Lender’s One ConferenceMDIA/HOEPA Presentation
Understanding new consumer protectionsunder TILA/HOEPA and UDAP Rules New Underwriting Requirements for HigherPriced Mortgage Loans A Brief MDIA Primer on fee limitations Advertising and Servicing Restrictions New FTC Proposals on Mortgage UDAPs A quick look at upcoming anti-predatorylegislation
Mortgage Disclosure Improvement Act (MDIA)Effective for all loan applications received on orafter July 30, 2009 Initial Fee RestrictionsEarly Disclosures“No Requirement to Complete” StatementSeven Business Days Prior to Consummation Three Business Days Prior to Consummation
MDIA – Initial Fee Restrictions No fees may be collected, except for areasonable credit report fee, untilconsumer has received early disclosures. Applies to lender and to all other parties.
MDIA – Early Disclosures Early disclosure rules apply to all closedend mortgage loans covered by TILA andRESPA, other than timeshares. No longer limited to only purchase-moneytransactions secured by principal dwelling.
MDIA – Early Disclosures Early disclosure must be placed in the mailor delivered both– No later than the third business day after thelender receives a written application, AND– No later than the seventh business day beforeconsummation.
MDIA – Early Disclosures The general definition of “business day” isused for initial three-day period (e.g., alldays in which lender’s offices are open tothe public), BUT “Rescission” definition is used for sevenday, pre-consummation waiting period(e.g., all calendar days except Sundaysand federal holidays).
MDIA – Early Disclosures If early disclosures are mailed, receipt isassumed three business days later(“rescission” definition) Fees may therefore be collected aftermidnight on third business day followingmailing.
MDIA – “No Requirement toComplete” Statement “You are not required to complete thisagreement merely because you havereceived these disclosures or signed aloan application.” Phrase must be “in conspicuous type sizeand format” and “grouped together withthe disclosures required by” Regulation Z.
MDIA - Three Business DaysPrior to Consummation If APR at consummation will differ by more than1/8 of 1% (1/4 for irregular transactions) from theAPR in the most recent disclosure, correcteddisclosures must be received by the consumerno later than the third business day beforeconsummation. If corrected disclosures are mailed, receipt isdeemed to have occurred three business daysafter mailing (“rescission” definition).
MDIA - Three Business DaysPrior to Consummation If APR at consummation will beoverdisclosed because of anoverdisclosed finance charge, thenredisclosure may not be required. Some investors may still requireredisclosure for both increased anddecreased APRs beyond the applicabletolerances.
MDIA – “3-7-3” Requirements Both the seven-day and the three-daywaiting periods must expire beforeconsummation.
TILA – Higher-PricedMortgage Loans A new category of “higher-priced mortgageloans” (“HPMLs”) created, with specificrequirements relating to HPMLs; New rules for all closed-end mortgage loanssecured by the principal dwelling, including rulesin relation to origination and servicing; and New advertising rules to curb various practicesthe Federal Reserve Board considers deceptive,for both open-and closed-end mortgage loans.
TILA – Higher-PricedMortgage Loans Rule and accompanying supplementarymaterials are over 400 pages long and there aremany nuances yet to be discovered. Undoubtedly much will be learned as thousandsof lenders and servicers across the countryadjust their systems, policies and procedures tocomply with the rule. Rule transforms TILA as applied to mortgagesfrom principally being a disclosure regime to onewith significant substantive restrictions.
Overview Broad new rule, adopted principally under theFederal Reserve Board’s authority underSection 129 of the Truth in Lending Act TILA Section 129(l)(2): “The Board, by regulationor order, shall prohibit acts or practices inconnection with—– (A) mortgage loans that the Board finds to be unfair,deceptive, or designed to evade the provisions of thissection; and– (B) refinancing of mortgage loans that the Board findsto be associated with abusive lending practices, orthat are otherwise not in the interest of the borrower.”
Overview Rule and accompanying supplementarymaterials are over 400 pages long and there aremany nuances yet to be discovered.– Undoubtedly much will be learned as thousands oflenders and servicers across the country adjust theirsystems, policies and procedures to comply with therule. Rule transforms TILA as applied to mortgagesfrom principally being a disclosure regime to onewith significant substantive restrictions
Effective Dates General effective date – October 1, 2009– Servicing rules effective for both new andexisting loans as of that date– April 1, 2010 for escrow requirements on sitebuilt homes– October 1, 2010 for escrow requirements onmanufactured housing loans Retroactive effect of rule?
