December 2013 Legal Briefs

• Dodd-Frank readiness
• Integrated mortgage disclosures finalized
• FinCEN definitions changes
• CFPB regulatory agenda
• Exemption thresholds creep upward

Dodd-Frank Readiness

Since the next wave of Dodd-Frank rules takes effect January 1, 2014, January 10, 2014, and January 18, 2014, we are providing some last minute advice in the form of Q&As on the topics of qualified mortgages, ATR and new Reg Z loan officer provisions.

Question 1. Does the ATR exemption for temporary loans apply to any dwelling secured loan for a term of 12 months or less or does it apply only to a ‘bridge’ type loan?

Answer: The exemption is “a temporary or “bridge” loan with a term of 12 months or less, such as a loan to refinance the purchase of a new dwelling where the consumer plans to sell a current dwelling within 12 months or a loan to finance the initial construction of a dwelling.” Because of the use of the word “or”, the exemption would apply to any temporary loan or a bridge loan.

Question 2. The exceptions list has ‘construction phase of 12 months or less of a construction to perm loan…is there an issue if the construction phase ends up going longer than 12 months? Is ATR impacted?

Answer: The Commentary at .43(a)(3)-2 discusses this issue and states that Where the construction phase of a construction-to-permanent loan is renewable for a period of one year or less, the term of that construction phase does not include any additional period of time that could result from a renewal provision. For example, if the construction phase of a construction-to-permanent loan has an initial term of 12 months but is renewable for another 12-month term before permanent financing begins, the construction phase is exempt from § 1026.43(c) through (f) because the initial term is 12 months. Any renewal of one year or less also qualifies for the exemption.

Question 3. If the bank will not be making QMs, do we need to worry about training on the definition of a HPCT? (We don’t want to muddy the water any more than we need to.)

Answer: For purposes of the ATR Rules, higher-priced covered transaction (HPCT) status comes into play for 2 reasons: 1) the level of protection for compliance with the ATR Rules when making a QM – either the safe harbor or the presumption of compliance; 2) the calculation the monthly payment on the covered transaction for loans with a balloon payment – the balloon payment is included in the calculation if it is an HPCT.

So if you will not be making QMs, and you do not make balloon payment loans, you could consider skipping training on the HPCT definition and its ramifications.

Question 4. Will lenders that do not qualify as a small entity be able to originate balloon mortgages if they follow the ATR and QM guidelines, particularly meeting the requirement of showing the ATR for the first 60 months?

Answer: Yes, as long as you follow the ATR Rules and keep in mind that how you calculate the payment on the covered transaction will depend on if the loan is a higher-priced covered transaction or not.

If the covered transaction is not a higher-priced covered transaction, the calculation is made using the maximum payment scheduled during the first 5 years after the date on which the first regular periodic payment is due. To avoid using the balloon payment as that “maximum payment,” the balloon would have to be due after 60 months (usually 60 + 1).

If the covered transaction is a higher-priced covered transaction, however, the calculation is made using the maximum scheduled payment including the balloon payment.

If you do not qualify as a small creditor, you will not be able to make a balloon payment QM. The only QMs that may have balloon payments are the Temporary balloon payment QM (e)(6) for small creditors and the Balloon payment QM (f) for small creditors that lend primarily in rural or underserved counties.

Question 5. What amount of residual income is acceptable for approving DTI?

Answer: The ATR rules do not include a specific amount of residual income or a debt-to-income ratio that would be acceptable in determining the consumer’s ability to repay the covered transaction. The creditor must determine its own acceptable debt-to-income ratio or residual income when making a reasonable and good faith determination that the consumer will have a reasonable ability to repay the loan according to its terms.

The determination may be made by considering the debt-to-income or the residual income or both. Other factors may also be considered when making this determination.

Question 6. How would you confirm employment status for self-employed borrower?

Answer: This is a question where the regulation and the commentary aren’t particularly helpful. There are no specific requirements provided in the regulation to be used to verify the employment status for a self-employed borrower.

Some suggestions for verifying employment status include copies of the K-1 from a partnership or LLC or the Schedule C of the consumer’s filed tax return. Although Appendix Q is only required to be used when making a General QM (e)(2), some of the information contained in the Appendix may be beneficial in analyzing information provided by self-employed individuals.

