February 2013 Legal Briefs

• The new mortgage servicing rules
• New appraisal rules
• Lending to the military – the CFPB’s new role

The New Mortgage Servicing Rules

By John S. Burnett

Mortgage servicers have a lot to do before January 10, 2014, when the CFPB’s new mortgage servicing requirements – some of them mandated by changes to RESPA and TILA made by the Dodd-Frank Act – become effective. The new rules were issued on January 17, and they affect almost every aspect of mortgage servicing. Here’s an overview of the new servicing rules, which affect both Regulation Z and Regulation X.

New rate-change notices (§1026.20(c) and (d))
The new rule will eliminate the current requirement in Regulation Z §1026.20(c) for ARM rate-change notices 25 to 120 days before a payment change, but adds two new rate notices.

The new standard rate-change notice: This requirement applies to a closed-end consumer credit transaction that is secured by the consumer’s principal dwelling in which the APR may increase after consummation. But there are exemptions for ARMs with terms of one year or less.

In general, the notice is due at least 60 but note more than 120 calendar days before the first payment at the adjusted level is due. There are special timing requirements for ARMs with regular, frequent rate adjustments and ARMs originated prior to January 10, 2015, in which the loan contract requires the adjusted interest rate and payment to be calculated based on the index figure available as of a date that is less than 45 days prior to the adjustment date.

The content of these notices is prescribed in detail, and includes a lot more information than a simple alert that the borrower’s interest rate and payment will be changing. Servicers will have to use a tabular format and follow model and sample forms H-4(D)(1) and (2) in Appendix H to the regulation.

The new special first rate-change notice. This notice is for the initial rate adjustment under a loan contract (it’s a one-time requirement). It has to be on a separate document, and it is to be provided at least 210 but no more than 240 days before the first payment at the adjusted level is due. That’s almost 7 to 8 months in advance, but it’s designed to give the new borrower plenty of advance notice and time to make other arrangements if there’s concern about being able to make the new payment amount. If the first payment at the adjusted level is due within the first 210 days after consummation, you give the notice (you guessed it) at consummation. ARMs with terms of one year or less are exempt from this initial rate change notice.

For this notice, labeled estimates are allowed if the new rate or new payment isn’t known when the notice is prepared. But any estimate must be based on the index reported within 15 business days prior to the date of the notice. That means that this special notice will be most useful to borrowers who have a discounted ARM with a starting rate that’s not fully-indexed.

This notice also has prescribed content that includes most of the same information as the new regular rate-change notice, and addition information that borrowers might find useful if there’s a concern they can’t make the new payment.

If this first rate-change notice has to be provided at consummation (because the first payment at the new rate will be due less than 210 days from consummation), and if the new rate and payment amount are not estimated in the notice, you can omit the standard rate-change notice that would be provided 60–120 days before the first changed payment is due.

This notice also must be provided in a format prescribed by the regulation, using Model and Sample forms H-4(D)(3) and (4).

Payment processing (§1026.36(c)(1) and (2))
This requirement applies to all consumer credit secured by a dwelling. It includes all the familiar current requirements on prompt application of conforming payments, and clarifies that a payment covering principal, interest and escrow can’t be delayed just because it doesn’t include a late fee or other charge.

There’s a new requirement that partial payments, if retained by the servicer in a suspense or unapplied funds account, will trigger a requirement that the next billing statement (see below) disclose the total amount of funds in suspense, and, once sufficient funds for a periodic payment have been accumulated in such an account, the servicer must promptly apply them as a periodic payment.

If the loan is secured by the consumer’s principal dwelling, late charge pyramiding is banned.

Payoff statements (§1026.36(c)(3))
The servicer, creditor or assignee (as applicable) must provide an accurate payoff statement as of a specified date, and send it within a reasonable time (but not more than 7 business days) after receiving a written request from the consumer or a person acting on behalf of the consumer. The 7 day deadline isn’t applicable when foreclosure or bankruptcy is involved, or if the loan is a reverse or shared-appreciation mortgage, or because of natural disasters or similar events. The requirement does not apply to a creditor or assignee that does not own the servicing rights to the loan.