HPML Threshold APR of “average prime offer rate” – yet to be fullydefined – plus 150/350 basis points for first/subordinateliens– Expected to be similar to the Freddie Mac Primary MortgageMarket Survey, but the Board will use the rate and points fromthe survey to calculate an APR for various loan types– Board is seeking comment on the average prime offer rate in thecontext of its Regulation C proposal – comments due August 29 Calculated as of time of rate lock – so lenders will needprocedures for filling in if the loan is identified as anHPML only at the time of rate lock Lenders need to analyze carefully whether FHA, jumbo,and PMI loans end up in the HPML category
Loan Categories HPMLs include only closed-end loans securedby the borrower’s principal dwelling. Thisexcludes– HELOCs– Loans on second homes and investment properties– Short-term construction loans Open question: Principal dwelling as of when? Unlike HOEPA, HPMLs will include purchasemoney loans
Ability to Repay Requires lender to verify the consumer’srepayment ability (e.g., verifying theconsumer’s income, assets and currentobligations)
Practical Effect If a HPML goes to default or foreclosure, aplaintiff will likely claim that the lender didnot comply with the underwritingrequirements
Add’l Requirements on allClosed-End Loans Secured byBorrower’s Principal Dwelling Appraiser anti-coercion Servicing
Appraiser Coercion Very broad anti-coercion rule that prohibits not onlycoercion but also any act that might influence theappraisal or “otherwise encourage” misstatement ofvalue. The rule provides– examples of acts that are violations (e.g. “[t]elling an appraiser aminimum reported value of a consumer’s principal dwelling thatis needed to approve the loan.”); and– examples of acts that are not violations (“[a]sking an appraiser toconsider additional information about a consumer’s principaldwelling or about comparable properties.”). Lender must not extend credit if knows at consummationcoercion occurred unless it documents diligence toensure appraised value not misstated
Appraiser Coercion May be hard to defend against claims that thelender knew of appraiser coercion Because of section 129 liability, the penalties forclaims of influencing the appraiser are high Like “ability to repay” claims, expect appraisercoercion counterclaims in foreclosures– What will plaintiffs have to plead to survive motion todismiss?
Servicing Requirements Prompt response to payoff requests (5 days) Application of payments the same day as theyare “received.”– Will create numerous operational difficulties forpayments received other than in the ordinary course. No late fee pyramiding.– Already illegal – it appears that industry did not evenbother to comment on this section.
Other Requirements on HPMLs First-lien HPMLs must be escrowed for at least the firstyear– Unclear how this interacts with state laws that prohibit escrowrequirements. Preemption? After one year? Strict prepayment penalty restrictions– No prepayment penalties for loans where the payment maychange in first four years; and– Prepayment penalties limited to a two year duration for otherloans and may not be imposed in a same creditor refinance Anti-evasion provision to prevent creditors fromstructuring loan as an open end loan to avoid HPMLstatus
Liability Most sections were promulgated under the Board’sSection 129 authority. Liability under this provisionincludes:– The usual closed-end TILA liability (statutory damages of 200- 2000 capped at 500,000 for a class action plusattorneys fees)– Plus two additional types of liability: Actual damages are potentially available for violations of some of thenew requirements– Actual damages are and have been available since the inception of TILAin 1968 but have almost never been proven because it is difficult toattribute actual losses to disclosure violations “All finance charges” under section 130(a)(4) for violations of Section129 (“materiality” requirement) No explicit class action cap on either of these types of damages
TILA – Advertising RulesEffective October 1, 2009, among other things, Credit terms advertised must be actually available If an advertisement shows a rate of finance charge, it must be expressedin terms of the annual percentage rate. The abbreviation “APR” may beused. The advertisement may also show a simple interest rate “inconjunction with, but not more conspicuously than” the APR. If an advertisement shows the amount of any payment, the number ofpayments or period of repayment (length of loan), or the amount of anyfinance charge, it must also show the (other) terms of repayment and theAPR. This is referred to as the “trigger term” rule. (Requirements withrespect to downpayments do not apply to mortgage loans other than salesfinance.)
FTC – Mortgage Actsand Practices FTC proposes rules addressing activitiesthat occur throughout the life-cycle of amortgage loan FTC seeks to assess whether, and to whatextent, the FTC should promulgate rulesthat would regulate (i) advertising andmarketing, (ii) origination, includingunderwriting, loan terms, and disclosures,(iii) appraisals, and (iv) servicing.
FTC – Mortgage Actsand Practices FTC proposes to cover acts and practices thatmeet the FTC’s standards for unfairness ordeception under Section 5 of the FTC Act. Proposal would apply to entities over which theFTC has jurisdiction under the FTC Act –specifically, entities other than banks, thrifts,federal credit unions, and non-profits thatengage in the conduct the rules would cover.
Other Federal Developments –“Skin in the Game” HR 1728: Mortgage Reform and AntiPredatory Lending Act Among other things, HR 1728 wouldrequire creditors to retain at least 5% ofthe credit risk on mortgages transferred,sold, or conveyed.
QuestionsJonathan W. CannonBuckleySandler [email protected]
– (A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and – (B) refinancing of mortgage loans that the Board finds to be associated wi