Source: https://nafcucomplianceblog.typepad.com/nafcu_weblog/hoepa/
Timestamp: 2019-04-19 03:04:28+00:00

Document:
The CFPB is required to annually adjust certain threshold amounts within various rules based on inflation. Last week, the bureau published a final rule implementing a few of these adjustments under the CARD Act, HOEPA and TILA. The rule modifies the credit card penalty fee safe harbor, the HOEPA total loan amount and fee trigger thresholds, and the loan amounts for specific points and fees limits under Regulation Z’s qualified mortgage rule.
CARD Act Penalty Fees Safe Harbor. Under Section 1026.52(b) of Regulation Z, fees on credit card accounts must generally be based on costs, but the rule contains safe harbor amounts that are considered compliant. Effective January 1, 2015, the safe harbor penalty fees will increase by one dollar. The new safe harbor for a member’s first late payment will be $27 and $38 for subsequent late payments within the same six month period.
“Effective January 1, 2015, for purposes of determining the total loan amount threshold that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent is $20,391. Comment 32(a)(1)(ii)-3, which lists the adjustments for each year, is amended to reflect the new dollar threshold amount for 2015.
Remember, none of these changes go into effect until January 1, 2015 but it is good to make a note of it now.
NAFCU's 2014 Credit Union Compliance GPS is still available. This comprehensive, electronic resource translates complex regulatory language into plain English. The latest edition includes improved user-friendly search functions, including more hyperlinks and bookmarks and much more. You can purchase a copy for your credit union here!
The latest issue of NAFCU's The Federal Credit Union (TFCU) is now available. Included in each issue is a Compliance Central article that might be useful to pass along to your management team and Board. We usually try to identify issues that are coming up next and highlight areas of potential concern.
Many of the CFPB’s proposed changes are mandated by the Dodd-Frank Act. For example, Dodd-Frank requires the CFPB to amend the thresholds for determining whether a mortgage loan is high-cost or not. However, the CFPB is also proposing numerous additional requirements that are not mandated by Dodd-Frank. In the majority of cases, the CFPB is proposing that all mortgage servicers or lenders comply with these additional requirements. NAFCU has urged the CFPB to focus solely on the changes required by Dodd-Frank and conduct additional due diligence — including reviewing whether exemptions are appropriate for credit unions — before finalizing any non-Dodd-Frank requirements on credit unions."
"For example, the CFPB is required to amend the annual percentage rate (APR) threshold for determining high-cost loan status. While this change seems innocuous, the CFPB has also proposed amending the definition of “finance charge,” which would have a direct impact on the high-cost APR threshold test. If the CFPB finalizes its proposed changes to the definition of finance charge, the APR on credit union mortgage loans would drastically increase and could result in numerous loans being classified as high cost.
The CFPB has proposed softening the impact of its proposed action by creating a new metric — the transaction coverage rate (TCR) — that credit unions would need to calculate to determine whether or not a particular mortgage loan is high cost. The CFPB claims this additional metric would decrease the compliance burden on credit unions. However, the opposite is more likely as credit unions would need to calculate the new APR for disclosure purposes and the new TCR for determining whether a loan is considered high cost. To make things more confusing, the new APR would only apply to closed-end mortgages. Credit unions would still need to use the “old APR” for all other loans, such as closed-end auto loans. Thus, contrary to the CFPB’s claims, it’s clear the ongoing regulatory burden from the proposed three calculations would be an increase from the one calculation under the current regulations."
You can find the full article here. The full issue of the TFCU is here. Or, via PDF if you prefer.
Extended Early-Bird Pricing. We've extended the deadline for registering for our November 7th webcast (next Wednesday!) on the CFPB's Latest Mortgage Proposals.
Register today (November 2nd) to Save $100!
October 16, 2012: Mortgage Loan Originator Proposal.
These comment letters can be a great way to get a summary of the proposed changes and help identify future headaches for your credit union if the rules are adopted as proposed.
NAFCU Webcast. Join NAFCU’s Regulatory Compliance team by watching the November 7, 2012, webcast on the CFPB’s latest mortgage proposals. Part II: The CFPB's Latest Mortgage Proposals and the Impact on Your Credit Union. The compliance team will highlight and discuss the mortgage loan originator proposal, the higher-risk appraisal proposal and the Regulation B appraisal proposal. Save $100 if you sign up by October 31. Note, NAFCU’s webcasts are open to all credit unions, regardless of membership or charter type!
Yesterday, we highlighted the various comment deadlines for the CFPB's mortgage proposals - including the extended deadline, now November 6, 2012, to comment on the CFPB's proposed change to the definition of finance charge.
Today, I wanted to highlight NAFCU's comment letter on this issue - which has already been sent to the CFPB. This comment letter is in addition to the joint comment letter sent on September 10th asking the CFPB to drop the APR proposal.
"NAFCU respectfully requests that the Bureau reconsider this proposal. Given the host of regulatory changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Bureau should not use its authority to require still more changes for credit unions. The cost of this proposal will be extraordinary. Those costs, not just in terms of money, but also in terms of time, are particularly difficult for lenders to bear as the industry struggles to comply with all of the Dodd-Frank Act. At the same time, the benefits are modest given that the proposal will, at best, only marginally improve a disclosure that consumers do not use. Further, the proposal would completely disregard the statutory scheme, and require a broad interpretation of the Bureau’s authority under the Truth in Lending Act (TILA). Finally, the changes will be particularly problematic in light of all of the other consumer protection laws that are tied to the finance charge."
