The Perfect Storm of Mortgage Regulations
Triplett, Richard, Mortgage Banking
The Dodd-Frank Act rules will pose tremendous compliance challenges for lenders in the coming months.
Fourteen years ago this month, the industry was in an uproar in response to thenSecretary of the Department of Housing and Urban Development (HUD) Andrew Cuomo's directive that the industry begin calculating maximum mortgage amounts differently (you remember the "simplified maximum mortgage calculation") - and do so in a mere 60 days. /// If you're like me, you look back longingly on those heady days of crammed, shortfused regulatory changes. /// Though there's been a staggering amount of regulatory changes over the past several years - with apologies to Bachman-Turner Overdrive - baby, you just ain't seen nothing yet. /// The regulatory changes coming under the auspices of financial reform - the Dodd-Frank Wall Street Reform and Consumer Protection Act - are extraordinary in number, timing, controversy and dramatic impact. /// The anticipated final rules during the first quarter of 2013 wiM set tne stage for how mortgage loans are originated well into the future.
The regulatory changes coming under Dodd-Frank, many due in January 2013, will commandeer the agenda of every company in the business of originating, servicing and securitizing mortgage loans. In addition, these rules will have an effect on affiliates, business partners and service providers.
The specific effective dates for compliance will be determined when the final rules are published in the Federal Register by the appropriate agencies. Approximately one-third of the 398 rulemaking requirements mandated by Dodd-Frank have been finalized, one-third have been proposed and one-third loom large on the horizon.
Not all of them have a direct effect on mortgage banking, but those that do will have an intense and lasting effect.
So dramatic will the change be under the umbrella of mortgage lending regulations that innovative chief financial officers might actually create new balance-sheet entries. Regulatory change always comes at a price to the mortgage lending industry, and all too often to the consumer who the regulations are designed to help.
Now more than ever, from receptionist to chief executive officer, people are paying close attention to regulatory compliance. But the complications don't end there.
In the past, a standard agreement between a mortgage lender and its investor often consisted of blanket clauses requiring compliance with federal, state and local laws and regulations. For originating lenders, it is no longer just a matter of compliance with underwriting/product guidelines. Now, at least in practice, mortgage lenders and brokers have to be compliant with laws and regulations of their prudential regulators, as well as the individual investors to whom they sell their loans, that investor's interpretation of those same laws and regulations at the time of origination and, often, that investor's regulator's interpretation of those laws and regulations.
Political differences and ideology will ensure that wrestling with regulatory changes will continue to be an endless cost of doing business. Companies unconcerned about regulatory compliance will set sail on a very perilous journey.
In the mid-1980s, the typical array of products consisted of a fixed-rate product, perhaps one adjustable rate product, a Federal Housing Administration (FHA) and a Department of Veterans Affairs (VA) product. Will the onslaught of regulations cause us to regress back to this product line once again? It may well depend on provisions contained in four new rules and how cautiously the industry reacts in implementing them.
Those four rules are: 1) the Qualified Mortgage (QM), 2) the Qualified Residential Mortgage (QRM), 3) the integrated Real Estate Settlement Procedures Act (RESPA)/Truth in Lending Act (TILA) disclosure and 4) the proposed revisions under the Home Ownership and Equity Protection Act (HOEPA).
Interestingly, they are all interrelated due to the much anticipated future changes to points and fees deemed "finance charges" proposed under Regulation Z, thereby affecting the annual percentage rate (APR). This complex interrelationship prompted an extension of the comment period with regard to the finance charge definition under the proposed rules until Nov. 6, 2012.
This converging maelstrom of regulations will produce a perfect storm due to the overwhelming imple mentation requirements and product limitations. Compliance with these requirements will be much easier for larger entities than for smaller independent lenders and banks that simply do not have the depth of staff, technology and budgets to compete.
The proposed rule that included the QM was published on May 11, 201 1, by the Federal Reserve, and then delayed and reissued by the Consumer Financial Protection Bureau (CFPB). The CFPB has indicated its desire to finalize the rules containing QMs by Jan. 21, 2013.
The QM and the Qualified Residential Mortgage combined will establish the parameters of lending as we move forward.
The controversy over QM is sparked by many facets of the proposed rules, and in particular the issue of rebuttable presumption and/or safe harbor provisions. Simply put, the QM establishes the criteria under which a consumer's ability to repay the debt must be verified.
The current proposal contains four options regarding the consumer's ability to repay: 1) verify the ability to repay by following eight underwriting factors provided in the proposed rule; 2) originate a streamlined refinance loan; 3) originate a Qualified Mortgage; or 4) small creditors operating in underserved areas can originate balloon loan Qualified Mortgages. However, there are proposed tier-based points and fee limitations tied to the loan amount in order to increase the base 3 percent for smaller loan sizes.
