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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2013

2014: A Regulatory Odyssey

Stay current with guideline changes before they weigh you down

From a regulatory perspective, the year 2014 will be a year of both implementation and confusion for the mortgage industry. The journey to understanding the complex new rules covering loan originations — from the evolution of loan-origination policies to the afterlife of requirements for record retention — will comprise a veritable odyssey for mortgage professionals. The final rules issued by the Consumer Financial Protection Bureau (CFPB) this past January and the Disparate Impact Rule recently issued by the Department of Housing and Urban Development (HUD) will have both intended and unintended consequences for everyone associated with real estate finance. r_2013-07_triplett_books_p

Some of the new rules will require mortgage companies to make certain policy changes and system reprogramming. Suffice it to say, however, that the implementation of the remaining bombardment of rules will make the previous implementation of the RealEstateSettlement and Procedures Act (RESPA) and the Mortgage Disclosure Improvement Act feel like distant memories.

That’s why it’s so important for mortgage brokers, bankers and originators to make sure that they’re familiar with the ins and outs of new and upcoming legislation. Here’s a closer look at a few of the most pressing new additions to the regulatory landscape.

HUD’s disparate impact 

Effective since this past March, HUD’s final rule essentially clarifies the existing interpretation regarding disparate impact discrimination on protected classes. HUD indicates that, because it’s not a change to the rule but rather a formal interpretation,the clarification applies to future and pending cases

In essence, the rule requires a lender to defend lending practices if the practices have a discriminatory effect “even if not motivated by a discriminatory intent.” Discriminatory effect is defined as a practice that “actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.”

If charged with violating this rule, a lender must prove that its practices are necessary to achieve one or more substantial, legitimate and nondiscriminatory interests via legally sufficient justification that is not be hypothetical or speculative.Further,the plaintiff still can prevail if proving that the challenged practice can be accomplished by another practice that has a lesser discriminatory effect. 

To provide one example, consider an issue in which all lending organizations struggle: policies establishing minimum loan amounts that are cost-effective for the lender and do not exclude applicants on a prohibited basis. To piggyback on that, add the current focus of federal and state regulators on fair-lending issues, and it’s easy to see how establishing policies on this issue will be difficult at best for lenders. Add to that some of the additional rules issued by the CFPB, and the tasks become even more uncertain

Compensation for mortgage lenders and brokers is tightening, and at the same time, the costs to originate loans are increasing in various ways. Consider, for instance, the minimum loan amount scenario, the limitation on fees to originate a qualified mortgage(QM), the changes forthcoming to points and fees, and the anticipated revisions to financing charges that are expected later this year. Originating loans with lower principal amounts may become increasingly more difficult, despite the tiered loan amount structure under the QM rule, which brings us to our next topic.

Qualified mortgages

Effective Jan. 10, 2014, the QM definition is certainly something that mortgage professionals will want to keep their eyes on. Are you planning on originating QMs with legal safe harbor, QMs with rebuttable presumption or non-qualified mortgages? Regardless,you must ask yourself an equally pressing question: How much litigation risk can you tolerate?

This is a decision that every residential mortgage lending entity will have to resolve. The rule applies ability-to- repay standards to covered transactions. Simplified, it means that underwriting and verification requirements, payment calculations, qualify ingratios, and residual-income requirements must be documented to ascertain whether the consumer will have a reasonable ability to repay the obligation

Compliance also can be achieved by originating a QM. Lenders can originate a QM with legal safe harbor or a QM with rebuttable presumption. The basis of legal safe harbor is a transaction that meets QM standards and is not a higher-priced mortgage loan (HPML). If the QM transaction is an HPML, it falls under rebuttable presumption (i.e., presumed compliance) provisions. When effective, a loan is an HPML when the annual percentage rate (APR) exceeds the average prime offer rate by 1.5 percent for first-lien conforming loans, 2.5 percent for first-lien jumbo loans and 3.5 percent for subordinate liens

Without delving into QM loan terms, conditions or underwriting criteria, let’s focus on maximum points and fees. There’s a tiered structure regarding maximum points and fees, starting with 3 percent for loan amounts of $100,000 or more. When a loan amount falls below $100,000, the maximum points and fees range from: $3,000 (for loans $60,000 to $100,000); 5 percent (for loans $20,000 to $60,000); $1,000 (for loans $12,500 to $20,000); and 8 percent (for loans less than $12,500). The determination of whether charges are considered points and fees for QM purposes mirrors the criteria of high-cost mortgages

Complicating the matter further, the points and fees have been expanded to include loan-officer compensation and added affiliates of the creditor for allowing the currently provided exclusion for third-party provider fees and real estate related fees, if such fees are not retained and bona fide for applicable entities.