Focus on Dodd-Frank Mandates. The letter asks the CFPB to focus on their Dodd-Frank mandates and not compound those burdens by adding new regulatory changes not required by law.
"NAFCU believes that the CFPB’s resources should be directed towards finalizing regulatory changes that are required by the Dodd-Frank Act. Proposing dramatic new changes to the regulatory framework that are not required by Dodd-Frank only exacerbates the already heavy burden being borne by credit unions and other small lenders. The CFPB is currently working on promulgating at least eight different rules that will have a dramatic impact on the mortgage market.......Given the enormous challenges presented by the Dodd-Frank Act and the tremendous strain lenders will be under to comprehend the rules, update systems and processes, train staff, and ultimately comply, the CFPB should reconsider this proposal. There is no pressing need to make changes to the finance charge calculation and consequently, NAFCU does not support such changes at this time. Our position on this issue is part of a broader policy that the CFPB should not, at this time, add to the regulatory burden for mortgage lenders by promulgating rules that are outside the scope of the requirements of the Dodd-Frank Act."
Cost-Benefit Analysis. The letter goes on to argue that the benefits of the proposed change are negligible while the costs are very, very real.
"As the Bureau discusses in the proposed rule, the Federal Reserve Board (the Board) conducted consumer testing on the APR which revealed that the figure is not widely used by consumers and is, generally poorly understood..........Given that consumers still do not understand the APR and still confuse it with the interest rate, forty years after it was introduced, the value of the proposal is somewhat speculative. The costs, however, associated with reconfiguring systems to calculate the newly defined finance charge, updating processes and training staff will be considerable."
Easier to Calculate? The CFPB's proposal posits that the proposed changes would reduce costs for lenders - including credit unions - because the APR determination would be easier to calculate. NAFCU disagrees.
"First and foremost, while the APR calculation is imperfect, lenders have existing procedures and processes in place to ensure the figure is accurately disclosed. Even if the Bureau’s proposed changes to the finance charge make it easier to calculate in the long term, those benefits must still be weighed against the substantial, initial set-up costs required to implement changes........Currently, lenders must calculate one APR for closed-end and open-end loans. Under the proposals advanced by the Bureau, lenders would be required to calculate an APR for closed-end [mortgage] loans for disclosure purposes and a transaction coverage rate (TCR) for closed-end [mortgage] loans for coverage purposes......Replacing one rate for disclosure and coverage purpose, with two rates that are calculated differently hardly simplifies the mortgage lending process."
The Plain Language of the Truth in Lending Act. NAFCU also questions whether the CFPB has the authority to change the definition of finance charge when the plain language of the Truth in Lending Act clearly articulates which fees should be finance charges and which should be excluded.
"The Bureau has noted the need to make broad use of its “exception authority” to implement the proposed changes in this rulemaking. The proposal would discard the current statutory list of inclusions and exclusions in the finance charge.........Section 105(a) of TILA and § 1405(b) of Dodd-Frank are broadly written and provide the Bureau considerable authority to modify certain requirements as it sees fit. However, Congress did not give the Bureau power to modify or change relevant, and unambiguous, sections of TILA. Furthermore, the Supreme Court states that “[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837, 842-43 (1984). Here, the intent of Congress is clear: Congress specifically created a statutory list of inclusions and exclusions in the term “finance charge.” Thus, NAFCU questions whether the Bureau has the authority to amend the statutory list."
NAFCU's Comment Letters. You can find the full September 21st letter here. The prior joint letter is here.
Credit Union Comment Letters. While NAFCU is certainly making these arguments for credit unions - it is still vitally important that individual credit unions make their voices heard on this issue. You don't need to detail each issue in a comment letter - just explain the details of what your credit union would need to do to adjust your existing systems, train staff, set up new audit procedures, explain the issue to your members, etc. I have a feeling the CFPB is vastly underestimating the compliance burden of this change. Vastly.
On Friday afternoon, the CFPB extended the comment period for the proposed change to the finance charge definition. Initially, the comment period was scheduled to close on Friday, September 7th. The extension will now allow public comments until November 6, 2012.
The proposed change was part of the TILA/RESPA proposal and would also impact the HOEPA proposed rule (as the move to an all-in APR would impact the number of mortgage loans covered by HOEPA). The CFPB's notice includes formal extensions for both the TILA/RESPA proposal and the HOEPA proposal.
"The comment period for whether and how to account for the implications of a more inclusive finance charge on the scope of HOEPA coverage, see proposed § 1026.32(a)(l)(i) and (b)(1)(i), is extended to November 6, 2012. The comment period for all other proposed amendments in that notice, which ends on September 7, 2012, is unchanged."
NAFCU Regulatory Alerts. NAFCU members can view our Regulatory Alerts on the TILA/RESPA proposal (which includes a separate Alert for the finance charge change), the HOEPA proposal and mortgage servicing proposed rules.
NAFCU Webcast on Mortgage Proposals. Don't forget, I'll be doing a special 3-hour webcast tomorrow on the CFPB's mortgage proposals. The presentation will focus heavily on the CFPB's mortgage servicing proposals (both the TILA and RESPA proposed changes) as well as the HOEPA changes. I'll also overview the TILA/RESPA rule - including a detailed discussion of the proposed change to the finance charge and how this change could impact credit unions (especially with relation to bringing more loans under the HOEPA protections).