Approximately 90 out of 535 members of the U.S. House of Representatives and the industry (in particular industry associations) have been pushing the CFPB for the elimination of the rebuttable presumption provisions in favor of a sound, valid, legal safe harbor for creditors complying with the final rules.
Consumer advocates want rebuttable presumption to remain. This is a critical issue as it relates to potential lit igation; if rebuttable presumption advocates prevail, lenders may see a significant rise in borrower claims of unfair lending practices.
As of this writing, the CFPB gives every indication of its desire to continue to have the rebuttable presumption provisions; however, we will see if the industry associations and others are successful when we receive the final rules.
What is a QM? For purposes of legal safe harbor, the QM is defined as a mortgage for which: 1) the loan does not contain negative amortization, interest-only payments, balloon payments or a loan term greater than 30 years; 2) the total points and fees do not exceed 3 percent of the total loan amount; 3) the borrower's income and assets are verified and documented; and 4) the underwriting of the loan is based on the maximum interest rate for the first five years of the loan, the fully amortizing payment schedule and includes any mortgage-related obligations. If you originate a mortgage loan with an expectation of legal safe harbor, it will need to fit in this bucket.
If rebuttable presumption provisions remain when we receive the final rule, your program would have to include everything offering legal safe harbor mentioned here and five additional underwriting requirements.
The ramifications of whether the final rule offers a rebuttable presumption of compliance or a legal safe harbor, or both, should not be taken lightly. Large banks and lenders are accustomed to a certain amount of litigation and often have specific allocation of funds set aside for such a purpose. This is usually not the case with small independent lenders and banks.
This rule will also affect the following: the limiting of available products; the reduction of streamlining loan documentation; and points and fees allowed to be charged in order to originate the loan, which may include not only fees paid to the mortgage broker or lender as it predominantly is today, but may include fees paid to others (see HOEPA information to follow).
There is yet another concern regarding establishing the parameters of the QM: The Dodd-Frank Act specifies that the Qualified Residential Mortgage should not be broader than the QM. Thus, the final rule for determining a Qualified Residential Mortgage must fit nicely inside the QM.
Qualified Residential Mortgage
Proposed on April 29, 2011, by the federal banking agencies (other than the CFPB), the Qualified Residential Mortgage will eventually set the parameters for what products are commensurate with mortgage loan securitization.
There are a number of controversial issues relative to the QRM. If a mortgage loan does not fit into the category of a QRM and the loan is included in a pool for securitization, the sponsor of the asset-backed security (ABS) must retain 5 percent of the credit risk of the collateral. That being said, the proposal does have an allowance for the sponsor of the security to allocate a portion of the credit risk to the originator of the loan.
Does this mean QRMs will be the only products available? Does this place smaller lenders and banks at a disadvantage?
It depends on how cautiously loan investors approach the QRM and whether or not sponsors of asset-backed securities are planning on pushing some of the credit risk downstream to the originating lender.
If the fear of QRMs limits small or intermediate lenders and banks to closing only a QRM qualified loan, large banks and lenders, as well as firms shelving the asset-backed security would gain a huge competitive advantage. Upstream investors arguably already control originations to some extent; this rule would hand them an enormous amount of power to wield against their business partners.
Pushing credit risk retention down to the smaller originating lender, who most likely would not have the liquidity to hold a portion of 5 percent of the collateral amount indefinitely, may force many originators to curtail their product offerings to only QRM loans.
To compound matters for smaller lenders, if that entity is statelicensed, and depending on the state, they may also have net-worth requirements and HUD liquidity requirements for FHA lending to contend with simultaneously.
Under the proposed rule, the QRM would have an 80 percent maximum loan-to-value (LTV) ratio for purchase loans (with a slight variation to current variances between sales price and appraised value) and 75 percent maximum LTV on refinances (70 percent for cash-out refinances). If this requirement stays in the rule, in conjunction with the credit risk retention provisions, the dramatic impact on lending as we know it is obvious.
Other provisions include: closed-end, first lien, one-tofour-unit properties (one must be a principal dwelling); credit history criteria; 3 percent point and fees; loan attribute prohibitions (similar to QM); maximum 2 percent annual and 6 percent lifetime caps on adjustable mortgages; a written property appraisal; borrower qualification ratios of 28 percent/36 percent; verified/documented income; verified/documented assets; verified/documented monthly housing debt and more.
Integrated RESPA and TILA disclosure
On July 9, 2012, the CFPB issued the proposed rules regarding the integration of disclosure requirements under RESPA and TILA. This 1,099-page proposed rule contains an exhaustive number of very complicated changes. Though space constraints here limit my discussion of all of them, readers should be aware that what may at face value appear to be minor revisions could present large implementation challenges.
