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.

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

The Smoking Gun - Loan Originator Compensation

COMMENTARY: by JONATHAN FOXX

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

On April 6, 2011, the TILA loan originator compensation rule (Rule) went into effect, despite the best efforts of numerous industry organizations, a federal agency, congressional legislators, and private citizens to prevent such implementation. Although the NAIHP has withdrawn its appeals case in order to pursue other options, the NAMB continues its legal challenge in the US Court of Appeals - DC.

A week before the April 1, 2011 statutorily effective date a letter was written to FRB Chairman Bernanke, requesting significant revisions to the Rule - revisions that strike at critical issues contained in the NAIHP and NAMB's objections.

Commentary and Outline

This Commentary offers a brief outline. I am leaving out citations, where possible, for ease of reading. This outline is not meant to be comprehensive, authoritative, or relied upon for legal advice. It offers only a brief synopsis of the argumentation. For citations, exhibits, and argumentation, please read the letter. (See below.)

The word that is heard perishes, but the letter that is written remains.
- Ancient Proverb 

On March 24, 2011, Barnie Frank (D-MA), the House's counterpart to the Senate's Christopher Dodd (D-CT) - now former Senator Dodd - wrote a letter to Chairman Bernanke requesting revisions to the FRB's implementation of the Rule.

Why Frank sent this letter to the FRB eight months after the enactment of his eponymously named legislation known as the Dodd-Frank Act (DFA) - otherwise known as the Wall Street Reform and Consumer Protection Act - after the commencement of litigation, after most of the mortgage industry leadership had spoken with many elected officials in congress to prevent implementation, after the SBA Office of Advocacy had requested a delay, after key organizations had lobbied all along against the Rule, and just days before the effective compliance date - why, that is, Mr. Frank decided to send this letter at the last minute, as it were, is anybody's guess.

Perhaps we can venture a guess or surmise some possible motives.

But, let's review the letter.

A letter does not blush.
- Marcus Tulius Cicero

In the letter, Mr. Frank wants the Rule to go into effect, but he would like the Rule amended "immediately thereafter" for two changes. How a federal statute affecting an entire industry can go into effect and then immediately thereafter not go into effect - that he does not say.

According to Mr. Frank, who is now the Ranking Member of the House Financial Services Committee, the Rule "go[es] beyond what was required" and the "two problems unnecessarily interfere with borrowers' ability to obtain loans from mortgage brokers," and revising the Rule accordingly "would not damage the core underlying consumer protections."

Yes, of course, the cited provisions are "problems" - precisely so.

Nevertheless, Mr. Frank believes:

"It is important that the rule take effect as scheduled, and that the Federal Reserve take immediate action to correct the two problems created by the rule."

Problem # 1

The Rule "appears" to prohibit a mortgage brokerage firm that is receiving compensation for a loan from the consumer from paying any compensation related to that loan to an employee of that firm.

According to Frank, this is because the rule:

"appears to include language that states that when a loan originator receives compensation from the consumer on a loan, no loan originator at all can receive compensation related to that loan from any source."

This interpretation differs from Section 1403 of the DFA, which "merely states" that if a loan originator receives compensation from the consumer, that originator cannot receive compensation from another source.

Frank avers that this statutory provision is meant to prevent "double dipping." However, the FRB's Rule is "more restrictive" because it prevents the sharing of the consumer-paid compensation by the firm with an employee for that employee's work on the loan.
Stating the obvious, Frank continues:

"I would note that such sharing of compensation would not involve an increase, directly or indirectly, in the level of fees paid by the consumer."

Here's his recommended change:

The language should be revised to allow employee compensation in this circumstance.

Problem # 2

Referring to - but not specifically stating - the Rule's requirements regarding the restrictions on making small fee reductions at loan closing to cover shortfalls which sometimes result because of last minute third party fee changes, or to cover the cost of a short extension of a loan lock when the loan failed to close within the window of the original loan lock, Mr. Frank thinks that the Rule is too restrictive.

Here's his recommended change:

The practice should be allowed (1) if the fee reduction is at the request of the borrower and is made within a short period (i.e., 24 hours) of the loan closing, and (2) if limited by frequency of such use, implemented through either the dollar or percentage amount of the reduction.

