Certified Mortgage Compliance Track: - PDF document

Certified Mortgage Compliance Track: TI
Certified Mortgage Compliance Track: TILA Compliance BasicsMay 5, 2019Moderator:Dan Sawatzke, Chief Compliance Officer, Academy Mortgage CorporationPanelists:Kris D. Kully, Partner, Mayer Brown LLPJoseph T. Lynyak, III, Partner,Dorsey & Whitney LLPCLE CreditsThis session is intended to satisfy CLE credits upon approval by applicable state bar licensing entities. Please give your BAR number to the s

taff at the MBA Booth in THE HUB.Where
taff at the MBA Booth in THE HUB.Where do I find the presentation? On the app schedule….1. Under session, click Resources2. Choose Presentation3. Scroll through slidesOr on the website… visit mba.orgTruth-in-Lending Introduction and Overview TILA Introduction and Overview•A short history of TILA and Regulation Z•A description of Regulation Z’s structure•Oversight and ownership by the CFPB a

nd other regulatory agencies•Liabili
nd other regulatory agencies•Liability A Short History of TILA and Regulation Z•TILA has had numerous iterations•Passed by Congress in 1968 and became effective in 1969•Authority to issue regulations given to the Federal Reserve Board•A jumbled assortment of judicial decisions created considerable legal and compliance risk•Truth-in-Lending Simplification Act and Reform Act adopted in 1980â€

¢Streamlined TILA and Regulation Z•
¢Streamlined TILA and Regulation Z•The “Federal Box” adopted for both open-end and closed-end credit •Resulted in the FRB issuing the Official Staff Commentary (discussed below)A Short History of TILA and Regulation Z•The2006-2007 mortgage meltdown changed all of that•Title X of the Dodd-Frank Act created the CFPB•Transferredpractically all federal consumer laws to the jurisdiction o

fthe CFPB—including TILA and Regula
fthe CFPB—including TILA and Regulation Z•Substantially modified scope and direction of the mortgage provisions of TILA•Imposed substantive national lending requirements•Directed the CFPB to meld together the TILA and RESPA mortgage disclosures•It only took 30 years to get this done….“Now Cometh the Days of the King…”*•••The Structure of Regulation Z•SubpartA—General Cov

erage•Purpose/Coverage and Organizat
erage•Purpose/Coverage and Organization•Definitions•Exempt Transactions•Financial Charges•Subpart B—Open-end Credit•Subpart C—Closed-end CreditThe Structure of Regulation Z•Subpart D—Miscellaneous•Record Retention•APR in Oral Disclosures•Language of Disclosures•Effect on State Laws•State Exemptions•Limitation on Rates•Subpart E—SpecialRules for

Certain Home Mortgage Transactions •
Certain Home Mortgage Transactions •Subpart F—Special Rules for Private Educational Loans•Subpart G—Special Rules Applicable to Credit Card Accounts and College Student Credit•AppendicesThe Practical Structure of Regulation Z•There are five primary components of Regulation Z:•Open-end credit•Closed-end credit•Closed-end mortgage credit•Forms and sample disclosure material

s •The CFPB’s Official Interpretat
s •The CFPB’s Official Interpretations to Regulation Z (the “Commentary”)Open-End CreditSection 1026.2(a) (20)—”Open-end credit”means consumer credit extended by a creditor under a plan in which:•The creditor reasonably contemplates repeated transactions;•The creditor may impose a finance charge from time to time on an outstanding unpaid balance; and•The amount of credit that m

ay be extended to the consumer during th
ay be extended to the consumer during the term of the plan (up to any limit set by the creditor) is generally made available to the extent that any outstanding balance is repaid•Includes—–Credit card credit, and–HELOCsClosed-End Credit•Section 1026.2(b)(10)—Closed-end creditmeans consumer credit other than “open-end credit” as defined [by Regulation Z]•Includes—•Most

home loans (except for HELOCs)•Lien
home loans (except for HELOCs)•Lien priority irrelevantClosed-End Mortgage CreditSection 1026.2(a) (24) Residential mortgage transactionmeans a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained in the consumer's principal dwelling to finance the acquisition or initia