Additionally, anticipated expansion of finance charges to be included in the APR are forthcoming with the final rules regarding the integration of disclosures under RESPA and the Truth in Lending Act (TILA).

QRM rule

Many industry professionals expect the final qualified residential mortgage (QRM) rule to be released this September. Unless the transaction is a QRM, this “skin in the game” rule requires the securitizing entity to retain 5 percent of the amount of the mortgage-backed security and has the potential for rolling a portion of this burden downstream to the originating lender.

A QRM will fall within the framework of a QM but also have additional restrictions. Among many others, some of the most concerning provisions under the proposed rule have the QRM at an 80 percent maximum loan-to-value (LTV) ratio for purchase loans —with a slight variation to current determination between the sales price and the appraised value — and a 75 percent maximum LTV on refinances. The LTV will be 70 percent for cash-out refinances.

High-cost mortgage rule

Otherwise known as Home Ownership and Equity Protection Act loans or Section 32 loans, the high-cost mortgage rule also will be effective on Jan. 10, 2014, and amends calculations that determine whether the transaction is classified as a high-cost mortgage. Mortgage professionals should know that the index for these transactions is changing to the average prime offer rate. The thresholds for APR comparisons are lowering to 6.5 percent for first-lien loans (8.5 percent if the dwelling is personal property and the loan amount is less than $50,000) and 8.5 percent for subordinate liens. The points and fees threshold is being lowered to 5 percent of the total transaction amount if that transaction is $20,000 or more.

In addition, the rule adds that a loan with a prepayment penalty of more than 36 months or penalties that exceed 2 percent of the amount prepaid is classified as a high-cost mortgage. Excluding specific transactions and not exclusive to high-cost mortgages,a listing of home ownership-counseling organizations is required as another part of the initial three-day disclosure, and lenders are required to get confirmation of attendance before extending a high-cost loan or if the borrower is a first-time home buyer and the loan contains negative amortization.

Reg X and Reg Z

Many industry professionals expect RESPA’s Regulation X and TILA’s Regulation Z new rules to go into effect this September. The purpose of the proposed rule is to take the disclosure requirements of the current good-faith estimate and Truth-in-Lending statement given at the time of application and integrate them with the Truth-in-Lending statement and the HUD-1 Settlement Statement given at the time of closing. The disclosures would be replaced by a three-page loan estimate and a five-page closing disclosure for applicable transactions

There are an exceptional number of revisions proposed, but in addition to the forms themselves, mortgage professionals should be aware of some other changes, as well. In particular:

  • Now some variances are provided regarding specific fees such as property-insurance premiums, escrow amounts and prepaid interest.
  • The proposed closing disclosure would be provided to the consumer three business days prior to the loan closing with additional re-disclosure requirements under specific scenarios.
  • The restriction will include the identified six items that constitute an application for financing without the presently allowed discretionary variances.


With the majority of its content also effective in January 2014, the loan originator compensation requirements modifies the compensation provisions under TILA’s Regulation Z, relative to specific provisions and adds further exemptions, as well. The rule provides clarification to the prohibition of compensation based on loan terms or conditions, specifically regarding the issue of “proxy.”

Moreover, the rule revises provisions regarding the following: authorizing pricing concessions in certain circumstances; allowing certain contributions to originator retirement plans and bonuses; allowing commissions as long as they are not based on the terms of loans originated; modifying originator- qualification requirements for registered originators, including appropriate training; prohibiting binding arbitration and financing of single-premium credit insurances (effective as of this past June);expanding the definition of loan originator to exclude certain individuals; and extending the record-retention period to three years.

Another implementation task regards the populating of the originator’s National Mortgage Licensing System unique identifier and name on specific enumerated loan documents. In regards to “appropriate training,” the rule does not contain language regarding training comparable to the Secure and Fair Enforcement for Mortgage Licensing Act for licensed originators.

• •  •

As this wide array of rules and regulations goes into effect, it is hard to judge just what the consequences — intended and unintended — will be, but the mortgage industry will adapt just as it always has with regulatory changes. Given the timing, complexity and overwhelming implementation considerations regarding this series of rules, however, it seems safe to say that mortgage professionals’ compliance journey has only just begun.


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