Festina Lente (More Haste, Less Speed)
- Ancient Latin Proverb

Mr. Frank's one-and-a-half page epistle to Chairman Bernanke ends as abruptly and politely as it begins, with these words:

"I believe that both of these provisions should be revised expeditiously by the Federal Reserve through an appropriate action or proceeding at the earliest possible time. Thank you for your consideration of these requests."

Guess, if you can, and choose, if you dare.
- Pierre Corneille

So, why this letter? It is not as if the FRB has a history of abiding by the requests of Congress. Recently, in fact, it took an Act of Congress to pry the FRB's financial data about distribution of "bail-out" funds from the FRB's closeted grasp.

And, at the time of the letter's writing, the FRB was already embroiled in resisting a stay of the Rule. Given the timing, is it really likely that the FRB would have been willing to change course on the basis of Frank's requests? I think not.

Ascertaining motive is always a very elusive undertaking.

In determining what sector of the mortgage origination industry benefits most and is best protected by Mr. Frank's recommended changes to the Rule, it is a good idea to follow the money - in more ways than one!

Our Library contains a copy of the Letter from Barnie Frank to Ben Bernanke.

What do you think?

Please Leave Your Comments Below!

SBA - 2nd Request to Postpone New LO Compensation Rules

Yesterday I notified you about the so-called "small entity compliance guide" issued on January 26, 2011 by the Federal Reserve Board. 

The "Guide" is inadequate, incomplete, and regurgitates most features of the "already known" aspects of the Regulation Z final rule amendments affecting loan officer compensation. 

That rule is scheduled to go into effect on April 1, 2011.

As you may know, I am writing an article on this subject - which will be published in March 2011 in the National Mortgage Professional Magazine - so I am watching this issue pretty closely and have had numerous discussions with industry members, such as compliance counsel, corporate officers, mortgage loan originators, and even a few lobbyists and politicians.

It is now clear to me that FRB's "Guide" is probably meant to be a response to the January 13, 2011 letter from the SBA's Office of Advocacy, which expressed concern, among other things, that the "the Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)." That is, the "Guide" is a transparent attempt to satisfy a regulatory requirement, though the dubious result adds little to an overall resolution.

Let's read the basis for the authority of the SBA's Office of Advocacy (Advocacy), as stated in its January 13, 2011 letter that: (My emphasis) 

• "Congress established the Office of Advocacy under Pub. L. 94-305 to represent the views of small business before Federal agencies and Congress. Because Advocacy is an independent office within the Small Business Administration (SBA), the views expressed by Advocacy do not necessarily reflect the views of the SBA or of the Administration. Section 612 of the Regulatory Flexibility Act (RFA) requires Advocacy to monitor agency compliance with the Act, as amended by the SBREFA. In 1980, Congress enacted the RFA after determining that uniform federal regulations produced a disproportionate adverse economic hardship on small entities. In order to minimize the burden of regulations on small entities, the RFA mandates that federal agencies consider the potential economic impact of federal regulations on small entities.
• In 1996, Congress amended the RFA with SBREFA. Among other things, SBREFA requires agencies to provide plain English compliance guides to clearly explain each final rule that has a significant economic impact on a substantial number of small entities. The intent of section 212 of SBREFA is to ensure that small businesses have a way to understand complex and technical federal regulations."

Advocacy's January 13, 2011 letter recommended that the Board publish a "compliance guide in the immediate future and extend the time for small entities to comply to reflect the delay in the availability of the guide." 

Obviously, Advocacy must have believed that the FRB would provide a robust and comprehensive compliance guide. But that has not been forthcoming, while the effective date of April 1, 2011 draws ever closer.

Today, February 1, 2011, Advocacy issued yet another letter to the FRB, again asking for a postponement and this time specifically enumerating the expectations of what constitutes satisfaction of compliance with Section 212(a)(4) of SBREFA, the section that sets up the requirements of a compliance guide.

The following outline provides my brief synopsis of Advocacy's letter to the FRB.

Best wishes,
Jonathan

Synopsis of Advocacy Letter  

Citation

(4) Compliance actions.
(A) In general.--Each guide shall explain the actions a small entity is required to take to comply with a rule.
(B) Explanation.--The explanation under subparagraph (A)--

(i) shall include a description of actions needed to meet the requirements of a rule, to enable a small entity to know when such requirements are met (emphasis added); and

(ii) if determined appropriate by the agency, may include a description of possible procedures, such as conducting tests, that may assist a small entity in meeting such requirements, except that, compliance with any procedures described pursuant to this section does not establish compliance with the rule, or establish a presumption or inference of such compliance.