l construction of that dwelling.Sectio
l construction of that dwelling.Section 1026.2(a)(19) Dwellingmeans a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence.Forms and Sample Disclosure Materials•The appendices of Regulation Z contain numerous forms and sample

disclosure language that provides a saf
disclosure language that provides a safe harbor in regard to format and type size•It makes little sense to use anything else, except in the case that a document drawing application hard wires a modification The Commentary•If Regulation Z is the Bible—the CFPB’s Official Interpretations (aka, the Commentary) constitutes the 10 Commandments•Good faith compliance with the Commentary affords protecti

on from liability under section 130(f)
on from liability under section 130(f) of the Truth in Lending Act by protecting creditors from civil liability for any act done or omitted in good faith in conformity with any interpretation issued by the CFPB Financial Protection•Generally issued in conformity with the Administrative Procedures Act•When under the jurisdiction of the FRB, the Commentary was an effective tool to assist lenders•Under th

e jurisdiction of the CFPB, not so much
e jurisdiction of the CFPB, not so much•Regulation Z needs to be read alongside of the corresponding provision of the Official InterpretationsAbility to Repay (“ATR”) and Qualifying Mortgages (“QMs”)Ability to Repay•Immediately prior to the transfer of authority to the CFPB, the FRB proposed a rule requiring that a dwelling loan could not be made unless the creditor verified the borrower’s abili

ty to repay the indebtednessThis was ev
ty to repay the indebtednessThis was eventually included in Section 1026.43(c) of regulation Z:(c) Repayment ability—(1)General requirement.A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.•The ATR rule ap

plies to a “covered transaction,” wh
plies to a “covered transaction,” which is defined as a consumer credit transactionthat is secured by a dwelling, including any real property attached to a dwellingAbility to Repay•In order to comply with the ATR requirement, a lender must consider the following:•Current or reasonably-expected income or assets (other than the value of the property that secures the loan) that the consumer will rely on t

o repay the loan•Current employment
o repay the loan•Current employment status (if employment income is used when assessing the consumer’s ability to repay).•Monthly mortgage payment for a loan. This is calculated using the introductory or fully-indexed rate, whichever is higher, and monthly, fully-amortizing payments that are substantially equal •Monthly payments on any simultaneous loans secured by the same property•Monthly paymen

ts for property taxes and insurance that
ts for property taxes and insurance that lenders require the consumer to buy, and certain other costs related to the property •Debts, alimony, and child-support obligations•Monthly debt-to-income ratio or residual income, calculated using the total of all of the mortgage and non-mortgage obligations listed above, as a ratio of gross monthly income•Credit historyWhy do We Care?15 USC 1640(k)—â€

¢A borrower may bring an action against
¢A borrower may bring an action against a creditoran assignee or other holderof a residential mortgage loan for a violation of the ATR as a matter of setoff or recoupment without regard to the applicable statute of limitations•Applies to both judicial and non-judicial foreclosures•The amount of the recoupment is equal to:•Actual damages•Statutory damages•Costs of litigation and attorneys’ f

ees, and •3 years of finance charges
ees, and •3 years of finance charges measured from the date of loan originationQualifying Mortgages•Thepredominant method of complying with the ATR Rule is by originatinga “Qualifying Mortgage” or “QM”•The basic rule for a QM requires:•The mortgage cannot increase the principal balance•Cannot allow the borrower to defer repayment of principal•Result in a balloon payment (with certain

exceptions)•The Loan term cannot exc
exceptions)•The Loan term cannot exceed 30 years•The monthly payment is based uponthe highest expected monthly payment in the first 5 years•Current and expected income and assets have ben considered and verified•Debt to income does not exceed 43%QMs—Points and Fees•Points and fees cannot exceed 3%for the total loan amount for loans of $100,000 or more•For loan exceeding $60,000 but less

