If you’ve taken Real Estate Institute’s 2014 CE class, you know there have been some questions raised regarding the borrower providing documentation to the creditor before receiving the new Loan Estimate under the rules that take effect on August 1, 2015.  Specifically, the question was how pre-approvals would be conducted given the language in Section 1026.19(e)(2)(iii) of Regulation Z going into effect next year, which states:

“The creditor or other person shall not require a consumer to submit documents verifying information related to the consumer’s application before providing the disclosures required by paragraph (e)(1)(i) of this section.” (Referring to the Loan Estimate.)

The official comments to the rule further state:

“A mortgage broker may ask for the names, account numbers, and balances of the consumer’s checking and savings accounts, but the mortgage broker may not require the consumer to provide bank statements, or similar documentation, to support the information the consumer provides orally before the mortgage broker provides the disclosures required by § 1026.19(e)(1)(i).” (Comment 19(e)(2)(iii) to the TILA-RESPA Rule)

As our instructors have mentioned in class, I wrote a letter to the Consumer Financial Protection Bureau some months ago asking for clarification on this section of the rule.  Specifically, I was concerned about the CFPB’s interpretation of the word “required” and whether a lender or broker would be in violation of the rule if we went through the typical pre-approval process as it exists in 2014.

I’m pleased to report that I received a call from Jeff Riley at the CFPB and had a lengthy discussion with him about this issue.  Jeff provided verbal clarification* that it is permissible for creditors/brokers to REQUEST information and documentation from the borrower prior to providing a loan estimate, including at the pre-approval stage.  However, the borrower cannot be REQUIRED to provide documentation before a creditor (or broker on behalf of a creditor) provides a loan estimate, nor can the collecting any of the six pieces of information that constitute an application be intentionally delayed until the borrower provides the documentation.  Put simply, if borrowers verbally provide you the six pieces of information (name, income, Social Security number, subject property address, estimate of value of the subject property and the desired loan amount), you must provide a loan estimate within three business days even if they refuse to furnish any documentation to substantiate what they verbally disclose.

What’s the takeaway here?  Carry on with your pre-approvals as you normally would after August 1, 2015.  Obtaining documentation from the borrower in order to issue a pre-approval would not appear to put you in violation of the TILA-RESPA rule (although I would certainly avoid giving the impression through verbal or non-verbal clues that any documentation is “required” or “mandatory”).  Also, if borrowers want to give you all of the required information verbally, don’t stop them from doing so until you’ve seen documents, as that would be a violation of the rule.

*NOTE – Verbal clarification is NOT official staff guidance or an official interpretation of the rule by the CFPB.  I encourage all readers to consult with a qualified attorney on all matters of law or regulation.  I am not an attorney (nor do I play one on TV), and no blog post can or should substitute for competent legal counsel.

Happy originating!


President Obama to Make ‘Recess Appointment’ of Richard Cordray to Head CFPB

Move has widespread impact for mortgage bankers and brokers.

As was widely expected, the president today announced that former Ohio Attorney General Richard Cordray will be appointed to the position of Director of the Bureau of Consumer Financial Protection (or “CFPB” – Consumer Financial Protection Bureau) while Congress is on recess.  The appointment is intended to circumvent a filibuster that was being staged by 42 senators who wanted to see changes made to the underlying Dodd-Frank legislation before allowing a vote on Cordray’s confirmation. 

What does this mean? My CE students already know.

Those of you who took my continuing education course in 2011 are intimately familiar with both Cordray and the CFPB and understand more than most that this move is NOT an insignificant one.  Without an official director, the CFPB could not utilize many of the powers that were granted to the agency in the Dodd-Frank legislation.  Now that Cordray will be taking the reins of the organization, the CFPB will be able to wield its full power – including supervisory authority over non-bank originators (i.e. mortgage banks and brokers) and rulemaking authority that will impact these businesses (i.e. most of you reading this post).  This move also paves the way for the CFPB to issue the new combined GFE/TIL disclosure that has been in development for the past year, as well as a redesigned HUD-1 settlement statement.  Expect to see those rolled out over the next few months, with a final implementation date later in the year.  Also, we should expect to see a mortgage loan originator “duty of care” rule issued soon as well, clarifying our responsibilities to safeguard borrowers from harm.  I have no advance knowledge of what that will look like, but I will certainly share the critical points with you when it is released.

Possible bump in the road.

There is one minor detail that may pose a bit of a bump in the road for Cordray: Congress is not officially in recess.  The Constitution prohibits either chamber from recessing for longer than three days without the consent of the other chamber.  In this case, the House of Representatives objected to the Senate going into recess, which triggered a series of “pro-forma” sessions where one member of Congress opens and closes a session (of an empty House of Representatives) once every three days.   There are some constitutional questions surrounding this appointment, but Congress has no grounds to challenge this in court.  Any challenge to the appointment’s constitutionality would have to be made by an individual or organization directly affected by the CFPB.  Some members of Congress indicated earlier this morning that they thought such a challenge would be forthcoming.  While this may be true, it will take time, and there is no guarantee of the eventual result. 