Question 7. Are small creditors not required to use the Appendix Q for underwriting in order to have a QM?

Answer: Use of Appendix Q is only required when making a general QM (e)(2). The requirement to follow Appendix Q applies because of the type of QM, not because of any characteristic of the creditor.

If you are making any other type of QM, including the 3 types that are available only to small creditors and small creditors plus (Small creditor portfolio QM (e)(5), Temporary balloon payment QM (e)(6), or Balloon payment QM (f)), you do not have to underwrite the loan according to the requirements in Appendix Q.

Question 8. Appendix Q doesn’t address the documentation guidelines for assets or credit. What documentation guidelines should be followed?

Answer: You are correct. The purpose of Appendix Q is to provide a methodology for determining total monthly income and total monthly debt payments for the purpose of calculating the debit to income (DTI) ratio for the applicant(s). It remains incumbent upon the creditor to evaluate other factors of creditworthiness using consumer credit reports or other appropriate tools, and when necessary, to evaluate the consumer’s assets as part of the credit decision.

Question 9. If we make a Small Creditor Portfolio Loan QM, do we have to follow Appendix Q for calculating or determining D/I?

Answer: Not unless you want to. Remember that Appendix Q is only required to be used in connection with underwriting loans to meet the “standard QM” requirements of section 1026.43(e)(2). Using parts of it for underwriting other types of qualified mortgages is completely optional.

Question 10. Appendix Q allows use of projected income if starting a new job within 60 days provided there is a guaranteed contract. I have never seen a contract that guarantees employment, rather they specifically state the contract is NOT guaranteed. Can we still use this income or not?

Answer: No. Not if you are using Appendix Q in connection with underwriting a section 1026.43(e)(2) qualified mortgage.

Question 11. Does ATR apply to non-owner occupied transaction?

Answer: Yes. It does. The ability-to-repay requirements apply to any closed-end consumer credit transaction secured by a dwelling, including any real property attached to a dwelling, except loans secured by a timeshare interest, reverse mortgages, temporary or bridge loans with a term of 12 months or less, the construction phase of 12 months or less of a construction-to-permanent loan, and certain other limited types of credit extensions. Owner occupancy is irrelevant, if the loan is subject to Regulation Z.

Question 12. What is the definition of small creditor under ATR?

Answer: It isn’t a defined term. There are three types of QMs in section 1026.43 that only certain creditors can make. The characteristics of those creditors are found by a cross-reference to section 1026.35(b)(2)(iii). The first three of those criteria matter for a creditor trying to qualify to make one of those three types of QMs.

(A) During any of the three preceding calendar years, the creditor extended more than 50 percent of its total covered transactions, as defined by § 1026.43(b)(1), secured by a first lien, on properties that are located in counties that are either "rural" or "underserved," as set forth in paragraph (b)(2)(iv) of this section;

(B) During the preceding calendar year, the creditor and its affiliates together originated 500 or fewer covered transactions, as defined by § 1026.43(b)(1), secured by a first lien; and

(C) As of the end of the preceding calendar year, the creditor had total assets of less than $2,000,000,000 (this number is subject to adjustment for inflation)

A “small creditor” that meets criteria (B) and (C) is qualified to originate small creditor portfolio QMs under 1026.43(e)(5) or balloon-payment QMs under the temporary provisions available under 1026.43(e)(6). If the “small creditor” meets all three of the criteria – (A), (B) and (C) above – it qualifies to originate balloon payment QMs under 1026.43(f).

Question 13. We are a small creditor that does not operate in a rural and underserved defined market. We intend to take advantage of the Temporary Balloon Payment Loan .43(e) (6) until Feb. 2016 as the CFPB continues to study balloon products in rural and underserved markets. We have participated in over 15 webinars and teleconferences regarding ATR/QM, and this is the first time we have heard that Appendix Q only needs to be applied to General QM .43(e)(2). Please provide the section of the rule that explains/confirms this.

