Summary of Mortgage Lending Dodd Frank ConsumerProtection Act

8/22/2019 Summary of Mortgage Lending Dodd Frank ConsumerProtection Act

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HC# 4852-9406-1062 1 Hudson Cook, LLP

Summary of the Mortgage Lending Provisions

In the Dodd-Frank Wall Street Reform and Consumer Protection Act

Prepared by

Robert A. Cook and Meghan Musselman

Hudson Cook

Revised as of July 30, 2010

A Few Key Points to Consider

Qualified mortgages will escape many regulatory restrictions.

Key parts of definition:

Fully amortizing fixed or variable rates No interest only payments or negative amortization Complies with debt-to-income or similar ability to repay guidelines to be set by regulation Total points and fees do not exceed three points

Benefits include:

Exemption from risk retention requirement Safe harbor for ability to repay test Some qualified mortgages may have a prepayment penalty Excluded from the higher-risk mortgage definition

Ability to repay requirements for all closed-end mortgage loans

HOEPA coverage tests are completely rewritten and much more expansive

Now covers purchase money loans and HELOCs Certain points and fees now excluded, may help limit impact

Qualified written requests must be acknowledged within five days (penalties also increased)

Loan broker compensation may not be based on loan terms other than the loan amount

But borrower may choose to pay broker fees by accepting an increased interest rateAppears to exclude servicer employees from mortgage originator licensing requirements

New higher-risk mortgage rules, including physical property visit required for appraisals

No arbitration agreements on residential mortgage loans (i.e. closed-end, dwelling secured) or HELOCs

TILA penalties increased

Class action cap raised to $1,000,000 Mortgage originators subject to TILA penalties for compensation and steering violations Heaviest penalties (by far) applied to violations of the appraiser independence requirements Attorney general enforcement expanded

Significant disclosure burdens added, including:

Monthly statements for closed-end mortgages Payment schedule disclosure must include escrow amounts Wholesale cost-of-funds rate Settlement charges and aggregate amount of other fees or required payments Disclosures regarding mortgage originator compensation, escrows, creditors partial payment

policy, negative amortization, hybrid rate reset notice, required flood insurance and appraisals


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Mandatory escrow accounts for most first lien closed-end mortgage loans

New force-placed insurance rules

TITLE IX INVESTOR PROTECTIONS AND IMPROVEMENTS TO THE REGULATION OF SECURITIES

Subtitle D Improvements to the Asset-Backed Securitization Process

1. Regulation of Credit Risk Retention Section 9411a. Effective Date: Regulations issued under this section will become effective:

i. With respect to securitizers and originators of asset-backed securities backed byresidential mortgages, one year after the date on which final rules are published

in the Federal Register

ii. With respect to securitizers and originators of all other classes of asset-backedsecurities, two years after the date on which final rules are published in the

Federal Register

b. Federal banking agencies and SEC are to issue regulations to require any securitizer toretain an economic interest in a portion of the credit risk for any asset sold or

transferred to a third party. Regulations must be issued no later than 270 days after

enactment.

c. Also within 270 days after enactment, the Federal banking agencies, the SEC, HUD andFHFA are to issue regulations for the securitization of residential mortgage asset.

d. The risk retention rules:i. Will apply to all types of entities, including banks

ii. Will prohibit securitizers from directly or indirectly hedging or otherwisetransferring credit risk that the securitizer is required to retain

iii. Are to require securitizers to retain:1. At least 5% of credit risk for any asset (1) that is not a qualified

residential mortgage and that is transferred or sold through the

issuance of an asset-backed security or (2) that is a qualified residential

mortgage that is transferred or sold through the issuance of an asset-backed security if one or more of the assets that collateralize the asset-

backed security are not qualified residential mortgages; OR

2. Less than 5% of the credit risk for an asset that is not a qualifiedresidential mortgage that is transferred or sold through the issuance of

an asset-backed security if the originator meets certain underwriting

standards to be established by the federal banking agencies

iv. Need not require securitizers to retain any part of the credit risk for an assetthat is sold or transferred through the issuance of an asset-backed security by

the securitizer if all of the assets that collateralize the asset-backed security are

qualified residential mortgages

v.

May provide a total or partial exemption from the credit risk retentionrequirement for the securitization of an asset that is issued or guaranteed by

the United States or an agency of the US (that would include loans guaranteed

or insured by FHA and VA, but Fannie and Freddie deemed not to be US

agencies), or that is issued or guaranteed by any state

vi. Are to address allocation of risk retention obligations between a securitizer andan originator where a securitizer purchases assets from an originator; establish

1Section references refer to sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act.


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asset classes and underwriting standards that specify characteristics of loans

within each asset class that indicate low credit risk

e. Exemptions from the entire section, including allocation of risk retention obligations:i. Farm Credit system institutions and other federal programs

ii. Asset-backed securities collateralized solely by qualified residential mortgages1. This term is to be defined for purposes of this exemption by the banking

agencies, SEC, HUD and FHFA, but the term must be no broader than

the definition of qualified mortgage defined in TILA 129C(c)(2),2

i. The regular periodic payments do not:which is one that:1. Result in an increase of the principal balance, or2. Allow the consumer to defer repayment of principal.

ii. Does not result in a balloon payment, which is defined as apayment where a scheduled payment is more than twice as large

as the average of earlier scheduled payments

iii. Income and financial resources to support the application for theloan are verified and documented

iv. For fixed rate loans, underwriting is based on fully amortizingpayment schedule and takes into account taxes, insurance and

assessments

v. For adjustable rate loans, underwriting is based on maximum ratepermitted during the first five years and a payment schedule that

fully amortizes the loan amount over the loan term and takes into

account taxes, insurance and assessments.

vi. Complies with any Board3vii. Total points and fees (defined in the same way as for high-cost

loans under the Act) do not exceed 3% of total loan amount

[NOTE: This provision uses the term total loan amount which

under HOEPA was defined to mean an amount that could be

lower than the amount financed. The Act changes the definitionof a high-cost loan under HOEPA and compares the total points

and fees to the total transaction amount. The total transaction

amount is not defined, but there is no indication that it should

not be given its everyday meaning. What the term total loan

amount means in this section of the Act is unclear.], and

guidelines on DTI or similar measures of

ability to repay

viii. The term does not exceed 30 yearsix. When the term qualified mortgages is used outside of the

context of the ability to repay, the Board is directed to set the

standards for reverse mortgage loans that would be considered

qualified mortgages.

2.

An asset-backed security that is collateralized by tranches of otherasset-backed securities will not be exempt under the qualified mortgage

exemption

2This reference should be to Section 129C(b)(2) of TILA as added by Section 1412 of the Dodd-Frank Act.

3The term Board currently refers to the Federal Reserve Board, but upon the designated transfer date, the

powers attributed in this outline to the Board will be transferred to the Bureau of Consumer Financial

Protection. The term FRB refers to duties the Federal Reserve Board will retain even after the CFPB is

established.


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3. An issuer will be required to certify each issuance of an asset-backedsecurity collateralized exclusively by qualified residential mortgages

2. Disclosures and Reporting for Asset-Backed Securities: The SEC is to adopt regulations torequire issuers of asset-backed securities to disclose certain information for each tranche or

class of security

3. Reps and Warranties: The SEC is to issue regulations on the use of representations andwarranties in the market for asset-backed securities4. Exempted Transactions: Eliminates the exemption from the Securities Act of 1933 for

transactions involving the offer or sale of first lien mortgages

5. Due Diligence Analysis and Disclosure: The SEC must issue rules within 180 days of enactmentrelating to the registration statement that is required of an issuer of an asset-backed security.

The rules will require an issuer to perform a due diligence review on the assets underlying the

asset-backed security and to disclose the nature of the review.

6. Financial Services Oversight Council is instructed to study the macroeconomic effects of the riskretention requirements

TITLE X BUREAU OF CONSUMER FINANCIAL PROTECTION

Subtitle C Specific Bureau Activities

1. Combined Mortgage Disclosures Section 1032(f)a. The CFPB is directed, within one year of the designated transfer date, to propose model

disclosures that combine the disclosures required under the Truth in Lending Act and

Sections 4 (the HUD-1 settlement statement) and 5 (the closing costs information

booklet and the good faith estimate) of the Real Estate Settlement Procedures Act into asingle, integrated disclosure

b. [NOTE: This directive is repeated in Sections 1098 and 1100A, which containconforming amendments to the Real Estate Settlements Procedures Act and the Truth in

Lending Act, respectively.]

