CFPB Offers A View Of Profit Sharing

The CFPB recently announced that it will update the TILA loan originator compensation rule (Rule) in July of 2012. The updated rule may cause some new concerns regarding the implementation of the current Rule or it just may actually provide some sorely needed repairs for issues, strange and otherwise, that have dogged the Rule from the very start.

One issue in particular has been fomenting all along: the FRB's interpretation of the Rule (and the interpretation informally adopted by the FDIC) regarding contributions made to retirement plans on behalf of loan originator employees. The FRB deemed such contributions to be compensation and subject to the restriction that compensation cannot be based on the terms and conditions of the loan transaction. This is because the FRB asserted that profits were considered a proxy for loan terms and conditions.

Recently, the CFPB has weighed into this matter by declaring that employers should be permitted to contribute to "Qualified Plans" out of a profit pool derived from loan originations.

So let's discuss what this all means and if this issue is really resolved! *

IN THIS ARTICLE

Profit Sharing Debacle
Contortions
Bulletin 2012-02
Interpreting the Bulletin
"Heads-Up" Regulating

Profit Sharing Debacle

Contributions to a profit sharing plan pose a significant challenge to mortgage brokers or bankers whose sole source of profitability is from the origination of loans. If the broker only brokers loans, then the income received was already subject to the restriction that it could not be based on the terms and conditions of the credit extended.

Thus, the profit sharing contribution also would not be based on the terms and conditions.

If, on the other hand, a mortgage banker funds the loans with its own money and makes a profit from a true secondary market transaction that is allowed to be dependent on the terms and conditions of the credit extended, it will be much harder to make a profit sharing contribution and effectively assert that the payment is not dependent on the terms and conditions of the credit extended.

For those entities, there might be a need to revise the 401(k) plan to make it a nondiscretionary plan so that such profits play no part in determining whether a contribution is made or the amount of the contribution.

There has been considerable debate on how or whether profit sharing plan contributions may accept compensation. If the contribution is tied to profits, and profits are tied to the origination of loans, a portion of which might be determined by the terms or conditions of the transaction originated, then the FRB asserted that no contribution could be made. This becomes particularly problematic because Employee Retirement Income Security Act (ERISA) rules generally do not allow for contributions to be made for some employees but not for other employees. Thus, this would have the effect of eliminating contributions for all employees.

So here is the debacle: In order for a lender to make the contributions for loan originators without running afoul of the Rule, it is the lender's responsibility to show that the contribution was not based on the terms and conditions of the credits extended.

Contortions

I will list just some of the contortions that loan originators have had to deal with thus far, depending on the profit sharing plan:

Plans with matching contributions: There would be no difficulty in showing the amount of the contribution was independent of the terms and conditions of the credit transaction because the amount of the contribution is based on the amount contributed by the employee.

Non-discretionary plans: Where the contributions must be made in a fixed amount irrespective of "profits," there would be a valid case that the amount of the contribution is not based on the terms and conditions of credit extended.

Discretionary non-elective or matching contributions: That are not tied directly to specific profit targets, is a more complicated issue, but could be supported by the point that all employees, mortgage originators or not, receive the same amount. In other words, no originator received compensation tied to the loan terms and conditions because others were compensated equally irrespective of loan terms and conditions.

Discretionary plan tied to specific profit targets: Would likely need to exclude the income from loan originations to avoid a challenge that the payment was based on the terms and conditions.

And, of course, any plan that sets the amount of the contribution based entirely on the income an originator generated would definitely violate the regulation.

Bulletin 2012-02

Since the CFPB issued its April 2, 2012 CFPB Bulletin 2012-02  (Bulletin) that dealt, in part, with profit sharing, various media outlets and industry associations have applauded it for "clarifying" that the Rule does not ban loan originators from participating in employee stock ownership plans (ESOPs) or 401(k) plans - so-called "Qualified Plans."

One prominent law firm provides the Bulletin's exact text, which states that "employers of loan originators may make contributions to employees' qualified profit sharing, 401(k), and stock ownership plans (qualified plans) out of a profit pool derived from loan originations."

Another highly-respected law firm issued a notice, stating the CFPB "has confirmed that Regulation Z (which implements the Truth in Lending Act) does not prohibit mortgage loan originators from participating in qualified profit-sharing 401(k) or employee stock ownership plans (Qualified Plans)."

The plain reading of the Bulletin's text seems to provide a somewhat more nuanced view!

OCC - Correcting Foreclosure Practices

On December 20, 2011, the Office of the Comptroller of the Currency (OCC) updated its announcement regarding correcting foreclosure practices. We have previously issued newsletters here, here, and here on this subject and also related matters regarding foreclosure processing.

Earlier in 2011, on April 13, 2011, the OCC, the Board of Governors of the Federal Reserve System (FRB), and the Office of Thrift Supervision (OTS) announced enforcement actions against 14 large residential mortgage servicers and two third-party vendors for unsafe and unsound practices related to residential mortgage servicing and foreclosure processing. The enforcement actions were based on interagency examinations conducted in the fourth quarter of 2010.