Additionally, I've done my best to highlight future headache areas. I'm sure there will be plenty of additional issues that will arise but I've tried to organize the webcast to put these topics "on your radar." Remember, the CFPB must finalize the mortgage servicing proposals and the HOEPA proposal by January 21, 2013.
Earlier this week, the CFPB issued its lengthy proposals on TILA/RESPA Combined Disclosures and HOEPA, which we briefly blogged about. I’m almost sure that was enough to put most compliance officers in a frenzy. But that’s not all we have to look forward to this year! In fact, there are quite a few other issues that the CFPB has in the works, mainly due to mandates prescribed by the Dodd-Frank Act. Today, I will focus on the mortgage servicing mandate – specifically, the periodic mortgage statement.
The Dodd-Frank Act requires creditors or mortgage servicers to provide most mortgage borrowers with periodic statements containing certain information. The periodic statement must include the principal loan amount, the current interest rate, the date on which the interest rate may next reset, a description of any late payment and penalty fees, information about housing counselors, and a telephone number and email address that may be used to contact the mortgage servicer/creditor. The idea is to make it easier for homeowners to understand their loans and avoid unnecessary costs and fees.
If you noticed my usage of the word “most” when referring to what borrowers must receive the periodic statements, it’s because Dodd-Frank provides an exception to the mortgage statement requirement. A mortgage servicer or creditor that provides coupon books to its borrowers is excepted from the requirement to provide mortgage statements if the mortgage has a fixed rate and the coupon book contains substantially the same information as required to be on the monthly statement.
On February 13, 2012, the CFPB published a prototype monthly mortgage statement to solicit general feedback from the public. However, the draft statement was not accompanied by a proposed rule. We are expecting a proposed rule to be released sometime this summer since Dodd-Frank requires a final rule by January 21, 2013. The mortgage statement requirement comes from Section 1420 of Dodd-Frank and will become part of Regulation Z once the rule is finalized.
We have blogged on mortgage servicing and the periodic statement requirement a few times. These blogs can be found here, here, and here. I also wanted to bring to your attention the CFPB’s Fact Sheet on Mortgage Servicing, as it contains very valuable information and does a great job summarizing the items that are being considered for the mortgage servicing proposal.
NAFCU Video Contest – Members Only. Enter for the chance to win a flip video camera and a free registration for anyone at your credit union to our advocacy event of the year – NAFCU's 2012 Congressional Caucus. In 3-minutes or less, tell us what benefits, experiences or connections you enjoy most as a NAFCU member. It’s easy to enter – just grab your smart phone or video camera, upload your video to You Tube and send us your link. Click here for more info.
The First Shoe. Well - the initial mortgage proposals from Dodd-Frank are out. The initial verdict: 1099 pages and 293 pages. And, keep in mind that this is only the beginning. There are numerous other mortgage proposals required by Dodd-Frank that will be proposed soon (and finalized within a short period of time after that).
Today's post will not attempt to provide an overview of the two proposals (we'll do that in our webcast tomorrow). Instead, we'll link to various documents and information released by the CFPB yesterday.
CFPB's Know Before You Owe webpage with resources and additional information.
Quite a day for the Consumer Financial Protection Bureau. It is probably a good thing the CFPB doesn't have a Board and doesn't hold public meetings prior to proposing regulations - who has the time anyway when there is so much regulating that needs to be done??
"I am here today to say about the mortgage market: “No Más.” No more costs and risks buried in the fine print that do not become clear until it is too late. No more mortgages designed to fail – mortgages that benefit originators but not borrowers. No more last-minute shocks at the closing table that leave consumers stuck with fees they did not know about or plan for. And no more costly surprises and runarounds by mortgage servicers that leave people with nowhere to turn when they need help the most."
The CFPB's Fact Sheet carries this theme as well as it highlights future changes to (1) Shopping for a Mortgage; (2) Closing on a Mortgage; and (3) Paying Off a Mortgage.
Regulatory Burden is in the Details. Not surprising, the CFPB's press release and blog posts do not mention the current and future burden that is placed on financial institutions trying to understand and comply with these future changes. Unfortunately, while just reading through the proposals themselves seem like a momentous task - the actual regulatory burden is in the details as credit unions and other mortgage lenders will need to alter almost every aspect of their mortgage lending practices. Oh, and retrain all their staff.
Earlier this week, the Fed issued a nice guidance document to clear some confusion on higher priced mortgage loans that centered on balloon loans and verifying the borrower's ability to repay. Access the guidance here. Before the guidance, many concluded that HPMLs with short-term balloons (less than 7 years) were a no-no. The Fed clarifies that this isn't the case.
I'd keep an eye out for this type of guidance moving forward. With virtually every aspect of Reg Z being amended, the Fed will have to clarify issues that pop up. And many will. I'd bet on it.
1. Question: Does the rule prohibit short-term balloon loans that are higher-priced mortgage loans?
Answer: No. However, the creditor must use prudent underwriting standards and, after considering consumers’ income, employment, obligations and assets other than the collateral, the creditor should determine that the value of the collateral (the home) is not the basis for repaying the obligation (including the balloon payment).
