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4

July 2015

PUBLISHER Ben Slayton [email protected] MANAGING EDITOR

Dr. Rick Roque [email protected] SENIOR EDITOR

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Dawn Slayton [email protected] ADVERTISING

Willa Robinson [email protected] PRODUCTION

Henry Suchman [email protected] WEB MANAGER

Eric Souza [email protected] COLUMNISTS & CONTRIBUTING AUTHORS

Mark Calabria Mitch Kider Jinnifer Miller

David Stein Richard Triplett Mitria Wilson

MCMag ADVISORY BOARD ANNEMARIA ALLEN PRESIDENT THE COMPLIANCE GROUP ANNA DESIMONE PRESIDENT BANKERS ADVISORY TOMMY DUNCAN PRESIDENT QUALITY MORTGAGE SERVICES H. BURTON EMBRY SENIOR VICE PRESIDENT PRIMARY RESIDENTIAL MORTGAGE MITCH KIDER CHAIRMAN AND MANAGING PARTNER WEINER BRODSKY KIDER PC HOWARD LAX BODMAN PLC BENJAMIN MADICK PRESIDENT MORTGAGE QUALITY MANAGEMENT & RESEARCH

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for additional content and articles from leading compliance leaders, and photos from regional & national compliance conferences.

CONTENTS

July 2015

SKEPTICAL LOOK AT MORTGAGE 10 AREFORM UNDER THE DODD-FRANK ACT

24 - 47

FIVE YEARS OF DODD-FRANK, SECTION XIV

Mark Calabria Despite the extensive expansion of mortgage regulation under Dodd-Frank, it is unlikely that such changes will significantly reduce mortgage defaults or mitigate future booms and busts in the housing market.

18

BALANCING CAVEAT EMPTOR

Mitria Wilson Why the Consumer Financial Protection Bureau is Good for America, its Consumers, and the Providers of Financial Services

DODD-FRANK SECTION XIV, SUBTITLES TO THE MORTGAGE REFORM AND PREDATORY LENDING ACT

25

SUBTITLE A: LOAN ORIGINATOR COMPENSATION RESTRICTIONS AND ENFORCEMENT

30

SUBTITLE B - THE UNRULY CHILD

36

SUBTITLE C: HIGH COST MORTGAGES – MORE THAN HOEPA

42

SUBTITLE E: DODD-FRANK MORTGAGE SERVICING – SOMETHING OLD, SOMETHING NEW

44

SUBTITLE F: DODD-FRANK & APPRAISALS: COMPLIANCE IS EASIER THAN YOU THINK

Mitch Kider

Richard Triplett

Mary Thorson Wright

David Stein

Jennifer Miller

Title XIV of the Dodd–Frank Wall Street Reform and Consumer Protection Act, contains eight different Subtitles; A, B, C, D, E, F, G and H. Due to space requirements in this issue, we are only presenting to you five of the eight Subtitles; A, B, C, E & F. We will followup in later issues with the other three Subtitles.

DEPARTMENTS 6 Editor's Foreword

7 ComplianceGAMES 8 Events Calendar 48 Police Blotter

49 Ask The Compliance Experts

50 MCM VIPs

52 State Regulatory Issues Update

56 Business Services Directory 59 Legal Services Directory 60 Advertisers Directory

July 2015

5

EDITOR'S FOREWORD

The Fifth Anniversary of Dodd-Frank and TRID Delayed to October 3, 2015 This issue is an important issue as it reviews each of the key subsections in the Dodd-Frank legislation. Loan officer compensation, new rules around appraisal management, Qualified Mortgages (QM), Ability-to-Repay (ATR), guidance around high cost mortgages, and new requirements on mortgage servicing are reviewed by each sub section of the legislation itself in this issue. The legislation triggered a landslide of new regulatory reforms that have dramatically increased origination and fullfilllment costs, led to significant industry contraction due to increased financial requirements on lenders, and have pushed vendors to create solutions for lenders to address rules and regulations that have been vague and nondescript. If TRID and it’s deadline have placed operational stress on lenders, just wait for QRM being defined as QM, and any potential affect on mortgage-backed securities to be implemented under the Credit Risk Retention Rule which goes into effect December 24th, 2015. With the delay of TRID to October, the next logical question is, “Will this have a trickle down effect?” The appetite by industry compliance, legal, and management leaders has been insatiable, and our publication has been pivotal in providing the thought leadership necessary to be most helpful to all key compliance figures throughout the industry. Central to the appetite for compliance guidance is the market confusion ultimately created by Dodd-Frank itself. We have a smart and insightful article by Mark Calabria from the Cato Institute, reviewing the often vague and confusing sections of Dodd-Frank. Everyone can agree that Predatory Lending is wrong, but what is it? How is this defined? As with many of the regulatory mandates, the guidance regarding determining the borrower’s ability to repay is weak at best. To counter the skepticism presented in Mr. Calabria’s article, we have Mitria Wilson’s article on why the CFPB is good for the American consumer and other key stakholders in the housing market. Despite the legislative miss steps, it was clear that many borrowers were indeed pushed into high risk loans who had no reasonable expectation to repay the mortgage. Over 50% of sub prime borrowers between 2003-2007 could have qualified for prime loans – so, while the CFPB and Dodd-Frank have been less than perfect, they certainly have put an industry on watch who couldn’t in the end, regulate itself with the goal of protecting the consumer and making home ownership available to frequently dis enfranchised members of the U.S. population. I believe the drama that has taken place regarding TRID is emblematic of the larger issues of the Dodd-Frank legislation itself. TRID, like with many of the changes put forward by the legislation or by the Consumer Financial Protection Bureau (CFPB or Bureau), reflects the most dramatic changes in process, technology, and consumer disclosures in retail mortgage lending. We now know that the CFPB formally delayed the implementation deadline to October 1st, and then, embarrassingly, to the 3rd of the same month, a delay attributed to an “administrative error” related to the Bureau’s own requirements per federal law which would have delayed the rule until August 15th. To avoid further confusion and with extensive input from industry trade groups and Congress, CFPB Director Richard Cordray determined an extended delay would be an adequate accomodation to “the interests of the many consumers and providers whose families will be busy with the transition to the new school year.” Ironically, this was the reasoning by the Mortgage Bankers Association (MBA) pertaining to the original deadline of August 1st, an appeal Director Cordray himself denounced as being an insufficient reason for postponement. The required loan documentation consists of two new forms: The Loan Estimate and the Closing Disclosure. The industry has been preparing for this change for a better part of a year, but didn’t truly get on the radar of most companies until the fourth quarter of 2014, which is why we focused our January issue strictly on TRID implementation and readiness. In the months that followed, many of our articles in that single issue became the most widely read collection of articles since the founding of the publication. We expect this issue to mirror the same relevance in our industry given the still broadly mis understood legacy of the DoddFrank legislation. Don’t forget to make comments on our Facebook page (https://www.facebook.com/MortgageComplianceMagazine) and, of course, don’t hesitate to provide me with your feedback. Should you have any questions or comments feel free to call me (408.914.5895) or email me using the contact information below.

Dr. Rick Roque Managing Editor [email protected] www.linkedin.com/in/rickroque Mortgage Compliance Magazine welcomes your feedback. If you have comments, questions, criticisms, praise, or information to share with us and our readers, please write us at [email protected].

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July 2015

THE MOST READ ARTICLE JUNE 2015 ISSUE

TRID: A View to Change CHANGE: The recent tragedy of the crash of Amtrak train 188 in Philadelphia, PA brought a cry from legislators for changes needed to improve the safety of those who ride the rails. The housing crash of 2008 brought about a concern from Congress for changes they believed were needed to better protect those who finance their homes. Although these crashes are quite different, the result is the same; a demand for better rules, systems and processes to protect those who depend on these services.

CONGRATULATIONS

Mike Vitali

For writing the most read article in the June 2015 Issue of Mortgage Compliance Magazine. Mike Vitali presently serves as the Chief Compliance Officer of LoanLogics, monitoring regulatory developments and their practical implications for lenders, servicers and vendors. Mike can be reached at [email protected]

If you would like to read the full article, visit our website at: www.MortgageComplianceMagazine.Com and click on Articles and look in the Compliance Tab.

The C ompliance GAMES

Find these words that Compliance Professionals use on a daily basis. Who says compliance can’t be fun?

ANNIVERSARY ASSETS CAPITAL COMPETITION CRISIS DAVID TARULLO DODD FRANK FEDERAL RESERVE GLOBAL GOVERNANCE

LEVERAGE MERGERS REFORM REGULATION RICHARD SHELBY RISK THOMAS HOENIG THRESHOLD TRADES

Solution to last month's puzzle

July 2015

7

CALENDAR OF EVENTS

Calendar of Events

2015

September 9-11 MBA Risk Management & Quality Assurance Forum Dallas, TX http://www.mbaa.org/ conferencesevents/conferences. aspxferences September 10-11 MBA's Human Resources Symposium 2015 Washington, DC https://www.mba.org/store/events/ mba-research-event/humanresources-symposium Sep 20 – 22, 2015 MBA Regulatory Compliance Conference Washington, DC https://www.mba.org/store/events/ mcode/regulatory-complianceconference

Grand Hyatt Washington, DC

October 18 – 21 MBA Annual 15 San Diego, CA https://www.mba.org/store/events/ conferences-and-conventions/ annual-convention-and-expo

8

July 2015

A Skeptical Look at Mortgage Reform Under the Dodd-Frank Act BY MARK CALABRIA

M Mark Calabria

Despite the extensive expansion of mortgage regulation under DoddFrank, it is unlikely that such changes will significantly reduce mortgage defaults or mitigate future booms and busts in the housing market.

July 2015

DODD-FRANK AND ‘PREDATORY LENDING’

One narrative of the financial crisis attributes the increase in mortgage defaults to ‘predatory lending.’ Dodd-Frank’s attempt to address predatory lending is contained in Title XIV, also labeled the Mortgage Reform and Anti-Predatory Lending Act. Despite the name, there is no actual definition of predatory lending contain in Title XIV, but rather a collection of prohibitions and restrictions. The major substantive provisions of Title XIV are structured as amendments to the Truth in Lending Act. Title XIV somewhat mirrors the anti-predatory lending statutes passed in North Carolina beginning in 1999. A recurring theme in Dodd-Frank’s mortgage reforms is the assumption that many borrowers were simply in the ‘wrong’ loan. Along this line of thinking, mortgage originators are prohibited from ‘steering’ borrowers toward loans that have certain features or for which the borrower lacks a reasonable ability to pay. Originators are also prohibited from mischaracterizing either the credit history of the borrower or their loan options. The intent here reflects a belief that many prime borrowers were steered into subprime products. In gener-

∆

10

ost accounts of the financial crisis of 2008 include a prominent role for the U.S. residential mortgage market. Although other property markets exhibited similar boom and bust patterns, the elevated level of defaults and associated costs borne by the taxpayer have brought a particular emphasis on single-family mortgage finance policies. It should be of little surprise that the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) contains multiple provisions related to mortgage finance. Dodd-Frank’s sixteen separate titles contain a number of provisions impacting the mortgage market. The financial services law firm Davis Polk & Wardwell LLP (Davis Polk) estimates that Dodd-Frank will require 49 separate instances of rule-making in the area of mortgage reform alone. Of particular importance are those found in Titles IX, X and XIV. Despite the extensive expansion of mortgage regulation under Dodd-Frank, it is unlikely that such changes will significantly reduce mortgage defaults or mitigate future booms and busts in the housing market.

al, originators placing borrowers into qualified mortgages (QM) will be protected from enforcement and liability. On January 10, 2013, the Consumer Financial Protection Bureau (CFPB) issued final rules implementing Dodd-Frank’s Title XIV Subtitle B, more commonly known as the Qualified Mortgage Rule. As the QM rule amends the Truth in Lending Act, violations of the QM that fall outside its safe harbor subject lenders to significant liability. Delinquent borrowers can also use violations of the QM rule as a defense to foreclosure proceedings. The heart of the QM standards is found in Section 1411’s Ability-To-Repay (ATR) Rule requirements. Section 1411 prohibits lenders from making a residential mortgage unless the lender makes a good faith determination that the borrower has a reasonable ability to repay the loan. While Section 1411 does provide some guidance on what constitutes a good faith determination and what is reasonable, considerable discretion remains in interpreting these terms. Due to concerns over the lack of clarity in the Ability-ToRepay standard, Dodd-Frank’s Section 1412 allows for the creation of a safe harbor from liability for lenders if loans meet the definition of a qualified mortgage. It is in minimizing liability risk that lenders will attempt to meet the standards for a qualified mortgage. Compliance with the Ability-To-Repay requirements is likely to be both costly and extensive. What data is to be collected? How is that data audited? How long is it stored? How does the originator create a clear audit trail that can be shared and verified by both servicers and investors? These are all difficult and subjective questions where the cost of being wrong will be significant. Similar to the Qualified Residential Mortgage (QRM) Rule finalized in October 2014, the statutory restrictions on QM ban certain mortgage features, such as interest only, balloon payments, and negative amortization. Section 1412 also limits points and fees to no more than 3 percent of the loan amount. For adjustable rate mortgages (ARM), Section 1412 requires loans to be underwritten at the maximum possible rate during the first five years of the loan. Loan terms may not exceed 30 years. Income and financial resources must be fully documented. DoddFrank’s Title XIV contains additional prohibitions that go beyond its Ability-To-Repay requirements. Specifi12

July 2015

cally, Section 1414 severely limits the use of prepayment penalties, prohibiting them for non-QM loans and capping their amount and duration for QM loans. Despite the increased liability from Title XIV or, perhaps, because of it, lenders are prohibited from requiring mandatory arbitration for all residential mortgages. Even if that did not increase liability costs, it is likely to increase the variance of liability costs. Section 1414 also requires lenders to make borrowers aware of their ability to ‘walk away’ in anti-deficiency states. Section 1417 increases civil money penalties under the Truth in Lending Act, of which both QM and the Home Ownership and Equity Protection Act (HOEPA) are part.

