Shortly after returning from their July 4 holiday, the CFPB unleashed nearly 1,4001 pages of mortgage regulations on the industry. These missives address the CFPB's Herculean task of combining the disclosures required by TILA and RESPA and redefining what a "HOEPA" loan means.
In addition to its efforts in the mortgage arena, the CFPB issued a strong warning to all lenders and their third party vendors regarding sales practices of "add-on products." The CFPB also demonstrated that its bite may be as bad as its bark by issuing its first temporary restraining order against a California law firm acting as a foreclosure rescue company.
The Bureau's "Know Before You Owe" initiative started with the concept of merging the early TILA disclosure with RESPA's GFE. The initiative spawned an Internet series of botanically inspired disclosure prototype forms and brought the CFPB to cities across the country. The result of those prototypes and focus testing is the three-page Loan Estimate form and the five-page Closing Disclosure. Copies of the forms are available here:
The proposed disclosures will apply to most closed-end mortgage loans (with the exception of reverse mortgage loans), including loans secured by a timeshare. To address the variety of mortgage loans that exist in the marketplace, the Bureau has proposed several versions of the disclosure. Thus, even though the standard loan estimate form will apply to most closed-end transactions, the Bureau has created other versions of the form to address more complicated transactions. The Bureau also has created Closing Disclosures for use in refinance loans (no seller) and purchase money loans.
Generally speaking, in terms of content, the Loan Estimate discloses the following in three pages:
- Page One. Page One describes the important terms of the loan: (i) identifying information describing the borrower and the loan; (ii) loan terms, amount, payments and rate; (iii) specific loan features such as prepayment fees and balloon payments; (iv) projected payments in future years; and (v) estimated cost and fees to close.
- Page Two. Page Two breaks down the settlement fees and costs (categorized generally into "tolerance" buckets) and details on escrows.
- Page Three. Page Three describes disclosure of the APR, which previously was the centerpiece of the TILA disclosure, along with new disclosures of the Total Interest Payment ("TIP"), availability of the appraisal, assumption of the loan, homeowner's insurance, late payment terms, the lender's inability to guarantee refinancing and transfer of servicing.
The Bureau touts the proposed Loan Estimate as being "simpler" than the forms that lenders are currently providing and better at highlighting the terms that the consumers actually care about, such as interest rate and monthly payments. The Bureau also believes that the Loan Estimate better warns consumers about risky features such as increased interest rates and payment amounts in later years of the loan.
As proposed, the Closing Disclosure is a five-page document:
- Page One. Page One of the Closing Document mirrors Page One of the Loan Estimate.
- Pages Two and Three. These pages resemble the prior HUD-1 providing a breakdown of the fees as well as a calculation of cash to close. They also provide direction with respect to calculating whether the fees disclosed are within tolerance.
- Pages Four and Five. These final pages provide details about the loan similar to Page Three of the Loan Estimate, including the TIP, assumption information and warning about refinancings.
The proposal and the model forms will be published in the Federal Register on August 23 and are available here: https://www.federalregister.gov/articles/2012/08/23/2012-17663/integrated-mortgage-disclosures-under-the-real-estate-settlement-procedures-act-regulation-x-and-the for review.
For over two decades, "HOEPA" or "Section 32" has referred to that category of mortgage loan that has an APR or "points and fees" that exceed certain thresholds, making the loan eligible for heightened regulatory scrutiny and consumer protection. Historically, because of the legal and reputational risk associated with making these loans, lenders have chosen to avoid them. Because of the assignee liability, investors rarely purchase them.
As part of its overhaul of the mortgage market, Dodd-Frank redefined what constitutes a "HOEPA" loan. "HOEPA" loans, renamed "high-cost mortgage loans" will soon include purchase money and open-end loans but will continue to exclude reverse mortgage loans. The APR and points and fees thresholds have been lowered and a prepayment fee trigger has been added. Specifically, a high-cost mortgage loan includes a loan where:
- The APR exceeds the average prime offer rate by 6.5 percentage points for most first-lien mortgages and 8.5 percentage points for subordinate lien mortgages;
- The points and fees exceed five percent of the total transaction amount or a higher threshold for loans below $20,000; or
- The creditor may charge a prepayment penalty more than 36 months after loan consummation or account opening, or penalties that exceed more than two percent of the amount prepaid.
