakeholders, consumers, and the public general questions the Bureau may consider in exercising its supervisory and enforcement authority under RESPA and TILA with respect to transactions involving mini-correspondent lenders. The CFPB said it would closely monitor the practices of mini-correspondents, including former mortgage brokers that have converted to this form. The Policy Guidance states that among the questions the CFPB will consider are:

  • Does the mini-correspondent still act as a mortgage broker in some transactions? If so, what distinguishes those transactions from its “lender” transactions?
  • How many “investors” purchase the mini-correspondent’s loans?
  • Does the mini-correspondent fund loans using a “bona fide warehouse line of credit”?Is the line of credit provided by a third-party warehouse bank?
  • How thorough was the process to obtain approval for the warehouse line of credit
  • Does the mini-correspondent have more than one warehouse line of credit?
  • Is the warehouse lender one of the investors that purchases loans from the mini-correspondent (or an affiliate of the investor)?
  • Is the correspondent required to sell the loans to the warehouse lender (or its affiliate)?
  • What percentage of the mini-correspondent’s total monthly originated volume does it sell to the warehouse lender (or its affiliate)?
  • Does the mini-correspondent’s warehouse line capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
  • What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
  • What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with residential mortgage lending?
  • Which entity is performing the majority of the principal mortgage origination activities?
  • Who underwrites the mortgage loan and otherwise makes the final loan decision?
  • What percentage of the principal loan origination activities (e.g., application, processing, underwriting) is performed by the mini-correspondent (or its “independent agent”)?
  • If the majority of the principal loan origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent? What conditions must be met to make this transition (e.g., number of loans, time)?

“The CFPB’s rules on mortgage broker compensation are intended to protect consumers from this type of abuse,” stated CFPB Director Richard Cordray. “Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”

“The guidance makes clear that no single question necessarily determines how the CFPB may exercise its supervisory and enforcement authorities, and that the facts and circumstances of the particular mortgage transaction being reviewed would be relevant to how the Bureau exercises these authorities,” the CFPB stated.