SKIN IN THE GAME

One of the more interesting approaches to managing mortgage risk is Dodd-Frank’s Section 941’s Regulation of Credit Risk Retention, which prohibits the issuance of any asset-backed security under the Securities Exchange Act of 1934 (1934 Act) unless 1) the issuer retains “not less than five percent of the credit risk for any asset that is not a qualified residential mortgage” or 2) meets the definition of a qualified residential mortgage. While Section 941’s risk retention requirement applies to any asset-backed security (ABS) issued under the 1934 Act, Dodd-Frank gives broad discretion to the Securities and Exchange Commission (SEC) to make such determinations for ABS that do not contain residential mortgages. Unlike other classes of ABS, Section 941, which adds a new Section 15G to the 1934 Act, establishes a number of statutory criteria to guide the regulatory QRM definition. These statutory requirements include: 1) documentation of the borrower’s financial resources; 2) debt-to-income standards; 3) mitigation of payment shock for adjustable rate products; 4) consideration of other credit enhancements; and, 5) the restriction of loan terms that have been demonstrated to exhibit a higher risk of borrower default. Dodd-Frank explicitly exempts Federal Housing Administration, Veterans Administration, and Rural Housing Service and Farm Credit loans from the risk retention requirements. Regulators have discretion over extending that exemption to loans securitized by Fannie Mae or Freddie Mac. By construction, mortgages held in portfolio would be exempt from the QRM requirements. An open question is to what extend would the QRM re-

quirements drive even loans held in portfolio, as the option to later sell those loans into the secondary market could influence initial origination decisions. Even during the height of the housing boom in 2006, a significant portion, approximately a fifth of both subprime and conforming loans, were not securitized. Among jumbo mortgages, the percentage securitized first broke 50 percent in 2007, after which such percent subsequently declined in 2008 and 2009 to the single digits. As the QRM is also an amendment to the 1934 Act, mortgage-backed securities (MBS) issues that are later determined to be non-QRM would subject the issuer to liability under SEC Rule 10b-5. Given the subjectivity in some of the documentation requirements under QRM and potential Rule 10b-5 liability, lenders can expect increased documentation and verification costs. Issuers should also brace themselves for investor litigation during the next housing bust.

IMPACT OF DODD-FRANK ON MORTGAGE AVAILABILITY

July 2015

∆

A goal of the Dodd-Frank Act is to eliminate certain products and practices from the mortgage market. So, at a very basic level, the choices facing mortgage borrowers will be reduced; the difficult question is in gauging how much. At least three independent attempts have been made to estimate the impact of QRM and/or QM on mortgage availability. These three analyses were performed by the United States Government Accountability Office (GAO), the Federal Housing Finance Agency (FHFA), and the private firm CoreLogic®. GAO’s analysis is based predominately on CoreLogic® data, so, unsurprisingly, their conclusions are similar. FHFA’s analysis is based upon its collection of Fannie Mae and Freddie Mac mortgage data. None of these studies attempt to incorporate behavioral changes and hence are likely to overestimate the impact of the QRM/QM rules. These studies also do not incorporate the impact of house price changes. If, for instance, the QRM/QM reduces the demand for housing, then housing prices should fall, which would off-set the reduced demand. Impacts of the QRM/ QM, in theory, are ambiguous as to net impact on homeownership rates. The three studies yield similar conclusions as to the impact of QRM. The most restrictive provision of the QRM Rule would be the ceiling on allowable

debt-to-income ratios (DTI). A number of QRM restrictions are likely to have very modest impacts as their prevalence in the mortgage market was generally low. Both the QM and QRM Rules ban negative amortization features; yet, according to GAO’s analysis, “almost 100 percent of [subprime] mortgage originations from 2001 to 2007 did not have negative amortization features.” Within the prime market, the percent with negative amortization features peaked in 2005 at nine percent (9%). The average between 2001 and 2010 was closer to one percent (1%). The disappearance of negative amortization mortgages will not be noticed by the vast majority of participants in the mortgage market. To the extent that a small number of borrowers used negative amortization products to smooth income volatility, these households will be left worse off under Dodd-Frank’s restrictions on negative amortization. If we return to the high levels of inflation witnessed in the 1970s, certain products, such as negative amortization, which gained acceptance as a reaction to high levels of inflation, may return. QRM could pose an obstacle to the return of products geared toward managing high levels of inflation. Dodd-Frank also places limitations on mortgages with terms in excess of 30 years. In the prime and near-prime market, essentially 100 percent of mortgages were under a 30-year term until about 2005, where longer than 30-year mortgages grew slowly to four percent (4%) of the market in 2007 before disappearing by 2009. Subprime followed a more unusual situation with nearly 100 percent of subprime being under 30 years until 2005 and 2006, when the share over 30 years peaked at 15 percent of the subprime market. As longer loan terms allow borrowers to make higher house price bids while maintaining a constant monthly payment, the growth in this market segment likely reflected a last ditch attempt by some subprime borrowers to purchase before the boom was over. Some amount of these loans may have reflected an attempt to refinance into lower monthly payments. Given the relatively small share of mortgages with durations over 30 years, this Dodd-Frank restriction will also likely be quite minor. Another loan feature restricted by Dodd-Frank is the use of balloon payments, where the mortgage does not fully amortize over its term leaving a balance due upon maturity. Final balloon payments are multiples of the monthly payment. Despite the prevalence of balloon loans before the

13

New Deal mortgage reforms of the 1930s, these products were generally rare, even during the height of the recent boom. GAO reports that almost 100 percent of prime, near-prime, and government-insured mortgages lacked any balloon features between 2001 and 2010. Among subprime loans, balloon features were also rare, close to zero until 2005 when they grew to about 10 percent of subprime loans in 2007, after which they have largely disappeared from the subprime market. Both the QM and QRM place restrictions upon borrower documentation, particularly in the area of income. A common concern is that no- or low-documentation loans lead to greater levels of fraud and higher losses in the mortgage market than would have occurred otherwise. Whereas the QRM is an obstacle for securitization, the QM standards come with substantial and uncertain liability; so, while there is likely to be a market for nonQRM loans, non-QM loans will become rare. By GAO’s estimates, the percentage of subprime loans lacking full documentation ranged from 40 percent in 2006 to 20 percent in 2001. A similar, but smaller, trend was witnessed among prime loans, where those lacking full documentation ranged from around 20 percent in 2006 to almost zero in the early 2000s. The documentation requirements under QM/QRM are likely to impact most self-employed borrowers. As there are over 15 million self-employed individuals in the United States, these restrictions could be significant. Loans that do not meet the QRM requirements can still be securitized, with the caveat that the issuers must retain not less than five percent (5%) of the credit risk of the securitized asset pool. Issuers are also prohibited from hedging or otherwise transferring this risk. Ultimately, the greater risk from the QRM is likely to be liability under the securities laws rather than the retention of a sliver of credit risk.

IMPACT OF DODD-FRANK ON MORTGAGE DEFAULT

14

July 2015

Marginal Impact on Default Probability Non-Prime Purchase Mortgage Fixed Long-Term ARM Loan Amount HPA: 1st year HPA: 2nd year difference DTI > 41% Full Documentation CLTV < 80 CLTV 80 to 90 CLTV 90 to 100 CLTV => 100

1.82 -2.05 1.05 0.25 -1.08 -0.21 -0.09 0.56 1.64

1.59 -2.35 1.26 0.08 -1.17 -0.92 -0.39 0.56 1.18

Hybrid ARM 5.11 -8.51 3.45 0.59 -1.24 -2.42 -1.36 -0.37 1.88

Marginal impact from one standard deviation increase in mean. HPA: House Price Appreciation DTI: Debt to Income CLTV: Combined Loan to Value Source: GAO (2010).

Despite having the largest impact on the number of loans, the proposed QM/QRM restrictions on DTI appear to have very modest impacts on projected defaults. The presence of a DTI in excess of 41 percent increases the probability of default by 0.25, 0.08, and 0.59 for fixed rate, long-term ARM, and hybrid ARM loans, respectively. According to GAO’s analysis, reducing the prevalence of mortgages with a DTI in excess of 41 percent will have barely noticeable effects (although statistically significant in all cases). Restrictions on low- or no-documentation loans do appear to have noticeable impacts on defaults in the subprime market. If all but full documentation loans were used, default probabilities, according to GAO’s analysis, would fall by -1.08, -1.17, and -1.24 percentage points for fixed rate, long-term ARM, and Hybrid ARM loans, respectively. GAO’s default analysis predicts substantial declines in defaults from reductions in loan-to-value (LTV), particularly initial moves below a 100 percent closed LTV. For fixed-rate non-prime purchase

∆

The Dodd-Frank Act is a response to the theory that ’bad‘ mortgage lending and lenders drove borrowers into default, which ultimately drove the housing market into decline leading to a fall in the value of mortgagebacked securities, and resulting in a panic among the holders of mortgage-backed securities. Setting aside that national house prices reached an inflection point almost a year before the inflection point in defaults, one measure of the effectiveness of Dodd-Frank’s mortgage

rules will be to what extent mortgage defaults are reduced. Table A reproduces select estimates from GAO’s analysis of the marginal impact on default probabilities of a standard deviation increase in the variable in question. In most cases, the measure is a dummy variable yielding the impact on default probabilities of change in the dummy. Effects are presented for fixed-rate, long-term ARM, and hybrid ARM loans, all estimates for non-prime purchase loans. Similar impacts (not reported) are found for re-financings.

loans, moving from a LTV of 100 to under 80 percent reduces projected default probabilities by over three percentage points. For hybrid non-prime ARMs, the reduction in projected default probabilities is just over six percentage points. Coupled with full documentation and a LTV under 80 percent, one could eliminate over 70 percent of the standardized default risk among hybrid non-prime ARMs. Academic studies have arrived at similar conclusions when examining the drivers of default among subprime mortgages. The approach of Dodd-Frank’s mortgage provisions is to focus on loan characteristics, largely ignoring borrower characteristics or housing market impacts. For instance, QM/QRM places no restrictions on borrower credit other than verification. A number of studies, however, find the largest impact on subprime defaults coming from borrower credit, as measured by FICO score. Increasing borrower FICO by one-standard-deviation, or about 74 points, decreases default probability by around seven times as much as switching from an ARM to fixed-rate loan. A 74 point increase in FICO also has over twice the impact of moving from no- or low-documentation to a full documentation loan. Studies also find the impact of housing price changes to be magnitudes higher than the provisions of the QM/QRM rule. As the down-payment requirements of the proposed QRM rule were abandoned, the remaining changes are likely to have modest impacts on default probabilities. The biggest impact would be from the full documentation requirements and the cap on DTI. These two changes combined, however, are projected to lower default probabilities by around one percentage point. A study from Professor Morris Kleiner, Humphrey School of Public Affairs, finds that states with more stringent licensing requirements for mortgage brokers actually witnessed higher levels of mortgage default. The hypothesis is that increased barriers to entry reduce underwriting efforts to such an extent that offsets any improvements in broker quality that result from the licensing scheme. Kleiner’s results raise the possibility that Dodd-Frank’s Section 1401 originator requirements, coupled with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), actually increase mortgage defaults rather than reduce them, as the statute intends. 16

July 2015

The barely noticeable reduction in projected defaults could be more than off-set by Dodd-Frank’s impact on the foreclosure process. As noted, DoddFrank’s Section 1413 allows borrowers an additional delay to the foreclosure process. A longer foreclosure process increases the borrower’s incentive to default. New regulations relating to mortgage servicing are likely to extend the ultimate time to foreclosure. Researchers, as well as industry experience, confirm the increase in ’strategic default‘ during the recent crisis. Dodd-Frank’s Section 1414(g) notice on anti-deficiency and the increased delays to foreclosure may well increase strategic defaults more than an amount to off-set reductions resulting from the QM/QRM provisions. Scholars have found that delays in the foreclosure process largely extend the process, raising the overall level of loans in foreclosure at any one time without significantly improving final outcomes for the borrower. Dodd-Frank could very well result in an increase in the level of mortgage defaults during the next housing bust.

CONCLUSIONS

The Dodd-Frank Act institutes the most significant changes to the federal oversight of mortgages in at least 20 years. Much of the details, however, have been left up to financial regulators with the new Consumer Financial Protection Bureau playing a leading role. While the proposed Qualified Mortgage and Qualified Residential Mortgage rules will likely increase the cost of mortgage credit, particularly due to increased litigation, compliance, and foreclosure costs, their impacts on reducing foreclosures during the next housing bust are likely to be modest and may even increase foreclosures. Despite the significant changes to the mortgage market under Dodd-Frank, those features of the American mortgage market most relevant to the financial crisis, such as lack of market discipline, remain unaddressed and, in many cases, have been made worse. MCM

Mark A. Calabria, is director of financial regulation studies at the Cato Institute. Before joining Cato in 2009, he spent six years as a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs. Mark can be reached at: [email protected].

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Balancing Caveat Emptor:

Why the Consumer Financial Protection Bureau is Good for America, its Consumers, and the Providers of Financial Services BY MITRIA WILSON

I Mitria Wilson

Despite the vocal protests of these critics and their misgivings, the creation of the CFPB is likely the most positive and enduring accomplishment of the DoddFrank Wall Street Reform and Consumer Protection Act of 2010

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t has been nearly four years since the Consumer Financial Protection Bureau (CFPB, Bureau, or Agency) first opened its doors. In that time, the independent federal agency has produced a slew of rules and regulations governing the financial services marketplace, engaged in a series of enforcement actions to reign in abusive practices, and embarked upon the course of providing much-needed consumer education and industry guidance. Yet, the Agency’s efforts in these respects have not been without criticism. Indeed, some in Washington and the financial services industry have questioned the very necessity of a federal consumer protection agency focused upon financial services—challenging everything from the Agency’s rulemakings and its objectivity, to its funding and autonomy. Despite the vocal protests of these critics and their misgivings, the creation of the CFPB is likely the most positive and enduring accomplishment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). An honest reflection on its efforts so far suggests that this independent agency has embodied its mandate – protecting consumer finances, while benefiting both financial service providers and the financial marketplace as a whole. How? The answer is relatively

straightforward. By serving as the principle catalyst of the federal effort to balance information asymmetry between sellers and consumers in the financial marketplace, the Bureau’s efforts promote stability for both groups. Both consumers and financial service providers that offer competitive, sustainable financial products benefit from the opportunity to exercise safer choices in a marketplace that rejects many of the reallife pitfalls associated with the principle of “caveat emptor.” Caveat emptor, a Latin phrase meaning “let the buyer beware,” dominated early legal understanding of the rights and responsibilities of American consumers in the marketplace. The principle, which operated in practice long before, but was first legally adopted by the United States Supreme Court in Chief Justice John Marshall’s 1817 opinion in Laidlaw v. Organ, places the burden exclusively on consumers to perform all necessary due diligence when purchasing a product, service, or good. The result was that consumers, no matter how defective the product or service, had no meaningful legal recourse or redress. Yet, experience proved that, despite their best efforts, consumers often suffered from an information asymmetry that unfairly benefitted sellers by allowing the true nature of the quality

concern about the environment as follows: “The truth is that many of us in the industry were deeply distressed by the growing practice of pushing high risk loans on borrowers who had no reasonable expectation of being able to repay the mortgage. Disclosures were often less than adequate, and faced with a bewildering array of loan terms, borrowers tended to trust their mortgage banker or broker. The broken trust that resulted has damaged borrower confidence in the mortgage industry.” Too many lenders made consumers high risk, often deceptively packaged, home loans without either assessing whether borrowers could repay the loans or while knowing full well that borrowers would be incapable of repaying the loans. The underlying assumptions that support caveat emptor, the idea that sellers and consumers occupy equal bargaining positions and that they share access to the same information governing a loan product’s quality or suitability, were simply untrue at the height of mortgage lending during the housing bubble. We don't permit unsafe products in the market generally, and this principle should also apply to financial products, especially given their potential to cause individual and widespread harm, as shown in the housing crisis and ensuing Great Recession. Modern notions of justice, fair dealing, and sound public policy necessitated the change to a new regulatory framework with a new regulatory body at its helm. Dodd-Frank accomplished that goal by the creation of the CFPB and the protections afforded by Title XIV.