Through those enforcement actions (consent orders), federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

In this newsletter, we will consider several aspects with respect to implementation of the consent orders.

• Independent Foreclosure Review
• Mailings to Consumers
• Deadline for Review Requests
• Independent Foreclosure Auditor
• Eligibility for Review
• Notifying the Public
• Engagement Letters
• Interim Report
• Library

Independent Foreclosure Review

Under the consent orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers.

Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

Mailings to Consumers 

As part of that program, the 14 mortgage servicers covered by the enforcement actions were required to begin mailings to consumers on November 1, 2011, continuing to December 31, 2011.

The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the special Independent Foreclosure Review website for more information about the review and claim process. Telephonic assistance is given at this website.

Deadline for Review Requests

 Review requests must be received by April 30, 2012.

Independent Foreclosure Auditor

An independent foreclosure auditor must be a third-party. The independent foreclosure auditor will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers.

Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

Ability-to-Repay: The Basics and a Chart

Commentary By: Jonathan Foxx
President and Managing Director of Lenders Compliance Group

On May 11, 2011, the Federal Reserve Board (FRB) issued a proposed rule (Rule) to implement ability-to-repay requirements for closed-end residential loans.[i] The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (Dodd-Frank).[ii] Comments on the Rule are to be received by no later than July 22, 2011.[iii] Having published the proposed Rule, the FRB retired from its involvement in this matter and handed over its rulemaking authority in the subject statute to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.[iv]

As a revision to Regulation Z (the implementing regulation of the Truth in Lending Act), the Rule requires creditors to determine a consumer’s ability to repay a mortgage before making the loan and would also establish minimum mortgage underwriting standards. The Rule applies to any consumer credit transaction secured by a dwelling, except an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan or ‘‘bridge’’ loan with a term of 12 months or less. [v] It appears that the Rule applies to purchase money and refinances, but not modifications of existing mortgages. There is a prohibition on prepayment penalties unless the mortgage is a prime, fixed rate, qualified mortgage - and unless the amount of the prepayment penalty is limited.

The Rule sets forth limits on prepayment penalties, the lengthening of the time creditors must retain records evidencing compliance with the ability-to-repay and prepayment penalty provisions, a prohibition to evading the Rule by structuring a closed-end extension of credit as an open-end plan, the delineation of new terms, procedures, and their resulting implications, and, very importantly, the means by which the Rule claims to offer tools to prevent likely default and mitigate risk for creditors and others who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain.

Complying with the requirements of the ability-to-repay Rule is essential, because borrowers in a foreclosure proceeding will likely claim that the creditor failed to comply with the Rule as a defense by way of recoupment or set off, without regard to the normal statute of limitations under the Truth-in-Lending Act (TILA).[vi] A violation of the Rule subjects the creditor to the TILA civil monetary penalties, plus the same enhanced civil remedies that apply to violations of TILA’s high-cost loan rules,[vii] and TILA also would authorize state attorneys general to bring actions for violations of the Rule for a period of up to three years.[viii]

A loan that is a covered transaction must qualify, among other things, as a “qualified mortgage” if the creditor wishes to include a prepayment penalty in the loan.

The Rule provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a ‘‘qualified mortgage,’’ which does not contain certain risky features and limits points and fees on the loan. Furthermore, one feature of a higher-risk mortgage loan (i.e., subject to enhanced appraisal requirements under Dodd-Frank § 1471) is the loan may not be a qualified mortgage.[ix]

There are four (4) options to the determination of compliance with the Rule. The Rule refers to these origination options as “methods” and equips each method with a description of (1) limits on the loan features or term, (2) limits on points and fees, (3) underwriting requirements, and (4) payment calculations.

Option # 1: General Ability-to-Repay Standard

A creditor can meet the general ability-to-repay standard or test by:

• Considering and verifying the following eight (8) underwriting factors:

1. Income or assets relied upon in making the ability-to-repay determination;

2. Current employment status;

3. The monthly payment on the mortgage;

4. The monthly payment on any simultaneous mortgage;

5. The monthly payment for mortgage-related obligations;

6. Current debt obligations;

7. The monthly debt-to-income ratio, or residual income; and

8. Credit history.

• Underwriting the payment for an adjustable-rate mortgage based on the fully indexed rate.

Comment: This is an option that will be carefully reviewed by plaintiff’s counsel in an action to challenge a creditor’s compliance with the Rule. Consequently, enforcing compliance with the Rule will require fully vetted, tested, and continually updated, written procedures to govern every aspect of the application and underwriting process. Without clear and unambiguous policies and internal enforcement of appropriate policies and procedures, the creditor is allowing exposure to such a challenge. This option contains rigorous underwriting criteria and requires unmitigated, fact-based evaluations. Option # 1- the ability-to-repay test - is somewhat unstable (due to the invariant rigors of procedural compliance) though a relatively favorable methodology for the creditor, even if the loan flow process leaves very little room for error.