Periodic statements (§1026.41)
Periodic statements will be required for closed-end dwelling-secured credit transactions, except for reverse mortgages, transactions secured by timeshare interests, and fixed-rate loans for which qualifying coupon books are provided. Small servicers (see below) are also exempted. If billing cycles are shorter than 31 days, a single statement can be used covering an entire month. The statement requirement does not apply to a creditor or assignee that does not currently own the mortgage loan or servicing rights.

Timing: The statement must be delivered (or placed in the mail) within a reasonable time after the payment due date or any courtesy period for the previous billing cycle.

Form and content: Written (electronic if the consumer agrees), in the format of the sample forms in Appendix H-30. The statement will include the next due date, the late fee amount and date it will be imposed, and the amount due (and any payment options such as interest only, etc.) and a breakdown of that amount (principal, interest, escrow), any fees due, and any past due payment. If the loan is past due, include a past payment breakdown. The statement will also include transaction activity since the last statement, and information about any partial payments held in suspense. Other statement information will include information on contacting the servicer for information, and several items of current account information, and any applicable delinquency information if the account is more than 45 days in arrears.

Small servicer exemption: The periodic statement requirement will not apply to small servicers, which are servicers that either services 5,000 or fewer mortgage loans for all of which the servicer or an affiliate is the creditor or assignee, or that are housing finance agencies.

RESPA Servicing Requirements
The new RESPA servicing requirements, found in new subpart C of Regulation X, only apply to closed-end transactions that are otherwise subject to RESPA. Loans exempted from RESPA coverage under §1024.5(b) are not covered by the servicing requirements, either. Because of the wording of the exemptions from RESPA coverage, some loans that are not covered by Regulation Z and TILA will be covered by RESPA and the Regulation X servicing requirements. The following is an overview of the new requirements in Regulation X.

New timely escrow disbursements requirement (§1024.34(a)): If the borrower is required to make escrow payments for taxes, insurance, etc., the servicer is required to make timely payments for those purposes from escrow (in time to avoid penalties).

New escrow refund requirement (§1024.34(b): Any escrow balance remaining and under the servicer’s control must be returned to the borrower within 20 business days of payment of the loan in full. But if the borrower agrees in the case of a same-lender refinancing, the servicer may credit the escrow balance from the old loan to the escrow account for the new loan.

New error resolution procedures (§1024.35): For any of 11 types of errors, if the borrower provides a written notice asserting the error, the servicer must generally provide a written acknowledgment in five business days. Depending on the nature of the alleged error, the servicer must complete the investigation, make any correction and notify the borrower in writing within 7 days of receiving the borrower’s notice (if a payoff figure error was alleged, or within 30 business days for other borrower error notices (but before a scheduled foreclosure sale if the borrower alleged an error in a foreclosure action). There are some technical exceptions to these requirements.

Information requests (§1024.36): There are similar requirements (and exceptions) for responding to borrower requests for information about their loans.

Force-placed insurance provisions (§§1024.17(k) and 1024.37): This new requirement covers hazard insurance, but does not cover flood insurance that is required under the Flood Disaster Protection Act. Optional flood coverage (e.g., coverage on property not in a designated flood hazard area) is covered by this Regulation X provision. The regulation does not make force-placement of coverage mandatory (unlike the requirements that force-placed coverage be obtained for required flood coverage). The servicer may not force-place insurance unless it is unable to disburse funds from escrow to ensure premiums are timely paid. To be unable to disburse from escrow, the servicer must believe that the hazard insurance has been canceled or not renewed for reasons other than nonpayment of premiums, or that the property is vacant. The lack of a sufficient escrow balance is not an inability to disburse from escrow, either (so the servicer may have to advance funds). Small servicers (as described above) may force-place hazard insurance, however, if the cost to the borrower is less than the amount that would have to be disbursed from escrow to timely pay the hazard insurance premium.

