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   ARTICLE   |   From Scotsman Guide Residential Edition   |   November 2010

Don't Fear Reform

You know how the Dodd-Frank Act affects your business … right?

Regulatory change tends to inspire fear. For many in the mortgage industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act epitomizes this statement. That could be a reflection of the sheer length of the 2,319-page act or the result of business demands that eliminate extra time from brokers' schedules.

Whatever the reasons, the excuses for not knowing the act's impact on mortgage lending must end. If you have yet to figure out how the act could affect your business, now is the time. By peeling back the layers of legislation and looking at the areas of primary importance, mortgage brokers can gain important insights into their future.

The Dodd-Frank Act (sctsm.in/frbill), signed into law this past July, represents the most significant change to financial regulation since the New Deal. Though many of its provisions won't take effect until 2011 and into 2012, its ultimate purpose is clear -- economic stabilization.

"If you have yet to figure out how the act could affect your business, now is the time. By peeling back the layers of legislation and looking at the areas of primary importance, mortgage brokers can gain important insights into their future."

Titles X and XIV of the act impart the most impact on the mortgage industry. Title X calls for the creation of the Bureau of Consumer Financial Protection, commonly called the Consumer Financial Protection Bureau (CFPB). Title XIV, meanwhile, establishes the Mortgage Reform and Anti-Predatory Lending Act.

The anti-predatory lending act identifies and curbs certain business tactics, products, terms, lender actions, marketing practices and fees that have come to be understood as predatory in nature. The thrust of Title XIV is to ensure that borrowers have a reasonable ability to repay their mortgage and that loan terms are understandable and not unfair, deceptive or abusive.

To ensure lender compliance, the Mortgage Reform and Anti-Predatory Lending Act increases penalties and establishes more than one means for consumer recourse. The following rundown sorts the act's requirements into six areas of impact:

  1. Business practices
  2. Products
  3. Terms
  4. Appraisals
  5. Fees
  6. Consumer protection

Business practices

The Mortgage Reform and Anti-Predatory Lending Act addresses business practices that drew the attention of state regulators and attorneys general along with consumer groups.

One widespread concern was loan-officer competence. The law reiterates the provisions of the Secure and Fair Enforcement for Mortgage Licensing Act (aka the S.A.F.E. Act). The S.A.F.E. Act was authorized under the Housing and Economic Recovery Act of 2008 and was designed to monitor mortgage-broker activity through the Nationwide Mortgage Licensing System and Registry (NMLS). The S.A.F.E. Act requires all mortgage-loan originators not working for federally regulated depository institutions or their subsidiaries to be qualified, registered and licensed.

The Mortgage Reform and Anti-Predatory Lending Act also prohibits all loan originators from discouraging borrowers from shopping for a better loan.

Under the act, loan originators, including brokers, must make a reasonable effort to ensure that borrowers can repay any loan they assume. This includes making a good-faith effort "based on verified and documented information." It also amounts to full due diligence in originating, processing and underwriting.

The act also prohibits:

  • Steering borrowers into loan products that net the originator higher compensation. Originators violating the anti-steering prohibition could be required to repay as much as three times the direct or indirect compensation.
  • Extending high-cost mortgages to borrowers unless the borrowers have received U.S. Department of Housing and Urban Development (HUD)-approved counseling.
  • Counseling borrowers not to make a scheduled payment when refinancing into a high-cost mortgage.

It also bars note-holders from financing prepayment penalties but not when a competitor refinances the same high-cost loan. This provision appears to discourage churning to enrich the loan-servicer through the prepayment penalty as well as the financed points on a new loan.

The act also prohibits mandatory arbitration for any residential mortgage loan secured by a principal dwelling.

The Mortgage Reform and Anti-Predatory Lending Act also amends the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA). These amendments result in better consumer protections, including the following:

  • RESPA: Loan-servicers face tighter restrictions on forced-placed insurance, which are policies lenders take out on uninsured borrowers' behalf and that cover the property placed as collateral. The penalties for violating this consumer protection have doubled.
  • TILA: Loan-servicers must post payments in a timely manner and loan-payoff requests must be provided within seven business days.
  • ECOA: Lenders must provide borrowers with a copy of the appraisal three days before closing.


The act also defines "qualified mortgages" and prohibits originators from steering borrowers to nonqualified mortgages if the borrowers meet the requirements for a qualified mortgage. As explained in the act, qualified fixed-rate mortgages generally:

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

Moreover, refinances must provide a net tangible benefit to borrowers. Streamlined refinancing without income verification for government and agency mortgages is permitted when borrowers are current on their mortgage and the new mortgage is at a lower rate. Streamlined refinancing, however, is allowed into a higher interest rate when borrowers are going from an adjustable-rate mortgage to a fixed-rate mortgage as long as the loan balance isn't increased.