Option # 2: Qualified Mortgage (QM)

A creditor can originate a “qualified mortgage,” which provides special protection from liability. Two alternative definitions of a “qualified mortgage” are being considered by the CFPB:

Alternative # 1: Provides a legal safe harbor and defines a “qualified mortgage” as a mortgage for which:

· The loan does not contain negative amortization, interest-only payments, or a balloon payment, or a loan term exceeding 30 years;

· The total points and fees do not exceed three (3%) percent of the total loan amount;

· The income or assets relied upon in making the ability-to-repay determination are considered and verified;[x] and,

· The underwriting of the mortgage (a) is based on the maximum interest rate that may apply in the first five years, (b) uses a payment scheduled that fully amortizes the loan over the loan term, and (c) takes into account any mortgage-related obligations.

Alternative # 2: Provides a rebuttable presumption of compliance and would define a “qualified mortgage” as including the criteria listed under Alternative # 1 (above) as well as additional underwriting requirements from the general ability-to-repay standard (see Option # 1). In any event, under Alternative # 2, the creditor would also have to consider and verify:

· The consumer’s employment status;

· The monthly payment for any simultaneous mortgage;

· The consumer’s current debt obligations;

· The monthly debt-to-income ratio or residual income; and

· The consumer’s credit history.

Comment: Two alternatives are given: in Alternative # 1, to obtain a legal safe harbor, the creditor must consider and verify the borrower’s current or reasonably expected income or assets to determine the borrower’s repayment ability; and, in Alternative # 2, to obtain a rebuttable presumption of compliance, the creditor must consider and verify the borrower’s current or reasonably expected income or assets (i.e., other than the value of the dwelling in question), the borrower’s current employment status (assuming the creditor relies on employment income), the borrower’s monthly payment on any simultaneous loan, the borrower’s current debt obligations, the borrower’s monthly DTI or residual income, and the borrower’s credit history. It should be noted that the second alternative is for the most part similar to the ability-to-repay test.

FTC Adopts New Rules Banning Deceptive Mortgage Advertisements

The Federal Trade Commission (FTC) has adopted the Final Rule (Rule) that bans deceptive claims in mortgage loan advertisements.

According to the FTC, the Rule covers all entities that are under the agency's authority that advertise mortgages, including: mortgage lenders, brokers and servicers; real estate agents and brokers; advertising agencies; and home builders. Financial institutions such as banks, thrifts and credit unions are not covered.

The FTC has substantial law enforcement experience with unfair or deceptive practices involving mortgage advertising practices or violations of Truth in Lending Act mortgage advertising.

Advertising includes, but is not limited to:
Print advertisements
Unsolicited e-mails
Direct mail marketing
Internet advertisements and Web sites
Telemarketing
In-person sales presentations

Effective: August 19, 2011

Claims and Violations

Alleged violations have included deceptive claims - often made to subprime borrowers - about key terms and other aspects of the loans, such as:

• Misrepresentations of the loan amount or the amount of cash disbursed.
• Claims for loans with specified terms, when no loans with those terms were available from the advertiser.
• Claims of low "teaser" rates and payment amounts, without disclosing that the rates and payments would increase substantially after a limited period of time.
• Misrepresentations that rates were fixed for the full term of the loan.
• Misrepresentations about, or failure to adequately disclose, the existence of a prepayment penalty or large balloon payment due at the end of the loan.
• Claims about the monthly payment amounts that the borrower would owe, without disclosing the existence, cost, and terms of credit insurance products "packed" into the loan.
• Claims that the loans were amortizing, when, in fact, they involved interest-only transactions.
• Claims of mortgage payment amounts that failed to include loan fees and closing costs of the kind typically included in loan amounts.
• False or misleading savings claims in high loan-to-value loans.
• False or misleading claims regarding the terms or nature of interest rate lock-ins.
• False claims that an entity was a national mortgage lender.
• Failure to disclose adequately that the advertiser, not the consumer's current lender, was offering the mortgage.
• False or misleading claims to consumers that they were "pre-approved" for mortgage loans.

Outline of Final Rule

• Covers misrepresentations about interest charged for the product, including, but not limited to, misrepresentations about (1) the amount of interest owed each month that is included in the consumer's payments, loan amount, or total amount due; or (2) the interest owed each month that is not included in the payments but is instead added to the total amount due.

• Bars misrepresentations about the APR, simple annual rate, periodic rate, or any other rate, including, but not limited to, a payment rate.

• Bars misrepresentations about the existence, nature, or amount of fees or costs associated with any mortgage credit product. It also prohibits false or misleading claims that no fees are charged.

• Covers misrepresentations about terms associated with additional products or features that may be sold in conjunction with a mortgage credit product.

• Covers misrepresentations relating to the taxes or insurance associated with a mortgage credit product.

• Bars misrepresentations about the existence or amount of any penalty for making prepayments on the mortgage.