Answer: Review section 1026.43(e)(6) of the Reg, and you will see that the loans that qualify are the same as those described in section 1026.43(f) except for the qualifications of the creditor (see Question 13, above). Now look at section 1026.43(f)(1)(i) which states that the loan “satisfies the requirements for a qualified mortgage in paragraphs (e)(2)(i)(A), (e)(2)(ii), (e)(2)(iii), and (e)(2)(v) of this section, but without regard to the standards in appendix Q;”

If a balloon loan under .43(f) can be made “without regard to the standards in appendix Q” and a balloon loan under .43(e)(6) is one that meets the standards in .43(f), then the loan under .43(e)(6) can also be underwritten “without regard to the standards in .43(f).”

Question 14. Regarding employer’s confirmation of employment, must we reach out to employer OR would having 2 years’ worth of W-2s, current paystubs, including a paystub received just before loan confirmation be acceptable?

Answer: We don’t think so, if you are using Appendix Q in connection with underwriting to the .43(e)(2) QM standard. Appendix Q calls for communication with the employer because it affords at least the opportunity for the employer to communicate that an applicant’s employment may not be ongoing, an opportunity not available unless there is communication of some type with the employer. Note that the communication can be written or oral or a combination of the two.

Question 15. We have encountered several questions with that are similar regarding MLO compensation.
a. Please address whether an incentive plan can include a provision where LOs will not be compensated for refis of the bank’s loans and whether the compensation can differ from portfolio to non-portfolio loans.

b. We pay our secondary market lenders a commission in addition to salary. If they get an application that cannot be sold on the secondary market, and we decide to make an in-house loan we do not want to pay a commission. How do we go about justifying this?

c. We pay our secondary market MLOs a commission, but if the loan is rejected by the secondary market we would deny the loan and counter-offer with an in-house loan. If accepted we would pay the MLO a small referral fee (no commission). The loan request is then handed off to our in-house lender who would earn the commission. Do you see any problems with that?

d. Can we distinguish between mortgage refis and purchase money mortgages in our MLO comp plan? If we use either one of these can they be termed a proxy? May we have a have compensation policy that distinguishes between in and out of area loans? We make mortgages nationwide but want loans “closer to home” so to speak.

“Paying a lower commission (fixed number of basis points) on an “out of region” loan is permissible; the MLO doesn’t control the property location or the price to the consumer.”

Does that sound OK?

e. Please address whether it would be permissible to recapture or reduce LOs commission if a loan pays off in six months.

Answer: The new requirements under § 1026.36 tell you when incentive pay is allowed. It does not say under what circumstances it must be paid. Any loan that does not violate these requirements means that compensation can be paid, but the bank is always free not to pay compensation when it is otherwise allowed. If the bank opts to omit portfolio loans or refinances, that is up to it. Certainly the bank may opt to pay what is allowed for those new and more valuable relationships and pay less for less profitable relationships.
Notwithstanding the prior statements, there must be no incentive for a lender to steer a loan request which might otherwise be a refinance or portfolio loan to another product based on the fact that the lender will receive greater compensation for that alternate product. The bank will not want a policy or incentive which leads a lender to a faster denial in order to move on to an income producing/commission producing loan.

We would say that steering or making denial decisions quickly without due diligence is the heart of the compensation rule: If there is incentive to steer, there can be an appearance of impropriety. The file, procedure and training done would require detailed notes to combat such a claim later.

Question 16. We have an individual who interprets for the bank. She helps the customer by answering questions on how to fill in the loan application, and then passes the application on to a loan officer to work with the customer, and interprets discussions with the customer. Does she fall under LO rule?

Answer: The regulation is clear on how it describes how a Loan Originator is defined. While there are exceptions, it is a person who does any of the following:

Takes an application
Arranges a credit transaction
Assists a consumer in applying for credit
Offers or negotiates credit term
Makes an extension of credit

“Taking an application” is first on the list. Assuming the other tests in the definition are met such as expects “direct or indirect compensation,” how this could be separated from any other person who takes applications. The fact that she is a translator does not diminish the act of taking the application and answering questions just as if it were in English.

Question 17. Credit reports were not pulled as part of the NMLS registration. Do we need to pull one now? Do we need to get a copy of the criminal background check from NMLS and review it ourselves? What are the guidelines on information in credit reports as to what is acceptable? Does the written policy have to be specific on what is acceptable for a LO to be hired, such as weakness specifics in their CB report, etc.