Before force-placing insurance, the servicer must have a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirement to maintain hazard coverage. It must provide the borrower two notices with specified information, with specified timing, and not have received evidence of borrower-paid coverage.

There are also requirements for a notice prior to a servicer’s renewing or replacing force-placed coverage.

Force-placed coverage must be canceled within 15 days of the servicer’s receipt of evidence of borrower-paid coverage in compliance with the loan contract, and the servicer must refund to the borrower any force-placed coverage premiums or fees for any period of overlapping coverage.

Servicing policies, procedures and requirements (§1024.38): Small servicers are not subject to this section. All other servicers will be required to have in place policies and procedures designed to (1) access and provide timely and accurate information to service borrower and servicing needs, (2) properly evaluate loss mitigation applications, (3) facilitate oversight and compliance of service providers, (4) facilitate transfer of information during servicing transfers, and (5) inform borrowers of written error resolution and information request procedures. There is no requirement that a service provide a loss-mitigation option.

Record retention requirements: Specific standard record retention requirements are spelled out in §1024.38(c).

Early intervention requirements for certain borrowers (§1024.39): This section does not apply to small servicers. Standards are established in this section for contact with delinquent borrowers, included live contact and written notices with prescribed content.

Continuity of contact (§1024.40): Small servicers are not required to comply with this section, which calls for policies and procedures that will assign personnel to delinquent borrowers and make them available by telephone to the borrower for inquiries and to assist with available loss-mitigation options until the borrower has returned to current status.

Loss mitigation procedures (§1024.41): If the servicer provides loss-mitigation options, this section governs how any loss mitigation application must be handled, including timing requirements and requirements for communication with loss-mitigation applicants. Restrictions on foreclosure steps when a loss-mitigation application is pending effectively prohibit the practice of “double tracking” of delinquent borrowers. Except for a limitation on initiation of the foreclosure process, small servicers are not subject to this section.

New Appraisal Rules

By Pauli D. Loeffler

In addition to the mortgage servicing rules discussed by John Burnett elsewhere in the February 2013 Legal Update, on January 18, 2013 the CFPB issued new Rules in connection with appraisals for applications for credit received on or after January 18, 2014 under both Reg Z (TILA) for HPMLs and under Reg B (ECOA).

Appraisal Rules for HPML/HPML-Flips (§1026.35(c))
[Note: In our next edition, we’ll discuss the Qualified Mortgage (QM) requirements that are part of the new Ability to Repay rules. You will be glad to learn that loans that you make that meet the QM standards won’t be subject to these enhanced appraisal rules.]

The new appraisal rules apply to closed end credit. Whether a loan is an HPML is determined by rate. The rate triggers for HPML have separately been revised effective June 1, 2013:

(a) Definitions. For purposes of this section:

(1) “Higher-priced mortgage loan” means a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set:

(i) By 1.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that does not exceed the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac;

(ii) By 2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds the limit in effect as of the date the transaction’s interest rate is set for the maximum principal obligation eligible for purchase by Freddie Mac; or

(iii) By 3.5 or more percentage points for loans secured by a subordinate lien.

There are two facets to the new appraisal requirements that come into play. The first is a general appraisal requirement that applies to ALL HPML loans where no exemption exists regardless of whether there is a first or second lien. The second new appraisal requirement ONLY applies where there is no exemption from the general appraisal requirement, AND the property has been “flipped” (see below), or what was referenced in the Proposed Rule as a Higher-Risk Mortgage.

