United States: Partial Rollback Of Dodd-Frank Act: Key Changes For Residential Mortgage Lenders

Leonard Bernstein is a Partner in Holland & Knight's Philadelphia office

Co-authored by Robert M. Jaworski


  • The Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) rolls back some of the provisions of the Dodd-Frank Act that were found to be overly burdensome and/or difficult to comply with, particularly for community banks.
  • Title I of the Act, entitled "Improving Consumer Access to Mortgage Credit," attempts to alleviate or at least lessen some of the burdens that Dodd-Frank placed upon residential mortgage lenders.
  • While the Act in general and Title I in particular could have done more to relieve the burdens placed upon community banks and others by the Dodd-Frank Act, it should nevertheless be welcomed by many in the industry, including residential mortgage lenders and servicers.

President Donald Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) on May 24, 2018. The Act rolls back some of the provisions of the Dodd-Frank Act that were found to be overly burdensome and/or difficult to comply with, particularly for community banks. Title I of the Act, entitled "Improving Consumer Access to Mortgage Credit," attempts to alleviate or at least lessen some of the burdens that Dodd-Frank placed upon residential mortgage lenders. Some of the more significant changes effected by Title I are set forth below.

  • Section 101 creates a new "qualified mortgage" (QM) safe harbor for loans made and held in portfolio by certain smaller depository institutions.
  • Section 103 allows for the making of loans secured by real property located in rural areas without an appraisal under specified conditions.
  • Section 104 exempts certain insured depository institutions from the burdensome additional Home Mortgage Disclosure Act (HMDA) reporting requirements imposed by the Dodd-Frank Act and implemented by the Bureau of Consumer Financial Protection (CFPB) in its recent revisions to Regulation C.
  • Section 106 provides temporary authority, subject to certain conditions, to:

    • properly registered loan originators (LOs) to continue to originate loans when they move from a depository institution to a non-depository institution, and
    • state-licensed LOs to originate loans in a state in which they are not licensed, provided their employing mortgage company is properly licensed in that state
  • Section 108 relieves certain smaller depository institutions from having to escrow for taxes and insurance when making higher-priced, first-lien mortgage loans (HPMLs).
  • Section 109 permits creditors to reduce the annual percentage rate (APR) on a consumer's mortgage loan without having to wait an additional three business days before closing.

Key Details

Key details concerning these provisions are set forth below.

Effective Date. The Act is generally silent as to its effective date, meaning that, except for sections or provisions that specify a particular effective date, it is effective immediately. Regarding Title I, only Section 106 (giving LOs temporary license authority under certain conditions) specifies a particular effective date – 18 months after enactment. Also, Section 108 (providing relief from HPML escrow requirement) requires the CFPB to adopt an implementing regulation. Although the other sections listed above neither specify an effective date nor expressly require implementing regulations, they are so intertwined with existing regulations that regulatory action would appear to be required before they can take effect.

New QM Safe Harbor. In 2013, pursuant to a mandate in the Dodd-Frank Act, the Bureau adopted a regulation that essentially requires all lenders of consumer credit secured by a dwelling to consider, document and verify that the loan applicant has the present ability to repay the loan for which he/she has applied in accordance with its terms (ATR Rule). As part of the ATR Rule, the Bureau also created several QM "safe harbors" (signifying compliance with the ATR Rule) for loans, other than HPMLs, that meet specified requirements. (HPMLs that meet these specified requirements were entitled only to a rebuttable presumption of compliance with the ATR Rule.) One already existing safe harbor is for portfolio loans made by a "small creditor," i.e., a creditor with total assets of less than $2 billion at the end of the previous calendar year, which, together with its affiliates, made no more than 500 first-lien covered loans during the preceding calendar year (Small Creditor Safe Harbor).

