Wednesday, October 23, 2013

Fair Lending Compliance, Ability-to-Repay and Qualified Mortgages

On October 22, 2013, the Consumer Financial Protection Bureau (Bureau), Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA) (collectively, the Agencies) issued a statement in response to inquiries from creditors about whether they would be liable under the disparate impact doctrine of the Equal Credit Opportunity Act (ECOA) [15 U.S.C. 1691 et seq., and its implementing regulation, Regulation B, 12 C.F.R. Part 1002] by originating only Qualified Mortgages as defined under the Bureau's recent Ability-to-Repay and Qualified Mortgage Standards Rule (ATR Rule). The ATR Rule implements provisions of the Truth in Lending Act (TILA).[1]

The Agencies' general approach and expectations regarding fair lending, including the disparate impact doctrine, are summarized in prior issuances.[2]

The Agencies state that they are issuing this statement to describe some general principles that will guide supervisory and enforcement activities with respect to entities within their jurisdiction as the Ability-to-Repay Rule takes effect in January 2014. Per the Agencies, the requirements of the Ability-to-Repay Rule and ECOA are compatible. ECOA and Regulation B promote creditors acting on the basis of their legitimate business needs.[3]

Therefore, the Agencies do not anticipate that a creditor's decision to offer only Qualified Mortgages would, absent other factors, elevate a supervised institution's fair lending risk.

The Bureau's Ability-to-Repay Rule implements provisions of the Dodd-Frank Act that require creditors to make a reasonable, good faith determination that a consumer has the ability to repay a mortgage loan before extending the consumer credit.[4] TILA and the Ability-to-Repay Rule create a presumption of compliance with the ability-to-repay requirements for certain "Qualified Mortgages," which are subject to certain restrictions as to risky features, limitations on upfront points and fees, and specialized underwriting requirements.

Consistent with the statutory framework, there are several ways to satisfy the Ability-to-Repay Rule, including, according to the Agencies, making responsibly underwritten loans that are not Qualified Mortgages.

The Bureau does not believe that it is possible to define by rule every instance in which a mortgage is affordable for the borrower. Nonetheless, the Agencies are recognizing that some creditors might be inclined to originate all or predominantly Qualified Mortgages, particularly when the Ability-to-Repay Rule first takes effect. The Rule includes transition mechanisms that encourage preservation of access to credit during this transition period.

Furthermore, according to the issuance, the Agencies expect that creditors, in selecting their business models and product offerings, would consider “demonstrable factors” that may include credit risk, secondary market opportunities, capital requirements, and liability risk. The Ability-to-Repay Rule does not dictate precisely how creditors should balance such factors, nor do either TILA or ECOA. Consequently, as creditors assess their business models, the Agencies are clearly stating they understand that implementation of the Ability-to-Repay Rule, other Dodd-Frank Act regulations, and other changes in economic and mortgage market conditions have real world impacts and that creditors may have a legitimate business need to fine tune their product offerings over the next few years in response.

Importantly, the Agencies seem to be recognizing that some creditors' existing business models are such that all of the loans they originate will already satisfy the requirements for Qualified Mortgages. An example given is where a creditor has decided to restrict its mortgage lending only to loans that are purchasable on the secondary market might find that - in the current market - are Qualified Mortgages under the transition provision. Thereby giving Qualified Mortgage status to most loans that are eligible for purchase, guarantee, or insurance by Fannie Mae, Freddie Mac, or certain federal agency programs.

With respect to any fair lending risk, the Agencies claim that situation here is not substantially different from what creditors have historically faced in developing product offerings or responding to regulatory or market changes. The decisions creditors will make about their product offerings in response to the Ability-to-Repay Rule are similar to the decisions that creditors have made in the past with regard to other significant regulatory changes affecting particular types of loans.

An example provided is where some creditors may have decided not to offer "higher-priced mortgage loans" after July 2008 (viz., following the adoption of various rules regulating these loans or previously decided not to offer loans subject to the Home Ownership and Equity Protection Act after regulations to implement that statute were first adopted in 1995). There were no ECOA or Regulation B challenges to those decisions.

Inevitably, creditors should continue to evaluate fair lending risk as they would for other types of product selections, including by carefully monitoring their policies and practices and implementing effective compliance management systems. As with any other compliance matter, individual cases will be evaluated on their own merits.