2. Question: Does that mean the creditor must verify that the consumer has assets and/or income at the time of consummation that would be sufficient to pay the balloon payment when it comes due?
Answer: No, such a requirement would effectively ban short-term balloon loans. If the Board had intended to ban these products it would have done so explicitly.
3. Question: What must the creditor do, then, to verify the borrower’s ability to repay a short-term balloon loan?
Answer: In addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral.
4. Question: How does the creditor verify, when it originates a short-term balloon loan, whether the consumer could qualify for a refinancing before the balloon payment is due?
Answer: The creditor has an affirmative duty to engage in prudent underwriting. Thus, the creditor should consider factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income—all as of the time of consummation. A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios. The creditor is not required to predict the consumer’s future financial circumstances, interest rate environment, and home value.
Escrow for Flood Insurance; Dividends on Escrow Accounts?
The new higher-priced mortgage requirements under HOEPA require the escrowing of taxes and mortgage insurance for loans secured by a first lien on a principal dwelling. This blog post discusses this requirement. Reminder: the deadline is April 1, 2010 (or October 1, 2010 for manufactured homes).
If a credit union requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after November 1, 1996, the credit union shall also require the escrow of all premiums and fees for any flood insurance required under § 760.3. The credit union, or a servicer acting on behalf of the credit union, shall deposit the flood insurance premiums on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Director of FEMA or other provider of flood insurance that premiums are due, the credit union, or a servicer acting on behalf of the credit union, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due."
Note that the section says "if a credit union requires the escrow." Could you argue that it is not the credit union requiring escrow but, rather, HOEPA which requires the credit union to escrow? I'm not so sure. In practice, the credit union would require escrowing of taxes and mortgage insurance to comply with HOEPA and, therefore, would need to escrow for flood insurance as well.
Thanks to Katey from Chevron FCU for bringing this to our attention.
The new HOEPA requirements will result in some credit unions escrowing for the first time which will bring some new challenges. One of them is state law that attempts to require escrow accounts to pay interest (or dividends).
Do federal credit unions have to pay dividends on escrow accounts? NCUA says that these state laws are preempted as they attempt to regulate the setting of dividends (an explicit power granted to the FCU Board under the Federal Credit Union Act). Here is another NCUA opinion from 1991 on a Wisconsin state law.
I HOEPA you enjoyed this overview. Today, we've come to the last "new" provision in the HOEPA rulemaking: 226.36. This section has a title that just rolls off the tongue: Prohibited acts or practices in connection with credit secured by a consumer’s principal dwelling. While the title will not win marketing awards, it is fairly accurate. And note: the requirements below do not apply to HELOCs.
Broker defined. 226.36(a) defines the term "mortgage broker." The definition excludes an employee of the creditor.
Coercion of appraisers. 226.36(b) addresses practices that will constitute impermissible coercion of appraisers for consumer credit transactions secured by a consumer's principal dwelling. This sort of closes the loop on appraisals. The HVCC only applied to Fannie/Freddie transactions, and some of the anti-coercion guidance on appraisals was just that - guidance. Now, such practices are a violation of Regulation Z. This section lists a number of examples of impermissible coercion, such as implying to an appraiser that current or future work depends on the value of an appraisal. But it also gives a number of examples that are not impermissible coercion, such as asking an appraiser to consider additional information about the basis for a valuation.
In addition, this section states that a creditor may not extend credit secured by a consumer's principal dwelling if it is aware of impermissible coercion in relation to the appraisal. There is an exception to this; if the creditor acts with reasonable diligence to determine that the appraisal does not misrepresent the value of the dwelling, then all is hunky-dory.
Servicing requirements. Section 226.36(c) places new requirements on loan servicers, which often are the creditors themselves. You may see a trend here: these requirements apply to loans that are secured by a consumers principal dwelling. Servicers must credit payments when they are received. If you provide specific instructions for payments that are not followed, and you accept the payment, you can credit it no more than 5 days after it is received. Servicers cannot pyramid late fees, and they cannot refuse to provide an accurate payoff statement within a reasonable time of receiving such a request. What is a reasonable amount of time? The Fed doesn't say for sure, but it states that 5 days would be reasonable. Or in other words, a safe harbor.
As always, there are additional details lurking within the Official Staff Interpretation section of the regulation.
On Friday, new NCUA Chairwoman Deborah Matz issued a statement regarding CARD ACT Compliance for credit unions.
OK, it is a Monday, and we're still slogging through Regulation Z. With that in mind, enjoy the following photo that I took of my son recently. It never fails to crack me up. How he finds this pose comfortable is beyond my understanding. Let's have a great week, everyone!
Yesterday's blog posting discussed the creation of the new "higher-priced mortgage loans" category, and today we will take a look at some of the restrictions and requirements that come with that special category of loans.
Repayment Ability. Higher-priced mortgage loans will be subject to the same repayment ability requirement that "Section 32" loans - which Sarah discussed earlier this week. The key is to realize that Section 226.35(b)(1) simply indicates that credit unions must verify repayment ability as provided in 12 C.F.R. 226.34(a)(4). So, refer to that section when looking for how to determine repayment ability (including the very, very useful official staff commentary).
(C) The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation."
A key here is to realize that these restrictions - which had already applied to "Section 32" mortgages - have been strengthened. Be sure you review any prepayment penalties your credit union may offer to make sure it will still be allowed when the stronger requirements go into place after October 1, 2009.