Section 101 of the Act amends Section 129(b) of the Truth in Lending Act (TILA), 15 U.S.C. 1629(b), to create an additional QM safe harbor for certain loans made by insured depository institutions that, together with their affiliates, have less than $10 billion in total assets (Small Bank Safe Harbor). To qualify for this new Small Bank Safe Harbor, the institutions must "consider and document" the debt, income and financial resources of the consumer and the loans must 1) be retained in portfolio, 2) not provide for prepayment penalties (except in limited circumstances), 3) have total points and fees that do not exceed 3 percent of the total loan amount, and 4) not have negative amortization or interest-only features. Additionally, if the institution subsequently sells the loan to a third party, the loan will cease to qualify for the safe harbor unless the sale falls within one of the limited exceptions provided in the Act.

The new Small Bank Safe Harbor differs from the existing Small Creditor Safe Harbor in several important ways. First, it appears to apply even if the loan is an HPML. Second, only insured depository institutions can qualify for it. Third, it disappears if the loan is sold to a third party (except in certain limited situations), whereas loans made under the Small Creditor Safe Harbor can be sold after three years and still retain their safe harbor protection. Fourth, loans can qualify for the Small Bank Safe Harbor without having to meet all of the requirements for the Small Creditor Safe Harbor.

With regard to the last difference noted above, to qualify for the Small Creditor Safe Harbor, loans must meet the same requirements needed to qualify for the Small Bank Safe Harbor plus 1) they must provide for substantially equal monthly payments (except for adjustable-rate mortgage (ARM) or step-rate adjustments), not have a term in excess of 30 years and not require a balloon payment; 2) the monthly payment amount used for underwriting purposes must include all monthly "mortgage related obligations" and must be calculated based on the maximum rate that can apply during first five years of the loan term; and 3) the creditor must determine that the monthly payment will repay either the outstanding principal balance over the remaining term when the rate adjusts to the maximum rate or the loan amount over the loan term. Finally, the Small Bank Safe Harbor appears to require the lender only to "consider and document," but not to "verify," the applicant's debt, income and financial resources.

The new Small Bank Safe Harbor is therefore both broader and, in some respects, more narrow than the existing Small Creditor Safe Harbor. Nevertheless, because it is an additional safe harbor and not a replacement for the Small Creditor Safe Harbor, it should enable smaller depository institutions to extend mortgage loans to more consumers. Implementing regulations appear necessary before banks will be able to take advantage of this new safe harbor.

Appraisal Requirement Exception. This change allows mortgage originators to make federally related mortgage loans of less than $400,000 in amount without an appraisal if they are secured by properties located in a rural area (as described in Section 35 of Regulation Z). The mortgage originator must certify, not later than three business days after it provides the consumer with the loan Closing Disclosure, that it contacted at least three State-certified or -licensed appraisers on its approved appraiser list and none was available within five business days to perform the appraisal for a customary and reasonable fee and within a customary and reasonable time frame.

Once a loan is made without an appraisal as authorized by this provision, it may not be sold or transferred to another person unless 1) it is in connection with the originator's bankruptcy or failure, 2) the other person is regulated by one of the prudential federal bank regulators and will hold the loan in portfolio, 3) it is pursuant to a merger or acquisition, or 4) the other person is the originator's wholly owned subsidiary and the loan will thereafter be considered the originator's asset for regulatory accounting purposes.

Finally, this exception does not apply to high-cost mortgages as defined in Section 103 of TILA or where an appraiser is required by regulation of the bank's prudential federal bank regulator.

HMDA Relief. In 2015, the Bureau, acting pursuant to a Dodd-Frank mandate, adopted amendments to Regulation C (12 CFR Part 1003) changing the criteria that determine which institutions are required to collect and report data concerning their home mortgage lending (Covered Institutions) and substantially adding to the data items that those institutions must collect and report (New Data Items). The new collection requirements commenced at the beginning of 2018, with the requirement to report the new data starting in 2019.