The OCC, the Board, the FDIC, and the NCUA believe that the same principles described above apply in supervising institutions for compliance with the Fair Housing Act (FHA), 42 U.S.C. § 3601 et seq., and its implementing regulation, 24 C.F.R. Part 100.[5]

[1] See Disparate impact is one of the methods of proving lending discrimination under ECOA. See 12 C.F.R. pt. 1002 & Supp. I.
[2] For instance, in 1994, eight federal agencies published the Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18,266 (Apr. 15, 1994), and last year the Bureau issued a bulletin on lending discrimination, CFPB Bulletin 2012-04 (Fair Lending) (Apr. 18, 2012). In addition, the OCC, Board, FDIC, NCUA, and Bureau each have fair lending examination procedures.
[3] Even where a facially neutral practice results in a disproportionately negative impact on a protected class, a creditor is not liable provided the practice meets a legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact. See 12 C.F.R. §1002.6; 12 C.F.R. pt. 1002, Supp. I, § 1002.6, ¶ 6(a)-2.
[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1411, 124 Stat. 1376, 2142 (2010) (codified at 15 U.S.C. § 1639c).
[5] The OCC, Board, FDIC, and the NCUA have supervisory authority as to the FHA.

Thursday, October 17, 2013

Elder Financial Abuse: Prevention and Remedies

I have written about elder financial abuse, and I will keep writing about it until stops.[i]

It is unfathomable to me that schemes to defraud the elderly are so pervasive. These seniors are attractive targets for financial exploitation. They are taken advantage of by scam artists, financial advisors, family members, friends, acquaintances, caregivers, home repair contractors, real estate firms, residential mortgage loan originators, credit repair companies, stock brokers, accountants, lawyers, collection agents, appraisers, fiduciaries, guardians, unscrupulous professionals and business people (or those posing as such), pastors, annuity salespersons, and doctors.

It is not news at this point that financial exploitation is a common form of elder abuse and that only a small fraction of incidents is reported to federal, state, or local enforcement authorities, despite persistent efforts by private companies and government agencies to slow its growth. 

Predator and Victim

Why target the elderly? Because older adults often have retirement savings, accumulated home equity, or other assets. Combine those factors with a likelihood of eventual physical or mental impairments, a range of cognitive disabilities, emotional decline, isolation, loneliness, health problems, loss of a partner, family, or friend – all contributing to being vulnerable to financial exploitation and scams – and the result is a feeding frenzy to obtain ill-gotten gains!

Financially abused elders, are susceptible to exploitation for numerous reasons. They are often frail, and the predators assume that frail victims will not survive long enough to follow through on legal interventions, or that they will not make convincing witnesses. Severely impaired individuals are also less likely to take action against their abusers, as a result of illness or embarrassment. The elderly are likely to have disabilities that make them dependent on others for help. These "helpers" or new “best friends” may have access to homes and assets, and may exercise significant influence over the older person. Many elderly people are not financially sophisticated or are unfamiliar with modern technology involving money management.

Family and friends may prey on the elderly. Statistically, ninety (90%) percent of abusers are family members or trusted others! A younger family member might fear that the older family member will get sick and use up savings, depriving the abuser of an inheritance. Or, the abuse is rationalized, believing that the predator stands to inherit assets, and thus feels justified in taking what is thought to be "almost" or "rightfully" due. Then there are the family members who have negative feelings toward siblings or other family members whom they want to prevent from acquiring or inheriting the older person's assets. Or, friends and family who have had a negative relationship with the older person feel a sense of "entitlement." And, certainly, there are close relations who have substance abuse, gambling, or financial problems, which tempt them to defraud and financially abuse the elderly family member.[ii]

What happens when an elderly person is financially abused? The devastation is deep, broad, and painful. These are some typical outcomes: loss of trust in others; loss of security; depression; feelings of fear, shame, guilt, anger, self-doubt, remorse, worthlessness; financial destitution; inability to replace lost assets through employment; inability to hire an attorney to pursue legal protections and remedies; becoming reliant on government ‘safety net’ programs; inability to provide for long term care needs; and, loss of the primary residence.[iii] 

Regulatory Responses

For many years, the Financial Crimes Enforcement Network (“FinCEN”) has kept track of very specific instances of elder abuse relating, for instance, to mortgage fraud. Importantly, it issues periodic advisories that offer statistics as well as outlines of new scams. My firm monitors FinCEN’s statistics and issuances, and we provide the findings in our newsletters, articles, and compliance alerts, and we place relevant documents and issuances in our website library.[iv]