Escrow Requirement. This requirement applies to loans secured by a first lien on a principal dwelling. In short, credit unions will not be able to extend a higher-priced mortgage loan unless they escrow for for property taxes and mortgage-related insurance. Mortgage-related insurance includes "insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss." This blog post contains a link to a great resource from the Philadelphia Federal Reserve Bank on escrow requirements.
Compliance Dates. The escrow requirement has an effective date of April 1, 2010. Loans secured by manufactured houses have an extended deadline of October 1, 2010.
Cancellation. The credit union can allow the member to cancel the escrow account only if one year has passed from consummation of the mortgage and the member submits a dated, written request to cancel the escrow account. Keep in mind that the request to cancel must come from the member and can not be signed at consummation to apply in the future. Rather, the written request must be signed, dated and submitted by the member after the one year period has expired.
"99 Regulation Z currently defines a dwelling to include manufactured housing. See § 226.2(a)(19). Official staff commentary § 226.2(a)(19) states that mobile homes, boats and trailers are dwellings if they are in fact used as residences; § 226.2(b) clarifies that the definition of ‘‘dwelling’’ includes any residential structure, whether or not it is real property under state law; §§ 226.15(a)(1)–5 and 226.23(a)(1)–3 make clear that a dwelling may include structures that are considered personal property under state laws (e.g., mobile home, trailer or houseboat) and draws no distinction between personal property loans and real property loans. "
1. Section 226.35(b)(3) applies to principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. See the commentary under §§ 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 226.35(b)(3) also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence."
Limited Exemptions for Cooperatives and certain Condominium units. Escrow accounts do not need to be established for loans secured by shares in a cooperative.
For loans secured by condominium units, the exemption is smaller - it only excludes the requirement to escrow for mortgage-related insurance premiums if the condominium association has an obligation to maintain a master policy insuring condominium units. However, even if this exception applies there is still a requirement to establish an escrow account for property taxes.
Section 226.35 creates a new category of mortage loans - "Higher-Priced Mortgage Loans" - which come with their own requirements and restrictions. Keep in mind that although this category was created by the HOEPA amendments to Reg Z, it is distinct and separate from the traditional HOEPA loans (a.k.a. "Section 32 mortgages" or "high-rate/high-fee loans").
By 3.5 or more precentage points for loans secured by a subordinate lien on a dwelling.
The "average prime offer rate" will be determined by the Federal Reserve Board and posted at least weekly on the FFIEC website. Because this rate will change on a weekly basis, credit unions will need to track their APR rates against this continuously moving "average prime offer rate" benchmark.
"3. Rate set. A transaction’s annual percentage rate is compared to the average prime offer rate as of the date the transaction’s interest rate is set (or ‘‘locked’’) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation." Comment 3 - Official Staff Commentary to 12 C.F.R. 226.35(a).
To see the latest "average prime offer rates" tables to gauge how your mortgage loan rates stack up, go to the FFIEC's rate spread calculator and review the tables for the maturity terms your credit union offers. For this week, the average prime offer rate for a 30-year fixed mortgage was 5.18%. Thus, if the new amendments were effective today, a first lien mortgage loan with a rate of 6.68% or higher would be a "higher-priced mortgage loan."
Remember, this benchmark will be a moving target that the credit union will need to monitor their loans against to ensure they are in compliance.
Exceptions. Temporary or "bridge" loans with a term of twelve (12) months or less, reverse-mortgage loans, and HELOCs are not included in the definition of "higher-priced mortgage loans" regardless of their APR.
Tomorrow we will cover the additional requirements and restrictions on "higher-priced mortgage loans" - including the escrow requirement for higher-priced mortgage loans secured by a first lien.
Two early-bird pricing offers expire tomorrow, Friday, August 28th. The two offers are for NAFCU's Online Training Program and NAFCU's Regulatory Compliance Seminar.
Online Training. By signing up for NAFCU's Online Training program by Friday, August 28th you will be able to lock-in the 30% introductory savings on the annual subscription price. After Friday, the introductory pricing expires but you can still sign-up and receive access to the online training program for one-year from the date of subscription. You can demo the online training program before purchasing and this powerpoint presentation Anthony created gives some additional information (including the pricing before and after Friday's early-bird deadline).
Compliance Seminar. The early-bird pricing for Compliance Seminar also ends Friday, August 28th. Signing-up by August 28 allows you to save $200 off the full compliance program registration price. The dates are October 19-22 in lovely Charleston, South Carolina.
Special Offer for Blog Readers. Given the short notice on the end of the early-bird pricing for Compliance Seminar - I've received the "go-ahead" to extend the early-bird for one week for blog readers. Between August 31 and September 4, when you sign-up for Compliance Seminar - use promo code "THEBLOG" and receive the early-bird pricing through September 4. Note: The promo code will not work prior to August 31 but the regular early-bird will still available through COB on Friday, August 28.
Remember, anyone can sign-up and attend Compliance Seminar. NAFCU members, non-members, and other credit union industry professionals are all welcome (and add significant value to the compliance discussions).
Compliance Hodgepodge at Seminar. At Compliance Seminar, Anthony and I will have time set aside to discuss a number of important compliance issues that have not been given their own slot in the program. In this fast-paced compliance environment, we decided to set aside these "Hodgepodge Sessions" on Wednesday and Thursday afternoons to discuss multiple issues.