Subtitle H Conforming Amendments

1. Alternative Mortgage Transaction Parity Act Section 1083a. The scope of the Parity Act will be significantly limitedb. Effective on the designated transfer datec.

Alternative mortgages are restricted to variable rate or renegotiable rate transactions[NOTE: Loans with balloon payments, interest-only payments, negative amortization or

other alternative mortgage features will not be considered alternative mortgage

transactions any longer unless they also have a variable rate or renegotiable rate

feature as well.]

d. Effect of preemption is limited to those state laws that prohibit a type of variable rate orrenegotiable rate transactions


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e. The CFPB is instructed to review the current Parity Act regulations issued by theComptroller of the Currency and the National Credit Union Administration to determine

if they are fair and not deceptive and then issue its own regulations

f. Transactions that occur before the designated transfer date will not be affected by thisprovision

2. Home Mortgage Disclosure Act Section 1094a. Extensive new data must be captured for each application and transactionb. Effective date: The new data (other than age of applicants) may not be required to be

reported earlier than the first January 1 that occurs nine months after the CFPB issues

regulations in final form

c. Will require reporting of the following additional information regarding mortgage loanapplications:

i. Age of applicants,ii. Total points and fees,iii. Difference between the APR and a benchmark rate (apparently to be

determined by the CFPB),

iv. Length of any prepayment period,v. Value of the real property securing the loan,vi. Length of any introductory rate period,

vii. Presence of interest-only or negative amortization periods,viii. Term of the transaction,

ix. The channel through which the application was received, such as retail, brokeror other,

x. And, as the CFPB may determine to be appropriate:1. The SAFE Act unique identifier for the loan originator2. A universal loan identifier3. The parcel number of the property to be pledged4. The credit score of the applicants, and5. Any other information the Bureau may require.

d. The CFPB may also require the reporting of this information with respect to loans soldby each institution and may require the reporting of the class of purchaser of the loans

e. The CFPB may specify the format for information reported under HMDA, as opposed tocontinuing to permit institutions to report the information in the form in which it is

maintained

3. Omnibus Appropriations Act, 2009 Section 1097a. Effective on the designated transfer dateb. Transfers from the FTC to the CFPB rulemaking authority related to unfair and deception

practices in mortgage lending, including mortgage modification and rescue scams.

c. Clarifies that state attorneys general may bring civil actions to enforce rulespromulgated by the CFPB under this authority

4. Secure and Fair Enforcement for Mortgage Licensing Act Section 1100a. Delays the effective date for the registration of loan originators employed by depository

institutions or their subsidiaries with the Nationwide Mortgage Licensing System and

Registry until one year of enactment of the Act

b. Gives the CFPB the authority to issue rules to implement the registration requirementsunder the SAFE Act


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5. Adjustments for inflation related to the coverage of the Truth in Lending Act Section 1100Aa. Expands the coverage of TILA for non-real estate, non-dwelling secured loansb. Effective on the designated transfer datec. The coverage of loans (or leases) that are not secured by real estate or personal

property that is the principal dwelling of the borrower under the Truth in Lending Act is

expanded to include amounts financed (or the total contractual amounts for leases) up

to $50,000

d. The CFPB is instructed to adjust this amount annually based on increases in theConsumer Price Index for Urban Wage Earners and Clerical Workers

TITLE XIV MORTGAGE REFORM AND ANTI-PREDATORY LENDING ACT

Effective Date Section 1400

1. Regulations implementing this Title must be issued in final form within 18 months of thedesignated transfer date. The designated transfer date is the date on which the CFPB accepts

functions from the other federal regulatory agencies. The designated transfer date is to be

established within 12 months after the passage of the Act; although the date can be delayed for

up to another six months.

2. Regulations must take effect within 12 months after date of issuance.3. The provisions of this Title take effect when the regulations become effective; however, if a

regulation to implement a provision of the Title has not been issued (presumably in proposed

form) within 18 months after enactment, then the relevant provision becomes effective 18

months after enactment, even though there are no regulations interpreting the provision.

4. [NOTE: Although the CFPB is ultimately given rulemaking authority for most of the regulationsthat implement Title XIV, the current federal regulator generally either the FRB or HUD couldissue regulations implementing these provisions prior to the designated transfer date.]

5. Exception: Interim final regulations implanting the appraisal independence requirements, whichwill replace the Home Valuation Code of Conduct, will become effective 90 days after

enactment.

Subtitle A Residential Mortgage Loan Standards

1. Defines a New Term: Residential Mortgage Loan Section 1401 [Adding TILA 103(cc)(5)]a. Most of the new mortgage reform provisions, including those applicable to mortgage

originators, apply to residential mortgage loans.b. Includes all consumer loans secured by a dwelling other than HELOCs or (for most

provisions) timeshare plans. Includes closed-end reverse mortgage loans.

c. The term residential mortgage loan should not be confused with the current TILAterm: residential mortgage transaction, which still refers only to a purchase money

transaction.

2. Creates New Definition of Mortgage Originator Section 1401 [Adding TILA 103(cc)(2)]


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a. Does not amend the SAFE Act definition of loan originator, but defines persons thatmust be licensed or registered under SAFE for purposes of TILA

b. Definition differs from SAFE as follows:i. Includes a person that takes an application, assists a consumer in obtaining or

applying for a residential mortgage loan offers or negotiates terms of a

residential mortgage loan

ii. Assists is new criteriaiii. Replaces and in the SAFE Act with or. [NOTE: HUD and the states hadgenerally read the and in the SAFE Act to mean or, but the federal banking

agencies had not.]

iv. Includes an exemption for persons engaged in merely clerical or administrativefunctions, but does not include the requirement, which is in the SAFE Act, that

such persons be supervised by a licensed or registered person

v. Excludes servicers or their employees agents or contractors that work on loanmodifications or refinances

vi. [NOTE: It will be interesting to see how this new definition changes theproposed rules issued by HUD that, if they become final, would require servicer

employees to be licensed or registered if they take applications for loan

modifications or offer or negotiate the terms of a modification. Whether or not

the final rules to be issued by HUD (or perhaps the CFPB if HUD decides not to

act) reflect the new definition of mortgage originator in TILA, the final rules

will not affect any state law that has been enacted that specifically requires the

licensing of such employees. Although, a favorable ruling from HUD or the CFPB

might influence states to revise their statutes.]

3. Establishes a Duty of Care for Mortgage Originators Section 1402 [Adding TILA 129B(a) and(b)]

a. This duty of care for a mortgage originator is limited to two requirements:i. Be licensed or registered as a mortgage originator pursuant to the SAFE Act

ii. Include on all loan documents the unique identifier provided by the NationwideMortgage Licensing System and Registry

4. Prohibition on Steering Incentives Section 1403 [Adding TILA 129B(c)]a. Prohibits compensation paid to a mortgage originator to be based on the terms of the

loan, other than the amount of principal.

[NOTE: Apparently compensation may not be based on factors such as:

i. The type of loan, i.e. fixed vs. adjustableii. The lien position

iii. Whether the loan is for a purchase money transaction or a refinancingiv. Whether the loan is conforming or non-conforming]

b. No person other than the consumer can pay a mortgage originator any fee other than abona fide third party charge unless:

i. The mortgage originator receives no compensation directly from the consumerii. The consumer does not pay any discount points or origination points or fees

upfront, other than bona fide third party charges not retained by either the

mortgage originator, creditor or an affiliate of either

iii. The Board may either waive the prohibition in (ii) above or provide exemptionsif it finds that the waiver or exemption is in the interest of consumers and the

public.