• Prohibits misrepresentations pertaining to the variability of interest, payments, or other terms of mortgage credit products, including, but not limited to, misrepresentations using the word "fixed" when terms are, in fact, variable or limited in duration.

• Bars false or misleading comparisons between rates or payments, including, but not limited to, comparisons involving savings.

• Prohibits misrepresentations about the type of mortgage credit product being offered (i.e., false claims that a mortgage is fully amortizing).

• Bars misrepresentations about the amount of the obligation or the existence, nature, or amount of cash or credit the consumer could receive from the loan.

• Prohibits misrepresentations about the existence, number, amount, or timing of any minimum or required payments.

• Prohibits misrepresentations about the potential for default on the mortgage credit product, including, but not limited to, misrepresentations about the circumstances under which the consumer could default for nonpayment of taxes or insurance, failure to maintain the property, or non-compliance with other obligations.

• Bars misrepresentations about the effectiveness of the mortgage credit product in helping consumers resolve problems in paying debts.

• Prohibits misrepresentations about the association between a mortgage credit product or a provider of such product and any other person or program, including, but not limited to, any affiliation with an organizational or governmental program, benefit, or entity.

• Covers misrepresentations about the source of the mortgage credit product and the commercial communications for it, including, but not limited to, claims that the communication is made by or on behalf of the consumer's current mortgage lender or servicer.

• Prohibits misrepresentations about the consumer's right to reside in the dwelling that is the subject of the mortgage credit product, including, but not limited to, false or misleading claims about how long or under what conditions a consumer can stay in the dwelling.

• Bars misrepresentations about the consumer's ability or likelihood to obtain any mortgage credit product or term, or a refinancing or modification of any mortgage credit product or term. This includes false or misleading claims about whether the consumer has been preapproved or guaranteed for any such product or term.

• Bars misrepresentations about the availability, nature, or substance of counseling services or any other expert advice offered to the consumer regarding any mortgage credit product or term, including, but not limited to, the qualifications of those offering the services or advice.

Dodd-Frank Act – Reformation and Regulations

Part I of a Three-Part Series on Financial Reform Legislation
By: Jonathan Foxx, President and Managing Director 
Published in National Mortgage Professional Magazine
First Published: August 2010

Who’s In Charge Here?

I never blame myself when I'm not hitting.
I just blame the bat and if it keeps up, I change bats.
After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?
Yogi Berra

Let’s admit it: the tendency to pretend we’re holding somebody or some entity “accountable” for the mortgage crisis, when we’re really not, is just a fashionable avoidance of that unpleasant word: “blame.” Once that label sticks, it’s on to dealing with the nasty culprits! Blaming is purported to be cowardly, even passive; and being held accountable is lauded as proactive and high-minded. So, the word “accountable” is now in vogue, instead of “blame.” Frankly, the word “accountable” in today’s world is merely politically-correct, euphemistic Newspeak for the fact that “you know you did wrong, I know you did wrong, everybody in the world knows you did wrong, but you’ll pay no penalties whatsoever for doing anything wrong.”

Although the tone-at-the-top mantra of the Obama Administration is “let’s look forward and not look back,” or the Bush Administration’s tactic of retroactively making lawful what was heretofore unlawful (or unconstitutional) remains beyond contest, or the on-going trading of opaque financial instruments seems to continue in an entirely unregulated market, or many government departments and agencies are still remaining reactive at best during a crisis – in the Newspeak of our times, we are assured of accountability, which now apparently means there’s nobody to blame at all, nobody held responsible for the meltdown, nobody to put in jail. Everybody’s free to go and, we’re admonished, it doesn’t do any good to blame anybody for anything, since we can’t fix this mortgage mess unless and until we all can get along, be bi-partisan, be post-partisan, and look to the better angels of our nature!

Accountability these days seems to mean no adverse consequences to the perpetrator and no blame for anybody. If you find a person to blame, that person’s not accountable; and if you find somebody who is accountable, that person is not to blame. While lobbyists, dogmatists, political catechists, and ideologues just make stuff up, they’ve found the culprit for sure, those bad actors portrayed as directly and indirectly culpable, the rapacious mortgage originators: they certainly should be blamed, reined in, re-regulated, and de-incentivized for having largely contributed to the worst financial crisis since the Great Depression!

Portraying mortgage originators as the culprit is a politically useful narrative meant for the consumption of low information voters; but, as we’ll see, there is plenty of blame in this game and, to date, not much real, old-fashioned accountability – the kind that has real world consequences – except, of course, for those who originated the mortgages in the first place.

Results are what you expect.
Consequences are what you get.
Anonymous

On Tuesday, June 22, 2010, a Conference Committee met in Room 106 of the Dirksen Senate Office Building, in Washington, to reconcile Senate and House versions of H.R. 4173, known as the Wall Street Reform and Consumer Protection Act. That bill ostensibly was drafted to create a new consumer financial protection “watchdog,” bring about an end to “too big to fail” bailouts, set up an early warning system to “predict and prevent” the next crisis, and bring transparency and accountability to exotic instruments such as derivatives. Led by Representative Barnie Frank (D-MA) and Senator Christopher Dodd (D-CT), the conferees reviewed and voted on new regulations as well as additions, deletions, and revisions of existing regulations.