A MEASURED AND BALANCED APPROACH

From its inception, the CFPB has suffered from attacks labeling it as an unnecessary, overreaching, and even lawless agency. Yet, reflection on the agency’s activities—free of political grandstanding and hyperbole—reveals that the Bureau has adopted fairly measured approaches. Examples of this restraint are perhaps best exemplified by the Bureau’s mortgage rules under the Ability-to-Repay (ATR) standard and Qualified Mortgage definition (QM). Dodd–Frank creates a series of bright line rules to protect consumers from the abusive mortgage lending practices that led to the Great Recession. In implementing those mandates through regulations, the CFPB has sought to strike a balance between protecting consumers and maintaining access to credit. For example, because of Dodd-Frank and the July 2015

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(or lack thereof) of the sellers’ products or services to remain opaque. Therefore, even the most thorough of consumers were subjected to potentially meaningful harm. The United States was first among modern nations to recognize this disparity. Throughout our history, this nation has led the charge in rejecting “caveat emptor” as an absolute doctrine in favor of establishing meaningful consumer protections designed to level the information playing field between sellers and consumers in the areas where it matters most. In 1906, the United States passed the Pure Food and Drugs Act, a law that firmly cemented the primary role of the Food and Drug Administration to act as a federal consumer protection agency. Likewise, the federal government established the National Highway Traffic Safety Administration in 1966 as a direct effort to ensure uniform safety standards for the cars we drive under the National Traffic and Motor Vehicle Safety Act. Finally, the Consumer Product Safety Commission ensures that buyers of physical products don’t have to worry about their televisions catching on fire or having their microwaves explode. Yet, in the area of financial products and services, similar singular federal oversight and uniform safety standards designed to protect consumers—especially consumers of mortgage products—remained largely unavailable. Fast forward to 2007. That summer, a Harvard law professor specializing in bankruptcy law introduced the concept of consolidated federal oversight of consumer financial protections with a single, straightforward contention: “If it’s good enough for microwaves, it’s good enough for mortgages.” That thesis, made by Elizabeth Warren, is the genesis of the Consumer Financial Protection Bureau and indeed many of the mortgage reforms enacted under Dodd-Frank. As now Senator Warren explains, when it comes to mortgages and other financial products and services, “families need to know there is a strong and independent watchdog on their side in Washington.” Recent history supports the Senator’s contention. In the aftermath of the housing crisis, Fannie Mae estimates show that 50 percent of subprime borrowers actually qualified for prime loans. Yield spread premiums were found in 85 to 90 percent of those mortgages. At a hearing before the Senate Banking Committee, Scott Stern−CEO of Lenders One−explained

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CFPB’s reforms, all lenders must now assess a mortgage borrower’s ability to repay a loan. In many ways, this requirement reasonably evaluates a borrower’s ability to repay a mortgage loan is the centerpiece of Title XIV and Dodd-Frank’s mortgage provisions. The standard was written into law to place homeowners and the sustainability of their loans at the core of how mortgage loans are made in the United States. As a result, it discourages market forces that previously caused responsible originators to “race to the bottom” in order to preserve market share and remain competitive. The CFPB’s Qualified Mortgage definition, which provides a presumption of compliance with the abilityto-repay standard for lenders that issue qualifying mortgages, prioritizes features that generally result in more sustainable lending for borrowers. Generally, a mortgage loan satisfies QM criteria if: 1) it is fully amortizing (i.e., no interest-only or negatively amortizing loans; 2) the points and fees do not exceed 3 percent of total loan amount, with larger percentages for small loans; 3) the terms do not exceed 30 years; and, 4) the rate is fixed or, for adjustable-rate loans, has been underwritten to the maximum rate permitted during the first five years. The decision to grant QM loans the strongest legal presumption available, a legal safe harbor, rather than a rebuttable presumption, was widely opposed by consumer advocates. Nevertheless, the CFPB felt that it was important to give originators greater certainty that they would face no legal liability if they chose to issue loans satisfying the definition. In adopting the Qualified Mortgage rule, the CFPB also explicitly rejected the idea of one-size-fitsall regulation. Instead, the agency consciously carved out exemptions meant to address geographic and business-scale differences in the mortgage market. For example, mortgages originated by eligible small creditors can obtain QM status if the loan meets the adjusted points and fees thresholds, is fully amortizing, does not include interest-only payments, and has a term of no more than 30 years. In addition, the lender is also “required to consider the consumer’s DTI ratio or residual income and to verify the underlying information.” However, these lenders do not need to meet the 43 percent DTI ratio threshold or use the DTI ratio standards. These rules are designed to provide greater flexibility to smaller creditors and are crafted in a way that is designed to reflect their business mod22

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el. Small creditor loans, for example, must be held in portfolio for three years to attain permanent QM status recognizing these lenders’ tendency to rely upon a portfolio lending model naturally. The CFPB has also developed a successful track record in adapting regulations to ensure that the market remains competitive for smaller lenders. For example, the CFPB recently requested comment on whether to increase the 500 first-lien mortgage cap under QM’s small-creditor definition. The Center for Responsible Lending expressed support for a reasonable increase of the 500-loan cap, limiting any potential increase to rural banks or for loans held in portfolio. The CFPB’s proposal quadruples the limit, expanding the loan origination cap for small lenders from 500 first-lien mortgages to 2,000. This 2,000 limit is exclusive of loans held in portfolio by both the creditor and its affiliates. In addition, the CFPB has proposed to only include first-lien mortgage originations of a small lender and its affiliate’s assets toward the current $2 billion asset cap. And, to accommodate concerns that the definition of a “rural and underserved” area is too narrow, the CFPB has proposed expanding the definition of rural areas by including any non-urban census blocks as defined by the U.S. Census Bureau. Finally, the CFPB is also proposing to allow grace and qualifying periods for small creditors to adjust to current and proposed standards. While reasonable minds may not always agree on all specifications of the CFPB’s proposals, its seems rational to acknowledge and support the bureau’s ongoing efforts to reasonably explore how mortgage rules can further accommodate lenders, services, and other industry participants to facilitate access, while balancing the interests of consumers.

PRESERVING INDEPENDENCE

Given the mandates imposed by Dodd-Frank on the CFPB, a need to maintain the Agency’s independence remains a paramount concern. Lawmakers initially sought to ensure the Agency’s strength and autonomy through three core actions: (1) establishing automatic funding through the Board of Governors of the Federal Reserve separate from the annual appropriations process, (2) granting the agency a broad scope of legal authority, and (3) consolidating the agency’s leadership structure into a single, independent director who— after appointment and confirmation—is only

removable for cause during a five-year term. President Bush and a broad bipartisan Congress enacted these same measures in the Housing and Economic Recovery Act of 2008 when creating the Federal Housing Finance Agency. The goal for both entities was the same: to ensure it they have the means, independence, and authority to do the job well. Multiple pieces of legislation introduced by the 114th Congress seek to chip away at the CFPB’s independence in each one of these areas. These efforts are inconsistent with the funding practices of other federal financial regulators, the need for regulatory certainty and consistency in the mortgage and broader financial markets, and undermine the benefit of uniformity that is achieved by having a single regulator possess consumer protection oversight over market players of various sizes. Thus, rather than helping, they actually hurt the very markets and market players some policymakers are aiming to protect. That result is not only bad for consumers, but also ominous for a mortgage market still attempting to fully recover from the financial crisis.

In the four years since the CFPB has opened its doors, the mortgage market has experienced more certainty, home loans and their terms have become safer for and more transparent to consumers, and− contrary to some of the most dire predictions−even the market for non-qualified mortgage lending continues to grow. The sky is not falling. To the contrary, because of the CFPB and its rulemakings, it may actually be opening up in a way that allows mortgage lenders to fairly compete for consumers’ business based on product quality and price. Considering where we’ve been, that sounds like a giant step forward in the right direction.

Mitria Wilson is Vice President of Government Affairs and Senior Counsel at the Center for Responsible Lending. She has spent the last 15 years working on housing finance, economic development, wealth inequality, short-term lending, consumer protection and affordable housing issues. Mitria can be reached at: [email protected].

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August 2-4, 2015

San Diego

Register at www.CMBA.com July 2015

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President Obama signing the Dodd–Frank Wall Street Reform and Consumer Protection Act and congratulating Senators Dodd and Frank on a job well done.

Photo Credit/Reuters

Photo Credit/AP

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July 2015

Photo Credit/UPI

Subtitle A: Loan Originator Compensation Restrictions and Enforcement BY MITCH KIDER & FED KAMENSKY

S Mitch Kider

Fed Kamensky

dresses certain other provisions of Subtitle A, and provides a review of the recent public enforcement actions that involve alleged compensation violations.

BRIEF HISTORY OF THE RULE

Unlike many other CFPB rules, the first iteration of the loan officer compensation rule did not stem from the Dodd-Frank Act. In August of 2009, the Board of Governors of the Federal Reserve System (Board) issued a proposed rule on loan originator compensation. The Dodd-Frank Act was enacted on July 21, 2010 and contained restrictions that closely, but not entirely, followed the Board’s proposed rule; however, less than a month after the Dodd-Frank Act was enacted, the Board finalized its rule. The Board acknowledged that there were differences between its rule and the DoddFrank Act, but the Board determined that delaying its rule would harm consumers.

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ubtitle A of Title XIV of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) amended the federal Truth-in-Lending Act (TILA) by imposing standards on residential mortgage loan originators. The majority of provisions in Subtitle A focus on mortgage loan originator compensation and steering restrictions. Since its formation, the Consumer Financial Protection Bureau (CFPB) has been busy issuing implementing regulations at an unprecedented pace. The wave of new regulations was followed in quick succession by a wave of enforcement actions, many focusing on compensation. The CFPB’s public enforcement actions show that the CFPB is paying close attention to compensation. Loan originator compensation issues also routinely arise during CFPB examinations. This article provides a brief overview of certain key loan originator compensation restrictions, ad-

July 2015

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The Board’s final rule became effective on April 6, 2011. Then, on January 20, 2013, the CFPB released its own loan originator compensation final rule (Rule). The Rule strived to reconcile the Board’s compensation and steering provisions with the Dodd-Frank Act and also added some additional provisions unrelated to originator compensation. The CFPB’s Rule became effective on January 1, 2014. Other provisions included in the Rule, which became effective on January 10, 2014, prohibit the financing of credit insurance and require disclosure of loan originator information in certain loan documents.

PURPOSE OF COMPENSATION RESTRICTIONS

Much of the impetus behind the compensation rules had been the belief by regulators and legislators that the historical lack of oversight of loan officer compensation allowed unscrupulous loan officers and mortgage brokers to take advantage of consumers. The compensation rules were designed to fight practices, such as “overages” and “yield spread premiums,” that were viewed as benefiting the originator at the expense of the consumer. The principal goal was to separate loan pricing from compensation and eliminate the incentive for originators to place their own financial interests ahead of those of the consumer.

KEY LOAN ORIGINATOR RESTRICTIONS

The key compensation and steering restrictions under the Rule include three basic prohibited practices: 1. Compensation based on loan terms other than the loan amount. 2. Compensation from the creditor or other parties if the loan originator is receiving compensation directly from the consumer. 3. Directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest to increase the loan originator’s compensation. The Rule applies to any closed-end consumer loan secured by a dwelling that is subject to TILA, regardless of owner occupancy (e.g., first and second homes) or lien position, including closed-end reverse mortgages. The Rule does not apply to open-end credit (e.g., HELOCs), timeshares, loans secured by real property that do not include a dwelling (e.g., vacant land), and loans that are not otherwise covered by TILA (e.g., business purpose loans).

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Importantly, the Dodd-Frank Act amended TILA to provide for expanded liability for violations of the compensation and anti-steering restrictions, including providing for individual liability for loan originators.

PAYMENTS BASED ON LOAN TERMS

The Rule prohibits loan originators from receiving compensation that is based on the terms of a transaction, the terms of multiple transactions, or the terms of multiple transactions by multiple originators. However, the amount of credit extended is not deemed to be a transaction term if the payment to the loan originator is based on a fixed percentage of the amount of credit extended. For reverse mortgages that are subject to the Rule, a loan originator’s compensation may be based on either (a) the maximum proceeds available to the consumer under the loan; or (b) the maximum claim amount (if the mortgage is an FHA-insured Home Equity Conversion Mortgage subject to 24 C.F.R. part 206), or the appraised value of the property, as determined by the appraisal used in underwriting the loan (if the mortgage is not subject to 24 C.F.R. part 206). The Rule also prohibits compensation that is based, in whole or in part, on a factor that is a proxy for a term of a transaction. A factor is a proxy if it consistently varies with a term over a significant number of transactions. If the loan originator has the ability, directly or indirectly, to add, drop, or change such factor in originating the transaction, then the factor is a proxy for a term of a transaction and a loan originator’s compensation may not be based on that factor.

PROFIT-SHARING, BONUS PAYMENTS AND POINT BANKS

The Rule prohibits loan originator compensation based on the profitability of a transaction or a pool of transactions. The prohibition under the Rule on compensation based on the terms of multiple transactions by multiple originators generally prohibits compensation based on profits, unless profits are from business other than mortgage-related business. The Rule adds two exceptions to this general prohibition. Mortgagerelated business profits can be used to make contributions to certain tax-advantaged retirement plans, such as a 401(k) plan, and to pay bonuses and contributions under certain other plans if either the amount paid does not exceed 10% of the individual loan originator’s total compensation or the loan originator acts

as an originator on 10 or fewer transactions over the preceding 12 months. However, compensation may not be directly or indirectly based on the terms of that individual loan originator’s transactions. As originally enacted, the Board’s compensation requirements resulted in confusion to the industry over what was permissible, particularly in the areas of pooled compensation and point banks. In revising the Board’s requirements, the CFPB clarified that certain pooled compensation structures violate the existing compensation regulations. The Rule did not add an express prohibition on point banks; however, the preamble to the Rule discusses point banks and indicates that the CFPB believes that there are no circumstances under which point banks are permissible. Point banks are any continuously maintained accounting balances, often in the form of basis points, credited to a loan originator by a creditor for originations. Point banks have been the subject of the CFPB’s recent enforcement actions, as discussed below. The CFPB did, however, make revisions in the Rule to allow loan originators to reduce their compensation in a very narrow set of circumstances. Loan originators may decrease their compensation to defray the cost of certain unforeseen increases in settlement costs. This exception is very narrow and does not to permit loan originators to reduce their compensation to bear the cost of a pricing concession to match a competitor’s pricing or to avoid high-cost mortgage provisions.