Appraisal Requirements for All HPMLs
Simply put: §1026.35(c) requires a FIRREA appraisal for HPMLs regardless of whether the loan amount meets the threshold for coverage under FIRREA unless an exemption exists. The appraisal must be done by a certified or licensed appraiser who does a physical inspection of the interior of the collateral. There is a “safe harbor” provision under §1026.35(c)(ii) for a written appraisal if the creditor:

• Orders that the appraiser perform the appraisal in conformity with the Uniform Standards of Professional Appraisal Practice and FIRREA any implementing regulations in effect at the time the appraiser signs the appraiser’s certification;
• Verifies through the National Registry that the appraiser who signed the appraiser’s certification was a certified or licensed appraiser in the State in which the appraised property is located as of the date the appraiser’s certification was signed; and
• Confirms that these elements (found in Appendix N) are addressed in the written appraisal:
  • Identifies the creditor who ordered the appraisal and the property and the interest being appraised.
  • Indicates whether the contract price was analyzed.
  • Addresses conditions in the property’s neighborhood.
  • Addresses the condition of the property and any improvements to the property.
  • Indicates which valuation approaches were used, and includes reconciliation if more than one valuation approach was used.
  • Provides an opinion of the property’s market value and an effective date for the opinion.
  • Indicates that a physical property visit of the interior of the property was performed.
  • Includes a certification signed by the appraiser that the appraisal was prepared in accordance with the requirements of the Uniform Standards of Professional Appraisal Practice.
  • Includes a certification signed by the appraiser that the appraisal was prepared in accordance with the requirements FIRREA.
     

Exemptions from the Appraisal Requirements: The following are exempt from the general appraisal requirements:

• A qualified mortgage as defined in 12 CFR 1026.43(e).
• A transaction secured by a new manufactured home regardless of whether the loan is secured by land
• A transaction secured by a mobile home, boat, or trailer.
• A transaction to finance the initial construction of a dwelling.
• A loan with maturity of 12 months or less, if the purpose of the loan is a “bridge” loan connected with the acquisition of a dwelling intended to become the consumer’s principal dwelling.
• A reverse-mortgage transaction subject to 12 CFR 1026.33(a).
   

“Flipped” Dwellings Require a Second Appraisal
In the Final Rule, the CFPB has done away with the term “Higher-Risk Mortgage Loan” it used in the Proposed Rule. For the sake of brevity, I will refer to these as HPML “flipped” properties. The Final Rule provides that HPMLs secured by the principal dwelling require a second appraisal IF the seller:

• acquired the property 90 or fewer days prior to the date of the consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceeds the seller’s acquisition price by more than 10 percent;
  OR
• acquired the property 91 to 180 days prior to the date of the consumer’s agreement to acquire the property and the price in the consumer’s agreement to acquire the property exceeds the seller’s acquisition price by more than 20 percent.

Under Oklahoma law, the date that the seller acquired the property would be the date title vested in the seller by warranty, quit claim or sheriff’s deed, or the date of a court order (think property division in a divorce proceeding). The time periods are calculated by counting the period AFTER the seller acquired the property up to and including the date the borrower and the seller signed the agreement for the borrower to acquire the property. The acquisition price does not include any cost for financing with regard to either the seller or the borrower in regard to determining the whether the property meets the percentages provisions for a “flipped” property. The creditor must exercise reasonable diligence in determining whether the HPML meets the definition of “flipped” property and requires a second appraisal. The creditor may NOT rely on oral statements regarding either the date the seller acquired the property or the seller’s acquisition price. Appendix O provides examples source documents that may be used for determining whether a property requires a second appraisal. If the creditor is unable to determine whether the property is a “flipped” property after exercising reasonable diligence, a second appraisal must be obtained (what I call the “when in doubt” rule).

The second appraisal must be obtained by a different licensed or certified appraiser, and the two appraisals must be conducted independently of each other. The Official Interpretation does NOT prohibit appraisers employed by the same appraisal firm from being used, BUT whether they have conducted the appraisal independently of each other must be determined based on the facts and circumstances of the particular case known to the creditor. THE CREDITOR CAN ONLY CHARGE FOR ONE APPRAISAL! The creditor cannot mark up the interest rate or other fees to cover appraisal costs and may not charge the borrower for copies of the appraisal(s).