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iv. [NOTE: Unless the Board provides a waiver or exemption, this provision willprohibit creditor paid compensation to loan brokers or incentive compensation

to in-house loan officers unless the borrower is offered a no-point loan. It also

further discourages the use of affiliated service providers.

c. However, the rules of construction discussed below permit a consumer to pay amortgage originators fees by having the fees added to principal or the rate (i.e. a YSP-

type payment), provided that the fees dont vary based on the means of payment.

d. Regulations: Directs the Board to prescribe regulations to prohibit certain mortgageoriginator practices, including:i. Steering consumers to mortgages they cannot repay or that have predatory

characteristics or effects (e.g. equity stripping, excessive fees, or abusive terms)

ii. Steering consumers from a qualified mortgage (defined in 129C(b)(2)) to a non-qualified mortgage

iii. Abusive or unfair lending practices that promote disparities among consumersof equal credit worthiness but of different race, ethnicity, gender or age

iv. Mischaracterizing a consumers credit history, the residential mortgage loansavailable to a consumer, or the appraised value of the property

v. Discouraging a consumer from seeking a mortgage from another originator ifthe mortgage originator is unable to recommend a loan that is not more

expensive than a loan for which the consumer qualifies. [NOTE: This provision

appears to require mortgage originators to know whether a borrower could

qualify for a better mortgage product from any other originator, a standard that

would be difficult to meet. In practice, however, mortgage originators can avoid

this conundrum by not discouraging applicants from seeking mortgages from

other originators.]

e. Rules of Construction: This subsection does not:i. Permit any YSP or similar compensation that would allow total direct or indirect

mortgage originator compensation to vary based on loan terms, other than the

amount of principal

ii. However, the subsection also does not restrict a consumers ability to financeorigination fees or costs through principal or rate or a mortgage originatorsright to receive such fees provided the fees do not vary based either on loan

term, other than amount of principal, or the consumers decision about whether

to finance such fees or costs. Thus, mortgage originators may be paid through

the rate as long as their total compensation does not vary based on the

payment method. [NOTE: The intended effect of this and the other anti-

steering rules may be to drive broker compensation away from creditor-paid

compensation to direct agreements between the applicant and the broker

regarding the brokers compensation. If a consumer agrees to pay

compensation to a broker, then the compensation can either be financed as

part of the principal, or can be paid through the interest rate on the loan, i.e. a

YSP-type payment. Also, having the applicant agree to pay the broker, eitherdirectly or through the principal of the loan or the interest rate, eliminates the

prohibition on upfront points and fees, including bona fide fees paid to an

affiliate of the creditor or mortgage originator.]

iii. Limit or affect amount of creditor compensation upon sale of a consummatedloan to a subsequent purchaser

iv. Prohibit incentive payments to a mortgage originator based on the number ofmortgage loans originated within a specified period of time.


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5. Penalties for Mortgage Originators Section 1404 [Adding TILA 129B(d)]a. A mortgage originator that fails to abide by these requirements may be subject to the

same penalties as provided for creditors under Section 130 of TILA

b. However, the maximum liability for a mortgage originator under Section 130 is limitedto the greater of actual damages or three times the total amount of direct and indirect

compensation involved in the violation, plus costs and attorneys fees

6. Defense to Foreclosure/Assignee Liability [NOTE: This appears to be just a right of set-off orrecoupment, not a complete defense] Section 1413 in Subtitle B of the Act [Adding TILA 130(k)])

a. In a foreclosure or collection action, a consumer may assert a violation of the mortgageoriginator compensation provisions as a defense by recoupment or setoff in the amount

of damages to which a consumer would be entitled for the violation

b. Such a claim may be raised against the creditor, assignee or other holder c. Such a claim may be raised at any time, even if the time limit on a private action for

damages, which is now three years for these provisions, has expired.

d. When a set-off or recoupment claim is brought after the three-year statute oflimitations has expired, the amount of set-off or recoupment may not exceed the

amount that would have been computed up to the day preceding the expiration of the

statute of limitations.

7. Discretionary Regulatory Authority Section 1405 [Adding TILA 129B(e)]a. Gives Board the authority to prohibit acts or practices related to residential mortgage

loans that are abusive, unfair, deceptive, or predatory

b. Gives Board the authority to exempt or modify disclosure requirements for any class ofresidential mortgage loans

8. Study of Shared Appreciation Mortgages Section 1406a. HUD to conduct comprehensive study to determine appropriate regulatory

requirements for shared appreciation mortgages

Subtitle B Minimum Standards for Mortgages

1. Coverage: Most of the new minimum mortgage standards apply to residential mortgageloans, which are closed-end consumer mortgage loans other than timeshare plans. See

definition in Section 1401. Some rules, as noted below, exempt reverse mortgage loans and

bridge loans.

2. Ability to Repay Section 1411 [Adding TILA 129C(a)]a. [NOTE: These rules are similar to the FRB rules adopted in June 2008 for higher-priced

mortgage loans. However, these rules apply to a significantly larger number of loans

and do not have a presumption of compliance based on processes used by the lender.Reverse mortgage loans and bridge loans with a term of 12 months or less are excluded.

The only safe harbor is for a qualified mortgage.]

b. In connection with a residential mortgage loan, creditors must make a reasonable andgood faith determination based on verified and documented information that, at the

time of consummation, the consumer has a reasonable ability to repay the loan,

including taxes, insurance and assessments.


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c. Multiple loans if the creditor knows or has reason to know that the consumer willobtain multiple loans on the same dwelling, the creditor must base the ability to repay

determination on the combined payments of all loans on the same dwelling.

d. Ability to repay determination must include consideration of:i. Credit history,

ii. Current income,iii. Expected income that the consumer is reasonably assured of receiving,iv. Current obligations,v. DTI or residual income,vi. Employment status and

vii. Other financial resources other than equity in the dwelling or real propertysecuring the loan.

e. Creditor must verify income and assets using W-2, tax forms, payroll receipts, financialinstitution records or other third party documents that provide reasonably reliable

evidence of income or assets.

i. Income history must be verified using IRS tax records or another meansapproved by the Board.

ii. Verification of income and assets may be waived by the relevant governmentagency for government guaranteed or insured loans used for refinancing

provided:

1. The consumer is not more than 30-days past due,2. The principal balance is not increased, except by fees and charges

allowed by the government agency,

3. Total points and fees (as defined for high-cost mortgage loans) for therefinancing do not exceed 3% of the new total loan amount4

4. The new interest rate is lower, unless the borrower is refinancing froman adjustable rate to a fixed rate pursuant to guidelines established by

the government agency,

,

5. The new loan is fully amortizing in accordance with regulationspublished by the government agency,

6. The new loan does not have a balloon payment, and7. Both the old loan and the new loan satisfy all requirements of the

government agency.

f. For nonstandard loans:i. For variable rate loans that defer repayment of principal or interest, creditors

must use a fully amortizing repayment schedule

ii. For a loan that permits or requires interest-only payments, creditors must use apayment amount that fully amortizes the loan by its maturity date

iii. Any balance increase that may occur due to negative amortization must betaken into consideration

iv. Creditors may assume:1.

Loan proceeds are fully disbursed at consummation,

2. The loan is repaid in substantially equal payments, unless the contractrequires more rapid repayment (such as a balloon payment), in which

case the calculation shall be made in accordance with regulations issued

by the Board for any loan with an annual percentage rate that does not

exceed the average prime offer rate for a comparable transaction as of

the date the interest rate is set, by 1.5 points for a first lien or by 3.5

4See page 3 for a discussion of the meaning of total loan amount.


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points for a subordinate lien; or, for other loans, using the contract

repayment schedule, and

3. The interest rate for the entire term is a fixed rate equal to the fullyindexed rate at the time of the loan closing, without considering any

introductory rate.

v. When a creditor refinances a non-delinquent hybrid loan (which term isundefined5

1. Consider the mortgagors good payment history on the existingmortgage,

) it holds into a standard loan (also an undefined term) in which

there would be a reduction in the monthly payment, the creditor may:

2. Consider if the new loan would prevent a likely default and give suchconcern a higher priority as an acceptable underwriting practice, and

3. Offer rate discounts and other favorable terms that would be availableto new customers with high credit ratings based on such underwriting

practice.

4. [NOTE: The Act does not explain whether these considerations maycompletely replace the otherwise required ability to repay

determination or whether they are simply additional factors to be taken

into consideration in making a determination of the applicants ability to

repay.]

vi. Fully-indexed rate means the index rate at the time the loan is made plus themargin that will apply after any introductory interest rate expires.

vii. If documented income, including income for a small business, is a repaymentsource for a loan, a creditor may consider the seasonality and irregularity of

such income.

3. Safe Harbor and Rebuttable Presumption for the Ability to Repay Section 1412 [Adding TILA 129C(b)]

a. [NOTE: Although the title of this section in the Act is Safe Harbor and RebuttablePresumption the language of this section permits creditors and assignees to make a

presumption, but does not explain whether this presumption is a safe harbor orwhether this presumption is rebuttable, and provides no indication whether the

permitted presumption can be relied upon or how it can be challenged.]

b. A creditor or assignee may presume that a consumer has the ability to repay if the loanis a qualified mortgage.

c. Definition of qualified mortgagei. The regular periodic payments do not:

1. Result in an increase of the principal balance, or2. Allow the consumer to defer repayment of principal.

ii. Does not result in a balloon payment, which is defined as a payment where ascheduled payment is more than twice as large as the average of earlier

scheduled paymentsiii. Income and financial resources are verified and documentediv. For a fixed rate loan, underwriting is based on the fully amortizing payment

schedule and takes into account taxes, insurance and assessments

5However, hybrid adjustable mortgage loan is defined in Section 1413 of the Act as a loan secured by the

consumers principal dwelling with a fixed interest rate for an introductory period that adjusts or resets to a

variable interest rate thereafter.