DUAL COMPENSATION

ADDITIONAL DODD-FRANK ACT PROVISIONS

In addition to compensation and steering provisions, the Rule prohibits mandatory arbitration clauses and the financing of single-premium credit insurance. The effective date for the financing of single-premium credit insurance was January 10, 2014, and the prohibition on mandatory arbitration clauses became effective on June 1, 2013. While the compensation provisions encompass the majority of Subtitle A, there are additional provisions that the CFPB has not yet implemented. For example, the Dodd-Frank Act imposes a restriction on upfront payment to the creditor for points or fees when an originator receives compensation from someone other than the consumer. The CFPB issued a proposal that would require a no-points, no-fees loan option (“zero-zero alternative”) to be offered to the consumer before upfront points or fees could be imposed. Under its exemption authority, the CFPB chose not to implement this provision as part of the Rule. Other provisions still awaiting implementation include a prohibition on certain kinds of steering, abusive or unfair lending practices, mischaracterization of credit histories or appraisals, and discouraging consumers from shopping with other mortgage originators. The CFPB is considering further rulemaking and may conduct consumer testing with respect to some of these issues.

CFPB ENFORCEMENT ACTIONS

To date, the CFPB has brought four significant public enforcement actions for alleged compensation violations. The actions resulted in substantial monetary relief to affected consumers and, in all but one case, civil money penalties against the company. Below is a summary of the CFPB’s findings in each of these actions that resulted in alleged violations. Improper Bonuses – CFPB’s First Loan Officer Compensation Enforcement Action In July of 2013, the CFPB took its first enforcement action for alleged violations of compensation restrictions. In this case, the CFPB filed a complaint in Utah federal district court against Castle & Cooke Mortgage LLC and two of its senior officers in their individual capacity. This case was originally referred July 2015

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In general, a loan originator may only receive compensation from one party, either the consumer or another party, but not both. The Board’s loan originator provisions resulted in several open questions that the CFPB attempted to address in the Rule. For example, the Rule provides a new exception to the dual compensation restrictions that allows mortgage brokerage companies that receive compensation from consumers to pay their employees or contractors commissions, as long as the commissions are not based on the terms of the loans that they originate. The Rule also implemented the Dodd-Frank Act’s prohibition on compensation based on transaction terms with respect to consumer-paid compensation. Therefore, mortgage brokerage companies may not base compensation paid by consumers on the terms of the transaction, and those consumer-paid compen-

sation amounts must be treated the same way as compensation from lenders.

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to the CFPB by the Utah mortgage banking regulator. The CFPB alleged that the company, acting through the two officers individually named in the suit, implemented a bonus program that paid loan officers quarterly bonuses that varied based on the interest rate of the loans the loan officers offered to borrowers. The complaint also alleged that the company did not refer to the bonus program in its written compensation agreements with its loan officers, did not maintain a written policy explaining the methods used to calculate the amount of the quarterly bonuses, and failed to record what portion of each loan officer’s quarterly bonus was attributable to a particular loan. The court entered a Stipulated Final Judgment and Order in November of 2013. The order provided for more than $9 million in restitution for consumers who obtained a mortgage loan from the company where the loan originator received a quarterly bonus. The order also provided for $4 million in civil money penalties against the company and two of its officers, jointly and severally, for paying bonuses to loan officers. Cash Rebates and Bonuses – CFPB’s Second Compensation Enforcement Action On November 13, 2014, the CFPB announced an action against a California mortgage lender, Franklin Loan Corporation, for steering consumers into loans with higher interest rates. The CFPB alleged that the company paid quarterly bonuses to loan officers based in part on the interest rates on the loans. According to the complaint, the company’s compensation plan provided for (a) an upfront commission based on a set percentage of the loan amount, and (b) a quarterly bonus paid from loan originators’ individual expense accounts. The quarterly bonus was based in part on retained rebates and the origination fees generated from the loan. The CFPB also alleged that the company gave its loan officers discretion to determine whether to pass on cash rebates generated from the interest rate to the borrower. The CFPB stated that higher interest rates on loans closed by the loan officer during the quarter resulted in a higher quarterly bonus for that loan officer. Under the terms of the Stipulated Final Judgment and Order, the mortgage lender agreed to pay $730,000 in redress to affected consumers. The CFPB did not impose a civil money penalty based on the mortgage lender’s financial condition and to maximize relief to affected consumers. 28

July 2015

Profit Based Bonuses and Point Banks – $20 Million Consent Order Against Mortgage Company and CEO On June 4, 2015, the CFPB entered into a consent order with RPM Mortgage, a mortgage lender headquartered in California, and its CEO personally, to settle alleged compensation violations. According to the complaint, the company’s compensation plan provided for (a) an upfront commission based either on a fixed percentage of the loan amount or a flat dollar amount per loan closed, and (b) compensation based on the loan profits, including periodic bonuses, pricing concessions, and supplemental commissions. For each closed loan, the company funded the employee’s expense account if the revenue exceeded the sum of the branch fees for operating the business and the upfront commission the loan officer earned on the loan. Thus, the CFPB alleged that loan officers could increase their compensation by steering consumers to higher-interest rate loans. Even though the company stopped paying bonuses from employee expense accounts at the end of 2011, the CFPB alleged that the company allowed loan officers to use loan profits deposited into expense accounts to cover the cost of individual commissionrate resets. The excess of a loan officer’s commission over the revenue the loan generated on the secondary market was covered by withdrawals from the employee expense accounts. The CFPB alleged that this practice allowed loan officers to convert profits from earlier high-interest loans into commission income. The CFPB also alleged that the company allowed loan officers to use the expense accounts as point banks to grant pricing concessions. This included providing interest rate reductions and credits for Real Estate Settlement Procedures Act (RESPA) tolerance cures or appraisal costs. The CFPB stated that this point bank arrangement violated Regulation Z – Truth in Lending because it allowed loan originators to close and earn commissions on loans they would otherwise have lost. The Stipulated Final Judgment and Order required the company to pay $18 million in redress to affected consumers and a $1 million civil penalty. For his personal involvement in managing the design and implementation of the compensation plan, the CEO was individually ordered to pay a $1 million civil penalty.

Branch Profits and Marketing-Services Companies – Latest Consent Order and $228,000 Civil Money Penalty On June 5, 2015, the CFPB announced an enforcement action against Guarantee Mortgage Corporation, a mortgage-brokerage firm and mortgage banker headquartered in California. According to the consent order, the company worked with marketingservices companies that were associated with the branch office. The company paid fees to the marketing-services companies based on the profitability of the branch. According to the consent order, the marketingservices companies were owned by producing branch managers and, in some cases, other loan originators from the branch. The consent order alleged that as a result of the company’s accounting methods, including allocation of expenses in branch income statements, the fees paid to marketing-services companies included income from originations by their owners. Thus, the CFPB alleged that the owners of the marketingservices companies received compensation based on the terms of loans they had originated. The consent order required the company to pay a civil money penalty of $228,000.

LESSONS LEARNED FROM CFPB ENFORCEMENT ACTIONS

The CFPB’s enforcement activity to date shows that the CFPB is paying close attention to compensation plans that, in its view, incentivize loan officers to steer consumers into loans with higher interest rates. In each instance, the CFPB found that plans that it reviewed impermissibly tied compensation to the interest rates on the loans that loan officers originated. For example, in one of the actions, the CFPB stated that the amounts of loan officer bonuses were “strongly correlated” with the balances in their individual expense accounts, which in turn were based on the terms of the loan officer’s transactions. The CFPB has focused on the use of periodic bonuses, employee-expense accounts, “point bank” arrangements, and similar structures. Three out of the four enforcement actions involved improper bonuses. Two actions involved employee expense accounts that the CFPB alleged were set up to mask compensation based on the interest rate. In one instance, the CFPB found that expense accounts served as “point banks” that improperly allowed loan officers to finance pric-

ing concessions and earn commissions on loans that otherwise would not be originated. Mortgage lenders and mortgage brokers should pay close attention to their compensation plans. Although some simple commission plans based on a pre-determined fixed percentage of the loan amount might not trigger the same level of scrutiny, the CFPB examiners will closely review all elements of a company’s compensation structure as part of routine examinations or other investigations. The CFPB’s examinations typically include a review of the relevant loan originator compensation agreements, a review of applicable accounting records, and interviews with individual loan originators. For these reasons, it is also important for companies to comply with the Rule’s record keeping requirements. The Rule generally requires that sufficient records of all compensation paid to loan originators, along with loan originator compensation agreements, must be maintained for three years after the date of payment. As evident from one of the enforcement actions, failure to maintain sufficient records documenting loan originator compensation can be viewed by the CFPB as a violation of the Rule. As noted above, the loan originator compensation provisions were implemented to address a perceived lack of regulation and concerns regarding abusive practices. The level of regulatory oversight is now sharply elevated, as shown by the unprecedented volume of rules and the number of public enforcement actions. With the CFPB’s focus squarely pointed at compensation, close scrutiny of mortgage lenders’ and mortgage brokers’ practices in this area will likely continue for the foreseeable future. MCM Mitchel H. Kider is an attorney and author residing in the Washington, DC; Mitch is Chairman and Managing Partner of Weiner Brodsky Kider PC, a national law firm specializing in the representation of financial institutions, residential homebuilders, and real estate settlement service providers.  Mitch can be reached at: [email protected] Fed Kamensky is a Member in the Washington, D.C. office of Weiner Brodsky Kider PC. Fed's practice focuses on federal and state regulatory compliance matters related to the financial services industry. Fed can be reached at [email protected]. July 2015

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Subtitle B - The Unruly Child BY RICHARD TRIPLETT

T Richard Triplett

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July 2015

Let’s take a walk through the provisions contained under Subtitle B, the implementing rules already effective, and those with imminent effective dates.

QUALIFIED MORTGAGE (QM)/ ABILITY-TO-REPAY (ATR)

The industry is presently focused on the wrestling match with TRID, and you may feel at this point the QM is so…last year, remember it was a harrowing battle to get here. This is evidenced by the seven implementing rules, subsequent proposals, corrections and interpretive statements, and one pending proposed rule. Yet, there is still potential impact on the horizon relative to the Qualified Residential Mortgage (QRM) being defined as a QM and any potential effect on mortgage-backed securities to be implemented under the Credit Risk Retention Rule effective on December 24, 2015.

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Since the enactment of the DoddFrank and the upheaval it has delivered the mortgage industry, Title XIV, Subtitle B, has played a significant role in sparking this turmoil.

he Dodd Frank Wall Street Reform and Consumer Protection Act (DoddFrank or Act) is a five-year old. As an industry, we have squirmed and fidgeted through the toddler years of implementation with plenty of confusion and headaches, but this unruly child still has a few tantrums brewing. Since the enactment of the DoddFrank and the upheaval it has delivered the mortgage industry, Title XIV (Mortgage Reform and Anti-Predatory Lending Act), Subtitle B (Minimum Standards for Residential Mortgage Loans), has played a significant role in sparking this turmoil. Although mostly all of the provisions of Subtitle B have already been implemented, there are some provisions with rapidly approaching effective compliance dates. You should be prepared to implement them shortly under the TILA-RESPA Integrated Disclosure Rule (TRID), or at least have a plan to get there as quickly as imaginable.

The ATR/QM requirements engulfed the industry for several years after the enactment of the DoddFrank Act and the roughly seven months from receipt of the final rule to the compliance effective date of January 10, 2014. Furthermore, specific criteria has been set forth by the appropriate agencies regarding the QM as it applies to FHA loans, VA loans, and Rural Housing Service (RHS) loans. HUD also addressed the curing of points and fees with regard to FHA QM loans. With very few exceptions, the ATR/QM rules were generally proposed and finalized as laid out under Subtitle B. The ATR/QM rule provides a choice regarding the specific requirements on documenting the consumer’s ability to repay the loan based on analysis of specific documents to verify qualifications during the underwriting of the loan. The determination of each residential mortgage loan originated under these standards is now based on three specific classifications: originating a loan based on the stated criteria and documentation to verify the consumer’s ability to repay (e.g., a loan originated using ATR standards); originating a QM loan with rebuttable presumption; or, originating a QM loan with legal safe harbor. The ATR standard includes a plethora of underwriting factors that must be adhered to during origination of the mortgage loan. The specific documents for determining this qualification are detailed in Appendix Q of Regulation Z. There are also exemptions for specific programs, such as FHA streamlined refinances and VA Interest Rate Reduction loan programs with some additional added criteria. Additionally, there is also an exemption for refinancing a non-standard mortgage to a standard mortgage, and the statute and implementing rule provide details regarding such scenarios, as well as, limited product exemptions for small creditors. The statute and rule also provide a manner in which this ability to repay is presumed by originating a “Qualified Mortgage”. The QM can be originated taking advantage under this presumption by either originating a QM with legal safe harbor (deemed compliant) or via rebuttable presumption (presumed compliant). The basis of whether a QM is originated with rebuttable presumption or legal safe harbor is whether the loan classifies as a higher-priced mortgage loan (HPML) or not, respectively. The Department of Housing and Urban Development (HUD) also 32

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added a different level of determining the threshold for an HPML where FHA loans are concerned. The QM adds another layer of requirements over and above the ATR standards. The most notable are the limitations on loan amortization, qualifying ratios, and eligibility for sale to the Enterprises and government housing agencies. Adding to the heartburn associated with the QM is the added limitation on points and fees that are tiered by the loan amount and adjusted each year. This is one area in which the statute differs slightly from the rules. The reaction by the industry of the ATR/QM has been somewhat puzzling depending on the entity with which you are conversing. By way of adding color to that statement, when the rule was initially implemented, the reaction by the majority of creditors was predominantly QM loans only. That being said, there were those few creditors who initially understood that you could still originate a non-QM loan under ATR standards, as long as you had a secondary market outlet for your originated loans or kept them in portfolio. It certainly goes without saying, the ATR/ QM rule has had a dramatic impact on the origination of loans. From this observer’s perspective, I have seen a growing number of lenders willing to open up to the origination of a loan under ATR standards over the last year in lieu of strictly originating QM loans, as the secondary market has become more receptive to such loans.