Here are the topics we plan to touch on: RESPA, S.A.F.E. Act, E-SIGN Act & E-statements, HVCC, Regulation D changes, Share Insurance, Fair Lending Exams, Regulation CC consolidation, Gift Cards, as well as Regulation Z issues (Private Student Lending Rules, HOEPA & MDIA Issues, and Proposed HELOC and Closed-End Amendments).
We will also touch on these issues: Legislative Update, BSA Update, Corporate Stabilization Update, Pandemic Update, and a NCUA Guidance Update.
If you have other ideas or topics you would like us to discuss, please leave a comment on the blog or shoot us an e-mail and we will do our best to incorporate them into the Hodgepodge Sessions.
This amendment to section 226.34 strengthens the requirement to verify repayment ability for "section 32" mortgage loans (it does not apply to temporary or bridge loans that do not extend beyond 12 months). What are Section 32 loans? These are the traditional HOEPA high-cost loans. They are referred to as section 32 loans because the definition of and requirements for these loans are found in section 226.32 of Reg Z.
The new rule provides that a credit union may not extend a Section 32 loan to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.
Current obligations include other loans, that the credit union has knowledge of, that are entered into at or around the same time as the current transaction and are secured by the same dwelling (i.e., piggy-back loans).
Mortgage related obligations include property taxes, premiums for mortgage-related insurance, and similar expenses such as homeowners/condo dues.
The credit union must verify the amounts of income/assets that you rely on by IRS W-2 forms, tax returns, payroll receipts, financial institution records, or other documents that provide reasonable reliable evidence. The credit union must also verify the consumer's current obligations, and this can be done by reviewing a credit report.
"For example, if a creditor determines a consumer's repayment ability by relying on the consumer's annual income of $40,000 but fails to obtain documentation of that amount before extending the credit, the creditor will not have violated this section if the creditor later obtains evidence that would satisfy Sec. 226.34(a)(4)(ii)(A), such as tax return information, showing that the creditor could have documented, at the time the loan was consummated, that the consumer had an annual income not materially less than $40,000."
the income the consumer will have after paying debt obligations.
Notwithstanding the above, there is no presumption of compliance for loans where the regular periodic payments for the first 7 years would cause the princpal balance to increase, or the term of the loan is less than 7 years and the regular periodic payments do not fully amortize the outstanding principal balance.
I know I go on and on about the Staff Commentary (I really am a fan), but again, the Fed provides great tidbits in there, including examples of how to determine the maximum scheduled payment in the first 7 years of the loan.
Tomorrow is Section 226.35, which incorporates these rules for higher-priced mortgage loans.
On to section 226.32. The HOEPA amendments added a new protection for "section 32" mortgages. But this new protection shouldn't be that big of a deal. It says that unless you fit within the exception outlined in 226.32(d)(7), you won't be able to charge a prepayment penalty on a mortgage subject to 226.32 (as determined by fees or the loan's interest rate).
That's old news to us. FCUs, as an industry, can't charge prepayment penalties. The prohibition is outlined in the Federal Credit Union Act.
Worth noting: Some federal credit unions waive closing costs on their mortgages. But if the member pays off that mortgage within 2 years, they seek to recoup those fees. Is that a prepayment penalty? NCUA says no.
On September 18, 2009, the NACHA IAT era will begin. The Fed is offering IAT transaction testing until September 11, 2009 for its FedACH customers. If you are one of those customers, you may want to take advantage.
Each year, the Fed's annual report documents how banks and thrifts are complying with consumer regs. It lists the most common compliance boo-boos in many areas. Shari Pogach has written an article highlighting the report, and the article can serve as a simple auditing tool to judge whether you have made similar mistakes in your shop. NAFCU members can access the article here.
Sure, HOEPA was designed to place a ton of protections on "higher-priced" mortgage loans. But the new regulations will create quite of few new consumer protections that affect many other loans. The new regulations add a number of requirements to Regulation Z's closed-end advertising rules.
In the Fed's own words..." The three most significant aspects of the (rule) related to strengthening the clear and conspicuous standard for advertising disclosures, regulating the disclosure of rates and payments in advertisements to ensure that low promotional or ‘‘teaser’’ rates or payments are not given undue emphasis, and prohibiting certain acts or practices in advertisements."
The Federal Reserve overviewof the HOEPA changes does a great job of highlighting the new rules. Rather than recreate the rule, here's what they had to say.
the fact that the payments do not include taxes and insurance premiums if a first-lien loan.
The additional disclosures discussed above must be equally prominent and in close proximity to the advertised payment or rate that triggered the required disclosures.
providing an advertisement in one language while providing required disclosures in another.
I find it amazing that the Fed felt the need to regulate away some of these practices. But just the other night, I saw an ad that did a number of these things. The ad showed a clip of President Obama talking about the need for affordable mortgages. Then the ad jumped into the marketing of the lender's mortgage product. The false implication was more than clear. And then the ad stated that depending on the value of the home, you could eliminate credit card debt. Note: the ad was at 2:30 in the morning while I was feeding Briggs. But still.
I'll handle these two sections rather quickly. As I mentioned earlier, the Fed first issued their HOEPA regulations in 2008. But then Congress passed MDIA, which overtook the HOEPA regs in several areas. Well, the overlapped areas affect the two sections noted above in this post's title.