Consumers who obtain one of these "high-cost" mortgage loans will receive all of the protections from what are considered to be "predatory" loan terms that currently exist for HOEPA loans. The proposed rule also would implement new Dodd-Frank Act restrictions and requirements concerning loan terms and origination practices for high-cost mortgages, for example:
- Prepayment Fees and Balloons. Balloon payments would largely be banned, and creditors would be prohibited from charging prepayment penalties and financing points and fees.
- Late Fees. Late fees would be restricted to four percent of the payment that is past due. Fees for providing payoff statements would be restricted and fees for loan modification or loan deferral would be banned.
- Ability to Repay. Creditors originating open-end credit plans would be required to assess consumers' ability to repay the loans. (Creditors originating high-cost, closed-end mortgage loans already are required to assess consumers' ability to repay.)
- Default. Creditors and mortgage brokers would be prohibited from recommending or encouraging a consumer to default on a loan or debt to be refinanced by a high-cost mortgage.
- Mandatory Counseling. Before making a high-cost mortgage, creditors would be required to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the loan.
In addition to expanding the protections for high-cost mortgage loans, the proposal would generally require lenders to distribute a list of homeownership counselors or counseling organizations to consumers within a few days after applying for any mortgage loan. The proposal also would implement a requirement that first-time borrowers receive homeownership counseling before taking out a negatively amortizing loan.
The proposed rule is available here and will be published in the Federal Register on August 15:
Although you will not see an announcement of it on their website, on July 18, 2012, the Bureau filed an action against the Gordon Law Firm, PC, a California loan modification/foreclosure rescue law firm. Details on the case can be found at the receiver's website here:
The law firm is alleged to have engaged in certain deceptive practices relating to the offering of loan modifications. Many of the allegations center around the firm's purportedly representing itself as a governmental entity or having governmental approval for its loan products. More specifically, the complaint includes a copy of an alleged mailing touting the consumer's "HUD Rights" and containing a logo that suggests the mailing may have been government-sponsored.
Days after stories of this enforcement action broke, the Bureau still did not formally announce the action but instead published a reminder for consumers on ways to avoid foreclosure relief scams. The Bureau warned consumers to be cautious of a company that does any of the following:
- Asks you to pay high fees upfront to receive services;
- Promises to get you a loan modification;
- Asks you to sign over title to your property;
- Asks you to sign papers that you do not understand;
- Says you should start making payments to someone other than your servicer or lender;
- Claims to be conducting a "forensic audit;" or
- Tells you to stop making mortgage loan payments altogether.
Companies that offer mortgage relief services are prohibited by law from collecting any fees until they give you a written offer from your servicer or lender that you decide is acceptable. A mortgage relief company must also tell you that:
- The company is not associated with the government;
- Your lender may not agree to modify your loan; and
- If the company tells you to stop paying your mortgage, you may lose your home and damage your credit.
As most credit card users are aware, credit card issuers often work with third-party vendors to market various "add-on" products such as debt protection, identity theft protection, credit score tracking, etc. To ensure that all of the participants in this industry act in a manner compliant with all applicable laws, on July 18 the CFPB issued guidelines outlining its compliance expectations.
Institutions supervised by the CFPB should take steps to ensure that they market and sell credit card add-on products in a manner that limits the potential for statutory or regulatory violations and related consumer harm. These steps should include, but are not limited to, ensuring that:
- Marketing materials, including direct mail promotions, telemarketing scripts, internet and print advertisements, radio recordings and television commercials reflect the actual terms and conditions of the product and are not deceptive or misleading to consumers;
- Employee incentive or compensation programs tied to the sale and marketing of add-on products require adherence to institution-specific program guidelines and do not create incentives for employees to provide inaccurate information about the products;
- Scripts and manuals used by the institution's telemarketing
and customer service centers do the following:
- Direct the telemarketers and customer service representatives to accurately state the terms and conditions of the various products, including material limitations on eligibility for benefits;
- Prohibit enrolling consumers in programs without clear affirmative consent to purchase the add-on product, obtained after the consumer has been informed of the terms and conditions;
- Provide clear guidance as to the wording and appropriate use of rebuttal language and any limits on the number of times that the telemarketer or customer service representative may attempt to rebut the consumer's request for additional information or to decline the product; and
- Where applicable, make clear to consumers that the purchase of
add-on products is not required as a condition of obtaining credit,
unless there is such a requirement.