PROVISIONS IMPACTING THE TILA-RESPA INTEGRATED DISCLOSURE RULE (PROPOSED TO BE EFFECTIVE ON OCTOBER 3RD)

Subtitle B is also impacting the disclosure requirements associated with the TRID Rule, and specifically added additional notifications found on the Closing Disclosure and required prior to consummation. This is accomplished due to the Closing Disclosure mandate of receipt by the consumer three business days prior to consummation. Anti-Deficiency Protection – Added to the Closing Disclosure by this subtitle is a notice to the consumer regarding Anti-Deficiency Protection (Deficiency Judgments). Found on page 5 of the Closing Disclosure (Liability after Foreclosure), the consumer must be informed before the time of consummation if state law protections are afforded under any anti-deficiency law and the effect of any loss of this protection. If the loan is for a refinance, a notice must be provided de-

scribing protections under the anti-deficiency law and the impact of the loss of such protections. Partial Payments – Also as part of the Closing Disclosure, Subtitle B added a requirement for the creditor to indicate its policy upon receipt of a partial payment by the consumer (also found on page 5). Unlike the Anti-Deficiency Protection notice listed above, this notice is required “prior to settlement” (rather than consummation). This notice is also required when the servicing is transferred, and it amended the rules regarding providing the Notice of Transfer of Servicing. Aggregate Settlement Charges – A small favor granted to the industry by the CFPB was the choice not to implement a portion of these provisions while rulemaking by not implementing the requirement for disclosure of the “wholesale cost of funds.” The requirement to disclose the aggregate amount of settlement services remains. Loan Originator Compensation – Required the disclosure of compensation paid to the mortgage loan originator (MLO) by the consumer and any amounts paid by the creditor to the originator. Total Interest Percentage (TIP) – These provisions added the disclosure the TIP found on the Closing Disclosure (page 5), consisting of the total amount of interest over the life of the loan as a percentage of the principal of the loan. Save travels as you explain this new percentage to consumers on the Closing Disclosure.

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VARIABLE RATE LOANS

Variable rate mortgage loans in which an escrow account will be established now require disclosure of the initial monthly payment and the amount of the monthly payment including amounts for deposit into the escrow account. Also required is disclosure of the amount of monthly payment under a fully-indexed rate, including the amount for deposit into the escrow account.

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Subtitle B also added notifications for hybrid adjustable-rate loans and periodic statements during the mortgage loan servicing stage. Hybrid Adjustable-Rate Mortgage Loans – For adjustable rate loans secured by a principal residence in which there was an introductory fixed rate period, otherwise defined as a “hybrid adjustable rate mortgage” under the Act, a six-month advance notice

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requirement was added to inform the consumer of the upcoming reset of the interest rate. Periodic Statements – As of this writing, there are additional proposed rules further affecting the requirements which must be included on periodic mortgage statements, but under the Dodd-Frank, the requirements mandated for specific disclosures have already been implemented. The CFPB was instructed to promulgate a standard form and have done so by providing them under Appendix H sample forms H-30(A), (B), (C) & (D) in Regulation Z.

fraud by adding an exemption for liability when a borrower has been convicted of obtaining the loan by fraudulent means.

PREPAYMENT PENALTY PROHIBITIONS

A prohibition of required arbitration by the creditor on the consumer was added for principal dwellings, but also added an allowance for arbitration if by mutual agreement.

A prohibition was added under the Dodd-Frank in Subtitle B regarding prepayment penalties for loans that are not classified as a QM. For these purposes, there are also exclusions in which a QM cannot include a residential mortgage loan that is either an ARM loan or is an HPML. With regard to a loan that is classified as a QM loan, the statute allows for limitation on prepayment penalties under a 3-2-1 standard (a limit of 3% in the first year, 2% in the subsequent year, and 1% in the third year after consummation). The consumer, however, must be provided the option of a loan product without a prepayment penalty. The impact this has had on the industry as a whole could be considered lackluster. There has been a noticeable difference over the past several years in those creditors willing to walk the vexing path of originating loans given the risk associated with prepayment penalties.

PROHIBITIONS ON SINGLE CREDIT INSURANCE

Although the purchasing of specialty insurance products is historically declining, the Act placed a prohibition on specific aspects of such insurances. The prohibition applies to financing by the creditor of insurances on a principal dwelling (including closed-end and open-end loans).

NEGATIVE AMORTIZATION LOANS

In order to originate a loan secured by a dwelling (excluding reverse mortgages) with the potential for negative amortization, the Act requires a specific set of disclosures applicable to such loans.

BORROWER FRAUD

The Act also provided some measure of protection for lenders with regard to borrower perpetrated

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FORECLOSURE DEFENSE

Subtitle B also added provisions recoupment or setoff for consumers claiming a violation by a creditor without regard to time limit on a private action for damages once a judicial or nonjudicial foreclosure has been initiated.

ARBITRATION

STATUTORY CAUSE OF ACTION

Provisions were enacted for residential mortgage loans (including open-end loans) regarding the creditor prohibiting the consumer from bringing an action via courts proceedings.

CIVIL LIABILITY

Last, but certainly not forgotten, the Act increased substantially the Civil Money Penalties for violations under TILA.

REQUIRED REPORTS BY THE COMPTROLLER GENERAL

Specific reports were mandated to perform studies by the Comptroller General on various aspects of availability and affordability of credit due to the effects of the Act. These reports were required within one year after enactment of Dodd-Frank. This unruly child, otherwise known as “DoddFrank Act, Title XIV, Subtitle B,” has certainly put the industry through its paces. As we reflect back on how this has impacted the origination of mortgage loans already, remember very shortly this child still has a few tricks up its sleeve regarding implementation of the TRID Rule, final rules still in rulemaking stages with the CFPB regarding servicing requirements, and defining a small creditor for purposes of the QM. MCM

Richard Triplett, CMB, is vice president and director of compliance for AllRegs an Ellie Mae Company. he can be reached at [email protected].

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Subtitle C: High Cost Mortgages – More than HOEPA BY MARY THORSON WRIGHT

W Mary Thorson Wright

The HOEPA was enacted in 1994 to address abusive mortgage loan practices. Now, HOEPA is amended and expanded under DoddFrank.

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hen the U.S. Congress passed the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank) in 2010, the mortgage industry was no stranger to ‘high cost mortgage’ rules. The Home Ownership and Equity Protection Act (HOEPA) was enacted in 1994 as an amendment to the Truth in Lending Act (TILA) to address abusive practices in refinancing and home equity mortgage loans with high interest rates or high fees. Since 1994, loans that met HOEPA’s high-cost coverage tests were subject to special disclosure requirements and restrictions on loan terms, and borrowers in high-cost mortgages benefited from enhanced remedies for violations of the law. The provisions of TILA, including HOEPA, are implemented in the Consumer Financial Protection Bureau’s (CFPB) Regulation Z – Truth in Lending. On the state level, many

legislatures passed ‘HOEPA-type’ rules that echoed or further expanded consumer protections and regulatory requisites for highcost mortgages made in or made to consumers in those states.

HOEPA AND DODD-FRANK In response to the 2008 economic depression and mortgage crisis, Congress amended HOEPA through Title XIV of Dodd-Frank, the Mortgage Reform and Anti-Predatory Lending Act (MRAL), and, specifically, high cost mortgage requirements are covered in Subtitle C. Although ‘predatory lending’ is not specifically defined or addressed, the provisions of the MRAL are intended to limit discretionary practices that were perceived to contribute to predatory lending. The amendments did expand the coverage of HOEPA and added consumer pro-

tections for high-cost mortgages, including a specific definition of ‘high cost mortgage;’ restrictions on balloon payment loans; prohibitions on loan default, late fees, accelerated debt, and financing for prepayment fees or penalties, points, or fees; and structuring to avoid the requirements.

MRAL implements this provision in one of the following ways:

HOEPA COVERAGE EXPANDED

• For a transaction in which the interest rate may vary during the term of the loan or credit plan in accordance with an index, the interest rate that results from adding the maximum margin permitted at any time during the term of the loan or credit plan to the value of the index rate in effect as of the date the interest rate for the transaction is set, or the introductory interest rate, whichever is greater; and • For a transaction in which the interest rate may or will vary during the term of the loan or credit plan, other than a transaction described in the previous paragraph, the maximum interest rate that may be imposed during the term of the loan or credit plan. Determination of APOR for Comparable Transactions - MRAL guidance directs creditors to published tables of average prime offer rates (APOR) for fixedand variable-rate closed-end credit transactions. There are no similar tables for open-end credit, and creditors opening HELOCs must compare the APR for a HELOC plan to the average prime offer rate for the most closely comparable closed-end transaction. To identify the most closely comparable closed-end transaction, the creditor must determine (1) whether the credit plan is fixed- or variable-rate; (2) if the plan is fixed-rate, the term of the plan to maturity; (3) if the plan is variable-rate, the duration of any initial, fixedrate period; and (4) the date the interest rate for the plan is set. Definition of Points and Fees for Closed-End Transactions - The definition of “points and fees” for HOEPA purposes generally tracks with the new definition of the term for purposes of the Qualified Mortgage (QM) safe harbor under the CFPB’s Ability-toRepay (ATR) Final Rule. The points and fees definition presents a challenge based on timing. The definition provides that “points and fees means the [following] fees or charges that are known at or before consummation.” The Commentary to Regulation Z offers that, July 2015

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Dodd-Frank expanded HOEPA in specific ways: Inclusion of New Loan Types – MRAL expands the types of loans that may be subject to HOEPA by removing previous exclusions (defined under Regulation Z to mean purchase money mortgage loans) for “residential mortgage transactions” and added home equity lines of credit (HELOCs) as potentially covered loans. The term high-cost mortgage now may include both a closed-end credit transaction and an open-end credit plan secured by the consumer’s principal dwelling. Reverse mortgages, construction loans, loans originated and financed by Housing Finance Agencies, and loans originated through the United States Department of Agriculture’s (USDA) Rural Housing Service section 502 Direct Loan Program remain exempt largely because they are not perceived to present the same risk of abusive practices as other mortgage loans. Lower Triggers for High-Cost Mortgages – HOEPA’s reach is expanded under MRAL under new tests to determine if a loan is high cost. The annual percentage rate (APR) and “points and fees” triggers are lower than they were previously under the 1994 HOEPA, and a new prepayment penalty trigger has been added. Meeting any one of the tests makes a loan a high cost mortgage. Three tests – the APR Test, the Points and Fees Test, and the Prepayment Penalty Test – are described in the amendments and are to be applied to consumer credit transactions secured by the consumer’s principal dwelling to determine if the loan will be a high cost mortgage. Interest Rate Used to Determine Annual Percentage Rate - Dodd-Frank Act added instructions to creditors to use one of three methods to determine the interest rate for purposes of calculating the APR for high-cost mortgage coverage. The guidance allows creditors to determine whether a loan will qualify as a HOEPA loan on the date the interest rate is set.

• For a transaction in which the APR will not vary during the term of the loan or credit plan (a fixed-rate loan), the interest rate in effect as of the date the interest rate for the transaction is set;

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in general, a charge is “known” if “the creditor knows at or before consummation that the charge or fee will be imposed in connection with the transaction, even if the charge or fee is scheduled to be paid after consummation.” Certain exceptions were called out, including some non-interest components of the finance charge.

ing open-end end loans are required to assess the consumer’s ability to repay the loan. Creditors originating high-cost closed-end loans are required to do so under the CFPB’s new ability-to-repay rule. Creditors must consider the consumer’s current and reasonably expected income, employment, assets other than the collateral, and current obligations, including any mortgage-related obligations, and are secured by the NEW RESTRICTIONS same dwelling that secures the high-cost mortgage For a loan that meets any of the high cost mort- transaction. Creditors must verify (i) income or assets, gage tests and is considered a high cost mortgage, including expected income or assets, and (ii) the connew restrictions come into play. sumer’s current obligations, including any mortgageBalloon Payments - The payment schedule gener- related obligations that are required by another credit ally may not include a payment that is more than two obligation undertaken prior to or at account opening, times a regular periodic payment. Exceptions are a and are secured by the same dwelling. Bridge loans of payment schedule adjusted to the seasonal or irregular 12 months or less are exempt from this requirement. income of the consumer; a bridge loan of 12 months Encouraging Default is Prohibited - Creditors and or less connected with the acquisition or construction mortgage brokers are prohibited of a dwelling intended to become from recommending or encourthe consumer’s principal dwellaging a consumer to default on For a loan that meets any of ing; or loans made by creditors an existing loan or other debt in the high cost mortgage tests operating predominantly in rural connection with consummating or underserved area and meeting and is considered a high cost or opening a high-cost mortgage certain criteria. For an open-end that refinances all or part of that mortgage, new restrictions credit plan, “regular periodic payloan or debt. come into play. ment” means the required miniRestrictions on Servicing Fees mum periodic payment - There are several restrictions on Prepayment Penalties – Preservicing fees. payment penalties are prohibited. For a closed-end • Modification fees and deferral fees are prohibited. credit transaction, prepayment penalty means a charge imposed for paying all or part of the transac- • Fees for payoff statements are generally prohibited; however, creditors and servicers may charge tion’s principal before the date on which the princia reasonable fee for providing a payoff statement pal is due, other than a waived, bona fide third-parby fax or courier, provided the fee is comparable ty charge that the creditor imposes if the consumer to fees imposed for similar services provided for prepays all of the transaction’s principal sooner than non-high-cost loans and provided the creditor or 36 months after consummation, except that interest servicer discloses that other delivery options are charged consistent with the monthly interest accrual available without charge. amortization method is not a prepayment penalty for

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• Late fees are restricted to four percent (4%) of the amount past due, must be specifically permitted by the terms of the loan documents, and may not be imposed more than once for a single late payment. Payments may not be applied in a way that results in the pyramiding of late fees. Late fees may only be imposed after a payment is 15 days past due (or 30 days for loans on which interest on each installment is paid in advance).

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FHA loans consummated before January 21, 2015. For an open-end credit plan, prepayment penalty means a charge imposed by the creditor if the consumer terminates the open-end credit plan prior to the end of its term, other than a waived bona fide third-party charge that the creditor imposes if the consumer terminates the open-end credit plan sooner than 36 months after account opening. Ability-to-Repay for HELOCs - Creditors originat-

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Financing of Points and Fees - Points and fees that are required to be included in the calculation of points and fees may not be financed.

NEW DISCLOSURES MRAL revised several consumer disclosures for high-cost mortgage loans, and it added new disclosures specific to open-end loans. Creditors must make these disclosures within three business days before consummating a closed-end high cost mortgage or opening the account for an open-end high cost mortgage, unless the consumer waives in writing the threeday waiting period because the credit is needed to meet a bona fide personal financial emergency. Similar to the rules applicable to waiving the Right to Rescind, circumstances qualifying as a bona fide personal financial emergency are expected to be rare.

CLOSED-END LOANS The creditor must disclose the amount of the regular monthly (or other periodic) payment and the amount of any balloon payment provided in the contract. The creditor must also disclose the total amount the consumer will borrow, as reflected by the face amount of the note, and if this amount includes finance charges not otherwise prohibited, that fact must be included as well.

