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Nutter Bank Report, August 2012
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1. Comprehensive Mortgage Servicing Rules Proposed by CFPB
2. CFPB Proposes Rules Implementing Dodd-Frank Restrictions on Points and Fees
3. Agencies Propose Appraisal Requirements for Higher-Risk Mortgage Loans
4. Other Developments: Foreclosure Guidance and Mortgage Disclosures
1. Comprehensive Mortgage Servicing Rules Proposed by CFPB
The Consumer Financial Protection Bureau (“CFPB”) has proposed mortgage servicing rules that would establish new requirements for periodic statements for residential mortgage loans, initial rate adjustment notices for adjustable-rate mortgages, and crediting of mortgage payments and responses to requests for payoff amounts. The August 10 proposals generally would apply to all mortgage loan servicers, regardless of the size of the institution or the size of the portfolio being serviced. However, certain small servicers would be exempt from the Truth in Lending periodic statement requirements and the CFPB has requested input from the public on whether to exempt small servicers from other requirements or modify certain requirements for small servicers. Among other new requirements, the proposed rules would require servicers to provide regular statements that must include a summary of principal, interest, fees and escrow payments, the amount of and due date of the next payment, recent transaction activity, and warnings about fees. Servicers would be required to provide earlier notices before the interest rate adjusts for most adjustable-rate mortgages, and disclosures about alternatives and counseling resources if the new payment is unaffordable. The new rules would require servicers to give advance notice and pricing information before charging consumers for force-placed insurance and make good faith efforts to contact delinquent borrowers and inform them of their options to avoid foreclosure. The proposed rules would also impose requirements for handling consumer accounts, correcting errors, and evaluating borrowers for options to avoid foreclosure. Comments on the proposed rules are due by October 9.
Nutter Notes: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd Frank Act”) amended the Truth in Lending Act and the Real Estate Settlement Procedure Act to impose a number of new consumer protections related to mortgage servicing that would be implemented by the proposed rules. Some of the new statutory requirements become effective on January 21, 2013, unless final rules are issued by the CFPB on or before that date. The proposed rules generally would apply to closed-end mortgage loans, with certain exceptions. Under the proposed amendments to the rules implementing the Real Estate Settlement Procedure Act (Regulation X), open-end lines of credit and certain other loans, such as construction loans, are excluded. Under the proposed amendments to the rules implementing the Truth in Lending Act (Regulation Z), periodic statement and adjustable-rate mortgage disclosure requirements apply only to closed-end mortgage loans, but prompt crediting and payoff statement requirements apply both to open-end and closed-end mortgage loans. Reverse mortgages and timeshares are excluded from the periodic statement requirements, and certain construction loans are excluded from the adjustable-rate mortgage disclosure requirements. The small servicer exemption to the Truth in Lending periodic statement requirements would apply to a servicer that services 1,000 or fewer mortgage loans and that only services loans for which the servicer or an affiliate originated the loan or is the owner or assignee.
2. CFPB Proposes Rules Implementing Dodd-Frank Restrictions on Points and Fees
The CFPB has issued a proposal to implement Dodd-Frank Act restrictions on points and fees charged on most mortgages. The CFPB’s mortgage loan origination proposals released on August 17 would also impose qualification and compensation requirements for mortgage loan originators. Absent the CFPB rulemaking, the Dodd-Frank Act would prohibit payment of up-front points and fees on most mortgages even where a consumer prefers a loan with a lower interest rate and some up-front costs. The proposed rules would require lenders to offer consumers a loan option without discount points or origination points or fees, unless the consumers are unlikely to qualify for such a loan. The proposal would also require that any up-front payment, whether a point or a fee, must qualify as a bona fide point or fee. A point or fee would qualify as bona fide only if the consumer receives at least a certain minimum reduction of the interest rate in return for paying the point or fee. The proposed rule would also require that all loan originators, including but not limited to those employed by depository institutions, be subject to the same standards for character, fitness, and financial responsibility. The proposal would impose criminal background check and minimum training requirements for all loan originators. The proposed rules also prohibit the payment of steering incentives to mortgage loan originators and place restrictions on arbitration clauses and financing of credit insurance, as required by the Dodd-Frank Act. Comments on the proposed rules are due by October 16.