The list of new regulations and amendments to existing regulations, consisting of thousands of pages, read like the attenuated, convoluted, cross-tabulated Index Section of a Whodunit’s Guide to the Perplexed. Seated around a large, rectangular dais, the Committee’s politicians called one another out, speechified, postured, and legislated to protect their respective constituencies, absolved themselves of ever having allowed their own politics to contribute to the financial crisis, while the Clerk recorded votes, staff members raced around, and lawyers scurried about with various and sundry red-lined versions of financial reform legislation.

On Friday, June 25, 2010, all the backroom, sub rosa, deals were ironed out, all the special interests had their way or lost their sway, and the votes tallied up mostly across party lines: Democrats – Aye; Republicans – Nay. The Ayes had it! Congratulations filled the conference chamber, Representatives and Senators praised one another, staff high-fived and hugged one another, and President Obama hailed the legislation as the “toughest financial reforms since the ones we passed in the aftermath of the Great Depression."[1] Now only House and Senate approval was needed,[2] and thence the President’s multi-pen signature, to become the law – which it did on July 21, 2010, just before noon. The legislation, now known as the Dodd-Frank Act, became the law of the land.

Among the many features of the legislation, the following was gaveled in:

· Requiring Lenders to Ensure a Borrower's Ability to Repay: Establishing a “simple federal standard” (sic) for all home loans to ensure that borrowers can repay the loans they are sold.

· Prohibiting Unfair Lending Practices: Prohibiting the financial incentives for subprime loans that “encourage lenders to steer borrowers into more costly loans,” including the bonuses known as yield spread premiums that “lenders pay to brokers to inflate the cost of loans.”

· Penalizing Irresponsible Lending: Issuing monetary penalties to lenders and mortgage brokers who don’t comply with new standards by holding them accountable for as high as three-year’s interest payments and damages plus attorney’s fees (if any), and, protects borrowers against foreclosure for violations of the new standards.

· Expanding Consumer Protections for High-Cost Mortgages: Expanding the protections available under federal rules on high-cost loans -- lowering the interest rate and the points and fee triggers that define high cost loans.

· Mandating Additional Mortgage Disclosures: Requiring lenders to disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.

· Establishing an Office of Housing Counseling: Establishing a special office within the Department of Housing and Urban Development (HUD) to “boost homeownership and rental housing” counseling.

And, most significantly, the legislation’s centerpiece: the creation of a new agency, tucked into the Treasury and clearly under its purview:

· Bureau of Consumer Financial Protection (Bureau): Creating a regulatory and supervisory authority to examine and enforce consumer protection regulations with respect to all mortgage-related businesses, large non-bank financial companies, and banks and credit unions with greater than $10 billion in assets.

Some of these policies have been worthy of consideration, although others seem to be the result of reactive, political triage, and short-sighted (if not also short-term) fixes, without having given much thought to consequences, unintended or otherwise, on the consumer and the mortgage industry.

The Spinmeisters have already begun their Ode to Financial Reform! In this article, the first in a series of articles on the “landmark” legislation, we will un-spin and unpack the new law and seek to learn more about exactly what the Dodd-Frank Act (Act) has wrought for the mortgage industry.

Housing bubble? What housing bubble?

“Homes that are occupied may see an ebb and flow
in the price at a certain percentage level,
but you’re not going to see the collapse that you see
when people talk about a bubble.”
Barnie Frank (D-MA) June 27, 2005[3]

The Act spans to 2,319 pages and affects almost every aspect of the financial services industry in the United States. Just the sheer size of the Act is indicative of the complexity and detailed, interlocking, regulatory authorities and mandates involved.[4] Compare this with the 31 pages of the Federal Reserve Act which became law almost one hundred years ago. The law’s size also should be taken to reflect the enormous increase in regulations in the intervening years that must be factored into or subsumed under the Act. Consider the following chart:[5]

 

Major Financial Legislation
Number of Pages

Perhaps it would ultimately be worth all the effort put into such a prodigious and voluminous legislation if its purported objective – prevention of another financial crisis – could be expected to result from enforcement of this law. Unfortunately, it won’t!

The Act does very little to prevent the next financial crisis because, among other things, it side-steps the “too big to fail” issues, for instance, by not imposing size limits on any financial institution; offers virtually no resolution to the dysfunctional operations of the GSEs, Freddie Mac and Fannie Mae; and, fails to reinstate the Glass-Steagall Act’s wall of separation between “utility” and “casino” banking. Although it will not prevent the next financial tsunami or Black Swan,[6] implementation of the regulatory requirements of the Act will dramatically and permanently affect the way residential mortgages are originated in this country.