OPEN-END LOANS Open-end credit disclosures include: • The creditor must provide an example, based on assumptions specified in the MRAL, showing the first minimum periodic payment for the draw period, the first minimum periodic payment for any repayment period, and the balance outstanding at the beginning of any repayment period. If the contract provides for a balloon payment, the creditor must also disclose that fact and provide an example showing the amount of the balloon payment. • The creditor must also disclose that the example payments (i) show the first minimum periodic payments at the current annual percentage rate if the consumer borrows the maximum credit available when the account is opened and does not obtain any additional extensions of credit, or a substantially similar statement, and (ii) are not the consum40

July 2015

er’s actual payments and that the actual minimum periodic payments will depend on the amount the consumer borrows, the interest rate applicable to that period, and whether the consumer pays more than the required minimum periodic payment, or a substantially similar statement. • The creditor must disclose the credit limit for the plan when the account is opened. • For variable-rate transactions, the creditor must disclose a statement that the interest rate and monthly payment may increase and the amount of the single maximum monthly payment based on the maximum interest rate. If the loan has multiple payment levels and more than one maximum payment amount is possible, the maximum payment for each level must be included in the disclosure.

HOEPA CURE PROVISION

Under certain conditions, a creditor or assignee of a high-cost mortgage may take steps to cure a HOEPA violation. A creditor or assignee in a high-cost mortgage who, when acting in good faith, failed to comply with any HOEPA requirement will not be deemed to have violated the requirement if the creditor or assignee either takes action within 30 days of consummation (or account opening, for HELOCs), or takes action within 60 days of discovery of the error.

UNDOING TRUTH IN LENDING SIMPLIFICATION

The Truth in Lending Act was enacted in 1968, and Regulation Z was written to implement it. Regulation Z has been amended many times to incorporate changes to the TILA or to address changes in the consumer credit marketplace. During the 1980s, Regulation Z was changed significantly to reflect the requirements of the Truth in Lending Simplification and Reform Act of 1980. Some evaluations of the TILA simplification have found that the “new Act [is] no more likely to increase consumer protection than the original Truth in Lending Act.” The original Truth in Lending Act was intended to create a level playing field and standardize certain required disclosures to help consumers make better credit choices. It is conceivable that, with the addition of the many and varied special rules that have now

been added to an already complex regulatory digest, simplification is becoming unrecognizable.

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COMPLICATIONS FOR LENDERS, BORROWERS, AND THE MARKET As noted in our lead story this month, “A Skeptical Look at Mortgage Reform Under the Dodd-Frank Act,” lenders, borrowers, and the market will likely experience negative effects from the restrictive rules, prohibitions, and complex disclosure requirements of the MRAL. Lenders are faced with extensive changes to product features, processes, and documentation that are expensive and difficult to administer effectively across offices and employees of entire organizations. Market discipline will likely not be affected by the MRAL amendments; however, market volatility will likely be negatively affected as product restrictions, documentation difficulties, and loan administration challenges decrease mortgage availability and volume. Consumers, who are the stated recipients of the benefits of the protective regulation, will likely experience a decrease in product choices from the mortgage market. Consumers will also likely feel the restrictions placed on lenders to meet debt-to-income ratios (DTI) and loan-to-value ratios (LTV) while they endeavor to finance home-secured loans, and, may be lulled into a false sense of security during the longer foreclosure process allowed under Dodd-Frank. The Dodd-Frank Act launched the mortgage industry another step forward from The Home Ownership and Equity Protection Act (HOEPA) enacted in 1994 to arrest abusive consumer lending practices, and, the industry will no doubt see more legislation of its kind. It is incumbent on the Consumer Financial Protection Bureau, as the leading player to administer MRAL requirements, to ensure the letter and spirit of the law is implemented effectively, and, if it is not effective, to ensure it is changed to be so. Consumers, the mortgage industry, and the American economy depend upon it. MCM

Mary Thorson Wright is the Senior Editor of Mortgage Compliance Magazine. She can be reached at [email protected].

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Subtitle E: Dodd-Frank Mortgage Servicing – Something Old, Something New BY DAVID STEIN

W David Stein

By updating existing laws and encompassing previously unrelated guidelines, the CFPB made the issue of collecting on a loan into something ‘new.

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ay back when, just after The DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank) hatched, the Consumer Financial Protection Bureau (CFPB or Bureau) made the subject of mortgage servicing one of its first focal points. Title XIV of Dodd-Frank (the Mortgage Reform and Anti-Predatory Lending Act), and specifically, Subtitle E: Mortgage Servicing, includes escrow requirements; prohibitions about force-placed insurance and charging fees for responding to written requests; failing to promptly respond to requests, failing to respond within 10 business days to a request to provide information about the loan owner, or failing to comply with any other obligations. Servicing requirements of RESPA and TILA were not quite enough. In one of its earliest pronouncements, the CFPB warned mortgage servicers that examiners would be “carefully reviewing servicers’ compli-

ance” with consumer’s laws including the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP). That’s a mouthful! Servicing is ‘old-hat.’ No loan has ever been made without the need to collect. By updating existing laws and encompassing previously unrelated guidelines, the CFPB made the issue of collecting on a loan into something ‘new. ‘ By doing so, servicers were put on notice that how they treat their customers was to be “job number one.” The Bureau, as an infant, quickly got to work issuing very specific details of how servicers must conduct their business. If anything was missing from the wide, wide world of compliance guidelines prior to Dodd-Frank, it was the need for focused

guidance of how a servicer should act throughout the life of a loan. There had been no requirement to be consumer-centric. The deal was done. The consumer now had his or her loan. The attitude was “pay me.” Logically, if Dodd-Frank was to serve its purpose as a consumer protection law, the need to ensure that consumers were protected after the origination of a loan was crying for attention. Mortgage lending is not just a sales process. The life of a loan can span 30 years. Thus, had the Bureau merely focused on originator compensation, loan disclosures, and sales practices, it would have ignored the majority of a loan’s life cycle. Enter updated servicing guidelines. Something new. Rules that created a new dynamic where there previously was little in the way of real guidelines. During the mortgage meltdown, consumers were left reeling with abusive loss mitigation procedures that left them powerless in dealing with inaccurate and sometimes hostile contacts with the owners of their loans. We have all heard and seen the horror stories of dual tracking, lack of follow-through, and errorprone accounting that led to large masses of people having little or no recourse to save their homes during very tough economic times. Dodd-Frank created new expectations for servicers by requiring accurate accounting, error resolution protocols, early intervention to prevent foreclosure, continuity of contact, and fair loss mitigation procedures. As a very recent consent order showed, the goal of the new rules was to ensure that servicers would be mandated to treat their customers right. The CFPB’s strategy for new guidelines and enforcement that did not just update and address RESPA and TILA, but to take into account collection practices under the FDCPA, FCRA, and UDAAP, forced servicers to perform self-examination so that old school loan collection would be updated with an eye for consumer protection. While one may argue that the progeny of guidelines being released by the CFPB have sometimes been overly aggressive, without an eye on unintended consequences, the modernization of servicing guidelines seems to have been right on target to help eliminate unfair practices throughout the loan collection life cycle. Consider this. Prior to Dodd-Frank, consumers were often left wondering about the very identity of their loan servicer, and how to handle accounting

errors, prevent default, or make informed choices about how to save their homes. They often had no consistent point of contact, were given inaccurate information, and were pushed from one department to another, watching their home slip away one missed opportunity at a time. As we reflect on the anniversary of Dodd-Frank, it should be with some relief that clear guidelines and accountability now exist in how consumers must be treated as they work to pay for their homes. Through the national mortgage servicing settlement and significant updates in written guidelines, many consumers now expect to be treated as nicely and efficiently in dealing with their major life investment (their homes) as they do in returning defective clothing to their local retailer. The mortgage servicing rules provide the CFPB’s clearest and most defined guidance of any of its rulemaking to date. While the investment to comply is significant, the ease of compliance is aided by the clear and definitive rules on how to act. The Bureau left very little to guess. The guidelines are very focused. They detail when and how to apply payments and partial payments, and how and when to account for escrow and respond to customers’ inquiries and complaints; how to prevent or mitigate loss, and when foreclosure or collateral recovery can proceed; and, the notice required when a consumer’s loan is sold or transferred. Compliance is easy, from the perspective that servicers are not left guessing as to the Bureau’s intent. Thankfully, the concept of creating guidelines by enforcement action was not employed for the servicing rules. We are left with something new and unique (by CFPB standards), a clear path for compliance. (No one can argue the fact that following these new rules may be onerous and require significant thought and resources, however.) Now, in the summer of 2015, we see the CFPB often using the tactic of deferring to future court decisions in determining how to be compliant on various issues of import. Let’s be thankful that the mortgage servicing guidelines took a different tack, leaving the industry with a clear recipe for compliance. MCM David K. Stein is of Counsel with Bricker & Eckler, LLP where he focuses on financial service matters, compliance, exam readiness, sales practices and regulatory defense. David can be reached at: [email protected] July 2015

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Subtitle F: Dodd-Frank & Appraisals: Compliance is easier than you think BY JENNIFER MILLER

S

ubtitle F of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank or Act) addresses appraisal activities and outlines several requirements that lenders, appraisers, and appraisal management companies (AMC) have been navigating for the past several years.

Jennifer Miller

The systems already exist to get you in compliance very quickly and with far less pain than you’ll feel from failing an exam.

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A SUMMARY OF THE ISSUES

Section 1471. Property Appraisal Requirements. This section of the Act largely deals with what the Consumer Financial Protection Bureau (CFPB) considers “higher-risk mortgage loans.” The requirements would necessitate a second appraisal by a licensed or certified appraiser for loans secured by a principal dwelling that meet their criteria for a higher-risk mortgage loan.The basic idea is to require a second appraisal on riskier loans and/or types of loans where fraud has been an issue in the past, such as

investment properties or flips. In addition, the CFPB wants a copy of the appraisal sent to the borrower at least three days prior to closing. Many lenders are still sending these disclosures manually and may not be able to prove compliance with an audit trail, and the CFPB will be looking for proof. Your appraisal management software platform should have a function to send valuations to the borrower and any other appropriate recipient. If your AMC sends a copy of the appraisal to the borrower, the lender is not automatically off the hook. As with every other aspect of this Act, it’s up to the lender to ensure that any vendor is complying, which means you need to have proof on every transaction that the appraisal was provided at least three days prior to closing. Section 1471 also adds a consumer notification that an appraisal has been ordered for the sole use of the creditor, and

There has been a lot of talk in the industry about AIR, and interpretations continue to evolve with most lenders having establishing policies that make compliance easy. If you aren’t yet in compliance, it’s fairly easy with the technology available now. There are many solutions from outsourcing everything to an AMC to employing the use of software to act as a firewall between the appraiser and your production loan staff. Keep in mind that one of the most important aspects of AIR, and one that is often overlooked, is that your production loan staff cannot select appraisers. If you’re still allowing production to push appraisers to you, you should make changes so appraisal operations team manages its own panel of trusted appraisers. One issue with multiple interpretations is the mandatory reporting requirement. All persons, including AMCs, lenders, and appraisers, are required to report perceived violations to their state appraisal boards. This means that if a reviewer or underwriter identifies something in an appraisal which is not, for instance, USPAP (Uniform Standards of Professional Appraisal Practice) compliant, your organization may be required to report the appraiser. In light of the reporting requirement and the widely varying implementations of it, your compliance strategy should include a full audit trail of your appraiser selection process, including communications with your appraiser. Vendor management software will automatically create audit trails for you, and it’s well worth looking into these tools so you are covered. Remember, the audit trail is also prudent because it may uncover violations that you can correct before an audit, and its existence is evidence your infrastructure is designed to comply with the law. Finally, this is the section that mentions you are required to compensate fee appraisers “at a rate that is customary and reasonable for appraiser services performed in the market area” of the property being appraised . This requirement has been difficult for many organizations because of the lack of data defining customary and reasonable fees; however, more studies are available now, five years after implementation. There are a wide variety of surveys and study data available, and your appraisal operations team needs to decide how to best handle this requirement going forward. Penalties in other sections can be relatively mild, but compensation violations are severe and can add July 2015

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the notice should include language about receiving a free copy of the report. It would be a good idea to bundle a notice about the borrower’s rights to a copy of the appraisal and include it in your disclosure package. Part of a compliance strategy for this section must also include the monitoring of your fee panel’s licensure status. If you’re using an AMC, you either have to monitor this yourself or have thorough documentation on how each of your AMCs is monitoring licensure. Fortunately, there is a central database for all appraisal licenses at https://www.asc.gov/favicon.ico, and you are allowed to download the entire database to run a comparison. Vendor management software can automate this task by scrubbing your fee panel against the Appraisal Subcommittee’s list of licensed appraisers daily. Fortunately, at $2,000 per violation , the penalties in this section aren’t as drastic as in other sections, but if your operations team hasn’t automated this process your penalties could add up very quickly. Another concern is there’s no burden of proof for damages. According to the Act, “A creditor that willfully fails to obtain an appraisal as set forth above (i.e., either the original appraisal or a second appraisal, where applicable) is liable to the applicant or borrower in the amount of $2,000. The liability under this new provision is in addition to any other liability under the Truth in Lending Act (TILA) (i.e., civil liability, administrative liability, and criminal liability). Section 1472. Appraisal Independence Requirements. This section established appraisal independence requirements that you’ve probably seen abbreviated as “AIR”. There are several requirements, but most are common sense in a compliance strategy designed to prevent collusion and most of these were also required by Home Valuation Code of Conduct (HVCC). Of course, you can’t say or imply to an appraiser that their future assignments depend on the amount at which the appraiser values a principal dwelling. You can’t tell an appraiser a value that is needed to approve the loan. You also cannot withhold payment or threaten to because the appraiser does not value the dwelling at or above a certain amount. And, as with HVCC, production loan staff (or mortgage brokers) can’t be involved in the appraiser selection process.