- To the maximum extent practicable, telemarketers and customer service representatives do not deviate from approved scripts;
- Applicants are not required on a prohibited basis to purchase add-on products as a condition of obtaining credit; and
- Cancellation requests are handled in a manner that is consistent with the product's actual terms and conditions and that does not mislead the consumer.
In conjunction with the U.S. Department of Education, the Bureau released a new web tool for borrowers who have fallen behind on their payments to help them understand their options, and work to bring their loans out of default or delinquency:
The tool will anticipate the amount that a consumer can afford to repay on his loan based on his income and family size. For example, a person who makes $40,000 per year could likely afford monthly payments of $296 (single person household); $224 (two-person household); $153 (three-person household); and $81 (four-person household).
Students and graduates who are struggling to make their loan payments are encouraged to utilize the tool and work with their servicers to modify their payments.
Know Before You Owe
Similar to their mortgage effort (but hopefully resulting in a much shorter regulatory proposal), the Bureau has been working with the Department of Education to create a new financial aid comparison tool and has launched a beta test. The Bureau hopes to have a live version available for the next school year. In the meantime, the Bureau is working to refine the presentation of information on the document as well as ways to integrate the shopping tool with existing tools used by government agencies and the private sector.
OTHER CFPB ACTIVITIES
This month, the CFPB issued three reports:
- 2012 Annual Report to the Committee on Appropriations
of the House of Representatives. According to this report,
the Bureau's significant 2012 obligations through June 2012
- $19.7 million to Treasury for various administrative support services, including information technology and human resource support, temporary office space and detailees;
- $11.8 million to Treasury's Office of the Comptroller of the Currency for office space;
- $7.6 million to Treasury's Bureau of the Public Debt for cross-servicing of various human resource and financial management services, such as core financial accounting, transaction processing and travel;
- $3.7 million to a contractor for human resource support services;
- $3.7 million to an information technology contractor for project management support services;
- $3.1 million to a contractor for hosting, cloud infrastructure and system administration services;
- $4.0 million to a contractor for the development and operations of the Consumer Response System; and
- $2.9 million for collection and analysis of credit card data to assist the Bureau.
- Semiannual Report to the President and
Congress. This report provides an update on the
Bureau's activities and accomplishments since its inaugural
report in January 2012. Highlights from the past year
- Targeted review of inherited regulations and restatement of inherited regulations via interim final rules;
- Issuance of rules concerning consumer remittance transfers to foreign countries;
- Interim final rules defining procedures for investigations, rules of practice for adjudication proceedings and procedures for disclosure of records and information;
- Bureau's Supervision and Examination Manual; and
- Formal solicitation for nominations for CFPB's Consumer
- Private Student Loans. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Director of the Consumer Financial Protection Bureau and the Secretary of Education to submit a Report on private student loans. This Report addresses the following topics: (i) the private lenders, their market and their products, as they have evolved and performed over time; (ii) the consumers of these products, their characteristics and their shopping, usage and repayment behaviors; (iii) consumer protections, including recent changes and possible gaps; (iv) fair lending compliance information currently available and its implications; and (v) statutory or legislative recommendations to improve consumer protections.
The Bureau's efforts to combine the TILA/RESPA disclosures into an integrated loan disclosure went far beyond the mere creation of two new disclosure documents. In fact, the Bureau reviewed the context in which the disclosures are provided and are proposing a number of substantive changes to the applicable regulations, ranging from the calculation of the finance charge on the loans to be disclosed to the timing of providing the disclosures.
Some highlights from the proposal include:
- "All (Most) In" APR. The Bureau is attempting to modify the existing "some in/some out" finance charge calculation regime by adopting a new "mostly in" finance charge calculation regime. This element of the proposal is arguably one of the most important because the policy adopted here will also affect related rulemakings, revising HOEPA/"high-cost" mortgage loans and qualified mortgage loans.
- Elements of an "Application." Presently, RESPA allows lenders to determine when they have received sufficient information to constitute a loan application such that they are required to provide consumers with a GFE. The proposal eliminates that discretionary element and requires lenders to provide disclosures upon the receipt of: (i) consumer's name, (ii) income, (iii) social security number, (iv) property address, (v) estimate of the value of the property, and (vi) amount of loan sought.