Get your house in order – NOW!

The bottom line is, those of you in compliance or ownership positions at non-bank lenders and brokers would be wise to ensure that your business practices are free of unfair, deceptive and abusive acts and practices (UDAAP) and that you’re ready to adapt to any significant changes that may be coming down the pipe.  I also strongly recommend that you obtain a copy of the CFPB’s “Supervision and Examination Manual” to give you a strong reference point for the items that the CFPB will be looking for when conducting examinations of companies (audits).   This is doubly true for any of you who are engaged in servicing loans.

Happy new year to all, and be sure to continue watching this space for updates on critical issues that will affect you in the future.  Happy originating!

Consumer Financial Protection Bureau – the Birth of a Regulator

A few weeks ago, amidst much fanfare, the Consumer Financial Protection Bureau (CFPB) assumed some level of regulatory authority over, well, pretty much the entire financial sector of the U.S. economy.  The reaction from most of the media has been one of fawning delight, as evidenced by this column that appeared on WalletPop.com back in May and this column by Gail MarksJarvis that appeared in the Chicago Tribune.  Indeed, a simple Google search for “Consumer Financial Protection Bureau” returns almost 2 million hits and, if my random sampling of articles is statistically valid, roughly 70% of the Literati are convinced that sliced bread has found some competition in the “best things” category.

It is certainly true that many banks are indeed ‘scared’ – a fact that the media pundits gleefully celebrate, as though a regulatory entity striking fear into the heart of the institutions that are charged with financing our hopes and dreams somehow makes things better for consumers.  Sorry, Charlie, but that is simply not true, and for evidence of that, look no farther than the announcement made by MetLife last week that it would sell its banking business to avoid CFPB regulation.  Lest you believe this is some sort of isolated incident, MetLife is joining its brethren insurers Hartford Financial Services Group and Allstate in divesting depository business. There are likely more firms to follow as the CFPB issues the expected myriad of new regulations necessary to implement other Dodd-Frank reforms over the next few months. 

Unfortunately for senior citizens, MetLife is currently one of the nation’s leading lenders in reverse mortgages – a product designed for the 62-and-older-crowd to help manage life expenses on a fixed income.  Most of the large “money center” banks have already shut down their reverse mortgage divisions, meaning that the result of MetLife’s announcement may be that funding for this necessary loan product becomes more difficult to find.  One must assume that limiting consumer choice for the elderly was NOT one of the goals of Dodd-Frank and, by extension, the CFPB. So let’s call this a real-world example of unintended consequences.

Here are some other possible unintended consequences arising out of the CFPB, as I see them:

  • Traditional mortgage loans may become much more difficult to obtain as a result of the Qualified Residential Mortgage (QRM) being so restrictively defined as to exclude a large portion of the loans actually written in the last two years.  Loans with terms falling outside the QRM definition will be subject to risk-retention requirements that will lower banks’ tier-one capital ratios and increase their administrative and compliance costs, leading to questions as to whether they will be willing to make these loans at all.
  • Mortgage, auto and consumer loan products may become more expensive for consumers as a result of restrictions that Dodd-Frank placed on debit card fees paid by retailers to banks.  Banks rely on these fees to pay for expansion and maintenance of their vast debit card networks and other overhead costs.  Restricting collection of such fees means that banks will have to compensate with increased fees and rates on their other products.
  • Mortgage, auto and consumer loan products may become more expensive for consumers as a result of banks’ increased regulatory compliance expenses.  Compliance costs for companies in the financial sector, whether or not they are depository institutions, have skyrocketed over the past two years as regulators at both the federal and state levels have implemented a series of laws designed to curb lending practices that the marketplace had already largely eliminated on its own.  More regulations and the addition of a new regulator with new reporting and examination procedures will only add to these costs.

Please don’t misunderstand; I’m not saying that the CFPB is without its positives.  For example, it has already been working behind the scenes to create simplified mortgage forms designed to merge the confusing Good Faith Estimate and Truth-in-Lending disclosures into one easy-to-follow document.  Consumers and mortgage professionals alike have been clamoring for this for a long time, and I am encouraged by what the CFPB has designed.  I am also encouraged that they have actually made the effort to solicit (and listen to!) input from the mortgage industry in the design process, making it far less likely that the result of the process will be an unworkable document with compliance consequences that extend outside the document itself, like the last GFE revision was.