The primary purpose of the proposed rule is to integrate the disclosure requirements of the current Good Faith Estimate (GFE) and truth in lending statement (TIL) at the time of application, and the TIL and the HUD ? at the time of closing.
These separate disclosures would be replaced by a three-page loan estimate and a five-page closing disclosure for applicable mortgage transactions - all closed-end loans other than reverse mortgages and open-ended loans.
There is no specific deadline for issuance of the final rule, and comments are requested by the CFPB regarding a realistic implementation time period.
Here are just a few of the headspinning highlights:
* Existing tolerances under RESPA are renamed "variances," with variance expansion to include affiliates;
* ? proposed transaction coverage ratio (TCR) is proposed as an alternative to the use of APR in determining whether a mortgage is categorized as high-cost;
* The integrated disclosure requirements are to be placed under TILA due to the statutory penalties (not contained under RESPA) and existing commentary under TILA (in lieu of the daunting number of frequently asked questions [FAQs] as issued during implementation of the previous RESPA Reform in January 2010);
* The closing disclosure would be provided to the consumer three business days prior to the loan closing, with re disclosure required if the amount of cash from the consumer to close the loan exceeds $100, prompting the three-business-day time period to begin again (re-disclosure must also be performed if less than $100, but in that case no waiting period applies);
* New concepts are represented as percentages - total interest percentage (TIP) and approximate cost of funds (ACF); and
* The elimination of the currently allowable additions to the six items constituting an application for financing, leaving only the promulgated six items.
Understand that these are only a fraction of the revisions under the proposed rule.
Moreover, there are numerous additional disclosures required under Title XIV of the Dodd Frank Act that relate to the aforementioned disclosures.
These additional mandated disclosures become selfeffectuating on Jan. 21, 2013; however, the CFPB may publish a final rule prior to this date in order to delay the mandated disclosure implementation to correspond with implementation of the new loan estimate and closing disclosure. These changes, the industry is being told, will bring mortgage lending clarity to the consumer.
Home Ownership and Equity Protection Act
Published in the Federal Registeron Aug. 15, 2012, with a comment period ending on Nov. 6, 2012, the revisions mandated under the Dodd-Frank Act have a similar issue as the integrated RESPA/TILA disclosure with regard to redefining what constitutes finance charges. This critical change is due to the proposed "all-in" concept when compared with the present definition.
The proposed rule adds items such as affiliate fees, escrow amounts for homeowner insurance and property taxes and title insurance to the points and fees definition of a finance charge. This rule would also lower the thresholds for both APR and points and fees triggers, as well as increase the points and fees contained in the APR.
There is also a proposed change to the index (U.S. X- Bill to Average Prime Offer Rate) used for comparison to the APR and the date of that index. In other words, the number of loans hitting the APR thresholds and points and fees thresholds would increase exponentially. You can see how this also affects all of the proposed rules discussed here in various ways.
Concerned yet? You should be. But wait - there's more.
In addition to the rules discussed in this article, there are either proposed rules or rules in pre-rule status on other regulations regarding loan originator compensation and qualifications; mortgage servicing standards; additional TILA revisions, including higherpriced mortgage loans and property appraisal; the Home Mortgage Disclosure Act (HMDA); Alternative Mortgage Transaction Parity Act (Regulation D) and others.
Is the industry going back to the 1980s? No - but we may be going back to the future in the sense that a lender's product menu consists of five products and where consumers have far fewer choices when it comes to lenders than they do today.
Clearly these rules will have a tremendous impact on every aspect of mortgage banking. Everyone related to the mortgage finance industry must be prepared to interpret and implement them over the next year, and do so cautiously; the penalties for non-compliance, unintentional or otherwise, are just too great.
The business imperative for understanding the coming rules mandated by the Dodd-Frank Act and their ramifications cannot be overstated. The entire residential real estate finance industry must prepare for this impending perfect storm of mortgage regulations.
Political differences and ideology will ensure that wrestling with regulatory changes will continue to be an endless cost of doing business.
The ramifications of whether the final rule offers a rebuttable presumption of compliance or a legal safe harbor, or both, should not be taken lightly.
The business imperative for understanding the coming rules mandated by the Dodd-Frank Act and their ramifications cannot be overstated.
Richard Triplett. CMB. is vice president, director of compliance for AllRegs in Eagan. Minnesota. He can be reached at rtriplettd>allregs.com.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: The Perfect Storm of Mortgage Regulations. Contributors: Triplett, Richard - Author. Magazine title: Mortgage Banking. Volume: 73. Issue: 2 Publication date: November 2012. Page number: 46+. © 2009 Mortgage Bankers Association of America. Provided by ProQuest LLC. All Rights Reserved.