(C) Procedures.--Procedures described under subparagraph (B)(ii)--

(i) shall be suggestions to assist small entities; and

(ii) shall not be additional requirements, or diminish requirements, relating to the rule.

(5) Agency preparation of guides.
The agency shall, in its sole discretion, taking into account the subject matter of the rule and the language of relevant statutes, ensure that the guide is written using sufficiently plain language likely to be understood by affected small entities. Agencies may prepare separate guides covering groups or classes of similarly affected small entities and may cooperate with associations of small entities to develop and distribute such guides. An agency may prepare guides and apply this section with respect to a rule or a group of related rules.

Has the FRB met its Obligations?

Points raised by Advocacy include:

• Concern that the FRB has not met the obligation to "include a description of actions needed to meet the requirements of a rule, to enable a small entity to know when such requirements are met."

• The guide does not have sufficient information to enable a small entity to know when the requirements have been met.

• The guidance answers almost none of the questions that the industry has about the rule and view it as simply a summary of a complex issue and not guidance on how to comply with the requirements of the rule.

• The FRB has an obligation to provide the industry with a description of the actions needed to comply with Regulation Z in a manner specific enough that will enable a small entity to know if it has met the requirements of the rule.

The FRB should amend the compliance guide to provide appropriate instructions.

Facilitating Revisions to the Guide

Points raised by Advocacy include:

• Advocacy is available to facilitate a meeting between the small entities and the FRB in terms of clarifying which issues the small entities believe need clarification and guidance.
• Advocacy believes that such a meeting would not only benefit the small entities, but it would provide the FRB with some insight into the problematic areas of the rule.

Consumer Advocacy

Points raised by Advocacy include:

• It is important for consumers to receive services from businesses that fully comprehend the requirements of this rule.
• Issuing a proper compliance guide not only helps the small entities, it also assists the Board in meeting its goal of protecting consumers.

Postponement Request

Points raised by Advocacy include:

• Because the effective date of the rule is rapidly approaching at a time that industry does not feel as though it has workable guidance, Advocacy once again encourages the FRB to postpone the implementation date for small entities.
• A delay to educate small entities on the proper implementation of the requirements of the rule will benefit the entities and the consumers who utilize their services.

Visit Library for Issuance 

Letter from SBA Office of Advocacy to Federal Reserve Board
February 1, 2011

FRB's Loan Officer Compensation "Guidance"

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

On January 26, 2011, the Federal Reserve Board issued a "Guide" - a "small entity compliance guide"  required under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), as amended. 

I have placed "Guide" in quotes because I haven't seen such a perfunctory and virtually useless issuance from the FRB in quite a long time in a matter of such consequence!

It seems to me that the "Guide" is more of a reaction to the January 13, 2011 letter from the SBA's Office of Advocacy, which expressed concern, among other things, that the "the Federal Reserve has not analyzed properly the full economic impact of the proposal on small entities as required by the Regulatory Flexibility Act (RFA)."

If this is meant to be a response to that letter, and to comply with the SBREFA, it falls far short of the mark; and, in any event, it surely doesn't seem to fulfill the statutory requirements carefully reasoned in the SBA's letter. 

Much of the FRB "Guide" is no more than a regurgitation of the "already known" aspects of the Regulation Z amendments affecting loan officer compensation. I doubt our clients will get much help from this document!

The SBA's letter recommended that the Board publish a compliance guide in the immediate future and extend the time for small entities to comply - now scheduled for April 1, 2011 - to reflect the delay in the availability of the guide. 

To quote directly from the SBA letter:

• "Small entities have indicated that the requirements of some of these changes are unclear and confusing. They are concerned that the lack of clarity may lead to problems in compliance.

• Advocacy reviewed the Board's website. Advocacy commends the Board for having a SBREFA compliance guide page on its website. However, although there are compliance guides for Regulations C, D, E, F, H, I, J, L, M, O, P, R, V, X, AA, BB, CC, DD, and GG, Advocacy was unable to find a compliance guide for Regulation Z."

Nevertheless, at this time it does not appear that a delay is being seriously considered.

In reviewing our Library and Archives, it appears that we have well over 300 documents on the subject of loan officer compensation. So I decided to open a new section in the Library devoted to COMPENSATION - MLOs. Over time, it will receive more and more relevant documents. Check back or bookmark the page, if you want to keep track of this controversial subject.