It is important to mention that elder financial abuse includes the Red Flags associated with identity theft. Therefore, the twenty-six Red Flags offered in the Interagency Guidance, through the Federal Trade Commission, are a resource.[v]

The Consumer Financial Protection Bureau uses its Office of Financial Protection for Older Americans to provide information and tools to avoid the financial exploitation of the elderly. Additionally, the agency has been carefully considering regulatory ways and means to curtail such financial abuse. Indeed, it has moved to the forefront in developing strategies to communicate that the Gramm-Leach-Bliley Act (“GLBA”) does not prohibit companies from reporting suspected elder financial exploitation, which I will discuss in some detail in the following section.[vi]

In this article, I will outline how the GLBA furthers the protection of the elderly from financial abuse. I will also provide an outline of some Red Flags as well as ways to increase public awareness about elder financial abuse. Understanding the ways and means available to provide consumer financial protection will help to end the plundering of the elderly. 

Using the Gramm-Leach-Bliley Act

On September 24, 2013, certain federal regulatory agencies issued guidance (“Guidance”) to clarify that the privacy provisions of the Gramm-Leach-Bliley Act (“GLBA”) generally permit financial institutions to report suspected elder financial abuse to appropriate authorities.[vii] Because the GLBA’s privacy provisions generally require a financial institution to notify consumers and give them an opportunity to opt out before providing nonpublic personal information to a third party, the Guidance seeks to clarify that it is generally acceptable under the law for financial institutions to report suspected elder financial abuse to appropriate local, state or federal agencies.

The federal agencies that have collaborated to issue the clarification Guidance, entitled Interagency Guidance on Privacy Laws and Reporting Financial Abuse of Older Adults, are the Federal Reserve System (“FRB”), Commodity Futures Trading Commission (“CFTC”, issuing as Staff Guidance), Consumer Financial Protection Bureau (“CFPB”), Federal Deposit Insurance Corporation (“FDIC”), Federal Trade Commission (“FTC”), National Credit Union Administration (“NCUA”), Office of the Comptroller of the Currency (“OCC”), and Securities and Exchange Commission (“SEC”). The purpose of the issuance is to provide guidance to financial institutions with respect to clarifying the applicability of privacy provisions of the GLBA, specifically regarding the reporting of suspected financial exploitation of older adults.

Wednesday, October 2, 2013

HUD’s Safe and Rebuttable Qualified Mortgages

The anxiously awaited Proposed Rule (“Rule”) outlining the Qualified Mortgage for FHA loans was published in the Federal Register on September 30, 2013. Given the bland, bureaucratic title Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages (“Issuance”), HUD is submitting for public comment its definition of a “qualified mortgage” for the types of loans that HUD insures, guarantees, or administers that align with the statutory ability-to-repay (“ATR”) criteria of the Truth-in-Lending Act (“TILA”) and the regulatory criteria of the definition given by the Consumer Financial Protection Bureau (“CFPB”), without departing from HUD’s statutory requirements. The expiration of the comment period is October 30, 2013.

A copy of the Proposed Rule is available in our Library.

In this article, I will provide an overview of the Rule with respect to Title II mortgages of the National Housing Act. I shall offer some practical insights relating to the potential consequences and implementation of the Rule for residential mortgage lenders and originators.*

Birthing HUD’s Proposed Rule

The Rule has its genesis in a foundational document, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which created the new section 129C in TILA, establishing minimum standards for considering a consumer’s repayment ability for creditors originating certain closed-end, dwelling-secured mortgages, and generally prohibiting a creditor from originating a residential mortgage loan unless the creditor makes a reasonable and good faith determination of a consumer’s ability to repay the loan according to its terms.

Briefly, Section 129C is meant to provide lenders a specific format to meet the ATR requirements when lenders make “qualified mortgages” (“QMs”). A new section 129C(b), added by section 1412 of Dodd-Frank, establishes the presumption that the ATR requirements of section 129C(a) are satisfied if a mortgage is a “qualified mortgage,’’ and authorizes the CFPB, to prescribe regulations that revise, add to, or subtract from the criteria in TILA that define a “qualified mortgage.’’ (Section 129C also provides for a reverse mortgage to be a qualified mortgage if the mortgage meets the CFPB’s standards for a qualified mortgage, except to the extent that reverse mortgages are statutorily exempted altogether from the ATR requirements. The CFPB’s regulations provide that the ATR requirements of section 129C(a) do not apply to reverse mortgages. Section 129C(a)(8) excludes reverse mortgages from the repayment ability requirements.)