Answer: An individual loan originator hired in 2014 or later is required to have a credit report pulled and meet the standards of the bank. Someone who was hired prior to 2014 without a credit report (or background check) having been pulled because it wasn’t required based on what they were doing, should also have one pulled now. If these were done, there is no need for them to be re-done unless that person leaves and is rehired, or the bank has reason to believe there is now a problem with an existing LO.

There is no defined standard for what information in a credit report determines whether a LO meets certain standards to act as a LO. Those are up to the bank, but your will want to consider how the bank will establish the LO was responsible and of good character in defending a lawsuit.

Be aware that the SAFE Act or other licensing requirements are separate from and in addition to those found in Reg Z for those loan officers whose acts make them MLOs under the SAFE. A bank employee may easily come within the broader definitions of Reg Z and subject to its requirements without being an MLO under the SAFE Act.

Integrated mortgage disclosures finalized

By John S. Burnett

Delayed effective date will provide needed relief

Bankers and other mortgage lenders will enjoy a chance to take a deep breath before having to dive into the task of analyzing the “next big thing” from the Dodd-Frank Act regulatory mill. On November 20, the Consumer Financial Protection Bureau unveiled its long-anticipated final rule for integrated TILA/RESPA disclosures. The 1,888-page document was revealed at a Boston, Massachusetts, field hearing by CFPB Director Richard Cordray.

The new rule will be effective August 1, 2015, which gives the industry and its technology partners just over 21 months to pull together all the software, procedural and policy changes that will be needed to implement the required changes. Two new integrated disclosures – a Loan Estimate and Closing Disclosure – will replace today’s disjointed, overlapping and frequently less-than-informative, RESPA Good Faith Estimate and TILA Early Disclosures near the time of application and RESPA Settlement Statement (HUD-1 or HUD-1A) and TILA Final Disclosures at the closing table. New timing requirements will mandate delivery of the integrated Closing Disclosure three business days prior to the actual closing of loans subject to the rules, and responsibility for preparing and providing the Closing Disclosure is shifted from the Settlement Agent to the Creditor.

We are still peeling away the layers of the new regulation, but here are some of the interesting tidbits we have uncovered:

25-acre exemption gone. RESPA’s exemption for loans secured by 25 acres or more of real property will disappear. Reg Z (TILA) did not provide for an exemption from coverage on the basis of acreage. Removing the RESPA exemption facilitates use of the integrated disclosures (see below).

GFE and HUD-1 forms aren’t going away entirely. Although loans that will be subject to the new integrated disclosure requirements won’t be subject to the current Good Faith Estimate and Settlement Statement requirements of RESPA, there will still be some loans to which the current RESPA rules will apply. To oversimplify a bit, the current separate TILA and RESPA disclosure forms will continue to apply to reverse mortgage loans. The new integrated disclosure requirements will apply to any “closed-end consumer credit transaction [for which an application is received on or after August 1, 2015] secured by real property, other than a reverse mortgage subject to § 1026.33.”

Timing for Loan Estimate. The integrated Loan Estimate will be delivered or placed in the mail by the third business day (using the “open for substantially all business functions” definition) after receipt of the consumer’s application, but not later than the seventh business day (using the “precise” definition of business day that includes all days except Sundays and the ten designated federal holidays) before consummation. There is an exception to the seven days before consummation requirement for time-share loans only. An extra three-business-day period is added to the seven-day requirement if the Loan Estimate is not provided to the consumer in person.

Another waiver provision. The seven-day period may be waived or modified in writing signed by the consumer if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency, however, the waiver cannot be prior to receipt of the Loan Estimate.

Advance delivery of Closing Disclosures. For closed-end consumer credit transactions secured by real property (other than reverse mortgages), the new integrated Closing Disclosure reflecting the actual terms of the transaction is to be provided to the consumer no later than three “precise rule” business days before consummation. Timeshare-secured loans are not subject to the three-day advance requirement. An extra three business days must be allowed if the disclosures are not delivered to the consumer in person. This three-day waiting period may also be waived for bona fide personal financial emergencies of the consumer.

Responsibility for Closing Disclosures. Although a Settlement Agent may provide the Closing Disclosure, the Creditor is responsible for ensuring that it is timely provided and that it otherwise meets the Closing Disclosure requirements.