than $100,000, the limit is $3000•Fo
than $100,000, the limit is $3000•Forloans of $20,000 but less than $60,000, the limit is 5% of the total loan amount•Forloans of $12,500 but less than $$20,000, the limit is $1000•Forloans less tha $12,500, the limit is 8% of the total loan amountTwo Levels of Safe Harbor Protection•For a QM that is not a higher-priced covered transaction—a conclusive presumption of compliance with the ATR Ru

le•For a QM that is a higher-price
le•For a QM that is a higher-priced covered transaction—a rebuttable presumption of compliance with the ATR Rule•Arguably the longer a borrower is capable of paying on his/her mortgage, the stronger the presumption has not been rebuttedTemporary Exceptions to ATR•A QM may qualify if it is eligible—except with regard to matters wholly unrelated to ability to repay—if it is purchased, guarante

ed or insured by—•Fannie Mae or F
ed or insured by—•Fannie Mae or Freddie Mac (while still in conservatorship)•FHA •Ginnie Mae•The Department of Agriculture•The Rural Housing Service•Several of the agencies have issued regulations defining what is a QM under their rules•There remains some ambiguity whether the temporary exception provides an conclusive presumption or rebuttable safe harborTemporary Exceptions to ATR•

Mostlenders run mortgage loans through
Mostlenders run mortgage loans through Desktop Underwriter or Loan Prospector to determine QM status•Limit on maximum loan amount severely impacts the West Coast and the North East•Non-QM loans frequently held in portfolio by banks•Secondary market for non-QM loans severely limited•Well over 90% of loans are QM loans using the GSE or FHA exemptions•The temporary QM rules expire January 10, 2021

(Yikes!!!!)Other ATR and QM Exemption
(Yikes!!!!)Other ATR and QM Exemptions•HELOCs•Timeshare plans•Small lenders extending no more than 200 loans in the previous year•Temporary of bridge loans of 12 months or less•Certain low-to-moderate income loans•Construction phase of construction to permanent loans of 12 months or less•Loans made under a public housing program•Loan made by non-profit and community development le

nders•Limited by number•Small cr
nders•Limited by number•Small creditor loans•Higher priced loan interest rate entitled to conclusive presumption •Relief for certain rural lendingContactsJoseph T. Lynyak III –Dorsey & Whitney LLPJoe Lynyak is a financial services partner in Dorsey & Whitney’s Financial Services Practice.Focusing his practice on the regulation and operation of financial service intermediaries, he provides co

unsel on strategic planning, applicatio
unsel on strategic planning, application and licensing, legislative strategy, commercial and consumer lending, examination, supervision and enforcement and general corporate matters.He has extensive expertise across a comprehensive range of issues before federal and state regulatory agencies such as the Federal Reserve Board, OCC, FDIC, NCUA, CFPB, SEC, FTC and California and New York Banking Departments.Mr. Lyny

ak’s representative clients include fo
ak’s representative clients include foreign and domestic banks, savings associations, credit unions, holding companies and mortgage banking companies.He can be contacted via email at Lynyak.joseph@Dorsey.comor at 310.386.5554.Loan Originator Compensationand QualificationsPresented byKris D. KullyPartnerMayer Brown LLPkkully@mayerbrown.comLoan Originator CompensationLoan Originator Compensation•“Loan

Originator” = A person who, in expect
Originator” = A person who, in expectation of compensation performs any of the following:–Takes application–Offers consumer credit–Arranges consumer credit–Negotiates consumer credit–Assists a consumer in obtaining or applying for consumer credit–Obtains or makes an extension of credit for another person–Represents to public that such person can or will perform these activities (through a

dvertising)12 C.F.R. 1026.36Loan Origi
dvertising)12 C.F.R. 1026.36Loan Originator Compensation•LO prohibited from receiving (and any person is prohibited from paying) compensation based on loan term or proxy (effective since April 2011)•Loan Terms:–Any right or obligation contained in promissory note, security instrument–Interest rate–Amount of fees and charges required to be disclosed on LE or CD (or whether related product/service i