Option-ARM borrowers, meanwhile, must qualify based on their income and a fully amortized loan schedule. Although this won't kill the option-ARM business, it will limit it to those for whom the product was originally designed -- high-income and affluent borrowers who earn a large part of their income in quarterly bonuses. Nonetheless, the negative-amortization features of option ARMs will require new consumer disclosures to better explain the product's terms.

In addition, lenders will be required to retain a percentage of the nonqualified loans they originate. This risk-retention provision is designed to incentivize lenders to originate high-quality, low-default loans.


Brokers must offer borrowers a mortgage without a prepayment penalty if a mortgage with a prepayment penalty is under consideration. This will enable borrowers to better compare and understand the differences in the mortgages based on terms, rate and price. Lenders are also prohibited from financing various insurance plans.

"As the legislation's provisions play out, mortgage brokers must understand the impacts and adjust their businesses appropriately."

Balloon payments are prohibited in high-cost mortgages. The high-cost mortgage provision has contradictory language concerning an acceleration clause. Although they are barred, acceleration provisions are permitted if borrowers are in default or sell the property.

Moreover, the act amends TILA to provide a defense to foreclosure by recognizing that consumers may bring a private action against a foreclosing lender. A no-time-limit provision permits borrowers to offset actual losses. Although the consumers would have lost the property, the net impact is that a deficit judgment against the consumers would be minimized.

The act also amends TILA to recognize state anti-deficiency-judgment laws that protect consumers and requires lenders to disclose to borrowers how they could lose this protection in a refinance.


Properties that sell within six months of a prior sale and are financed with higher-risk mortgages will require a second appraisal at the lender's expense. In other words, the risk of lending and the required due diligence falls on the lender, not on borrowers.

The act also protects appraiser independence by forbidding loan originators from coercing, extorting, colluding, instructing, inducing, bribing or intimidating appraisers in connection with a property value or payment for the appraiser's services.

Loan originators can, however, ask appraisers to:

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

The act addresses the need to study the impact of the Home Valuation Code of Conduct in the selection of appraisers, the impact on cost and quality, the impact on mortgage brokers, and the impact on consumers.

Also, pursuant to an amendment to TILA, lenders will be required to deliver a free copy of each appraisal in connection with a higher-risk mortgage within three days of closing; and, pursuant to an amendment of ECOA, lenders must provide a copy of the appraisal on all mortgages. A lender's refusal to comply can result in a $2,000 fine.


The act permits as much as 3 percent in total points and fees that can be charged for a qualified mortgage with the stipulation that the mortgage interest rate does not exceed the prime rate by more than 2 percentage points. Smaller loan amounts aren't defined, but future rulemaking will address lenders' need to originate at a profit and consumers' need to access credit in smaller amounts without excessively paying more.

Further, the act defines high-cost mortgages by amending TILA rather than the existing definition in the Home Ownership and Equity Protection Act (HOEPA). For first mortgages, a 6.5-percent margin above the prime rate would serve as a high-cost mortgage trigger. For second mortgages, the trigger is an 8.5-percent margin over the prime rate.

Closing-cost points and fees are also addressed, but the trigger is based on the interest rate, not the points. As many as 2 bona fide discount points can be charged for interest-rate reductions. This is not a high-cost trigger but a standardized cap on discount-point charges.

Consumer protection

The Mortgage Reform and Anti-Predatory Lending Act also establishes the Office of Housing Counseling through the Expand and Preserve Home Ownership Through Counseling Act. One of this new office's roles is to carry out HUD's monitoring of "abusive, deceptive, or unscrupulous lending practices relating to residential mortgages."

Look for upcoming HUD-approved mortgage software that will empower consumers to make more-informed decisions based on cost-benefit analysis. Moreover, HUD will become a competitive information-service-provider of default and foreclosure data.

In addition, the CFPB will assume the responsibilities of developing and distributing to lenders an updated and simplified mortgage information booklet in a variety of languages. Lenders engaged in government lending must in turn distribute those booklets to borrowers.

The burden will be on consumers to read the comprehensive booklet that will address terms, regulations, costs, obligations and products. The booklet will be available for use by borrowers in conjunction with updated booklets on ARMs, mortgage fraud and home inspections.

•  •  •

The Dodd-Frank Wall Street Reform and Consumer Protection Act, and particularly the Mortgage Reform and Anti-Predatory Lending Act laid out in Title XIV, should help resolve some of the anger many U.S. residents, real estate investors and homeowners feel toward the financial sector and especially the mortgage industry. As the legislation's provisions play out, mortgage brokers must understand the impacts and adjust their businesses appropriately.

When the dust settles, brokers who acted with knowledge and acumen will be best positioned to thrive. Even so, the regulatory climate will continue to change. Keeping up won't be easy, but it will help stop fear of the unknown.


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