As you may know, I have published and presented extensively on QMs and have dubbed the non-qualified mortgage with the acronym “NQM.” For some of my work on this subject, please visit HERE, and HERE, and HERE.

Section 129C authorizes the agency with responsibility for compliance with TILA, that is, the CFPB, to issue a rule implementing these requirements. The CFPB already set forth its Final Rule on ATR, QMs, and NQMs, as issued in the Federal Register on January 30, 2013. Along with certain other agencies, HUD was also later on charged by the CFPB, pursuant to Dodd-Frank, with prescribing regulations defining the types of loans that it would insure, guarantee, or administer, as applicable, that are qualified mortgages. In the Rule, HUD now proposes that any forward single family mortgage insured or guaranteed by HUD must meet the criteria of a qualified mortgage, as defined in the Rule.

HUD reviewed its mortgage insurance and loan guarantee programs and, in the Issuance, stated that all of the single family residential mortgage and loan products offered under HUD programs are qualified mortgages; that is, they “exclude risky features and are designed so that the borrower can repay the loan.” However, for certain of its mortgage products, HUD proposes its Rule for qualified mortgage standards similar to those established by the CFPB in its definition of “qualified mortgage.” 

Safe Harbor and Rebuttable Presumption of Compliance

Through its “qualified mortgage” rulemaking, the CFPB established both a “safe harbor” and a “rebuttable presumption of compliance” for transactions that are qualified mortgages. CFPB's label of safe harbor is applied to those mortgages that are not higher-priced covered transactions (i.e., the annual percentage rate (“APR”) does not exceed the average prime offer rate (“APOR”) by 1.5 percent). These are considered to be the least risky loans and presumed to have conclusively met the ATR requirements of TILA. The label of rebuttable presumption of compliance is applied to those mortgages that are higher-priced transactions.

TILA Section 129C(b)(2)(ix) provides that the term “qualified mortgage” may include a “residential mortgage loan” that is “a reverse mortgage which meets the standards for a qualified mortgage, as set by the Bureau in rules that are consistent with the purposes of this subsection.” But the Federal Reserve Board’s proposal, adopted by the CFPB, does not include reverse mortgages in the definition of a “qualified mortgage.” Indeed, the CFPB’s Final Rule does not define a “qualified” reverse mortgage.

HUD proposes to designate Title I (home improvement loans), Section 184 (Indian housing loans), and Section 184A (Native Hawaiian housing loans) insured mortgages and guaranteed loans covered by the Rule to be safe harbor qualified mortgages and HUD proposes no changes to the underwriting requirements of these mortgage and loan products.

The largest volume of HUD mortgage products - those insured under Title II of the National Housing Act – would be bifurcated into qualified mortgages similar to the two categories created in the CFPB final rule: a safe harbor qualified mortgage and a rebuttable presumption qualified mortgage.

Specifically, the Rule would define the safe harbor qualified mortgage as a mortgage insured under Title II of the National Housing Act (excepting reverse mortgages insured under section 255 of this act) that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR 1026.43(e)(3), and that has an APR for a first-lien mortgage relative to the APOR that is less than the sum of the annual mortgage insurance premium (“MIP”) and 1.15 percentage points. HUD would define a rebuttable presumption qualified mortgage as a single family mortgage insured under Title II of the National Housing Act (excepting reverse mortgages insured under section 255 of this act) that meets the points and fees limit adopted by the CFPB in its regulation at 12 CFR 1026.43(e)(3), but has an APR that exceeds the APOR for a comparable mortgage, as of the date the interest rate is set, by more than the sum of the annual MIP and 1.15 percentage points for a first-lien mortgage.

Therefore, under the Rule, HUD would require that all loans insured under Title II of the National Housing Act to be either a rebuttable presumption or safe harbor qualified mortgage, and, importantly, that they meet the CFPB’s points and fees limit at 12 CFR 1026.43(e)(3). The CFPB set a three (3%) percentage points and fees limit for its definition of qualified mortgage and allowed for adjustments of this limit to facilitate the presumption of compliance for smaller loans.