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   ARTICLE   |   From Scotsman Guide Residential Edition   |   September 2010

Making Sense of the Financial-Reform Bill

Sweeping legislation could start a new era for mortgage brokers and housing finance

The financial-reform bill President Barack Obama signed this past July 21 affects mortgage-origination, underwriting and servicing standards. It also outlines rules for mortgage-broker compensation, impacts the way brokers and property appraisers interact, and sets the stage for a new era in mortgage lending.

Many of the changes discussed in the 2,319-page act address mortgage origination, underwriting and servicing and represent revisions to the Truth in Lending Act (TILA).

Formally titled the Dodd-Frank Wall Street Reform and Consumer Protection Act, the financial-reform bill includes two acts pertinent to mortgage brokers:

  1. The Consumer Financial Protection Act, which calls for the creation of the Bureau of Consumer Financial Protection under the Federal Reserve Board. The bureau will regulate consumer finance, including residential mortgage financing. Many details of its authority will be finalized in the next several months.
  2. The Mortgage Reform and Anti-Predatory Lending Act, which aims to protect, limit and regulate residential mortgage lending to strengthen economic stability and to ensure consumer access to responsible and affordable mortgages.

Although many regulatory specifics will emerge following rulemaking processes in the months ahead, brokers should understand the legislation's general scope and pay close attention to the establishment of the Bureau of Consumer Financial Protection and interpretations of the Mortgage Reform and Anti-Predatory Lending Act.

The U.S. Department of the Treasury is responsible for planning, creating and organizing the Bureau of Consumer Financial Protection until Obama nominates and the Senate confirms a director. The bureau should assume its full authority for protecting consumers by July, according to the Treasury Department.

Here is a closer look at some of the major changes in the reform bill of which brokers should be aware.

Origination standards

The financial-reform legislation mandates that creditors make reasonable and good-faith determinations that consumers can repay the loans they take out. Creditors must base these determinations on verified and documented information collected at the underwriting level.

Loans meeting this requirement will be considered "qualified mortgages." Generally, qualified mortgages:

  • Use payment schedules that fully amortize the loan;
  • Rely on full documentation of income and assets, including Internal Revenue Service verification;
  • Don't use any negative amortization;
  • Don't include balloon payments; and
  • Don't charge total points and fees greater than 3 percent of the total loan amount.

In the case of adjustable-rate loans, the underwriting must be based on the maximum interest rate permitted under the loan in the first five years.

Although the law doesn't explicitly make reduced-documentation loans illegal, it does make lender liability so great that these loans likely will be unfeasible.

These changes are amendments to TILA. Brokers also should note that the financial-reform act specifically reinforces the requirement for mortgage originators to be qualified, licensed and registered in accordance with the Nationwide Mortgage Licensing System and Registry. It does not, however, offer clarity about whether mortgage brokers must act with a fiduciary responsibility toward their clients, a point that remains open to regulatory interpretation.

Some industry experts say state regulations pertaining to fiduciary responsibility will be studied as possible models for nationwide rules still under development. Fiduciary duty would require brokers to act with the highest degree of honesty and loyalty toward their clients' best interests.

In addition, the act calls for the Bureau of Consumer Financial Protection to issue rules and disclosures for public comment that combine the disclosures required under TILA and the Real Estate Settlement Procedures Act.

NAMB's Stance

NAMB — The Association of Mortgage Professionals has stated the Dodd-Frank Wall Street Reform and Consumer Protection Act will adversely affect consumers and small businesses and create consequences such as higher costs for consumers and continued job losses for small mortgage businesses.

The group, formerly known as the National Association of Mortgage Brokers, said in a statement (sctsm.in/frnamb) that the bill will deprive consumers of their existing choices and options for financing mortgage-closing costs. It also said lawmakers failed to show any evidence to support provisions in the bill that tie broker compensation to consumers' ability to repay a loan.

NAMB has pledged to work with regulators through the rule-writing process.


The financial-reform act generally prohibits residential mortgage originators from receiving compensation that varies based on loan terms other than the principal amount. This change, also reflected in TILA, places originator compensation under regulatory oversight of the Bureau of Consumer Financial Protection.

Under the financial-reform legislation, mortgage originators cannot receive any origination fee from anyone other than the consumer, unless the originator does not receive compensation directly from the consumer. This seems to require that consumers pay all origination fees directly and upfront or pay all origination fees indirectly, with premiums from the rate.

Although this rule protects consumers from abuses, it also could restrict their flexibility to choose creative loan terms. Whether it eliminates yield-spread premium (YSP), however, remains unclear pending final rulemaking.

"I think we have some interpreting to do here," says Bill Howe, president of NAMB -- The Association of Mortgage Professionals. "There isn't clarity on the issue [of YSP]."

The act does, however, specifically prohibit steering consumers to loans that:

  • They can't reasonably repay;
  • Have predatory characteristics, including equity-stripping, excessive fees or abusive terms;
  • Discriminate based on race, ethnicity, gender or age;
  • Mischaracterize the property value or the borrower's qualifications; or
  • Are not qualified mortgages if the consumer meets the requirements for a qualified mortgage.

The legislation doesn't intend to restrict consumers' ability to finance origination fees as long as the fees don't vary based on the loan terms, other than the principal amount, or consumers' decisions about whether to finance such fees.


The financial-reform bill calls for the Federal Reserve to implement interim appraisal-independence standards by Oct. 20. Those rules will end the Home Valuation Code of Conduct, which is set to sunset on Nov. 1, while maintaining appraiser independence. As of press time, it was unknown whether the Fed will accept public comment on the interim standards.

The Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp., the National Credit Union Administration Board, the Federal Housing Finance Agency and the Bureau of Consumer Financial Protection will implement final appraisal regulations jointly.

The new appraisal standards will become a part of TILA and ensure appraiser independence. The standards will address appraisal portability and allow originators and other interested parties to ask appraisers to:

  • Consider more property information, including additional comparable properties;
  • Provide details or explanations for the value conclusion; and
  • Correct errors in the appraisal report.

Coercive action will continue to be prohibited. 

The financial-reform legislation also addresses appraisal standards and appraiser licensing and calls for the Government Accountability Office to conduct a complete study of appraisal methods.

On the Web

Other issues

The reform act also addresses high-cost mortgages, generally defined as mortgages with rates exceeding the average prime-offer rate by 6.5 percentage points or that have total fees exceeding 5 percent of the transaction amount.

It also:

  • Sets up a new Office of Housing Counseling under the U.S. Department of Housing and Urban Development;
  • Implements new mortgage-servicing requirements;
  • Addresses mortgage resolution and modification; and
  • Generally prohibits prepayment penalties and mandatory arbitration.

Brokers should familiarize themselves with all the aforementioned changes and the general scope of the financial-reform bill. They also should pay close attention to the establishment of the Bureau of Consumer Financial Protection and the interpretations of the Mortgage Reform and Anti-Predatory Lending Act.

Although keeping up with the changes may be difficult, brokers who do can gain insights that will help them plan for a new era in mortgage lending.


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