Covered Institutions are defined in Regulation C to mean depository institutions and nonbank lenders that meet certain conditions, one of which is that, in each of the two preceding calendar years, they originated at least 1) 25 covered closed-end mortgage loans or 2) 500 covered open-end lines of credit. The Act amends HMDA, specifically 12 U.S.C. 2803, to exempt Covered Depository Institutions from having to collect and report any New Data Items with respect to: 1) closed-end mortgage loans, if the depository institution originated fewer than 500 such loans in each of the two preceding calendar years; or 2) open-end lines of credit, if the depository institution originated fewer than 500 such loans in each of the two preceding calendar years. However, Covered Depository Institutions that have received a Community Reinvestment Act (CRA) rating of "needs to improve" on each of its two most recent CRA examinations or "substantial noncompliance" on its most recent CRA examination, will not qualify for this exemption.

This exemption should relieve smaller Covered Depository Institutions that tend to make few closed-end or open-end mortgage loans from the expanded collection and reporting requirements in the 2015 final rule amending Regulation C with respect to one or both of those classes of loans. It appears the CFPB will have to amend Regulation C before this change can become effective.

Temporary LO License Authority. This is a significant change. The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) (12 U.S.C. 5101 et seq.) mandated the creation of a uniform nationwide licensing system for loan originators, including originators who work for state- and federally chartered depository institutions and independent mortgage lenders and mortgage brokers. This was to be effected through the enactment of state laws that were consistent with the federal mandates contained in the SAFE Act and the U.S. Department of Housing and Urban Development's (HUD), now the CFPB's, implementing regulations or, in states which failed to enact such a law, through the adoption of a federal licensing regime established and administered by HUD. All states enacted legislation consistent with the federal mandates.

A key mandate in the SAFE Act is that individuals not be permitted to engage in the business of a loan originator 1) for a depository institution or a wholly owned subsidiary of a banking institution without first obtaining, and maintaining annually, a registration as a registered loan originator, or 2) for an independent mortgage lender or mortgage broker without first obtaining, and maintaining annually, a license and registration as a state-licensed loan originator. The
SAFE Act also required state licensing laws to include certain requirements for loan originator licensure, such as the need to obtain pre-license education credits and to pass a qualifying examination in order to qualify for a license and to obtain continuing education credits to qualify for annual license renewals, requirements that did not apply with respect to registered loan originators.

The dual federal/state regime created by the SAFE Act created a problem for registered LOs (employed by depository institutions) that wish to work for a nonbank mortgage lender or broker and for state-licensed LOs that wish to move to states in which they are not licensed. It did not allow states to provide temporary license authority to such individuals. As a result, these LOs might have to wait months – while they take the requisite pre-license education courses and take and pass the necessary qualifying examination – before they could begin taking applications and earning commissions. This presented a substantial financial hardship for them and, in some cases, could effectively prevent them from making the desired change in their employment status.

The amendment applies to 1) registered LOs who wish to begin originating loans for a nonbank mortgage lender in a state, and 2) state-licensed LOs who wish to begin originating loans in a state in which they are not licensed (in both cases, the Application State). It gives these LOs temporary authority to do so upon submission of a license application to the Application State.

To qualify for this temporary authority, registered LOs must have been registered in the Nationwide Mortgage Licensing System and Registry (NMLS&R) for at least one year, and state-licensed LOs must have been licensed as a LO in a state for at least 30 days, preceding submission of their application to the Application State. In addition, both registered and state-licensed LOs must not have had a LO license denied, revoked or suspended, or been subject to or served with a cease and desist order, in any governmental jurisdiction or by the CFPB, or been convicted of a misdemeanor or felony that is disqualifying under the law of the Application State.

The temporary authority provided by this amendment ends as soon as the LO's application is withdrawn, denied (or an intent to deny is issued), granted or the application has been pending for 120 days and is listed on the NMLS&R as incomplete.