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v. For an adjustable rate loan, underwriting is based on the maximum ratepermitted during first five years and a payment schedule that fully amortizes

over the loan term and takes into account taxes, insurance and assessments

vi. Complies with any Board guidelines on DTI or similar measures of ability torepay

vii. Total points and fees (defined in the same way as for high-cost loans) do notexceed 3% of total loan amount [NOTE: This provision uses the term total

loan amount, which under HOEPA was defined to mean an amount that couldbe lower than the amount financed. The Act changes the definition of a high-

cost loan under HOEPA and compares the total points and fees to the total

transaction amount. The total transaction amount is not defined, but there

is no indication that it should not be given its everyday meaning. What the term

total loan amount means in this section of the Act is unclear.], and

viii. Loan term does not exceed 30 yearsix. When the term qualified mortgage is used outside of the context of the ability

to repay, which does not apply to reverse mortgage loans, the Board is directed

to set the standards for reverse mortgage loans that would be considered

qualified mortgages.

d. Exceptions: The Board has authority to modify the definition of qualified mortgage toinclude:

i. Loans of smaller amountsii. A balloon loan, provided that:

1. The loan otherwise meets all of the criteria except those applicable to:a. The prohibition on deferred repayment of principal,b. The prohibition on balloon payments, andc. The underwriting requirements related to fixed and variable

rate loans

2. The creditor determines that the consumer has the ability to make allscheduled payments, other than the balloon payment, out of income or

assets other than the property

3. The underwriting is based on a payment schedule that fully amortizesthe loan over a period of not more than 30 years and takes into account

taxes, insurance and assessments

4. Is extended by a creditor that:a. Operates primarily in rural or underserved areasb. Together with affiliates has total annual mortgage originations

that do not exceed a limit set by the Board

c. Retains the balloon loans, andd. Meets any asset size threshold and any other criteria set by the

Board

iii. The Board may change the criteria for qualified mortgages if necessary toensure that responsible, affordable mortgage credit remains availableconsistent with the purposes of this section of the Act, to prevent circumvention

or to facilitate compliance

e. HUD, the Department of Veterans Affairs, the Department of Agriculture, and the RuralHousing Service may, in consultation with the Board, revise these criteria to define other

mortgages that they insure, guarantee or administer as qualified mortgages.

4. Additional Standards and Requirements for Residential Mortgage Loans Section 1414 [AddingTILA 129C(c)]


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a. Restrictions on Prepayment Penaltiesi. Prepayment penalties are prohibited on all residential mortgage loans except

certain qualified mortgages. [NOTE: The prohibition does not apply to HELOCs,

which do not fall within the definition of a residential mortgage loan.]

ii. For purposes of this prohibition, a qualified mortgage does not include:1. ARMs2. For first liens in amounts equal to or less than the Freddie Mac

conventional loan limit, a loan with an APR that exceeds the averageprime offer rate for a comparable transaction by 1.5 or more

percentage points

3. For first liens in amounts greater than the Freddie Mac conventionalloan limit, a loan with an APR that exceeds the average prime offer rate

for a comparable transaction by 2.5 percentage points

4. For subordinate lines, an APR that exceeds the average prime offer ratefor a comparable transaction by 3.5 or more percentage points.

5. The Board is directed to publish the prime offered rates and may adjustthe thresholds above to reflect significant changes in market conditions

to effectuate the purposes of the Act.

iii. When prepayment penalties are permitted on qualified mortgages, they arelimited to:

1. During 1st year of loan, prepayment penalty may not exceed 3% ofoutstanding loan balance

2. During 2nd year of loan, prepayment penalty may not exceed 2% ofoutstanding loan balance

3. During 3rd year of loan, prepayment penalty may not exceed 1% ofoutstanding loan balance

4. After 3rd year of loan, prepayment penalties prohibited5. [NOTE: A loan with a prepayment penalty in excess of 2% of the

amount prepaid is now a HOEPA loan, which will create a further

practical limit on prepayment penalties.]

iv. If a creditor offers a loan with a prepayment penalty, the creditor must alsooffer a loan that does not have a prepayment penalty

b. Prohibition on Single Premium Credit Insurance Also applies to HELOCs [NOTE: Thisprohibition appears to be broader than just credit insurance products.]

i. Creditors may not finance insurance premiums or debt cancellation/suspensionfees on either residential mortgage loans or HELOCs secured by the consumers

principal dwelling

ii. This prohibition includes credit property insurance, but it is unclear whetherCongress meant to prohibit the financing of the first years premium for title

insurance or the hazard insurance protecting the real property

iii. This prohibition also includes any other accident, loss-of-income, life, or healthinsurance. Thus, the financing of premiums for any type of insurance may beprohibited.

iv. This prohibition does not include:1. Insurance premiums or debt cancellation/suspension fees that are

calculated and paid in full on a monthly basis, as these are not

considered financed by the creditor

2. Credit unemployment insurance if the premiums are reasonable, thecreditor does not receive compensation, and the premiums are not paid

to an affiliate of the creditor


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c. Prohibition on Arbitration Agreements Applies to residential mortgage loans andHELOCs secured by the borrowers principal dwelling

i. Pre-dispute mandatory arbitration agreements are prohibited on residentialmortgage loans and HELOCs secured by the consumers principal dwelling

ii. Waivers of statutory causes of action are also prohibitedd. Negative Amortization Applies to all closed and open-end mortgages secured by a

dwelling except reverse mortgage loans

i. Creditors may not make a mortgage loan that includes negative amortizationwithout first providing a prescribed noticeii. In the case of first time borrowers for a residential mortgage loan,

homeownership counseling is required

e. Notice of Anti-Deficiency Protectioni. If a residential mortgage loan is subject to anti-deficiency protection under state

law, the creditor or mortgage originator must notify the consumer of that fact

before consummation

ii. If a consumer applies for a refinancing that would affect such an anti-deficiencyprotection, the creditor or mortgage originator must provide notice to the

consumer explaining the protections of the anti-deficiency law and the

implications of losing that protection before any agreement for the refinancing

is consummated [NOTE: It may not always be clear if the loan that a lender is

refinancing is protected by an anti-deficiency statute.]

f. Partial paymentsi. With regard to residential mortgage loans, creditors must disclose their policy

on acceptance of partial payments, how such payments will be applied, and

whether those amounts will be placed in escrow

ii. This provision states that it also applies in the case of a person becoming acreditor with respect to an existing residential mortgage loan, at the time such

person becomes a creditor. This is an apparent attempt to refer to a

subsequent assignee of a residential mortgage loan; although an assignee is

generally not a creditor as defined in the Truth in Lending Act.

g. Timeshares are exempted from all of the limitations in this section5. Defense to Foreclosure/Assignee Liability (This appears to be a right of set-off or recoupment,

not a complete defense) Section 1413 [Adding TILA 130(k)]

a. In a foreclosure or collection action, a consumer may assert a violation of the mortgageoriginator compensation and the ability to repay provisions as a defense by recoupment

or setoff in the amount of damages to which a consumer would be entitled for the

violations

b. Such a claim may be raised against the creditor, assignee or other holderc. Such a claim may be raised at any time, even if the time limit on a private action for

damages, which is now three years for these provisions, has expired.

d.

When a set-off or recoupment claim is brought after the three-year statute oflimitations has expired, the amount of set-off or recoupment may not exceed the

amount that would have been computed up to the day preceding the expiration of the

statute of limitations.

6. Expanded Civil Liability Penalties Under the Truth in Lending Act Section 1416 [Amending TILA 130(a)]

a. Statutory penalties for leases and HELOCs are doubled from a minimum of $100 and amaximum of $1,000 to a minimum of $200 and a maximum of $2,000. [NOTE:


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Statutory penalties for closed-end loans secured by a dwelling or real property remain at

a minimum of $400 and a maximum of $4,000. Statutory penalties for open-end credit

plans not secured by real property or a dwelling remain at a minimum of $500 and a

maximum of $5,000.]

b. The maximum statutory penalty for a class action is doubled to $1,000,000. This limitapplies to an action related to any type of loan or lease.

c. The additional HOEPA statutory penalties (all finance charges and fees paid by theconsumer, unless the creditor demonstrates that the failure to comply is not material)will apply for violations of the mortgage originator compensation provisions and the

ability to repay requirements.