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up quickly. According to the Act, violators are subject to a civil penalty of up to $10,000 per day for the first violation and up to $20,000 per day for subsequent violations. That doesn’t include the civil penalties or the associated penalties for violations of TILA. Recently, the Louisiana State Appraisal Board posted a Stipulations and Order against an AMC regarding payment of reasonable and customary fees to appraisers, resulting in the AMC’s adoption of a Louisiana fee survey. You can read about it in National Mortgage News’s article here. In my opinion, because the penalties are so severe and the technology is readily and affordably available, it’s reckless not to institute these practices as part of your compliance strategy now. The guidelines make good sense from a risk perspective, and we’ve seen good vendor relations make or break an AMC or lender; so, it’s unwise not to protect your institution when it’s easy to do so. Section 1473. Various amendments. This section has been largely undecided and will undoubtedly expand through the rule making process. Currently, this section of the Act sets a $250,000 loan threshold for necessitating an appraisal and bans the use of a broker price opinion on any first mortgage loan on a principal dwelling. Most investor requirements are far below that $250,000 mark, so it shouldn’t be an issue with most institutions. In addition, this section requires the Appraisal Subcommittee to provide an annual report; requires AMCs to register with their state appraisal boards; and requires the Appraisal Subcommittee to create a national registry of AMCs. State AMC laws vary widely. There are states that require all principals to get fingerprinted and have a background check. There is a state that charges the AMC every time an appraiser is added or removed from a fee panel, and there is at least one state that has language where the AMC has to ‘ensure the appraiser’s competence.’ When you use an AMC, part of your due diligence must be a current understanding of these state regulations. Section 1474. Equal Credit Opportunity Act Amendment. This section relates to the creditor’s obligation to provide copies of appraisals and valuations to the loan applicant, even in the case where the application is withdrawn or the loan is denied. In general, you are required to provide a copy of all written ap46

July 2015

praisals and valuations that are developed in connection with an application for a loan to be secured by a first lien on a dwelling. The copy is to be furnished upon completion, but in no event later than three days before loan closing. Again, most institutions routinely provide the appraisal to borrowers anyway, so, the major concern for compliance strategies is the timing of the disclosure. Vendor management software can handle this, or an AMC can do it for you. But under either circumstance, you should have access to a full audit trail to document your compliance. Get a date and time stamp on when the appraisal was sent to the applicant, when the recipient consented to receive it, and when the recipient viewed the file. This section also mandates a notification to the applicant of their right to receive the appraisal, but you should be doing that automatically when they apply, so you’re in compliance with section 1471 as discussed above. Section 1475. Appraisal Fees. This section suggests HUD-1 and HUD-1A disclosure forms associated with appraisals handled by an AMC contain two fields for the appraisal fee. One field would show the fee paid directly to the appraiser, and a separate field would show the administration fee charged by the AMC. Some states took the AMC act as an opportunity to require AMCs to publish their fee to the borrower and lender. Right now, there are many AMCs that have to do this on a case-by-case basis, depending on the state. I think it will actually ease the burden if this just becomes a standard rule.

DODD-FRANK’S APPRAISAL ISSUES SEEM COMPLICATED, BUT COMPLIANCE CAN BE EASY

The good news is that compliance with DoddFrank’s appraisal provisions doesn’t have to be difficult. Industry best practices have been largely established in the five years since Dodd-Frank’s introduction, empowered by technology advancements that make it fairly painless to comply, that can ensure you’re mitigating risk and enhancing your institution’s overall due diligence strategy. The systems already exist to get you in compliance very quickly and with far less pain than you’ll feel from failing an exam. To get a jumpstart on compliance, you should focus on these actions:

1. Identify the weaknesses in your current appraisal operations. Dodd-Frank is just one compliance consideration, and there are countless others in addition to investor requirements. Find a proven appraisal management system trusted by others in the industry to help you find the risks in your current process. Unless you have a team of in-house compliance experts, the landscape is too complex to try to go it alone. Many of the technology platforms have integrated compliance tools so you can adjust software settings to suit your compliance strategy, rather than retraining staff and hoping for the best. To find a partner, you often don’t have to sign contracts or even use their services. Many times, it’s nothing more than reaching out to experts, so form a relationship with an appraisal management expert you can trust. 2. Implement tools directly in your workflow to protect your institution. We all know that even the most stringent compliance measures won’t be consistently followed by staff unless they are tightly integrated into your appraisal workflow and operations. With technology, you can effectively automate many compliance functions and eliminate the risk of human error. 3. Require an audit trail for every appraisal transaction for your future protection. Comprehensive audit trails are a must, and their importance has received tremendous media attention lately. When the rubber meets the road, the audit trail on your appraisal transaction will make or break you in an exam or buyback request. Whether you’re managing appraisals internally or using an AMC, make sure every transaction is documented in an audit trail. Even if the audit trail catches an occasional violation from your staff, you’ve shown that your institution’s policies are aligned with compliance. For more insight on the importance of audit trails, see Amy Bergseth’s article in Mortgage Technology, “How Technology Can Make or Break an Audit Trail”. 4. Conduct due diligence on all your third-party vendors, including AMCs and technology partners. Of course, you must perform proper due diligence on your AMC. Monitor their policies and

performance, including their appraiser selection process and compliance strategies. Your technology partners should also undergo extensive due diligence, and they should be accustomed to these compliance audits and able to answer your questions clearly and quickly. I can’t over-emphasize the importance of working with, or at least networking with, an appraisal workflow expert. They have to understand these regulations because they work with hundreds of lenders and AMCs, so building a relationship is a great way to give your institution a shortcut to easy compliance. MCM

Jennifer Miller is president of Mercury Network, a web-based appraisal management software platform. Mercury Network is used by more than 600 lenders and AMCs to power more than 20,000 appraisal deliveries a day. Jennifer can be reached at Jennifer. [email protected].

Write for Mortgage Compliance Magazine. Let your voice and knowledge be heard by writing for us. Reach our audience of Mortgage Compliance Professionals around the country.

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July 2015

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POLICE BLOTTER

Fair Oaks Man Found Guilty of Mortgage Fraud After Five-Day Trial U.S. Attorney’s Office June 17, 2015 SACRAMENTO, CA—Today, after a five-day trial, a federal jury found Sacramento area loan broker and real estate agent, Anthony Salcedo, 34, of Fair Oaks, guilty of one count of conspiracy to commit mail fraud and four counts of mail fraud for his involvement in a mortgage fraud scheme, United States Attorney Benjamin B. Wagner announced. According to court documents and evidence produced at trial, Anthony Salcedo worked in the real estate industry beginning in 2000, was licensed as a real estate agent in 2004 and as a mortgage broker in 2006, and worked for two different mortgage lenders for five years. When selling his personal properties in 2005 and 2006, Salcedo worked with licensed mortgage broker Sean McClendon, 49, of Fair Oaks, and Anthony Williams, 47, previously of Memphis, Tennessee, to find buyers. As an incentive to complete the sales transactions, Salcedo paid kickbacks to the buyers and to McClendon outside of escrow. The payments were never disclosed to the lenders as part of the purchase and sale agreements, and the buyers’ income and assets were falsified in order to qualify for the loans. Ultimately, substantial sums were exchanged outside of escrow as part of this scheme, equaling in one instance as much as 16 percent of the total purchase price of the property. The exchange of money

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Eastern District of California (916) 554-2700 outside of escrow reduces the fair market value of a property to below what is reflected in the contract price and impacts the appraised value of a home. At least two of the buyers declared bankruptcy and lost not only their investment properties, purchased by way of the scheme, but their own homes. In all, approximately $2.6 million in fraudulently obtained loans were involved in the scheme, while Salcedo and his family got out from under their $1.6 million in mortgage debt at a time when Salcedo knew the real estate market was slowing down. “Much of the mortgage fraud that was so common in this region during the 20052008 timeframe was associated with dishonest real estate and mortgage financing professionals such as Anthony Salcedo and his co-defendants in this case,” said U.S. Attorney Wagner. “Accordingly, in our continuing effort to restore integrity and confidence to the residential real estate market, we have focused our enforcement efforts on identifying and prosecuting those professionals and the persons who aided and benefited from major mortgage fraud schemes.” “To those involved in committing mortgage fraud, today’s verdict should send a clear message that this type of activity will have criminal consequences,” said Andrew J. Toth, Acting Special Agent in Charge, IRS-Criminal Investigation.

“This is a case about dishonesty and collusion fueled by greed. While this verdict cannot reverse the damage caused by the defendants, it highlights the ongoing commitment of IRS-CI and our law enforcement partners to hold accountable those involved in these types of crimes.” Co-defendant Sean McClendon pleaded guilty on October 12, 2013, and is awaiting sentencing. Co-defendant Anthony Williams pleaded guilty, was sentenced to two years and nine months in prison, and is currently serving that sentence. Salcedo is scheduled to be sentenced on September 10, 2015, by Chief United States District Judge Morrison C. England Jr. The maximum statutory penalty for mail fraud and the related conspiracy is 30 years in prison, a $1 million fine, or both. The actual sentence, however, will be determined at the discretion of the court after consideration of any applicable statutory factors and the Federal Sentencing Guidelines, which take into account a number of variables. This case is the product of an investigation by the Internal Revenue ServiceCriminal Investigation and the Federal Bureau of Investigation. Assistant United States Attorneys Jean M. Hobler and Marilee L. Miller are prosecuting the case. This content has been reproduced from its original source. MCM

ASK THE COMPLIANCE EXPERTS

ASK THE COMPLIANCE EXPERTS

Burton Embry

Lisa Klika

Josh Weinberg

Sam Morelli

I am trying to come up with a plan to address security breaches when they occur. What recommendations can you provide?

It is important to have a plan in place to respond promptly when security breaches or other incidents occur where sensitive information has the potential to be compromised. An effective plan will be coordinated among company personnel to swiftly contain the breach, followed by an analysis of the scope of and extent of the incident. An evaluation of the affected population is important in order to assess reporting and other obligations with respect to legal authorities, impacted consumers, investors, regulators, and state attorneys general. Keep in mind that these obligations may have specific timing requirements. Beyond this, it is important to consider what additional steps the company may be willing to take to help protect and mitigate the damage to consumers who are affected by the breach. Having policies, procedures, and a checklist to document and guide the response efforts, along with sample notification letters, will give you a good start in planning your response efforts. Beyond this, keep in mind your company's obligations under state and federal law to have policies, procedures, and safeguards in place to proactively guard against security breaches from occurring.

Got Questions? We Got Answers! Send your compliance questions to [email protected] The Compliance Experts are not lawyers and the answers which are given are not to be taken, construed or interpreted as legal advice. You should consult with your attorney for your legal advice. The answers the Compliance Experts provide are based upon their own professional experience, knowledge, and expertise, which they have acquired while working as leaders in the mortgage compliance field for many years. All answers herein are the answers of the collective group of experts and not just one individual expert answering each question.

July 2015

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MCM VIPS

Congratulations,  Angela D’Acquisto, on being selected Mortgage Compliance Magazine’s Mortgage Compliance Professional of the Month – July 2015! Angela currently serves as Compliance & Policy Manager at NOVA® Home Loans (NOVA®) in Tucson, Arizona. Her span of responsibility includes overseeing and leading the Compliance Department to research and implement federal and state regulatory compliance requirements for mortgage loan origination and overseeing all licensing issues at the individual, branch, and company level. More recently, she has led the way for TILA-RESPA Integrated Disclosure Rule (TRID) implementation, engaging all appropriate departments to ensure a comprehensive approach. NOVA® management says, “Angela has been ahead of the curve in many of the TILA-RESPA interpretations and implementation steps to ensure a seamless transition to TRID compliance and has been responsible for rolling out companywide compliance training. She is, in many ways, the face of the Compliance Team for NOVA® and both promotes and exemplifies the culture of compliance that NOVA upholds. We are very fortunate to have her.” Angela joined NOVA® in 2011 as the company’s Education Coordinator.

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In that role, she was responsible for managing real estate schools run by the company, including facilitating instructor applications; course development and approval; creating and distributing certificates; keeping training records; and scheduling training courses. This experience introduced her to regulatory compliance standards as she worked to stay on top of new state and federal rules and regulations, as well as new topics in the real estate and mortgage industries. Angela also assisted with company marketing and public relations initiatives, including press releases, website content writing and editing, and corporate award submissions, and designed and published the company’s monthly newsletter. She then moved into a position as NOVA®’s Licensing & Policy Coordinator. In that role, Angela facilitated corporate, branch, and originator licensing in the Nationwide Mortgage Licensing System and Registry (NMLS), including new applications, renewals, and regulatory updates and reporting. She also worked with the Director of Compliance & Policy Management and department managers to maintain a comprehensive electronic library of policies and procedures for the entire organization. Her responsibilities included researching and aligning policies and procedures with the compliance requirements of the company based on state and federal guidelines, and she continued to work with NOVA®’s training department to develop a plan, implement, and track

compliance policy training, and to coordinate mortgage originator continuing education efforts. Zenén Salazar, Director of Compliance & Policy Management for NOVA®, offers his thoughts about Angela’s contributions, “Angela D’Acquisto’s track record speaks for itself – successfully owning each of the roles she has executed. Her communication approach expands perspectives, fosters success, and builds capacity throughout the organization. She diligently prepares herself to perform at the highest level and works tirelessly on projects from beginning to end. She is a seasoned professional demonstrating the leadership, collaboration, dedication, and reliability qualities essential in the mortgage industry!” Prior to joining NOVA®, Angela attended The University of Arizona, Tucson, obtaining a Bachelor of Arts degree in Communication in May 2004 and a Master of Arts degree in Communication in May 2007. She also served as an Instructor and Graduate Assistant at the university and participated as an instructor for classes in the Communication Department in the College of Social & Behavioral Sciences; assisted in the development of curriculum; created and delivered lecture material; designed projects; and evaluated proposals. Angela is also the devoted mother of a four-year-old son and two-year-old daughter. Angela has attended numerous sessions of industry and trade association-sponsored education, including the NMLS Annual Conference; American Association of Residential Mortgage Regulators Annual Conference; Mortgage Bankers Association Regulatory Compliance Conference, TILA-RESPA Integrated Mortgage Disclosure Forum, and Legal Issues and Regulatory Compliance Conference; and EllieMae’s TILA-RESPA Workshop.

MCM VIPS

up MOVIN ON

Ron Briggs has been promoted to Senior Vice President of Business Development at Aspen Grove Solutions (AGS) in Frederick, Maryland. Ron joined AGS earlier this year as a Business Architect, bringing 25 years of experience from the real es-

tate industry, specifically the mortgage servicing and default space. In his new role and with the assistance of his business development team, he supports clients to ensure AGS delivers fit for purpose solutions in a timely and cost effective manner that

are easy to use and quick to implement. His responsibilities include technology solutions for REO, Short Sale, Asset Management, Inspections, Property Preservation, Vendor Management, and Compliance. As the head of AGS business development, he will report to AGS’ president Edmond Buckley and becomes a member of the senior leadership team.

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STATE REGULATORY ISSUE UPDATE

STATE REGULATORY ISSUES UPDATE ALABAMA

Homestead and Personal Property Exemptions - The state of Alabama amended its provisions by increasing the homestead and personal property exemption amounts. These provisions are effective immediately.

ARIZONA

Notice of Trustee's Sale - The state of Arizona modified its provisions regarding the Notice of Trustee's Sale. These provisions were announced earlier and were effective on July 3, 2015.

Mortgage Servicer Requirements - The state of Hawaii modified its provisions regarding mortgage servicer licensing and regulatory requirements including the crediting of payments, payment of taxes and insurance, delinquencies and loss mitigation efforts, borrower complaints, fee and information disclosures, record maintenance, assignment of servicing rights, prohibited activities as well as establishing bond requirements. These provisions are effective immediately.