Bottom line – in my opinion, the CFPB should tread very lightly in promulgating new regulations.  In order to be successful, they need to keep in mind that protecting the consumer from “unfair, deceptive and abusive acts and practices” does NOT mean the same thing as preventing the consumer from making his or her own decisions for fear that they will end up being bad ones.  They also must be cognizant of the fact that, regardless of the portrait that the media paints, the financial sector was really NOT an “unregulated wildwest” before the Dodd-Frank legislation.  In many cases, stated goals can be accomplished with minor tweaks to existing regulations instead of sweeping new ones intended as punitive to the very financial institutions that the government is pressuring to increase lending and save the larger economy from another downturn.

New Legislation – What’s Next For Loan Originators? (Part 2)

IT’S OFFICIAL.  President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law last Wednesday as expected.  As we mentioned in our first report on the legislation, this massive (2300 page) new law contains a subsection called the “Mortgage Reform and Anti-Predatory Lending Act”, which imposes wholesale changes on the mortgage lending industry and may have a direct impact on your day-to-day business and bottom line. 

This is the second in a series of reports on what’s in the law, what’s not in the law, what we know and what we don’t.  Considering that massive amounts of new powers were given to the new “Consumer Financial Protection Bureau” to create a structure of regulations (that carry the force of law) to implement the requirements of the Act, details are sketchy on many of the items addressed in the legislation, but we’ll do our best to share as much as possible with you. 

In this update, we will discuss the requirement for creditors to consider a borrower’s ability to repay a loan before making it, and the exemption from that requirement given to a new category of “qualified mortgage loans.”

Title XIV, Subtitle B, Section 1411 of the Act prohibits creditors from making a residential mortgage loan without making “a reasonable and good faith determination based on verified and documented information” that the consumer “has a reasonable ability to repay the loan … and all applicable taxes, insurance … and assessments.”  This determination would specifically have to include consideration of the following items:

  1. Credit history
  2. Current income
  3. Expected income the consumer is reasonably assured of receiving
  4. Current obligations
  5. Debt-to-income ratio, or the residual income the consumer will have after paying mortgage and non-mortgage debt
  6. Employment status
  7. Other financial resources other than the equity in the subject property

Note that the law does not say which of the factors above must be prioritized, as long as all of them are considered.  Given the perceived intent of the 7 items above, it is ironic that there is also a provision in the Act that would permit the originator to “consider seasonal and irregular income” in underwriting. 

The Act also contains guidelines directing creditors how to calculate the monthly principal and interest payment for purposes of determining the borrower’s ability to repay.  We can expect these guidelines to be added to the applicable Selling Guides for FNMA and FHLMC in the near future, we’ll omit a discussion of them here for the time being.

The final item we’ll go over in this update is the “safe harbor” provision of the Act that says that a borrower is presumed to have the ability to repay a “qualified mortgage loan.”  This will essentially give lenders an automatic defense against any lawsuits brought for violation of the “ability to repay” requirement for loans that meet the criteria.  Although the Act defines what a “qualified” loan is, it gives power to the Bureau to issue regulations changing the definition, so we can’t yet know what the final definition will look like.  However, as of now, a “qualified mortgage loan” is defined as a loan in which all of the following apply:

  1. The payments of the loan may generally not result in an increase of the principal balance
  2. The terms of the loan do not result in a balloon payment, except for certain limited exceptions
  3. Any income and financial resources relied upon to qualify are verified/documented
  4. For a fixed rate loan, underwriting is based on a fully amortizing payment and includes applicable taxes and insurance
  5. For an ARM loan, underwriting is based on a fully amortizing payment at the maximum rate the loan can attain during the first 5 years, including taxes and insurance
  6. The loan complies with any guidelines the Federal Reserve Board establishes regarding Debt-to-Income ratios or residual income requirements
  7. The total points and fees payable in connection with the loan do not exceed 3 percent of the total loan amount (with the FRB to issue regulations for “smaller” loans)
  8. The loan term does not exceed 30 years, except in limited circumstances

For the purposes of computing “points and fees” for number 7 above, include all charges paid to the originator or an affiliate of the originator (in the case of a broker, this means that lender fees would be included in this calculation), including the maximum prepayment penalty (if any) and any upfront credit insurance premiums.  Third party fees not retained by the originator or an affiliate are excluded, as are up to two (2) “bona fide discount points” in many circumstances.  The wording of this section, while certainly not friendly to the mortgage lending industry, is much more favorable than the wording in the original Senate bill which would have included a portion of the FHA MIP or VA funding fee.  Given that the Act specifically gives the new Consumer Financial Protection Bureau the power to amend/change these requirements in the future, it is possible that these rules may change significantly and may become even more restrictive. 

A key concern raised by the safe harbor is whether banks will make loans that are NOT “qualified” loans, or whether they will pull out of that space altogether.  Such a result would resemble the initial market response to Section 32 high cost loans when HOEPA went into effect.  When you combine these provisions with the effective elimination of Yield Spread Premiums (to be discussed in the next update), it is reasonable to expect that mortgage brokers and table-funders will be impacted by these requirements much more than correspondent lenders or chartered banks.