And if ineptitude, complacency, and failure to implement existing regulations were hallmarks of the regulatory environment prior to the Act, how will we know in advance how things are going with all these new regulatory requirements? After all, thanks to an unnoticed provision in the Act, the Securities and Exchange Commission (SEC) is now declaring itself exempt from Freedom of Information Act (FOIA) requests, one of the bulwarks of government transparency. Perhaps other government entities involved in the Act’s implementation will stake out similar positions.[7] Of course, there are periodic reports to Congress on many issues and programs; however, Congress is the domicile of politicians and they often find ways to underplay failures and exaggerate successes.

Residential Mortgage Loan Provisions
- New Rules -

 

Analyzing this vast financial and mortgage reform legislation is a daunting prospect. Over this series of articles, we will highlight many of the Act’s components. The articles in this series on the Dodd-Frank Act are meant to provide an overview. However, this legislation is extremely detailed and extensive. Therefore, for guidance and risk management support, I recommend that you consult a residential mortgage compliance professional in developing policies and procedures to implement the Act’s requirements.

Essentially, the following matrix provides a generalized outline of the salient provisions of the Act that directly affect residential mortgage loans originations.

For the remainder of this article, we will be reviewing the Mortgage Loan Regulatory Provisions and, where relevant, its integration into other parts of the Dodd-Frank Act.

Ability-to-Repay: Regulating or Underwriting? Part II

Jonathan Foxx is the President and Managing Director of Lenders Compliance Group.

Click below to download my article:

ABILITY-TO-REPAY:

REGULATING OR UNDERWRITING?

Part II

It has been published in the National Mortgage Professional Magazine - July 2011.

I am providing this article to you as a courtesy, for your personal use. I hope you enjoy it.

Please feel free to contact me at any time.

EXCERPT # 1

It seems to me that the imposition of an ability-to-repay requirement as a regulatory mandate is an admission that market forces cannot discipline lenders or incentivize lenders to act in their own self-interest. 

This is an obvious shift in liabilities, because this mandate shifts the burden of compliance to the lenders in order to assure that their contractually bound borrowers can pay back their loans. Parties to any contract can become adversaries! 

In other words, the relationship between the creditor and the borrower is innately affected and extensively undermined by this Rule, inasmuch as it imposes a new kind of theory for a regulatory framework and, in my estimation, infantilizes lenders by making them comply with a regulator's ad hoc way of rationing the extension of credit.

ABILITY-TO-REPAY:

REGULATING OR UNDERWRITING?

Part II

EXCERPT # 2

If the rationing of credit is meted out through this regulatory construct, it can be legitimately asserted as well that lenders are not arms-length, contractual counterparties; that is, lenders now will have a duty to assess a prospective borrower's ability to repay, irrespective of collateral value and securitization.

This change in the dynamics between and the inherent, due diligence tension among the parties to a residential mortgage transaction raise serious issues about the systemic consequences soon to be engendered.

ABILITY-TO-REPAY:

REGULATING OR UNDERWRITING?

Part II

Adverse Action and Risk-Based Disclosures (Final Rules)

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notification relating to this rule was on 7/7/11, on 3-2-11, and 1-3-11.

The Rules amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements. 

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

REGULATION B (ECOA)

Adverse Action Notice

Section 701 of the Equal Credit Opportunity Act (ECOA) requires a creditor to notify a credit applicant when it has taken adverse action against the applicant. The ECOA adverse action requirements are implemented in the FRB's Regulation B.

Section 615(a) of the Fair Credit Reporting Act (FCRA) also requires a person to provide a notice when the person takes an adverse action against a consumer based in whole or in part on information in a consumer report.

Certain model notices in Regulation B include the content required by both the ECOA and the FCRA adverse action provisions, so that creditors can use the model notices to comply with the adverse action requirements of both statutes.

The FRB is amending these model notices in Regulation B to include the disclosure of credit scores and related information if a credit score is used in taking adverse action.

The revised model notices reflect the new content requirements in section 615(a) of the FCRA as amended by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

REGULATION V (FCRA)

Fair Credit Reporting Risk-Based Pricing Regulations 

On January 15, 2010, the Board and the Commission published final rules to implement the risk-based pricing provisions in section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act), which amended the Fair Credit Reporting Act (FCRA).

The final rules generally require a creditor to provide a risk-based pricing notice to a consumer when the creditor uses a consumer report to grant or extend credit to the consumer on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that creditor.

The FRB and the Commission are amending their respective risk-based pricing rules to require disclosure of credit scores and information relating to credit scores in risk-based pricing notices if a credit score of the consumer is used in setting the material terms of credit.

These final rules reflect the new requirements in section 615(h) of the FCRA that were added by section 1100F of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Effective: August 15, 2011

LIBRARY

Equal Credit Opportunity
Regulation B
Adverse Action Notice
FRB: 12 CFR Part 202
Final Rule
July 15, 2011

Fair Credit Reporting
Regulation V
Fair Credit Reporting Risk-Based Pricing Regulations
FRB: 12 CFR Part 222
FTC: 16 CFR Parts 640 and 698
Final Rules
July 15, 2011

FRB: Mortgage Rulemaking Chart 2008 - 2011

Yesterday, we notified you about the testimony given by witnesses in the hearing held by the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."