- "Preliminary" Loan Estimate. Lenders will be permitted to provide an estimate of their loan estimate, provided any such preliminary estimate clearly discloses that it is not a loan estimate and is not likely to cause consumer confusion.
- Fees. Lenders remain prohibited from charging any fees prior to providing the Loan Estimate and receiving affirmative assent to proceed with the loan application; however, the proposal imposes even more stringent restrictions on the lenders' ability to obtain payment information (such as a credit card number) prior to receiving the consent to proceed.
- Timing. Lenders remain responsible for providing the Loan Estimate within three business days of receiving an application. Brokers may provide the Loan Estimate. The lender, however, is responsible for those disclosures.
- "Zero Tolerance." The Bureau is looking to expand the "zero tolerance" (i.e., fees that cannot increase by any amount from the time disclosed on the Loan Estimate to the time of closing) category to include, under most circumstances, fees charged by an affiliate and fees associated with services for which the borrower chooses from the list of the lender's service providers. Exceptions to this general rule may exist under certain circumstances, such as a consumer-requested change or if information provided by the consumer is found to be inaccurate. Otherwise these fees join lender and broker fees in the "zero tolerance" category.
- Three-Day Waiting Period. Generally speaking, the proposal requires that three business days elapse between providing the Closing Disclosure and closing. (This requirement, however, does not apply to loans secured by a timeshare or to de minimis changes of less than $100). Any changes that occur during that waiting period would trigger the provision of a new disclosure and would restart the three-day waiting-period clock.
- Closing Disclosure. Commenters are requested to weigh in on whether the lender or the settlement agent is responsible for providing the Closing Disclosure. At present, the lender is responsible for the final TIL and the settlement agent is responsible for the HUD-1 settlement statement.
Once the proposal is adopted as final, the effective date remains unknown. The Bureau is requesting comment on that point, attempting to balance its desire to make the regulation effective as soon as possible with the industry's need to assimilate and program for a significant number of changes within a brief period of time.
On July 16, coinciding with a field hearing in Detroit, the Bureau issued its first in a series of "Larger Participant" rulemakings. The rulemaking is significant in that it signals the manner in which the CFPB will utilize its supervisory authority over non-bank entities in markets other than mortgage, small dollar and private education. According to this rulemaking, the CFPB will have authority to supervise consumer reporting agencies with more than $7 million in annual receipts from consumer reporting activities. Accordingly, this authority will cover approximately 30 firms, or seven percent of market participants, but will account for approximately 94 percent of industry receipts.
The effects of this rulemaking are already being felt in the industry.
Lenders and other persons with permissible purposes to utilize credit reports should anticipate more aggressive auditing from the credit reporting bureaus and should ensure that their use of credit reports is strictly limited to the permissible purpose for which they received the report. They also should be aware that the bureau may not accept written authorization to receive a report as a permissible purpose. As such, the bureau may request evidence of an additional permissible purpose in addition to the written authorization.
Outstanding Federal Register Publications
1. Given the eyebrow raising (and "green" undermining) length of the proposed regulation for the TILA/RESPA combination, the Bureau took the time to breakdown the regulation in terms of dedicated pages (which, however, does nothing to alleviate the burden of having to read the proposal,):
Preamble - 684 PAGES
- Directions on how to submit comments
- Summary of the proposed rule
- Overview of the mortgage market and the mortgage shopping process
- Summary of 43 years of TILA and RESPA mortgage disclosure regulation
- Summary of the Dodd-Frank Act provisions requiring the Bureau to combine the TILA and RESPA mortgage disclosures and related Dodd-Frank Act mortgage rulemakings
- Summary of the Bureau's outreach, disclosure testing and Small Business Review Panel
- Statement of the Bureau's legal authority
- Detailed explanations of the reasons for each aspect of the proposed rule and requests for comment
- Analyses of the costs and benefits of the proposed rule for consumers and industry, as required by the Dodd-Frank Act, the Regulatory Flexibility Act (as amended by the Small Business Regulatory Enforcement Fairness Act) and the Paperwork Reduction Act
Proposed amendments to regulations – 209 PAGES
- New rules
- Technical and conforming amendments to existing rules
Proposed guidance - compliance with the amended regulations – 205 PAGES
Signature Page – 1 Page
Total Pages – 1,099
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.