7. Expanded State Attorneys General Enforcement Section 1422 [Amending TILA 130(e)]a. Currently state attorneys general may enforce the HOEPA provisions in the Truth in

Lending Act

b. The Act expands this authority to include:i. Section 129B Mortgage originator compensation

ii. Section 129C Minimum mortgage standardsiii. Section 129D Escrow or impound account requirementsiv. Section 129E Prompt crediting of home loan paymentsv. Section 129G Prompt payoff balance response

vi. Section 129H Property appraisal requirementsc. [NOTE: TILA provides a three-year statute of limitations for actions brought by an

attorney general.]

8. Extended Statute of Limitations Under the Truth in Lending Act Section 1416 [Amending TILA 130(c)]

a. The statute of limitations for a private action for damages has been extended to threeyears for:

i. A HOEPA violationii. A violation of the mortgage originator compensation rules

iii. A violation of any of the new minimum standards for mortgage lendingcontained in Section 129C, i.e. the ability to repay requirements and the

restrictions on prepayment penalties

9. Lender Rights in Context of Borrower Deception Section 1417 [Adding TILA 130(l)]a. Creditors not liable for a violation of TILA (either statutory damages or rescission) if a

borrower is convicted of obtaining the mortgage loan by actual fraud

10.Notice Before Reset of Hybrid ARMs Section 1413 [Adding TILA 128A]a. A new disclosure must be provided before the first interest rate adjustment on a hybrid

ARM

b. For this section, hybrid adjustable mortgage loan means a loan secured by theconsumers principal dwelling with a fixed interest rate for an introductory period thatadjusts or resets to a variable interest rate thereafter

c. An adjustment notice must be sent separate from all other correspondence in theseventh month before the first reset date of a hybrid ARM or delivered at

consummation, whichever is later

d. The notice must include:i. The index or formula used in making the adjustment


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ii. An explanation of how the new interest rate and payment are determined,including an explanation of how the index was adjusted, such as by the addition

of a margin

iii. A good faith estimate of the amount of the monthly payment that will be dueafter the adjustment and the assumptions on which the estimate is based

iv. A list of alternatives the consumer may pursue before the adjustment anddescriptions of what the customer must do to pursue these alternatives. Such

alternatives include:1. Refinancing,2. Renegotiation of loan terms,3. Payment forbearance, and4. Pre-foreclosure sale.

v. The names, addresses, telephone numbers and Internet addresses of counselingagencies or programs available to the consumer

vi. The address, telephone number and Internet address for the appropriate statehousing finance authority

e. The Board may require similar notices for adjustable rate mortgage loans that are nothybrid ARMs.

11.New Required Consummation Disclosures for Residential Mortgage Loans Section 1419[Amending TILA 128(a)]

a. The following disclosures would have to be included with the current truth in lendingdisclosures provided at consummation. [NOTE: These new disclosures also will have to

be provided within three business days of application under the current Mortgage

Disclosure Improvement Act rules.]

b. For ARMs with escrow accounts:i. The initial monthly payment for principal and interest, as well as initial monthly

payment including escrow amounts, and

ii. The fully indexed monthly payment for principal and interest, and the fullyindexed monthly payment including escrow amounts

c. For all residential mortgage loans:i. The aggregate amount of settlement charges,

ii. The amount of settlement charges included in the loan (i.e. which are financed),iii. The amount of settlement charges the borrower must pay at closing,iv. The approximate amount of the wholesale rate of funds for the loan, andv. The aggregate amount of other fees or required payments in connection with

the loan

vi. [NOTE: The last two are problematic. It is not clear that all lenders would havea relevant wholesale rate of funds to disclose. And, it is simply unclear what

the last item refers to with the phrase other fees or required payments. Are

these some other types of settlement charges not included in the other

disclosure items or does this require a disclosure of life of the loan fees?]d. For all residential mortgage loans:

i. The aggregate amount of fees paid to the mortgage originator,ii. The amount of such fees paid directly by the consumer, andiii. Any additional amount received by the originator from the creditor.

e. For all residential mortgage loans:i. The total amount of interest that consumer will pay over the life of the loan as a

percentage of the principal of the loan


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12.New Monthly Statements Requirements for Residential Mortgage Loans Section 1420 [AddingTILA 128(f)]

a. The Board is directed to develop a standard periodic statement that would include:i. The principal amount,

ii. The current interest rate,iii. The date of the next rate adjustment,iv. The amount of any prepayment fee to be charged,v. A description of any late payment fee,vi. A telephone number and email address to obtain information regarding the

mortgage

vii. The names, addresses, telephone numbers, Internet addresses of counselingagencies and programs, and

viii. Such other information as the Board may require.b. The information must be set forth in a clear and prominent manner. [NOTE: It is not

clear how this standard differs from the clear and conspicuous standard that applies

to most other TILA disclosures.]

c. The periodic statement requirement does not apply to any fixed rate loan provided thatthe consumer receives a coupon book with substantially the same information

13.GAO to report on effects of the Mortgage Reform and Anti-Predatory Lending Act on availabilityand affordability of credit Section 1421

Subtitle C High-Cost Mortgages

1. [NOTE: The definition of a loan that is subject to HOEPA, i.e. is a Section 32 loan, has beengreatly expanded. Some previously exempt types of loans are now included and both the rate

test and the points and the fees test have been changed, and a prepayment penalty test has

been added. The changes will result in more loans being categorized as HOEPA loans; although

some discount points have been excluded that previously were included in the points and feestest. In addition, as discussed below, new restrictions and prohibitions have been added for

loans that meet either the rate test or the points and fees test.

a. HOEPA will now apply to purchase money transactionsb. HOEPA will now apply to HELOCsc. HOEPA still only applies to loans secured by a consumers principal dwellingd. Reverse mortgage loans continue to be exempt]

2. New Prepayment Penalty Test Section 1431 [amending TILA 103(aa)]a. A loan is a Section 32 loan if the contract documents permit a creditor to charge:

i. A prepayment charge more than 36 months after consummationii.

The total of the prepayment charges that may be imposed exceed 2% of theamount prepaid

3. Amended Annual Percentage Rate Test Section 1431 [amending TILA 103(aa)]a. The new test is based on the comparable average prime offer rate, which is the rate

now used to identify HMDA reportable transactions and higher-priced mortgage loans

under TILA. The Act is silent as to the date of the average prime offer rate that is used in

this test.


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b. First mortgage loans either not secured by personal property or in amounts of $50,000or greater: If the APR at consummation exceeds the average prime offer rate by 6.5

percentage points.

c. First mortgage loans of less than $50,000 secured by personal property (such as mobilehomes): If the APR at consummation exceeds the average prime offer rate by 8.5

percentage points.

d. Subordinate mortgage loans: If the APR at consummation exceeds the average primeoffer rate by 8.5 percentage points.

e. For loans where the rate varies only in accordance with an index, the APR is determinedby the index value at consummation plus the highest margin provided in the contact.

f. For a transaction where the rate can vary at any time for any reason, the APR isdetermined assuming the maximum highest rate is charged for the term of the loan.

g. The Act does not explain how to apply the APR test to HELOCs.h. By regulation the Board can adjust the percentage points added to the prime offer rate

from between 6 and 10 (or 8 and 12).

i. Comparison of the old and new APR triggers for fixed rate mortgage loans and HELOCs(as of June 30, 2010):

i. First mortgage loans either not secured by personal property or in amounts of$50,000 or greater:

1. Old Test: APR must exceed 12.01%2. New Test: APR must exceed 11.25%

ii. First mortgage loans of less than $50,000 secured by personal property:1. Old Test: APR must exceed 12.01%2. New Test: APR must exceed 13.25%

iii. Subordinate mortgage loans:1. Old Test: APR must exceed 13.82%2. New Test: APR must exceed 12.72%

iv. Purchase money mortgages and HELOCs1. Old Test: Did not apply2. New Test: See applicable triggers above for purchase money loans. It is

unclear which prime offer rate is used with respect to HELOCs (perhapsthe one-year ARM rate, shown below, would be appropriate)

j. Comparison of the old and new APR triggers for one-year ARM mortgage loan (as ofJune 30, 2010):

i. First mortgage loans either not secured by personal property or in amounts of$50,000 or greater:

1. Old Test: APR must exceed 12.01%2. New Test: APR must exceed 9.67%

4. Amended Points and Fees Test Section 1431 [amending TILA 103(aa)]a.

General: the total points and fees, other than bona fide third party charges not retainedby the mortgage originator, the creditor or an affiliate of either do not exceed:

i. Transactions of $20,000 or more: 5% of the total transaction amountii. Transactions of less than $20,000: the lessor of $1,000 or 8% of the total

transaction amount. The $1,000 amount may be adjusted by the Board.

b. Total transaction amount is not defined. [NOTE: Presumably this means the principalamount of the loan as opposed to the total loan amount, which under the current

version of HOEPA can mean something less than the amount financed.]

c. Points and Fees Whats Included:


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i. Generally, all fees other than third-party fees not retained by the mortgageoriginator, creditor, or an affiliate of either.

ii. The definition of points and fees has deleted the requirement that such pointsand fees had to be paid by the consumer prior to or at closing.

iii. As defined in more detail, the following are included in the points and fees testif they are retained by the mortgage originator, creditor or an affiliate of either:

1. Finance charges, except interest or time-price differential2. Compensation paid directly or indirectly by either the consumer orcreditor to the mortgage originator (including a creditor in a table-

funded transaction). [NOTE: This part of the old definition has been

expanded to include indirect payments by creditors to brokers, i.e.

YSPs.]

3. Non-finance charge closing costs (the old 4(c)(7) fees)4. Single premium insurance premiums or debt cancellation fees [This part

of the definition has been expanded to include debt cancellation fees]

a. Other accident, loss-of-income, life or health insurancepremiums are included. Thus, premiums for life or other

insurance sold at or before closing as part of the financing

would be included [New]

b. Includes credit property insurance premiums, which maycover real property insurance or title insurance purchased at

closing, if such insurance is sold through an affiliate [New]

5. The maximum prepayment penalties that can be charged on the newloan [New]

6. In a refinancing, the prepayment penalties the consumer must pay if theoriginal loan was made or is held by the same creditor or an affiliate

[New]

d. Points and Fees Whats Excluded [These are all new exclusions.]i. Mortgage insurance premiums:

1. All premiums paid after closing2. Government premiums (e.g. VA, FHA)3. Private mortgage insurance that does not exceed the maximum FHA

rate and that is refunded on an automatic and pro-rated basis upon

satisfaction of the mortgage

ii. Bona fide discount points:1. Up to two bona fide discount points but the non-discounted rate

cannot exceed the prime offer rate (or average FHA rate for a personal

property secured loan) plus one point

2. Or, as an alternative, up to one bona fide discount point but thenon-discounted rate cannot exceed the prime offer rate (or average

FHA rate for personal property secured loan) plus two points

3.

Discount points must be knowingly paid by the consumer to reduce therate and the rate reduction must be consistent with established industry

norms and practices for secondary market transactions. [NOTE: This

criterion interjects some ambiguity into the exclusion for discount

points. The Act does not clarify how to determine industry norms and

secondary market practices. It is unclear whether purchasers will

become comfortable purchasing loans that would otherwise be Section

32 loans but for this exclusion.]

e. Points and Fees For HELOCs


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i. The points and fees test is based on the total minimum fees a consumer wouldhave to pay in order to draw down the entire line of credit

5. New HOEPA Tests and State High-Cost Mortgage Lawsa. [NOTE: Some state laws refer to one or more of the triggers in HOEPA to define loans

subject to the states high-cost mortgage laws. It is not clear how these amendments to

HOEPA will affect these state laws.]

6. New Restrictions on High-Cost Mortgage Loans Section 1432 [amending TILA 129(c)(2)]

Section 1433 [amending TILA 129]

a. Prepayment penalties under current law prepayment penalties are permitted incertain circumstances. They will be prohibited

b. Balloon payments under current law balloon payments are permitted in certaincircumstances. They will be prohibited for high-cost mortgages under the Act except

when the payment schedule is adjusted due to the seasonal or irregular income of the

consumer

c. Creditors may not recommend default on an existing loand. Late fees are limited to:

i. 4% of amount of past due paymentii. Must be specifically authorized in loan documentsiii. May not be imposed before a 15-day grace periodiv. No more than one late fee can be assessed on each late paymentv. No pyramiding of late feesvi. However, if the loan agreement provides that payments are first applied to past

due principal balance and the consumer fails to make a payment and

subsequently resumes payments but has not paid all past due installments, the

creditor may impose a separate late payment charge for any principal due until

the default is cured

e. The loan documents may not authorize the creditor to accelerate except in the case ofpayment default, pursuant to a due-on-sale clause, or pursuant to a material violation ofanother provision of the loan document unrelated to the payment schedule

f. Creditors may not finance:i. Prepayment penalties in a refinance transaction if the creditor or an affiliate is

the holder of the refinanced note or

ii. Points or feesiii. The phrase points or fees is not defined in this context. It may refer to points

and fees as defined for the points and fees test, or it may include all charges

assessed at closing

g. Creditors are prohibited from structuring a loan as an open-end transaction or anotherform of loan or dividing a loan into separate parts in order to evade the high-cost

mortgage provisions [NOTE: The reference to restructuring a loan as an open-endtransaction is an interesting provision. Under the current law the Board adopted a

regulation to this effect, which made some sense because HELOCs are not currently

covered. Now that HELOCs are specifically covered, one would not think such a

provision is required. However, it may still have some meaning if, under the closed-end

tests, a loan would not be covered, but would be covered if the loan was disguised as

a HELOC.]

h. Modification, amendment, extension and deferral fees are prohibitedi. Payoff statements


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i. Borrowers are entitled to four free payoff statements in each calendar year.Creditors may impose a reasonable fee for any additional payoff statements.

ii. Creditors may charge a transaction fee to transmit the payoff statement by faxor courier, provided the creditor or servicer discloses that the payoff statement

is available for free (presumably by mail).

iii. Payoff statements must be provided within five business days after receiving aconsumers request

j. Pre-loan counseling is required7. Cure Provisions for Mistakes Related to High-Cost Mortgage Loans Section 1433 [amending

TILA 129]

a. Creditors or assignees will not be liable for violations related to the high-cost mortgagerules that are made in good faith if:

i. The consumer is notified of the errorii. Appropriate restitution [undefined] is madeiii. Whatever adjustments are made to the loan to either, at the choice of the

consumer:

1. Make the loan satisfy the requirements of the Act or2. Change the terms of the loan in a manner so that the loan is no longer a

high-cost mortgage

3. The Act does not specify what happens if the consumer does not makethis election within the 30-day corrective period

iv. The corrective action under this provision must be taken within 30 days of loanclosing and prior to the institution of any action

b. If a violation is made in good faith and is unintentional or a bona fide error, creditors orassignees will not be liable if:

i. The consumer is notified of the errorii. Appropriate restitution [undefined] is madeiii. Whatever adjustments are made to the loan to either, at the choice of the

consumer:

1. Make the loan satisfy the requirements of the Act or2. Change the terms of the loan in a manner so that the loan is no longer a

high-cost mortgage

3. The Act does not specify what happens if the consumer does not makethis election within the 60-day corrective period

iv. The corrective action in this circumstance must be taken within 60 days ofdiscovery or notification of the error and prior to the institution of any action

Subtitle D Office of Housing Counseling

1.

Establishes Office of Housing Counseling. Functions include overseeing HUDs development ofhomeownership and rental housing counseling, among other things. Sections 1442, 1443,

1444, 1445, 1448 and 1449

2. HUD is directed to conduct a study of causes of default and foreclosure Section 14463. HUD is directed to develop a database of information on foreclosures and defaults Section

1447


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4. Mortgage Information Booklet Section 1450a. The Bureau of Consumer Financial Protection is directed to update and simplify the

mortgage information booklet formerly published by HUD

i. The booklet has to be prepared in various languages and cultural stylesii. Lenders are directed to provide the booklet in the version that is most

appropriate for the person receiving it

b. [NOTE: Although the title of this section is updating and simplification of mortgageinformation booklet, the Act requires the booklet to address many more topics, andmore complicated topics, than are covered by the current booklet. Thus, it is doubtful

that the booklet will be simplified much.]

5. Home Inspection Counseling Information Section 1451a. HUD is instructed to inform potential homebuyers of the availability and importance of

independent home inspectors

b. HUD is directly to prepare booklets in English and Spanish to inform the publicc. FHA lenders and housing counselors are required to provide this information to

consumers

6. Warning Homeowners About Foreclosure Rescue Scams Section 1452a. HUD is to fund the Neighborhood Reinvestment Corporation to assist in warning

homeowners of foreclosure rescue scams.