Sections 226.17 (general disclosure requirements) and .19 (certain mortgage and variable rate transactions) were amended by the Fed in 2008, but were superseded by the MDIA amendments to Reg Z. When you begin working toward compliance for HOEPA, remember this important distinction. The FDIC created thisgreat side-by-side chart that details how MDIA widened and strengthened the disclosure requirements.
With all the important compliance work we're going to have to do, I didn't want you heading down alleyways that are no longer relevant.
Here are a few things kicking around my in-box.
Prescreened offers are important. Just ask this mortgage company that forgot to include the all-important prescreen opt-out notice. A mistake that cost them $20,000.
NCUA issued a legal opinion recently offering guidance to a credit union that was trying to offer loan servicing and collection services to a non-profit entity. It is an interesting read, as it brings up a credit union's charitable donation powers in a way that had not occurred to me. The letter also offers guidance relating to nonmember services and CUSOs.
The OCC has issued an updated version of its "Other Consumer Protection Laws and and Regulations. While not every reg in the massive document apply to federal credit unions, many do. And there are audit checklists for each one. Two words for this, my friends. Good stuff.
The Federal Reserve provides guidance on the clear and conspicuous standard through new comments in the staff commentary. Which brings up a researching tidbit - always look to see if the rule includes staff commentary. The Federal Reserve hides very useful information in its staff commentary to rules, as we'll see below.
In general, all advertisements are subject to a "clear and conspicuous" standard. In the final rule, the Federal Reserve has provided guidance on what is "clear and conspicuous" for certain types of HELOC advertisements.
Promotional Rates and Payments for HELOCs. Additional disclosures that are required due to the advertisement of a promotional rate or payment will be deemed in compliance if they are in the same type size as the trigger terms and appear immediately next to or directly above or below the trigger terms, without any intervening text or graphical displays.
Internet Advertisements for HELOCs. The required disclosures cannot be obscured by such techniques as graphical displays, shading, coloration, or other devices that hinder the consumer's ability to read them. This is true for visual text TV HELOC advertisements as well. Also, for TV advertisements, the consumer should be able to read the disclosures - very fine print would not comply with the standard if consumers cannot read it.
Oral Advertisments for HELOCs. Disclosures should be given at a speed and volume at which consumers can understand them (i.e., not too fast, not too quiet). This applies to all oral advertisements whether over the radio, TV, or internet.
And just a couple of last tidbits for HELOC advertisements. The final rule requires additional disclosures regarding balloon payments if an advertisement states any minimum periodic payment amount. An advertisement that states or implies that the interest expenses under a HELOC plan may be tax deductible must not be misleading, and an advertisement distributed in paper form or via the internet that states the advertised extension of credit may exceed the fair market value of the applicant’s dwelling will trigger additional disclosures.
NCUA has issued a Regulatory Alert regarding the Credit CARD Act requirements. For regular readers of the blog, I don't know that there's much in here that would be new to you, but they do provide it in a handy-dandy chart form.
Although most of the HOEPA provisions apply to closed-end loans, the final rule did tweak advertising rules for HELOCs. The major changes to Section 226.16 relate to the clear and conspicuous standard, the advertisement of promotional terms, and the advertisement of initial discounted and premium rates. As Anthony mentioned, these rules apply for advertisements that occur on or after October 1, 2009.
2. information about the rate or payment that will apply after the promotional period. These must be listed in a clear and conspicuous manner with equal prominence and in close proximity to each listing of the promotional rate or payment.
A promotional rate is defined as a rate, in a variable rate plan, that is not based on the index and margin that will be used later in the plan, if that rate is less than a reasonably current APR that would be in effect under the index and margin.
A promotional payment is defined, for a variable-rate plan, as a payment applicable for a promotional period that is not derived by applying the index and margin, and is less than other minimum payments under the plan derived by applying a reasonably current index and margin, given an assumed balance. For a non-variable-rate plan, the promotional payment is any minimum payment applicable for a promotional period if that payment is less than other payments required under the plan given an assumed balance.
Under the rule, if an advertisement states a discounted or premium rate, it must also state the amount of time the rate will be in effect, and a reasonably current APR that would be in effect using the index and margin. Again, these must be stated with equal prominence and in close proximity to the advertised discounted or premium rate.
The final rule provides alternative disclosure options for radio and television HELOC advertisements that contain trigger terms. A radio/television HELOC ad that contains a trigger term may comply with the disclosure rules by providing APR information and a toll-free telephone number (or any number that allows the consumer to reverse charges) along with a reference that the consumer may call to obtain additional cost information.
Tomorrow we’ll go through the clear and conspicuous standards, which help to explain what “equal prominence and in close proximity” mean, along with some other amendments to the HELOC advertising rules.
When navigating a new regulatory requirement, do not overlook definitions. With the Reg Z changes that implement HOEPA, there was a tweak of the definition of "business day." This is important because the HOEPA changes create new requirements for early disclosures.
The final HOEPA rule was designed to expand upon Regulation Z's requirements to require early TILA disclosures for certain mortgage loans. In addition, a new requirement will prohibit a lender or any person from collecting a fee, other than a credit report fee, from a borrower until after the borrower has received the early TILA disclosures. For mailed disclosures, the lender may assume that the disclosures have been received three business days after mailing and assess a fee at that time.