Exemptions from the Second Appraisal Requirement: The second appraisal is NOT required in connection with extensions of credit that finance a consumer’s acquisition of property:

• From a local, State or Federal government agency;
• From a person who acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure as a result of the person’s exercise of rights as the holder of a defaulted mortgage loan;
• From a non-profit entity as part of a local, State, or Federal government program under which the non-profit entity is permitted to acquire title to single-family properties for resale from a seller who acquired title to the property through the process of foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure;
• From a person who acquired title to the property by inheritance or pursuant to a court order of dissolution of marriage, civil union, or domestic partnership, or of partition of joint or marital assets to which the seller was a party;
• From an employer or relocation agency in connection with the relocation of an employee;
• From a servicemember, as defined in 50 U.S.C. App. 511(1), who received a deployment or permanent change of station order after the servicemember purchased the property;
• Located in an area designated by the President as a federal disaster area, if and for as long as the Federal financial institutions regulatory agencies, as defined in 12 U.S.C. 3350(6), waive the requirements in title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, as amended (12 U.S.C. 3331 et seq.), and any implementing regulations in that area; or
• Located in a rural county, as defined in 12 CFR 1026.35(b)(2)(iv)(A).There are 8 exemptions from having to obtain a second appraisal.

Disclosures, Timing and Providing Copies of Appraisals: The timing for providing the new disclosure of right to receive appraisal under the Final Rule for HPMLs under Reg Z as well as the language of the disclosure itself is identical to the Final Rule under Reg B as well as the timing for providing copies of the appraisal. However, major differences exist with regard to the two regs which I will discuss with respect to the revisions to Reg B (below).

Appraisal Rules under Reg B
As indicated above, the CFPB’s final rule regarding the disclosure of right to receive appraisal is identical for both HPMLs under Reg Z and for Reg B. The timing for this disclosure is also identical: it shall be mailed or delivered to the primary applicant where this is readily apparent not later than the third business day after the creditor receives an application for credit secured by a lien on a dwelling and may be provided to the applicant in electronic form, subject to compliance with the consumer consent and E-Sign, BUT

• The new Reg B disclosure is ONLY required IF the lien is a FIRST lien while the notice under Reg Z §1026.35 is required regardless of lien position.
• If the creditor does not know at the time of application whether the lien is a first lien subsequently determines it is, the creditor must provide the notice not later than the third business day of the determination.
• The Reg B notice is required regardless of whether the purpose of the loan is business or consumer. (Reg Z is consumer only).
• The Reg B notice applies regardless of whether the first lien is on a principal dwelling.
• The notice is required for both closed- and open-end credit.
• The Reg B notice is required whether or not there is a lien on real estate.

With regard to closed-end credit, both Reg Z’s HPML and Reg B’s provisions require copies of appraisals be provided no later than three business days prior to consummation of the loan (or account opening for open-end credit); or in the case of a loan that is not consummated, no later than 30 days after the creditor determines that the loan will not be consummated, BUT

• Reg B permits an applicant to waive the timing requirement, and agree to receive any copy of appraisals or valuations at or before consummation or account opening. Any such waiver must be obtained at least three business days prior to consummation or account opening.
• Reg Z’s HPML provisions strictly and explicitly forbid such waivers!
• Reg B requires that the creditor provide a copy of all appraisals or other written evaluations promptly upon completion. If the creditor re-uses a prior appraisal or evaluation for a renewal request without updates, the creditor is not required to deliver a previously provided appraisal or evaluation. If an appraisal or evaluation is simply updated, the creditor is only required to provide the updates. There are four examples regarding “promptness” provided in the Official Interpretations to Reg B §1002.14, none of which did I find particularly enlightening.

In summation, Reg B requirements cover all first liens on dwellings (including manufactured housing, mobile homes, and house boats but not vehicles) whether or not the dwelling is the principal residence of the borrower or the loan is consumer purpose.