Subtitle E Mortgage Servicing

1. Mandatory Escrow or Impound Accounts For Certain Mortgages Section 1461 [Adding TILA 129D(a) through (i)]

a. [NOTE: These requirements will apparently replace the sometimes complimentary andsometimes contradictory requirements adopted by the Board for higher-priced

mortgage loans.]

b. Coverage: All closed-end first mortgage loans secured by a lien on the consumersprincipal residence, other than reverse mortgages

c. Escrow accounts must be required where:i. State law or federal law requires them

ii. The loan is made, guaranteed or insured by a state or federal governmentagency

iii. The original principal amount does not exceed the Freddie Mac conventionalloan limit, as of the date the interest rate is set, and the APR exceeds the

average prime offer rate by 1.5 or more percentage points;

iv. The original principal amount exceeds the Freddie Mac conventional loan limit,as of the date the interest rate is set, and the APR exceeds the average prime

offer rate by 2.5 or more percentage points; [NOTE: The Boards currentdefinition of higher-priced mortgage loan does not make this distinction

between loans in amounts above or below the conventional loan limit. Thus,

fewer jumbo loans will be covered under the rules established by the Act.] or

v. Escrow is required by regulation. [NOTE: The Act does not indicate whetherthis refers to any particular federal regulation, or even whether it includes state

or local regulations.]

d. Mandatory escrow must extend for at least five years unlessi. The borrower has sufficient equity so that PMI is no longer required


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ii. The borrower is delinquentiii. The borrower is otherwise noncompliant with the loan agreement, as

established by rule [NOTE: Again, it is unclear whose rule the Act refers to.]

iv. The underlying mortgage is terminated.v. [NOTE: The current rules for higher-priced mortgage loans permit a borrower

to cancel an escrow account after one year. The Act will apparently require

escrow accounts to continue for five years or until one of these other events

occurs.]e. Escrows are not required for loans secured by shares in a cooperative. Insurance

premiums do not have to be included in the escrow account for a condominium if the

condominium is covered by a master policy. [NOTE: These exemptions are the same as

the ones contained in the current rules for higher-priced mortgage loans.]

f. Requirements for mandatory escrow accountsi. Must be established in a federally insured depository institution or credit union

ii. Must be administered in accordance with RESPA, although a violation of RESPAdoes not give rise to an additional violation of this Act, the Flood Disaster

Protection Act or state law

iii. Creditor must pay interest if required by federal or state lawiv. Creditor must give an initial escrow disclosure at least three business days prior

to closing that states:

1. The fact that an escrow or impound account will be established,2. The amount required at closing,3. The estimated amount in the initial year after closing for taxes,

insurance premiums and other required periodic payments, based on

the taxable assessed value of the property or the replacement value of

the property,

4. The estimated monthly amount to be paid into the escrow account,5. The fact that if the consumer elects to terminate the escrow account in

the future, the consumer will be responsible for paying the taxes,

insurance premiums and other periodic payments, and

6. Such other information as the Board requires.v. [NOTE: The current rules for higher-priced mortgage loans do not contain these

disclosure requirements for escrow accounts.]

2. Escrow Waiver Disclosure Section 1462 [Adding TILA 129D(j)]a. If an escrow account is not established in connection with a consumer credit transaction

secured by real property, or if the consumer elects to close an escrow account after one

has been established, the creditor must provide an escrow waiver disclosure that states:

i. Applicable fees or costs associated with not having an escrow account,ii. A clear and prominent statement that the consumer is responsible personally

and directly for paying the non-escrowed items, in addition to paying the

mortgage payment and the fact that costs for taxes, insurance and related feescan be substantial,

iii. A clear explanation of the consequences of failing to pay non-escrowed items,including the possible forced placement of insurance at a potentially higher cost

(including any potential commission payments to the servicer) or reduced

coverage, and

iv. Such other information that the Board may requireb. [NOTE: The current rules for higher-priced mortgage loans do not require this

disclosure.]


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3. RESPA Amendments Section 1463 [Amending RESPA 6]a. Force-placed insurance

i. Servicers of federally related mortgage loans (as broadly defined in RESPA) mustnot:

1. Force-place insurance unless there is a reasonable basis to believe theborrower has failed to maintain required property insurance

2. Charge fees for responding to qualified written requests3. Fail to respond timely to a borrowers request to correct errors relatedto the allocation of payments, final payoff balances, or other standard

servicer duties

4. Fail to respond within ten business days to a borrowers request for theidentity or contact information of the owner or assignee of the loan

5. Fail to comply with any other obligation prescribed by the CFPBii. Requirements for force-placed insurance on federally related mortgage loans

1. Before imposing a charge for force-placed insurance, a servicer mustsend to the borrower two written notices at least 30-days apart that:

a. Explain the borrowers obligation to maintain hazard insurance,b. State that the servicer does not have evidence of the required

insurance,

c. Explain to the borrower in a clear and conspicuous statementhow to provide such evidence to the servicer, and

d. State that the servicer may obtain such coverage at theborrowers expense if the borrower does not provide evidence

of coverage in a timely manner.

2. These rules do not prohibit the simultaneous or concurrent notice oflack of flood insurance that may be required pursuant to Section 102(e)

of the Flood disaster Protection Act

3. The servicer may not impose a charge for force-placed insurance until15 days after the second notice has been sent.

4. A servicer must accept any reasonable form of written confirmation ofinsurance coverage from a borrower that either includes the insurance

policy number and the contact information for the insurance company

or agent or otherwise meets the requirements of the CFPB

5. Within 15 days of receiving evidence of insurance coverage from theborrower, the servicer must terminate the force-placed insurance and

refund any force-placed insurance premiums the borrower paid during

the time the borrowers insurance coverage was in effect, and any

related fees.

6. Any charge for force-placed insurance must be bona fide andreasonable, other than charges subject to state regulation as the

business of insurance.b. Penalties: The maximum statutory penalties under RESPA for failure to respond to a

qualified written response or to provide information regarding mortgage transfers and

notices of mortgage transfers are doubled:

i. From a maximum of $1,000 to a maximum of $2,000 for individual actions, andii. From a maximum of $500,000 to a maximum of $1,000,000 for class actions.

c. Faster response times: The required time to respond to qualified written responses hasbeen shortened drastically


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i. The time period to acknowledge a qualified written request is shortened from20 days to five days [NOTE: Servicers may face a challenge in simply identifying

whether a communication from a customer is a qualified written request within

this time frame. Query whether servicers may send a generic acknowledgment

of receipt of a communication within five days without having to identify

whether the servicer deems the communication to be a qualified written

response.]

ii. The time period to make any corrections in response to a qualified writtenrequest or to provide the borrower with a written explanation are shortenedfrom 60 days to 30 days; however, a 15-day extension is permitted if the

servicer notifies the borrower before the end of the 30-day period and provides

the reason for the delay in responding

d. Escrow refunds: Servicer must refund or credit to a similar account for a new mortgageany escrow amounts within 20 days of when the loan is paid off.

4. TILA Amendments Related to Crediting Payments and Providing Payoff Statements Section1464 [Adding TILA 129F and 129G]

a. In connection with a consumer credit transaction secured by a consumers principaldwelling, a servicer must credit a loan payment on the date of receipt unless a delay in

crediting does not result in a charge or the reporting of negative information to a

consumer reporting agency. Exception if a servicer specifies in writing requirements

for the consumer to follow in making payments but accepts a payment that does not

conform to those requirements, the servicer must credit the payment as of five days

after receipt. [NOTE: These rules are similar to existing provisions of Regulation Z.]

b. A creditor or servicer of a home loan must send an accurate payoff balance no morethan seven business days after the receipt of a written request from the borrower.

5. Including Escrow Amounts in TILA Disclosures Section 1465 [Amending TILA 128(b)]a. Coverage: All first lien mortgage loans and subordinate mortgage loans secured by the

consumers principal dwelling and loans secured by personal property that is the

consumers principal dwelling.b. The amounts on the payment schedule disclosures required at consummation (and

within three business days of application under the current Mortgage Disclosure

Improvement Act rules) must include the amount of any escrow payments.

c. The disclosures are to be based on the assessed taxable value of the real property andany improvements, if known, and the replacement value of any improvements. [NOTE:

The and appears in the Act, but probably should be an or, which would be

consistent with the Acts requirement regarding how the amount of force-placed

insurance should be calculated for the purposes of the notice to homeowners in Section

1461.]

d. [NOTE: This section duplicates, in part, the requirement in Section 1419 of Act thatescrow amounts be included in the TILA payment schedule disclosures for residentialmortgage loans with adjustable rates in Section 1419.]