HAWAII

Insurance Coverage Limits IDAHO Mortgage - The state of Idaho amended its

provisions regarding coverage limits on mortgage insurance. These provisions were effective on July 1, 2015. This information was originally published in April 2015 and is being republished as a reminder.

CALIFORNIA

Equity Lines of Credit - The state of California added provisions regarding equity lines of credit by requiring that a mortgage lender, upon receipt of a specified written request from a borrower and a specified payment, close a borrower's equity line of credit, and release or reconvey the property secured by the equity line of credit. These provisions were effective on July 1, 2015, and remain in effect until July 1, 2019. This information was originally published in August 2014 and is being republished as a reminder.

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July 2015

Sale Foreclosure Law - The state of Maine amended its provisions by making changes to the power of sale foreclosure law that includes clarifying that the statutory power of sale applies to a mortgage granted by a limited liability partnership. These provisions are effective on September 15, 2015 (or 90 days following adjournment of the legislative session).

MAINE

STATE REGULATORY ISSUE UPDATE

INDIANA

Vacant and Abandoned Housing and Property - The state of Indiana amended its provisions regarding vacant and abandoned housing and property by providing that a county, city, or town fiscal body may adopt an ordinance to establish a deduction period for rehabilitated property that has also been determined to be abandoned or vacant; specifying that there must be delinquent property taxes or special assessments on real property before it may be sold by the county treasurer as an abandoned or vacant property; and relating to delinquent tax sales, the tax sale blight registry, mortgage servicing, sales disclosure forms and foreclosure prevention agreements. Provisions vary from effective immediately to effective on July 1, 2015.

RHODE ISLAND

Lender, Loan Broker and MLO Licensing Requirements - The Rhode Island Department of Business Regulations adopted provisions to consolidate regulations relating to lender, loan broker and mortgage loan originator licensing requirements and add provisions on net branching, financial responsibility and criminal background checks into its newlycreated regulation called Banking Regulation 6. In addition, the Department also adopted provisions to repeal its current regulation titled, Licensees (Banking Regulation 98-14), and include these provisions in Banking Regulation 6. These provisions were effective on June 11, 2015. Debt Collectors and Third-Party Loan Servicers - The state of Rhode Island amended its provisions by prohibiting a person from acting as a debt collector without first obtaining a licensing; requiring licensees to maintain business records and keep these records for a minimum time period; and establishing fees, minimum capital requirements and bonding amounts. In addition, this bill also establishes provisions requiring third-party loan servicers to be licensed as well. These provisions were effective on July 1, 2015. This information was originally published in July 2014 and is being republished as a reminder.

OREGON

Reverse Mortgages - The state of Oregon enacted provisions requiring lenders, or agents or affiliates of lenders, in any advertisement, solicitation or communication intended as an inducement to apply for or enter into a reverse mortgage, to include the summary of certain provisions of the reverse mortgage contract. In addition, this bill also specifies those that are exempt from this requirement. These provisions are effective immediately with an operative date of January 1, 2016. Security Breaches Involving Personal Information - The state of Oregon modified its provisions by expanding the definition of personal information in regards to the state Consumer Identity Theft Protection Act as well as relating to the enforcement of notification requirements for breaches of security involving personal information. These provisions are effective on January 1, 2016. Homestead Provisions - The state of Oregon modified its provisions relating to the homestead property tax deferral program; creating an exception to a 5-year ownership requirement for homestead under certain circumstances; providing written attestation that claimant incurred debt for a specified percent of the purchase price of the a new homestead; and increasing the maximum allowable value for homesteads. These provisions are effective on October 12, 2015 (or 91 days following adjournment of the legislative session). VA Loan Foreclosure Exemptions - The state of Oregon amended its provisions relating to the exemption for the Department of Veterans Affairs from certain foreclosure practices as well as the exemption from disclosure of certain personal information of uniformed service members. These provisions are effective on January 1, 2016. Money Awards in Judicial Foreclosure - The state of Oregon modified its provisions relating to money awards in judicial foreclosures as well as other provisions affecting foreclosure and judgments. These provisions are effective immediately. Real Estate Loan Agreements - The state of Oregon amended its provisions relating to statements concerning obligations borrowers owe to lenders under real estate loan agreements. These provisions are effective immediately.

July 2015

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STATE REGULATORY ISSUE UPDATE

SOUTH DAKOTA

Homestead Exemption Interests - The state of South Dakota amended its provisions that protect certain homestead exemption interests during the sale of homestead or the separation of owners. These provisions were effective on July 1, 2015. This information was originally published in March 2015 and is being republished as a reminder.

TENNESSEE

Notice of Sale - The state of Tennessee amended its provisions regarding the contents to the notice of sale. These provisions were announced earlier and were effective on July 1, 2015. Consumer Protection - The state of Tennessee modified its provisions regarding consumer protection by prohibiting the printing of a social security number on a check in order to receive a benefit, good, service, or other value, unless the person provides written permission or the disclosure is required by state or federal law. These provisions were effective on July 1, 2015. This information was originally published in April 2015 and is being republished as a reminder.

Consumer Protection Laws - The state of Vermont amended its provisions regarding its Security Breach Notice Act. These specific provisions were effective on July 1, 2015, and there are other provisions within Senate Bill 73 that have additional effective dates.

VERMONT

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July 2015

TEXAS

September 1, 2015.

Licensing Exemptions - The state of Texas amended its provisions relating to exemptions from the applicability of the state Secure and Fair Enforcement for Mortgage Licensing Act of 2009. These provisions are effective on

Rescission of Nonjudicial Foreclosure Sales - The state of Texas enacted provisions relating to the rescission of nonjudicial foreclosure sales. These provisions are effective on September 1, 2015. Recording of Certain Documents for Nonjudicial Foreclosure Sales - The state of Texas added provisions relating to the recording and effective date of certain documents in regards to nonjudicial foreclosure sales. These provisions are effective on September 1, 2015. Uniform Disclaimer of Property Interests Act - The state of Texas updated its provisions relating to the adoption of the Uniform Disclaimer of Property Interests Act. These provisions are effective on September 1, 2015. Disclosure of Home Mortgage Information to Surviving Spouse - The state of Texas added provisions relating to the disclosure of home mortgage information to a surviving spouse. These provisions are effective on September 1, 2015.

VIRGINIA

Security Instruments and Maximum Recordation Tax - The state of Virginia amended its provisions relating to security instruments and maximum recordation taxes by clarifying that the calculation of the tax is based on the difference between the maximum obligation secured and the maximum amount of debt secured at the time the original instrument was recorded. These provisions were effective on July 1, 2015. This information was originally published in March 2015 and is being republished as a reminder.

STATE REGULATORY ISSUE UPDATE

WEST VIRGINIA

Deeds of Trust - The state of West Virginia revised its provisions relating to deeds of trust by permitting the recording of a memorandum of the deed of trust in lieu of the deed of trust; and requiring the recording of the original deed of trust prior to the commencement of foreclosure action. These provisions were effective on June 8, 2015. Trustee Real Estate Sales under Deed of Trust The state of West Virginia amended its provisions relating to trustee real estate sales under the deed of trust. These provisions were effective on June 11, 2015. Debt Collection Practices - The state of West Virginia revised its provisions by clarifying permitted and prohibited actions in connection with debt collection practices. These provisions were effective on June 12, 2015. Modification Charges in Connection with Consumer Loans - The state of West Virginia amended its provisions regarding modification charges in connection with a real estate secured consumer credit sale or consumer loans as well as providing for minimum and maximum modification charges that may be collected. These provisions were effective on June 12, 2015.

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WYOMING

Uniform Trust Code - The state of Wyoming modified its provisions regarding its Uniform Trust Code by providing protection against liability for a trustee who consents to a modification or termination of a trust in good faith; providing that a distribution from a discretionary trust to a beneficiary does not create an interest in property; and amending a creditor's claims against a settler as well as amending powers of the trustee. These provisions were effective on July 1, 2015. This information was originally published in March 2015 and is being republished as a reminder.

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877.779.5215

CrossCheck Compliance, LLC is a national professional

services firm, specializing in delivering compliance, internal audit, and loan review programs to banks and mortgage lenders. Built around a core team of industry leaders, the firm is uniquely positioned to provide crucial advice and high-impact execution to help clients successfully navigate core regulatory issues and manage risk. The company has the tools, methodologies and a customized approach that foster long-term client relationships and deliver superior client satisfaction.

Touching over 40,000 files each and every month, Digital Risk is the largest independent provider of Quality Control, Due Diligence, Valuations, and Fulfillment Services for the complex and dynamic financial services market. The individual talents of our thousands of analysts are amplified by the company’s proprietary technology and advanced analytics performed using the Making Mortgages Safe™ solutions suite. Digital Risk compliance and surveillance solutions provide interactive assessment and mitigation of operational, credit and counter-party risk exposures. Proactive services protect against costly legal, reputational and financial perils of such exposures, and address the challenges of tougher standards and stringently enforced lending laws.

For over 25 years, DocMagic has been a leading provider of end-to-end Document Preparation, Delivery and Compliance Solutions for the Mortgage Industry. With over 10,000 customers spanning community banks, credit unions, mortgage banks, and national depository banks in fifty states, DocMagic has built its reputation on innovation, quality, and service.

Ellie Mae is a leading provider of innovative on-demand software solutions and services for the residential mortgage industry. Ellie Mae's all-in-one Encompass(R) mortgage management solution provides one system of record that allows banks, credit unions and mortgage lenders to originate and fund mortgages and improve compliance, loan quality and efficiency.

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BUSINESS SERVICES DIRECTORY B2B

BUSINESS SERVICES DIRECTORY Casey Hughes Business Development [email protected]

818.304.8393

Rob Chrisman Daily Mortgage Commentary

[email protected]

Tommy Duncan Chief Executive Officer www.qcmortgage.com

615.591.2528 ext. 122

YOUR LOGO HERE

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July 2015

YOUR CONTACT INFO HERE

HQVM provides vendor management oversight to mitigate risks inherent with the use of third party vendors. HQVM's audit and monitoring process, combined with its customized technology solutions, enables a lender to easily assess its vendor's compliance with applicable regulations and to ensure a vendor conducts its business in a manner consistent with the lender's core values.

Mortgage Industry News, Commentary and Resources are published daily. Our newsletter is distributed to over 35,000 mortgage banking professionals six days a week and is intended to serve as a bulletin board for industry related issues and resources. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For archived commentaries, or to subscribe, go to www.robchrisman.com.

Quality Mortgage Services is a nationwide recognized leader in mortgage audit services, quality control procedures, and mortgage compliance solutions. With over 20 years of experience and a broad knowledge in the mortgage banking industry, Quality Mortgage Services is a full service risk management and mortgage compliance solutions company that provides mortgage loan analysis results. Our reputation has been recognized by many in the industry including federal and state housing agencies and authorities.

YOUR COMPANY'S MESSAGE HERE. TO ADVERTISE YOUR COMPANY IN THE BUSINESS SERVICES DIRECTORY CONTACT [email protected]

LEGAL SERVICES DIRECTORY

LEGAL SERVICES DIRECTORY 202-778-9027

AK, CA, DE, DC, FL, IL, MA, NC, NJ, NY, OR, PA, SC, TX, WA

K&L Gates LLP’s Consumer Financial Services practice is one of the preeminent consumer credit practices in the United States, representing diversified financial services institutions and their affiliated service providers. With a strong presence in Washington, D.C. we divide our work among transactional, regulatory compliance, government enforcement, licensing and approvals, public policy and governmental affairs, and litigation (including class action defense). To learn more visit www.klgates.com or subscribe to our blog at www.consumerfinancialserviceswatch.com.

Robert Lotstein

DC, GA

LotsteinLegal advises the mortgage and financial services industry in compliance and litigation matters. The firm defends our clients in government enforcement, agency investigation and litigation proceedings. We provide licensing outsourcing, litigation management, exam readiness and market fee analysis. Our clients include financial institutions, secondary market aggregators, wholesale lenders, mortgage bankers, minicor and mortgage brokers, and reverse mortgage lenders. We offer particular expertise in the mortgage servicing arena and advise master servicers, subservicers, and component servicers, as well as collection agencies and debt buyers.

CA, FL, LA, MI, NY, OH, TX

McGlinchey Stafford earned its reputation as a national leader in the financial services industry by providing reliable and efficient solutions to lenders throughout the country. McGlinchey Stafford’s 180 attorneys are based in eleven offices in California, Florida, Louisiana, Mississippi, New York, and Ohio and Texas. For more information visit www.mcglinchey.com.

CA, DC, GA, FL, LA, MD, MI, MO, NJ, NY, OH, PA, TN, TX, VA

Weiner Brodsky Kider PC is a Washington, D.C.-based firm with a national practice focused on compliance, regulatory, transactional and litigation matters related to financial services concerns. We represent a broad client base, from start-up businesses to Fortune 500 companies, throughout the United States.

Phillip L. Schulman

[email protected]

[email protected]

202-280-6620

Bennet S. Koren

[email protected]

504-596-2732

Mitchel H. Kider Managing Partner

[email protected]

202-557-3511

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ADVERTISERS DIRECTORY

COMERGENCE James Deane (714) 489-8856

COMPLIANCE EASE Katie Jacobs (650) 373-1111 ext. 1145

COMPLIANCETECH Mike Taliefero (703) 920-3805

HQ VENDOR MANAGEMENT Casey Hughes (818) 304-8393

LENDERNEWS

Rob Chrisman [email protected]

(800) 309-6000 Paulfredrick.com/special promo code: C4FSMC

QUALITY MORTGAGE SERVICES DOCMAGIC

Tommy Duncan (615) 591-2528

Steven Fox (800) 204-4255

ELLIE MAE

Cathleen Schreiner Gates (877) 779-5215

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July 2015

WEINER BRODSKY KIDER Deanna Johnston (202) 557-3551

WE HAVE A CLEAR VIEW OF THE COMPLIANCE UNIVERSE

ComplianceEase’s sole focus is compliance. With one suite of solutions you can manage the vast universe of compliance with unmatched speed and accuracy, making informed, confident decisions every day.

1.866.212.Ease (3273) | ComplianceEase.com © 2015 LogicEase Solutions Inc. All Rights Reserved.

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  Serving  the  mortgage  banking  community     for  more  than  three  decades                        Washington  DC  

Dallas  Metro  Area  

 California  

     1300  19th  Street  NW          5th  Floor        Washington,  DC  20036-­‐1609        (202)  628-­‐2000  

2904  Corporate  Circle     Suite  128     Flower  Mound,  TX  75028   (469)  635-­‐7539  

   8001  Irvine  Center  Drive        Suite  400      Irvine,  CA  92618      (949)  754-­‐3010

 

 

 

 

 

 

 

 

 

 

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