The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets.

During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs, provided written testimony containing a table entitled "Summary of Federal Reserve Board Mortgage Rulemakings - 2008 through 2011."

I have removed the table from the written testimony and featured it separately in our Library.

MORTGAGE RULEMAKINGS - 2008 THROUGH 2011

FINAL RULES

• Home Ownership and Equity Protection Act (HOEPA): Final Rule
• Mortgage Disclosure Improvement Act, Part I: Final Rule
• Mortgage Disclosure Improvement Act, Part II: Interim Final Rule
• Helping Families Save Their Homes Act - Mortgage Transfer Disclosure: Final Rule
• Loan Originator Compensation: Final Rule
• Dodd-Frank Act - Appraisal Independence: Interim Final Rule
• Dodd-Frank Act - Escrow Account: Final Rule

PROPOSED RULES

• Regulatory Review of Disclosure Rules for Closed-end Mortgages (Phase I)
• Regulatory Review of Disclosure Rules for Home Equity Lines of Credit (HELOCs) (Phase I)
• Regulatory Review of Mortgage Disclosure Rules (Phase II)
• Dodd-Frank Act - Escrow Account Disclosures
• Dodd-Frank Act - Ability to Repay/Qualified Mortgages

LIBRARY

Summary of Federal Reserve Board Mortgage Rulemakings
2008 through 2011
Statement of Sandra F. Braunstein, Director
Division of Consumer and Community Affairs, Federal Reserve System
Insurance, Housing, and Community Opportunity Subcommittee
(Committee on Financial Services)
July 13, 2011

Hearing: FRB Testimony on LO Compensation

On Wednesday, July 13, 2011, the Insurance, Housing and Community Opportunity Subcommittee (Committee of Financial Services) held a hearing, entitled "Mortgage Origination: the Impact of Recent Changes on Homeowners And Businesses."

The overall purpose of the hearing was to evaluate recent changes to mortgage origination laws, with particular focus on the impact the new laws and regulations have on consumers and credit availability in the mortgage finance markets. 

During the hearing, Sandra Braunstein, the FRB's Director of Division of Consumer and Community Affairs seemed to state that the loan officer employees of loan originators (i.e., brokers) would not be required to be paid only by a salary on consumer-paid transactions, but may also be paid "bonus" commissions.

Her testimony today actually supports my understanding of her statement to this Subcommittee.

[See page 8-9 of Director Braunstein's submitted testimony in our Library.]

Under the new TILA loan compensation rule, if a loan is brokered and the consumer is paying the broker fee, then the branch manager, the loan officer, and all the other employees may only be paid a salary or hourly wage.

Similarly, bonuses and referral fees to tellers, processors, and other staff are not be permitted for a brokered loan when the borrower pays broker fees or other origination fees to the broker.

Perhaps I did not understand fully Director Braunstein's remarks. But if that aspect of the Rule is changed, then this would be a significant relief to mortgage brokers. 

In any event, the details and facts must be considered. So further clarity will be needed to determine if this is actually a change in FRB policy.

 HEARING

The hearing consisted of two panels.

The full text of the testimony of each witness may be found in our Library.

 WITNESSES

Panel I

Sandra F. Braunstein, Director of Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System

Teresa Payne, Associate Deputy Assistant Secretary, Regulatory Affairs, Department of Housing and Urban Development

Kelly Cochran, Deputy Assistant Director for Regulations, Consumer Financial Protection Bureau , Department of Treasury

James R. Park, Executive Director, Appraisal Subcommittee, Federal Financial Institutions Examination Council

William B. Shear, Director of Financial Markets and Community Investment, Government Accountability Office

Anne Norton, Maryland Deputy Commissioner of Financial Regulation, on behalf of the Conference of State Bank Supervisors

Panel II

Steve A. Brown, Executive Vice President, Crye-Leike, on behalf of the National Association of Realtors

Henry V. Cunningham, Jr., CMB President, Cunningham & Company, on behalf of the Mortgage Bankers Association

Tim Wilson, President, Affiliated Businesses for Long & Foster Companies, on behalf of the Real Estate Services Providers Council, Inc.

Anne Anastasi, President, Genesis Abstract and President, American Land Title Association

Mike Anderson, President, Essential Mortgage, on behalf of the National Association of Mortgage Brokers

Marc Savitt, President, The Mortgage Center, on behalf of the National Association of Independent Housing Professionals

Sara Stephens, President Elect, Appraisal Institute

Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform

Janis Bowdler, Director, Wealth-Building Policy Project Office of Research, Advocacy, and Legislation, on behalf of the National Council of La Raza

Ira Rheingold, Executive Director, National Association of Consumer Advocates

 Library

Insurance, Housing and Community Opportunity Subcommittee
(Committee of Financial Services)

"Mortgage Origination: the Impact of Recent Changes 
on Homeowners And Businesses"
 
Witness Testimony - Two Panels

July 13, 2011

FRB and FTC: Credit Score Disclosure - Final Rules

On July 6, 2011, the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) jointly issued final rules (Rules) to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Our previous notifications relating to this rule were on 1-3-11, and 3-2-11.