At this time, I am completing an article that will be published in the March 2011 edition of National Mortgage Professional Magazine, the country's premier magazine of the mortgage industry. The article will cover, comprehensively and practically, the salient features of loan officer compensation that will become effective on April 1, 2011. 

Moreover, my article will provide clear guidelines to assist mortgage loan originators in understanding and applying compensation requirements. 

In the meantime, we will watch the situation closely and provide updates, where needed.

Best wishes,
Jonathan Foxx

Some Highlights of the "Guide"

Definitions of a Loan Originator and Mortgage Broker:

• All persons who originate loans, including mortgage brokers and their employees, as well as mortgage loan officers employed by depository institutions and other lenders.

Payments based on transaction terms or conditions:

• Prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended.
• Compensation can neither be increased nor decreased based on the loan terms or conditions.
• When the creditor offers to extend a loan with specified terms and conditions (such as rate and points), the amount of the originator's compensation for that transaction is not subject to change, based on either an increase or a decrease in the consumer's loan cost or any other change in the loan terms.
• The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the prohibition, provided the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. (Such compensation may be subject to a minimum or maximum dollar amount. The minimum or maximum amount may not vary with each credit transaction.)
• Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.
• An originator that increases the consumer's interest rate to generate a larger yield spread premium can apply the excess creditor payment to third-party closing costs and thereby reduce the amount of consumer funds needed to cover upfront fees. (There is no prohibition from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction's terms or conditions.)

Payments by persons other than the consumer:

• If compensation is received directly from a consumer in a transaction, no other person may provide any compensation to a loan originator, directly or indirectly, in connection with that particular credit transaction.
• Payments made by creditors to loan originators are not payments made directly by the consumer, regardless of how they might be disclosed under HUD's Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA).

Prohibition on steering and allowance of Safe Harbor:

• Prohibits a loan originator from "steering" a consumer to a lender offering less favorable terms in order to increase the loan originator's compensation.

• Provides a safe harbor to facilitate compliance:

To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business.

The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in the rule.

The safe harbor is met if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include:

(A) the loan with the lowest interest rate for which the consumer qualifies;

(B) the loan with the lowest total dollar amount for origination points or fees, and discount points, and

(C) the loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.

Visit Library for Issuance

FRB - Small Entity Compliance Guide - Regulation Z:
Loan Originator Compensation and Steering,
12 CFR 226 (1/26/11)
Print and Website Versions

New Risk Based-Pricing Rules

Risk-based pricing refers to the practice of using a consumer's credit report, which reflects his or her risk of nonpayment, in setting or adjusting the price and other terms of credit offered or extended to a particular consumer.

The risk-based pricing rules implement section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACTA), which amends the Fair Credit Reporting Act (FCRA).

The Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) proposed regulations in May 2008 that generally would require a creditor to provide a consumer with a risk-based pricing notice when, based in whole or in part on the consumer's credit report, the creditor offers or provides credit to the consumer on terms less favorable than the terms it offers or provides to other consumers.

On December 28, 2009, the FRB and FTC announced the final risk-based pricing rules, with the effective compliance date of January 1, 2011. Publication in the Federal Register of the final rules took place on January 15, 2010.

The new rules apply to all mortgage brokers, correspondents and lenders and impacts all consumers that have credit data and/or scores accessed for a risk-based pricing decision, regardless of loan approval status.

Indeed, risk-based pricing rules apply, with certain exceptions, to all creditors that engage in risk-based pricing. A risk-based pricing notice would generally be provided to the consumer after the terms of credit have been set, but before the consumer becomes contractually obligated on the credit transaction.

The rules provide a number of different approaches that creditors may use to identify the consumers to whom they must provide risk-based pricing notices.

In addition, the rules include certain exceptions to the notice requirement, the most significant being an exception that permits creditors, in lieu of providing a risk-based pricing notice to those consumers who receive less favorable terms, to provide all of their consumers with their credit scores and explanatory information.

As an alternative to providing risk-based pricing notices, the final rules permit creditors to provide consumers who apply for credit with a free credit score and information about their score. Today, most consumers must pay a fee to obtain their credit score.