Nutter Notes: The loan originator qualification requirements would apply where a loan originator is not already required to be licensed under the Secure and Fair Enforcement for Mortgage Licensing Act (“SAFE Act”). The proposal would require the loan originator’s employer to ensure that the loan originator meets character, fitness, and criminal background check standards that are equivalent to SAFE Act requirements and receives training commensurate with the loan originator’s duties. Typically, loan originators employed by insured depository institutions are exempt from state loan originator licensing requirements (though they generally must register with the Nationwide Mortgage Licensing System and Registry). The proposed rules would also implement a Dodd-Frank Act provision that bans the practice of varying loan originator compensation based on interest rates or other loan terms and clarify certain issues related to that prohibition. The proposed rule treats different types of compensation structures differently based on an analysis of the potential steering incentives created by the particular structure. The proposed rule would permit employers to make contributions to qualified plans (such as defined benefit and contribution plans that satisfy IRS requirements), even if the contributions were made out of mortgage business profits. Additional requirements would apply to bonuses under non-qualified profit-sharing plans, profit pools, and bonus pools and employer contributions to non-qualified defined benefit and contribution plans.
3. Agencies Propose Appraisal Requirements for Higher-Risk Mortgage Loans
The federal banking agencies together with the CFPB and the Federal Housing Finance Agency have issued a proposed rule that would establish new appraisal requirements for higher-risk mortgage loans as provided in the Dodd-Frank Act. The proposal released on August 15 would amend Regulation Z to require creditors to obtain an appraisal or appraisals meeting certain specified standards, give applicants a copy of the written appraisals and provide applicants with a notification regarding the use of the appraisals. Under the Dodd-Frank Act, a mortgage loan is higher-risk if it is secured by a consumer’s home and has an interest rate above a certain threshold. The applicable threshold depends on whether the mortgage loan is a first- or subordinate-lien loan and whether the loan is a jumbo loan based on the original principal amount. In general, loans are higher-risk mortgage loans if the annual percentage rate exceeds the average prime offer rate for a comparable transaction (to be published by the CFPB) by 1.5% for first-lien loans, 2.5% for first-lien jumbo loans, and 3.5% for subordinate-lien loans. The definition of higher-risk mortgage expressly excludes qualified mortgages and reverse mortgage loans that are qualified mortgages, as defined in the Truth in Lending Act. The proposed rule would also exempt loans secured solely by residential structures, such as many types of manufactured homes, which more closely resemble titled vehicle loans. Comments on the proposed rule are due by October 15.
Nutter Notes: The proposed rule implements Section 1471 of the Dodd-Frank Act, which amended the Truth in Lending Act to impose appraisal requirements on higher-risk mortgages. The proposed rule would require a creditor that makes a higher-risk mortgage loan to use a licensed or certified appraiser to prepare a written report based on a physical inspection of the interior of the mortgaged property. The proposed rule also would require creditors to disclose to applicants for higher-risk mortgage loans information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report. Creditors would have to obtain an additional appraisal from a different certified or licensed appraiser if the purpose of the higher-risk mortgage loan is to finance the purchase or acquisition of a mortgaged property from a seller within 180 days of the purchase or acquisition of the property by that seller at a price that was lower than the current sale price of the property. The additional appraisal would include an analysis of the difference in sale prices, changes in market conditions, and any improvements made to the property between the date of the previous sale and the current sale. This requirement is meant to discourage fraudulent property flipping by seeking to ensure that the value of the property being used as collateral for the loan legitimately increased.
4. Other Developments: Foreclosure Guidance and Mortgage Disclosures
- Massachusetts Division of Banks Issues Guidance on New Foreclosure Law
The Massachusetts Division of Banks on August 3 released guidance on compliance with the new Massachusetts foreclosure prevention statute, Chapter 194 of the Acts of 2012. The guidance clarifies the Division’s expectations for the timing of the delivery of notices required by the statute and certain documentation that examiners will expect to see in loan files.
Nutter Notes: The Division of Banks is also preparing to issue regulations under the statute that would require lenders and servicers to take reasonable steps to avoid foreclosure for certain mortgage loans. A public informational hearing on the new regulations has been scheduled for August 29 at 10:00 a.m. at the Division’s offices at 1000 Washington St.
- CFPB Releases New Combined TILA and RESPA Disclosure Forms
The CFPB has published a proposal to combine the initial and closing disclosure forms that consumers receive in connection with a residential mortgage loan under the Truth in Lending Act and the Real Estate Settlement Procedures Act, as required by the Dodd-Frank Act. The proposal includes a detailed explanation of how the forms should be filled out and used.
Nutter Notes: The first form, the Loan Estimate, would replace the Good Faith Estimate and the early Truth in Lending disclosure statement and would be provided to consumers within three business days after they submit a loan application. The second form, the Closing Disclosure, would replace the HUD-1 and the final Truth in Lending disclosure statement and would be provided to consumers three business days before they close the loan.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. The 2009 Chambers and Partners review says that a “real strength of this practice is its strong partners and . . . excellent team work.” Clients praised Nutter banking lawyers as “practical, efficient and smart.” Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Lisa M. Jentzen. The information in this publication is not legal advice. For further information, contact:
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