Oops, something changed! Corrected disclosures will be required if the first set of Closing Disclosures becomes inaccurate before consummation. If the change requiring corrected Closing Disclosures involves an APR that has become inaccurate, a change of the loan product, or the addition of a prepayment penalty, a new three-business-day waiting period will be required (subject to the consumer’s waiver of that period for a bona fide financial emergency as indicated above).

New Regulation Z sections. New sections 1026.19(e), (f), and (g) will require the delivery, respectively, of the integrated Loan Estimate, integrated Closing Disclosures, and RESPA special information booklet (the last requirement is essentially transplanted from Regulation X). New section 1026.37 lays out the specifics of the Loan Estimate, and 1026.38 provides the details of the new Closing Disclosure.

New Model Forms. Several new model and sample forms are added to Regulation Z’s Appendix H. The regulation essentially requires the use of the model forms for providing Loan Estimates and Closing Disclosures under the new integrated disclosure rules.

“All-in” APR proposal excluded

One of the more controversial aspects of the August 2012 proposed rule for integrated disclosures was an overhaul of the definition of the annual percentage rate which would have greatly reduced the number of excluded costs in the calculation of that key disclosure item. The Bureau carved that proposal out of the final rul, and indicated it would consider it further as part of its required five-year review of the rule. Reportedly, the public feedback suggesting that the proposed redefinition might have affected the types of loans available to consumers was a significant factor in the Bureau’s decision to delay action on that part of the August 2012 proposed rule.

More analysis to come

Those are some of the more significant items to report in the new final rule, but you can be sure there is a lot more important information buried in those 1,888 pages. We will continue to digest the final rule and its implications and will share what we find over the coming months.

FinCEN definitions changes

By John S. Burnett

FinCEN announced a final rule that changes the definitions of “funds transfer” and “transmittal of funds” under section 1010.100 of its Bank Secrecy Act regulations found at 31 CFR Part 1010. No substantive change will result from the revised definitions which were made in order to ensure that Dodd-Frank Act amendments to the Electronic Fund Transfer Act don’t exclude consumer foreign remittance transfers from coverage by BSA regulations. Bankers sometimes get concerned when they see a FinCEN rules change. This one falls under the “ho-hum” heading.

CFPB Regulatory Agenda

By John S. Burnett

The Consumer Financial Protection Bureau recently published a semi-annual update of its rulemaking agenda. Each spring and fall, the White House’s Office of Management and Budget and the Regulatory Information Service Center (RISC), work with federal agencies to compile a list that outlines most of the rulemaking activities of the agencies for the coming twelve months. The Bureau’s fall agenda update shows that the agency is “both continuing to work on rulemakings mandated by the Dodd-Frank Act and turning [its] attention to significant issues in other major markets for consumer financial products and services.” On the agency’s list, for example, are some follow-up mortgage issues such as how to apply exemptions to preserve credit in “rural or underserved” areas, along with significant changes under the Home Mortgage Disclosure Act’s Regulation C to expand on the information that will be required to be included in lenders’ HMDA Loan Application Register (LAR) filings.

Apparently also on the agency’s “short list” is working on a proposed rule covering prepaid card products as well as regulatory initiatives affecting debt collection, payday loans/deposit advance products, and bank overdraft programs.

On a definite positive note, the Bureau says it wants to streamline and modernize the regulations that currently require disclosures of information sharing practices (“privacy notices”). One possible outcome of that effort will be the elimination of annual notices when sharing policies have not changed.

We will be keeping a close eye on each item on the CFPB’s regulatory agenda over the next several months. We’ll make sure to include updates when there are any developments to report.

Exemption thresholds creep upward

By John S. Burnett

The annual inflation adjustment for the Regulation Z/Regulation M exemption threshold amounts was announced in late November. Beginning January 1, 2014, the current $53,000 exemption amount for consumer leases under Regulation M and for extensions of credit under Regulation Z will increase by $500 to a new threshold of $53,500. Note that the threshold amount exemptions do NOT apply to consumer loans secured by real property or secured by a consumer’s dwelling nor to loans that are private education loans under Reg Z.)