s purchased, or from whom)–Type of c
s purchased, or from whom)–Type of collateral (e.g., condo, co-op, detached home, manufactured housing)–Profits from the mortgage business12 C.F.R. 1026.36Loan Originator Compensation•Compensation factor is prohibited if it constitutes a proxy(or a stand-in) for a term of the transaction.•Two-Step Analysis to Determine Whether Proxy Exists:–Does factor consistently vary with term of transac

tion over a significant number of trans
tion over a significant number of transactions; and–Whether LO has ability, directly or indirectly, to add, drop, or change factor when originating the transaction (i.e., steering)–Examples of Factors Subject to Proxy Analysis:•Portfolio vs. secondary market•DTI, LTV, credit score•Geography•Etc.–Depends on Facts and Circumstances12 C.F.R. 1026.36Loan Originator Compensation•Nota Term

or Proxy –The following bases for co
or Proxy –The following bases for compensation are permitted:–Fixed percentage of amount of credit extended–LO’s overall dollar volume–Long-term performance of LO’s loans–Existing customer–Fixed in advance (including tiers)–Percentage of approved applications actually consummated–Quality of loan files (accuracy and completeness)–Actual hours worked (not estimated)–If basis fo

r compensation is not on list above, mus
r compensation is not on list above, must analyze whether it is a term of the loan transaction or a proxy for loan terms.12 C.F.R. 1026.36Loan Originator Compensation•“Pricing concessions” by LOs are generally prohibited–Limited exception –An LO may reduce its compensation only in response to unforeseen costs occurring even though the estimate provided was consistent with the best information reasona

bly available to the disclosing person a
bly available to the disclosing person at the time of the estimate.•“Point Banks” are generally prohibited–“Deposits” and “withdrawals” from an “account” based on loan terms.12 C.F.R. 1026.36Loan Originator Compensation•Profits-Based Compensation –Constitutes loan-term based compensation and is generally prohibited.•Compensation through designated tax-advantaged defined contr

ibution or defined benefit plans is per
ibution or defined benefit plans is permitted (but contribution must not be directly/indirectly based on terms of individual LO’s transactions).•Compensation under an arrangement for variable, additional compensation based on mortgage-related profits is permitted only if:–The compensation is not based on the terms of the individual LO’s transactions; and either:–The amount does not exceed 10% of tot

al compensation for time period; or–
al compensation for time period; or–The LO was a loan originator for 10 or fewer transactions during the 12-month period preceding the date compensation is determined.12 C.F.R. 1026.36Loan Originator Compensation•“Dual” compensation is prohibited.–--LO cannot receive compensation from both the consumer and from any other person.–However, limited carve-out for brokers to pay LO employees, even

when receiving consumer-paid compens
when receiving consumer-paid compensation.12 C.F.R. 1026.36Loan Originator CompensationProhibition Against Steering:•LO may not steer consumer to loan for greater compensation (unless transaction in consumer’s interest)•Safe harbor: Determine loan products of interest to consumer (i.e., fixed, ARM, etc.). Then provide to consumer the following options for which consumer likely qualifies:–Loan wi

th lowest interest rate–Loan with lo
th lowest interest rate–Loan with lowest interest rate without adverse features (negative am, interest only, etc.)–Loan with lowest dollar amount for origination points or fees and discount points12 C.F.R. 1026.36LO QualificationsLoan Originator Qualifications•Must be registered/licensed as required by federal/state law, including the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (

SAFE Act)•Loan originator organiz
SAFE Act)•Loan originator organizations must comply with legal existence and foreign qualification requirements, and ensure that individual LOs are licensed/registered as required before the acting as a loan originator•Companies not subject to state licensing (i.e., depository institutions) must:•Obtain criminal background checks and credit reports, and review any public administrative,

civil, or criminal findings published o
civil, or criminal findings published on the NMLS website; and•Request such information from any loan originator not already registered on NMLS.12 C.F.R. 1026.36Recordkeeping RequirementsLoan Originator Compensation•Recordkeeping Requirements: •Creditor must maintain, for three years after payment:–Records of all compensation it pays to a loan originator, and–The compensation agreement t

hat governs those payments.•Loan
hat governs those payments.•Loan originator organization must maintain, for three years after receipt or payment:–Records of all compensation it receives from a creditor, a consumer, or another person,–Records of all compensation it pays to any individual loan originator, and–The compensation agreement that governs each such receipt or payment.12 C.F.R. 1026.25LO Comp PenaltiesATR/QM and