Unfortunately, LOs will continue to have to live with the current situation for quite a while longer, since, as indicated above, this provision does not become effective for 18 months after enactment of the Act. During this period, the CFPB will need to amend its applicable SAFE Act regulation (Regulation H) and the states that wish to allow for such temporary licensing authority will have to amend their loan originator licensing laws.1

Relief from HPML Requirement to Escrow. Until now, creditors wishing to make an HPML secured by a first lien on a consumer's principal dwelling (with certain limited exceptions) were required to establish and maintain an escrow account for the payment of taxes and insurance (and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums with respect to the property or the loan terms). Further, the escrow account could not be canceled until either the underlying debt obligation was terminated or the creditor or servicer received a cancellation request from the borrower no earlier than five years after consummation of the loan, whichever came first.

The only creditors that were exempted from this escrow requirement were creditors that: 1) during the preceding year or, for applications received before April 1, either of the two preceding calendar years (the Designated Year), made at least one first lien consumer credit transaction secured by a dwelling (a Covered Loan) in a rural or underserved areas (the Rural Requirement); 2) as of Dec. 31 of the Designated Year, had an asset size less than $2 billion (adjusted annually); 3) together with their affiliates that regularly make Covered Loans, originated no more than 2,000 Covered Loans during the Designated Year that were sold, assigned or otherwise transferred to, or subject at consummation to a commitment to be acquired by another person; and 4) did not escrow for any mortgages they or their affiliates currently service, except in limited instances (the No Other Escrows Requirement).

The Act requires the CFPB, by regulation, to create an additional exemption from the HPML escrow requirement for depository institutions that 1) have assets of $10 billion or less, 2) together with their affiliates, made 1,000 or fewer principal dwelling-secured Covered Loans during the preceding calendar year, and 3) satisfy both the Rural Requirement and the No Other Escrows Requirement. This exemption will take effect as soon as the CFPB adopts the necessary implementing regulation

No Waiting Period for Lower APR Offers. The Truth in Lending/RESPA Integrated Disclosures Rule (TRID), found at 12 CFR 1026.19(e), 19(F), (37) and (38), includes a provision that requires a Closing Disclosure (CD) to be delivered to the consumer no later than three business days prior to consummation. It also provides that if, between the time the CD has been delivered to the consumer and consummation of the transaction, the APR disclosed on the CD "becomes inaccurate," a corrected CD must be delivered to the consumer no later than three business days before consummation (the "Three-Day Waiting Period"), meaning that in some cases the loan closing would have to be delayed.

As a general rule, a disclosed APR is considered accurate if it is not more than 1/8 (or 1/4, in the case of an "irregular" transaction) of 1 percentage point above or below the actual APR. However, if the APR disclosed on the CD decreases by more than 1/8 (or 1/4) of a percentage point prior to consummation, the lower APR would still be considered to be accurate so long as the decrease was the result of a decrease in the finance charge and the Three-Day Waiting Period would not be triggered. On the other hand, if such a decrease resulted from some other factor, such as the creditor providing the consumer with a second offer of credit at a lower rate, the resulting APR would not be considered accurate and the Three-Day Waiting Period would apply, which seemed senseless. The Act provides that the Three-Day Waiting Period does not apply in cases where the APR has decreased from that disclosed on the initial CD, regardless of the cause of the decrease.

This section of the Act also includes a statement of the "Sense of Congress" that the Bureau "should endeavor to provide clearer, authoritative guidance" on the applicability of TRID to mortgage assumption transactions and construction-to-permanent home loans (C-to-P Loans), the conditions under which C-to-P Loans can be properly originated, and the extent to which lenders can safely rely on the TRID model disclosures when they do not reflect recent amendments to the regulation.


While the Act in general and Title I in particular could have done more to relieve the burdens placed upon community banks and others by the Dodd-Frank Act, it should nevertheless be welcomed by many in the industry, including residential mortgage lenders and servicers, for the changes that it does make.


1. New Jersey already has a bill pending in its legislature to effect this change. See Senate Bill 709.

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.

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