If a credit score is used in setting material terms of credit or in taking adverse action, the statute requires creditors to disclose credit scores and related information to consumers in notices under the Fair Credit Reporting Act (FCRA).

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

The rules under Regulations V and B are effective 30 days after the date of publication in the Federal Register, which is expected soon.

Effective Date: July 21, 2011

 REGULATION V

The Rules amend Regulation V (Fair Credit Reporting) to revise the content requirements for risk-based pricing notices, and to add related model forms that reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act (Dodd-Frank) amends section 615(h) of the FCRA to require that additional content be disclosed to consumers in risk-based pricing notices; specifically, if a credit score is used in making the credit decision, the creditor must disclose that score and certain information relating to the credit score.

Rulemaking authority for the risk-based pricing provisions of the FCRA, including the amendments prescribed by section 1100F of the Dodd-Frank, will not be vested in the Consumer Financial Protection Bureau until the date that the section 1100F amendments become effective.

 REGULATION B

The Rules also amend certain model notices in Regulation B (Equal Credit Opportunity), which combine the adverse action notice requirements for Regulation B and the FCRA, to reflect the new credit score disclosure requirements.

Section 1100F of the Dodd-Frank Act amends section 615(a) of the FCRA to require creditors to disclose on FCRA adverse action notices a credit score used in taking any adverse action and information relating to that score.

The FRB is issuing revised model adverse action notices substantially as proposed, and revised to the extent necessary for the adverse action model notices in Regulation B to be consistent with the requirements of section 1100F of the Dodd-Frank.

 LIBRARY

 

 FRB: 12 CFR Part 222, Regulation V and
FTC: 16 CFR Parts 640 and 698
Fair Credit Reporting Risk-Based Pricing Regulations
July 6, 2011

 FRB: 12 CFR Part 202, Regulation B
Equal Credit Opportunity
Final Rule
July 6, 2011

Ability-to-Repay: Regulating or Underwriting? (Magazine Article)

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

I think you may be interested in reading my article in the June 2011 edition of National Mortgage Professional Magazine, entitled:

Ability-to-Repay: Regulating or Underwriting?

The article is Part I of a two-part magazine series.

As you may know, on May 11, 2011, the Federal Reserve Board (FRB) issued a proposed rule (Rule) to implement ability-to-repay requirements for closed-end residential loans.

The Rule implements Section 1411, Section 1412, and part of Section 1414 of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010.  Comments on the Rule are to be received by no later than July 22, 2011. 

But, having published the proposed Rule, the FRB will soon retire from its involvement in this matter, because it will hand over its rulemaking authority in the subject statute to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011.

Thus, the promulgation of the final Rule will be under the aegis of the CFPB.

In this article, I explore some of the salient features of this Rule, noting particularly that, as a revision to Regulation Z (the implementing regulation of the Truth in Lending Act), it requires creditors to determine a consumer's ability to repay a mortgage before making the loan and would also establish minimum mortgage underwriting standards.

The Rule applies to any consumer credit transaction secured by a dwelling, except an open-end credit plan,  timeshare plan, reverse mortgage, or temporary loan or ''bridge'' loan with a term of 12 months or less. It includes a closed-end home improvement loan on a vacation residence.

It appears that the Rule applies to purchase money and refinances, but not modifications of existing mortgages.

There is a prohibition on prepayment penalties unless the mortgage is a prime, fixed rate, qualified mortgage, and unless the amount of the prepayment penalty is limited.

As a courtesy, I am sharing this magazine article with you. I hope you enjoy reading it! 

Excerpt # 1

Complying with the requirements of the ability-to-repay Rule is essential, because borrowers in a foreclosure proceeding will likely claim that the creditor failed to comply with the Rule as a defense by way of recoupment or set off, without regard to the normal statute of limitations under the Truth-in-Lending Act (TILA). 

A violation of the Rule subjects the creditor to the TILA civil monetary penalties, plus the same enhanced civil remedies that apply to violations of TILA's high-cost loan rules, and TILA also would authorize state attorneys general to bring actions for violations of the Rule for a period of up to three years.

Excerpt # 2

A loan that is a covered transaction must qualify, among other things, as a "qualified mortgage" (QM) if the creditor wishes to include a prepayment penalty in the loan.

The Rule provides a presumption of compliance with the ability-to-repay requirements if the mortgage loan is a ''qualified mortgage,'' which does not contain certain risky features and limits points and fees on the loan.

Furthermore, one feature of a higher-risk mortgage loan (i.e., subject to enhanced appraisal requirements under Dodd-Frank § 1471) is the loan may not be a QM.  (Under Dodd-Frank § 941, a "qualified residential mortgage" may not be broader in scope than a QM as defined in the Rule.)