Lending to the Military – the CFPB’s New Role

By Andy Zavoina

Military Lending Act
The Servicemembers Civil Relief Act isn’t the only law protecting servicemembers when it comes to loans. The Military Lending Act (MLA) was enacted to protect the military from abusive lending practices. You might refer to the MLA as the “Talent Amendment” or the “John Warner National Defense Authorization Act (JWNDAA).” The Talent Amendment was actually a part of the JWNDAA. It is implemented by Department of Defense (DoD) Part 232.

The MLA applies to active duty military personnel which include active National Guard or Reserve personnel, and their dependents. It includes the following provisions:

• Caps annual interest rates for consumer credit to military borrowers at 36 percent including all fees and charges, credit insurance premiums and other ancillary charges.
• Prohibits lenders from securing a consumer credit loan to a military borrower with a personal check, debit authorization, wage allotment, or title to a vehicle.
• Requires written and oral disclosure of interest rates and payment obligations before loan is issued.
• Retains the following legal rights for borrowers:
  • States must enforce their own laws to protect military families stationed within their borders.
  • Lenders cannot require mandatory arbitration or unreasonable notice provisions in the event of a dispute with borrowers.
  • Lenders cannot require that borrowers waive their right to legal recourse under any law, including the Servicemembers Civil Relief Act.
• Prohibits rollovers, or same-creditor refinances, renewals or consolidations.
• Makes violations a misdemeanor and preserves remedies including awarding of damages and voiding of contracts.

In general, the MLA covers short-term, small dollar loans, including payday, car title, and refund anticipation loans. It protects not only the servicemember, but their dependents too. According to DoD regulations the MLA excludes credit cards, overdrafts, and all forms of open-end credit.
You might be asking yourself why your examiners haven’t reviewed the MLA. While we are all aware of these laws, banks make these loans less often than other lenders, and they are part of the DoD laws and not the traditional alphabet soup regulations we are most familiar with such as the Truth in Lending Act. The MLA did not expressly provide enforcement authority to any federal regulator. But this year, on January 2, the President signed H.R. 4310, the National Defense Authorization Act (NDAA). The NDAA amends the MLA so that it now says the same regulatory agencies that enforce the Truth in Lending Act now have administrative authority to enforce for the MLA. This clarifies that the CFPB has enforcement authority under the MLA. This makes sense as the CFPB has authority over many of the lenders which do make these loans. But this also opens the door to more supervision in banks that may make applicable loans now, or may consider a product in the future. The NDAA gives the CFPB an opportunity to influence implementation of the MLA regulations. The DoD must consult with the CFPB on implementation of the MLA’s protections, and requires that the agency be consulted at least every two years. This may also be a good fit with the CFPB’s Office of Servicemembers Affairs department. It will increase the collaborative efforts between the CFPB and DoD on lending enforcement actions. This has already been done on student loans and fraud protection.

The NDAA also adds a civil liability provision that allows private actions for MLA violations to be filed in federal court. It provides for actual damages with a minimum liability of at least $500 in damages even if the actual damages are less.

As mentioned above, protections under the MLA extend to servicemembers and their dependents. The NDAA revision changes the definition of a “dependent.” Under the DoD Sec. 232.3(c) a dependent was the servicemember’s spouse, child, or an individual for whom the servicemember provided more than one-half of the individual’s support for 180 days immediately preceding an extension of credit subject to the MLA. The new definition is a person who is eligible for medical and dental care provided to servicemembers. Under the new MLA definition, unremarried widows and widowers and certain unremarried former spouses of servicemembers would qualify as “dependents.”

As a side note, we are hearing from many bankers that their examiners have given them a heads up that SCRA will be a focal point in their next exam (expect to be asked if MLA loans are made in your bank). One banker said they just received a request letter and there was only one SCRA question. Another banker responded that her request letter also had only one question, but her policy and procedures were thoroughly reviewed.

We are encouraging all bankers to review their policies and procedures and to verify they address all issues, and are being followed. Among other things, ask yourself how your bank designates who is protected under the SCRA on your loan or CIF records, who verifies a borrower’s military status prior to a foreclosure or repossession, and what documents do you have supporting any refusals made when SCRA protections were requested.