LO Comp: Penalties for Violation•CF
LO Comp: Penalties for Violation•CFPB-Authority to issue cease and desist orders and impose civil monetary penalties•Private Right of Action –Affirmative action for actual damages, up to $4K in statutory damages (individual and class actions), costs and attorney fees, and special damages equal to all finance charges and fees (unless failure not material)–LOs may be liable to plaintiffs for LO Comp vi

olation for greater of actual damages or
olation for greater of actual damages or 3 times total compensation (plus atty fees/costs).–3 year statute of limitations–No arbitration •Foreclosure defense -By recoupment or set off–No 3 year statute of limitations –TILA damages, but special statutory damages limited to no more than 3 years of finance charges and fees–Applies to assigneesHigh Cost & Higher-Priced Mortgage LoansPresented

byKris D. KullyPartnerMayer Brown LLP
byKris D. KullyPartnerMayer Brown LLPkkully@mayerbrown.comHigh Cost MortgagesHigh Cost Mortgages –New Definitions•Now includes all open-or closed-end principal dwelling-secured loans, other than reverse. (Previously excluded purchase, initial construction, open-end.)•APR Trigger:–First Lien: If APR will exceed the average prime offer ratefor a comparable transaction by more than 6.5

percentage points (or 8.5 percentage po
percentage points (or 8.5 percentage points, if the dwelling is personal property and the transaction is for less than $50,000). (Previously = 8 percentage points over comparable Treasuries.)–Subordinate Lien: If APR will exceed the average prime offer rate for a comparable transaction by more than 8.5percentage points. (Previously = 10 percentage points over comparable Treasuries.)12 C.F.R. 1026.32High Co

st Mortgages –New Definitions•Po
st Mortgages –New Definitions•Points and Fees Trigger:–Total points and fees payable in connection with the transaction will exceed 5% of the total loan amount, for loans $21,549 or more (for 2019; adjusted annually); or–For loans less than $21,549, the lesser of 8% of the total loan amount or $1,077 (adjusted annually). (Previously = 8% or $632 for 2014.)–Calculated differently –Includes all

compensation paid by a consumer or credi
compensation paid by a consumer or creditor to a mortgage originator; all prepayment fees or penalties incurred if the loan refinances a loan made or currently held by the same creditor or affiliate; but excludes certain mortgage insurance premiums, and up to 2 bona fide discount points, depending on the rate•Prepayment Fee Trigger:–If the loan documents permit prepayment fees more than 36 months after closi

ng, or–A prepayment penalty exceeds,
ng, or–A prepayment penalty exceeds, in the aggregate, more than 2% of amount prepaid.12 C.F.R. 1026.32Higher-Priced Mortgage LoansHigher-Priced Mortgage Loans Definitions•APR Trigger:–A closed-end consumer credit transaction secured by the consumer’s principal dwelling–With an APR that exceeds the average prime offer rate (APOR) for a comparable transaction, as of the date the inte

rest rate is set:–(i) By 1.5 or more
rest rate is set:–(i) By 1.5 or more percentage points, for loans secured by a firstlien withinFreddie Mac conforming loan limits;–(ii) By 2.5 or more percentage points, for loans secured by a firstlien that exceedFreddie Mac conforming loan limits; or–(iii) By 3.5 or more percentage points, for loans secured by a subordinatelien.12 C.F.R. 1026.32Higher-Priced Mortgage Loans Definition

s•Requirements:•Must escrow fo
s•Requirements:•Must escrow for property taxes and insurance–Exemption for certain small servicers–May cancel escrow account only upon borrower’s request after five years, 80% LTV, and not at that time delinquent or in default.•Must comply with specific appraisal requirements (which cannot be waived)•Also:•Ability-to-repay implications•Limitations on prepayment penal