Subtitle F Appraisal Activities

1. Appraisal Requirements for Higher-Risk Mortgages Section 1471 [Adding TILA 129H]a. Applies to higher-risk mortgages, which are defined as residential mortgage loans

(which includes second mortgages but excludes HELOCs) that:


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i. Are not qualified mortgagesii. Are not reverse mortgagesiii. Where the APR exceeds the prime offer rate on a comparable transaction by

1. 1.5 percentage points for first lien mortgages that does not exceedFreddie Mac conventional loan limits

2. 2.5 percentage points for first lien mortgages that exceed Freddie Macconventional loan limits

3. 3.5 percentage points for subordinate lien mortgagesiv. [NOTE: This definition is similar to the existing definition of higher-pricedmortgage loans, but the current definition does not include the exception for

qualified mortgages nor does it make the distinction between conventional and

non-conventional first lien mortgages. The Acts definition would cover fewer

jumbo mortgages. However, the current definition excludes bridge loans. The

definition in the Act does not.]

b. Physical property visits of the interior of the property by a certified or licensed appraiserare required

c. Second appraisals are required, at no cost to applicants, if the higher-risk mortgage willfinance the purchase of property from a person within 180 days of that persons

purchase of the property at a price lower than the current sale price of the property.

d. Creditors must provide one free copy of each appraisal to applicants at least three daysprior to closing

e. Creditors must provide a notice at application that the appraisal is prepared for the soleuse of the creditor and that the applicant may choose to have a separate appraisal

conducted

f. Joint regulations will be issued by the FRB, OCC, FDIC, NCUA, FHFA, CFPBg. In addition to the standard Truth in Lending Act penalties, a willful violation of these

appraisal requirements carries a $2,000 penalty

2. Appraiser Independence Section 1472 [Adding TILA 129E]a. Effective Date: This is one provision of the Act affecting mortgages that will have

become effective relatively quickly. The Board must prescribe interim final regulationsno later than 90 days after enactment. On that date, the Home Valuation Code of

Conduct will sunset.

b. [NOTE: Appraisal independence rules were added to Regulation Z in July 2008.However, these provisions, particularly the requirement to pay fee appraisers

customary and reasonable compensation and the greatly enhanced penalties go well

beyond the current rules.]

c. Applies to any appraisals obtained for any mortgage secured by the principal dwelling ofthe consumer

d. To ensure appraisal independence, the following is prohibited:i. An attempt by any person with an interest in the underlying transaction to

compensate, coerce, extort, collude, etc. any person or entity conducting orinvolved in an appraisal

ii. Mischaracterizing or suborning a mischaracterization of the appraised value ofthe property

iii. Seeking to influence an appraiser or otherwise encouraging a targeted value inorder to facilitate the making or pricing of the transaction; and

iv. Withholding or threatening to withhold timely payment for an appraisal reportor services when the appraisal report or services are provided for in accordance

with the contract between the parties


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e. A person with an interest in a real estate transaction, including a mortgage broker,lender or banker, may ask an appraiser to consider additional information such as

comparable properties; may provide further detail or explanation for the appraisers

value conclusion; and may correct errors in the appraisal report.

f. Conflicts of interest are prohibited. An appraiser may not have an interest in thetransaction.

g. Any person involved with a real estate transaction, including mortgage lenders, brokersbankers and appraisal management companies, who has a reasonable basis to believean appraiser is failing to comply with the Uniform Standards of Professional Appraisal

Practice, is violating applicable laws or is otherwise engaging in unethical or

unprofessional conduct, must refer the matter to the appropriate state agency.

h. A creditor who knows, at or before loan closing, of a violation of the appraisalindependence requirements, must not extend credit based on that appraisal unless the

creditor documents that it has acted with reasonable diligence to determine that the

appraisal does not materially misstate or misrepresent the value of such dwelling

i. The FRB, OCC, FDIC, NCUA, FHFA and CFPB will issue joint rulesj. The Act also authorizes regulations to address appraisal report portabilityk. Lenders must compensate fee appraisers (i.e. those that are not an employee of the

mortgage originator or an appraisal management company) at a rate that is customary

and reasonable for appraisal services performed in the market area of the property

being appraised. In the case of a complex appraisal, the fee may be increased to reflect

increased time, difficulty and scope of work.

l. Penalties: In addition to Section 130 penalties, a civil penalty of $10,000 may beimposed for each day any violation of the appraiser independence rules continues. For

subsequent violations, a civil penalty of $20,000 may be imposed for each day any

violation continues.

3. Miscellaneous Appraisal Provisions Section 1473 [Amends and adds various sections of FFIEA,ECOA 701 and RESPA 4]

a. Amends statutory provisions related to the Appraisal Subcommittee of the FFIECb. Authorizes FRB, OCC, FDIC, NCUA, FHFA, CFPB to issue regulations establishing minimum

standards for states in registering appraisal management companies and sets

parameters for those regulations, similar in concept to the NMLS for loan originators

c. Automated Valuation Modelsi. Establishes quality control standards for AVMs

ii. Directs FRB, OCC, FDIC, NCUA, FHFA, CFPB to promulgate regulations toimplement quality control standards

d. Broker Price Opinionsi. A BPO may not be used as the primary basis to determine the value of a

property in connection with a residential mortgage for the purchase of a

consumers principal dwelling

e.

ECOA Amendmenti. [NOTE: This amendment amends the current option consumers have under the

ECOA to obtain a copy of their appraisal. The option has been changed to a

requirement, the delivery time has been set to before closing and the

requirement now applies to any evaluation, not just an appraisal.]

ii. Creditors must give applicants a copy of any and all written appraisals andvaluations developed in connection with an application for a first lien loan

secured by a dwelling. [NOTE: This may require the disclosure of any internal

valuation, such as one prepared by a creditors appraisal review desk.]


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iii. Copies must be provided promptly upon completion of the appraisal orvaluation, but in any case no later than three days prior to loan closing, whether

the application is denied, incomplete or withdrawn.

iv. Applicants may waive the three-day requirementv. Creditors can require an applicant to pay a reasonable fee to reimburse the

creditor for the cost of the appraisal, unless otherwise prohibited by law

vi. Notwithstanding the provision immediately above, creditors must provide a freecopy of each written appraisal or valuation

vii. Creditors must notify applicants at the time of application of the right to receivea copy of each written appraisal and valuation

f. RESPA Amendmenti. The Act provides that the HUD-1 Settlement Statement may include, in the

case of an appraisal coordinated by an appraisal management company, a clear

disclosure of the fee paid to the appraiser by such company and the

administration fee charged by such company. [NOTE: The use of may seems

odd. Is this meant to be a requirement or a suggestion that HUD may want to

amend Regulation X, if it wants to?]

4. GAO Appraisal Study Section 1476a. The GAO is instructed to conduct a study on the effectiveness and impact of various

appraisal methods, valuation models and distributions channels, and on the Home

Valuation Code of Conduct and the Appraisal Subcommittee

Subtitle G Mortgage Resolution and Modification

1. HUD is instructed to establish a multifamily mortgage resolution program Section 14812. Changes to HAMP Guidelines Section 1482

a. Directs the Treasury Department to revise HAMP guidelines to require eachparticipating mortgage servicer to provide each borrower whose HAMP application hasbeen denied with all borrower-related and mortgage-related input data used in any net

present value analyses performed in connection with the mortgage. Input data must be

provided to the borrower at the time of denial.

b. Directs the Treasury Department to create a web site with a calculator for the netpresent value analysis of mortgages, based on Treasurys methodology for calculating

such values, that borrowers can use to enter their own information and that provides a

determination of whether their mortgage would be accepted or rejected under HAMP

c. Directs the Treasury Department to make its net present value methodology, computermodels and variables publicly available on a web site

3.

Public Availability of Making Home Affordable Program Information Section 1483a. Directs the Treasury Department to revise MHA guidelines to provide that the data

collected from each participating mortgage lender and servicer will be made public

b. Directs Treasury to make such information public online not more than 14 days aftereach monthly deadline for submission of data; Treasury must make the data available to

the public at the individual record level not more than 60 days after each monthly

Documents

Summary of Mortgage Lending Dodd Frank ConsumerProtection Act