Companies that use a credit report or score in connection with a credit decision must send notice, containing specified information, to a consumer when, based on a credit report or score, the company grants credit on material terms that are not the most favorable terms offered to a substantial proportion of consumers. For instance, in most cases, the rule defines "material terms" as the loan's Annual Percentage Rate.

Effective: January 1, 2011

Highlights

The new rule differs from the current FACTA required Notice to Home Loan Applicant and Consumer Score Disclosure requirements in several important ways:

1) Each risk based pricing disclosure must include the decisioning credit score and a comparative study showing how each consumer's credit score relates to others using that specific scoring model.

2) Whereas the previous FACTA notices allowed for combining of joint applicants, the new disclosures are required to be sent individually and separately. (These disclosures cannot be combined with any other non-FACTA documents and/or required disclosures.)

3) A unique disclosure is required in instances where a credit score is not available.

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Fair Credit Reporting Risk-Based Pricing

Fair Credit Reporting Risk-Based Pricing Regulations, Final Rule, FR 75/10, January 15, 2010
Fair Credit Reporting Risk-Based Pricing Regulations - Agency Notice, December 28, 2009
Model Forms - Risk-Based Pricing, Agency Notice, December 28, 2009
Fair Credit Reporting Risk-Based Pricing Regulations: Correction, FR 73/104, May 29, 2008
Fair Credit Reporting Risk-Based Pricing Regulations, Proposed Rule, FR 73/97, May 19, 2008

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FRB: Publishes TILA Interim Rule - Update

Today, the Federal Reserve Board approved an interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA).

The Board is issuing this interim rule to clarify certain aspects of a September 24, 2010 interim rule, in response to public comments.

The September interim rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which amended TILA to require mortgage lenders to disclose examples of how a loan's interest rate or monthly payments can change.

Those statutory amendments are effective on January 30, 2011.

Please visit out archive for relevant posts, such as our compliance update of October 14, 2010. (Archive)

The MDIA seeks to alert borrowers to the risks of payment increases before they take out mortgage loans with variable rates or payments. Under the Board's September interim rule, lenders' cost disclosures must include a payment summary in the form of a table stating the initial rate and corresponding periodic payment and, for adjustable rate loans, the maximum rate and payment that can occur during the first five years as well as a "worst case" example showing the maximum rate and payment possible over the life of the loan.

• This interim rule clarifies that creditors' disclosure should reflect the first rate adjustment for a "5/1 ARM" loan because the new rate typically becomes effective within 5 years after the first regular payment due date.

• Today's interim rule also corrects the requirements for interest-only loans to clarify that creditors' disclosures should show the earliest date the consumer's interest rate can change rather than the due date for making the first payment under the new rate.

• The rule also clarifies which mortgage transactions are covered by the special disclosure requirements for loans that allow minimum payments that cause the loan balance to increase.

Creditors have the option of complying with either the Board's September 2010 interim rule as originally published or as revised by this interim rule until October 1, 2011, at which time compliance with this interim rule will become mandatory.

Comment Period Deadline: 60 days after imminent publication in the Federal Register. Contact Information in Federal Register.

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FRB: TILA Interim Rule - request for public comment.
Clarifying 9/24/10 Interim Rule.
December 22, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FRB: Appraisal Independence - Interim Final Rule

On October 28, 2010, the Federal Reserve Board published an interim final rule in response to revision requirements to the Truth in Lending Act (TILA), pursuant to the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act. TILA Section 129E establishes new requirements for appraisal independence for consumer credit transactions secured by the consumer's principal dwelling.

The amendments ensure that real estate appraisals used to support creditors' underwriting decisions are based on the appraiser's independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. The amendments also seek to ensure that creditors and their agents pay customary and reasonable fees to appraisers.

The interim final rule applies to a person who extends credit or provides services in connection with a consumer credit transaction secured by a consumer's principal dwelling. Although TILA and Regulation Z generally apply only to persons to whom the obligation is initially made payable and that regularly engage in extending consumer credit, TILA Section 129E and the interim final rule apply to persons that provide services without regard to whether they also extend consumer credit by originating mortgage loans. Thus, the interim final rule applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers and other firms that provide settlement services.

Specifically, the interim final rule applies to appraisals for any consumer credit transaction secured by the consumer's principal dwelling. Covering consumer credit transactions is consistent with the scope of TILA generally, which only applies to credit extended for personal, family or household purposes. The revisions provide a broader scope, as required by Section 1472 of the Dodd-Frank Act, which does not limit coverage to closed-end loans and also covers HELOCs.