Does this sound familiar? It should. MDIA did the same thing. Only sooner. If you recall, after the Fed issued the HOEPA regs that we are discussing, Congress passed the Mortgage Disclosures Improvements Act, which pushed up (and expanded) some of the HOEPA requirements. If it sounds confusing, it is. But here's the point I am trying to make: when MDIA or HOEPA talks about days or business days, be sure you understand what they mean. Because it can mean two things, depending on the situation.
Under the standard definition, a business day means a day on which the creditor’s offices are open to the public for carrying on substantially all of its business functions. However, for purposes of rescission under §§ 226.15 and 226.23, and for purposes of § 226.31, a ‘‘business day’’ means all calendar days except Sundays and specified legal public holidays.The definition of ‘‘business day’’ is being revised to apply the second definition of business day to the consumer’s receipt of early mortgage loan disclosures under § 226.19(a)(1)(ii). The Board believes that the definition of business day that excludes Sundays and legal public holidays is more appropriate because consumers should not be presumed to have received disclosures in the mail on a day on which there is no mail delivery.
So, as you work through the HOEPA (and review MDIA) requirements, don't forget to note that business day has a very specific meaning. The devil is in the details, or definition section, many times.
You may have noticed already, but the NAFCU Compliance Blog has surpassed 1,000 subscribers. Did you hear that sound? It was us patting ourselves on the back. :) All kidding aside, we have a lot of fun with this, and we appreciate that you choose to read what we have to say.
NAFCU's August Flash Report is available. (NAFCU log-in needed.) Many folks do not know that NAFCU has a team of economists that do a BUNCH of stuff. One of the things they do is issue a monthly Flash Report, which summarizes the results of a member survey. The August issue, linked above, looks at regulatory burden. From a compliance perspective, it is fairly interesting. For example...(a)lmost all participating credit unions said that they would expect their regulatory burden to increase should the June 30th proposal for a consumer finance protection agency come into effect. The rough estimate respondents stated of their credit union’s annual regulatory costs due to a duplicate agency was an average of $45,120.
Remember when I wrote about how GAO wasn't overly pleased with how fair lending regs are being enforced? Well, on August 4, the FFIEC did release new fair lending exam procedures. I would glance through this doc if you are in lending.
HOEPA. Compliance deadline: October 1, 2009.
Overview. The mortgage crisis continues to throw curve balls at compliance officers. Using its existing powers under the Home Ownership and Equity Protection Act (HOEPA), the Fed amended Regulation Z to create a slew of consumer protections in the area of mortgage lending. And while many refer to this as the "higher priced mortgage" regulation, there are provisions that affect all dwelling-secured loans.
Many of the key provisions of the rule relates to higher-priced loans, a new category of mortgage loans within Regulation Z containing expanded consumer protections. This new loan category should not be confused with existing HOEPA loans, often referred to as “section 32” loans. Higher-priced loans have lower triggers than HOEPA loans and therefore encompass more loans. In addition, the rule for higher-priced loans applies to purchase money mortgages, which are excluded from HOEPA's coverage. But like HOEPA, the final rule for higher-priced loans excludes home equity lines of credit (HELOCs) and construction and reverse mortgage loans. The final rule also prohibits lenders from structuring a closed-end higher-priced loan as an open-end line of credit to evade the rule's protections. The rule for HOEPA loans remains in effect, albeit with some enhancements.
Next, I think it would be good to share some resources on the upcoming requirements.
Here's a link to the actual regulation itself.
Here's a link to a wonderful overview produced by the Philadelphia Fed.
In addition, this Wednesday, NAFCU will host a webcast that will address HOEPA requirements.
I'd read the overview first or our Regulatory Final. This will give you a good foundation. Then you can dive into the rule itself for tough issues. Now, let's get started.
The changes amend many sections of Regulation Z. Today, we'll focus on section 226.1. The section covers "Authority, purpose, coverage, organization, enforcement, and liability." Never overlook these sections when reviewing regs. They can hold important information.
Subpart E contains special rules for mortgage transactions. Section 226.32 requires certain disclosures and provides limitations for loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with mortgage transactions that are subject to § 226.32. Section 226.35 prohibits specific acts and practices in connection with higher-priced mortgage loans, as defined in § 226.35(a). Section 226.36 prohibits specific acts and practices in connection with credit secured by a consumer’s principal dwelling.
Makes it clear that the requirements apply to covered loans where applications are received on or after October 1, 2010.
Makes it clear that the rules apply to refinances and assumptions considered new transactions under 226.20.
Notes that the rules for mandatory escrow for certain covered loans kicks in on April 1, 2010. But mandatory escrow for covered manufactured loans kicks in October 1, 2010. We'll tackle the escrow issue later.
It also notes that for advertising, requirements apply to ads occurring on or after October 1, 2009. But interestingly, it notes that a radio advertisement, for example, occur on the day it they are "first broadcast." And that would make sense. Perhaps advertisements are scheduled to air for months. Forcing folks to plan ahead to make advertisements comply with future requirements would effectively move up the compliance date.
Tomorrow, we'll tackle 226.2, definitions.
HUD has dropped its FAQ document that is designed to help compliance with the upcoming RESPA changes. It was announced as HUD's "first release," so hopefully, there will be more.

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