Finally, with a few exceptions, the interim final rule applies to any person who performs valuation services, performs valuation management functions, and to any valuation of the consumer's principal dwelling, not just to a licensed or certified ''appraiser,'' an ''appraisal management company,'' or to a formal ''appraisal.''

The Board seeks comment on this interim final rule.

Dates:
Effective: December 27, 2010
Compliance Date: April 1, 2011
Comments Deadline: December 27, 2010

HIGHLIGHTS

Coercion and prohibited extensions of credit.

-Prohibits covered persons from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person's independent judgment.

-Prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that (a) coercion or other similar conduct has occurred, or (b) that the person who prepares a valuation or who performs valuation management services has a prohibited interest in the property or the transaction as discussed below, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the value of the property.

Conflicts of interest.

-Provides that a person who prepares a valuation or who performs valuation management services may not have an interest, financial or otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use of in-house appraisers or affiliates. However, because the Act prohibits appraisers from having an ''indirect financial interest'' in the transaction, it is possible to interpret the Act to prohibit creditors from using in house staff appraisers and affiliated appraisal management companies (AMCs).

-Clarifies that an employment relationship or affiliation does not, by itself, violate the prohibition.

-Establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function, to prevent conflicts of interest. Special guidance on firewalls is provided for small institutions, because they likely cannot completely separate appraisal and loan production staff. Small institutions are those with assets of $250 million or less.

Mandatory reporting of appraiser misconduct.

-Provides that a creditor or settlement service provider involved in the transaction who has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers under applicable federal or state law, or the Uniform Standards of Appraisal Practice (USPAP) must report the failure to comply to the appropriate state licensing agency.

-Limits the duty to report compliance failures to those that are likely to affect the value assigned to the property.

-Provides that a person has a ''reasonable basis'' to believe an appraiser has not complied with the law or applicable standards, only if the person has knowledge or evidence that would lead a reasonable person under the circumstances to believe that a material failure to comply has occurred.

Customary and reasonable rate of compensation for fee appraisers.

-A creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located. The rule provides two presumptions of compliance. Under the first, a creditor and its agent is presumed to have paid a customary and reasonable fee if the fee is reasonably related to recent rates paid for appraisal services in the relevant geographic market, and, in setting the fee, the creditor or its agent has:

· Taken into account specific factors, which include, for example, the type of property and the scope of work; and

· Not engaged in any anti-competitive actions, in violation of state or federal law, that affect the appraisal fee, such as price fixing or restricting others from entering the market.

-A creditor or its agent would also be presumed to comply if it establishes a fee by relying on rates established by third party information, such as the appraisal fee schedule issued by the Veteran's Administration, and/or fee surveys and reports that are performed by an independent third party (the Act provides that these surveys and reports must not include fees paid by AMCs).

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Federal Reserve Board
Interim Final Rule - Appraiser Independence
Federal Register, Vol. 75, No. 208
October 28, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

FRB: Issues Interim Final Rule for Appraiser Independence

On October 18, 2010, the Federal Reserve Board (FRB) announced an interim final rule that is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). This interim final rule includes several provisions that are meant to protect the integrity of the appraisal process when a consumer's home is securing the loan.

The Act mandates that the Home Valuation Code of Conduct (HVCC) shall have no effect, once the Board issues this interim final rule. [See: TILA Section 129E(j), 15 U.S.C. 1639e(j)] The HVCC provides that, among other things, only a creditor or its agent may select, engage, and compensate an appraiser and that a creditor must ensure that its loan production staff do not influence the appraisal process or outcome.

The FRB's interim final rule intends to ensure that real estate appraisers are "free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions."

In addition, the interim final rule seeks to ensure that appraisers receive customary and reasonable payments for their services.

Public comments are due 60 days after publishing the interim final rule in the Federal Register, which is expected soon.

Compliance: April 1, 2011.

HIGHLIGHTS

The Rule includes several provisions that protect the integrity of the appraisal process when a consumer's home is securing the loan.

Interim Final Rule

• Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment.

• Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions.

• Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated.

• Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities.

• Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.

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FRB: Appraiser Independence, Interim Final Rule,
12 CFR Part 226, Regulation Z, Truth in Lending
October 18, 2010

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.