The following outlines the primary consumer protection requirements of the Mortgage Reform and Anti-Predatory Lending Act (the “Act” or the “Mortgage Act”), which is Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Effective Dates. The Mortgage Act is somewhat ambiguous as to its effective dates. There is a possible argument that those many provisions of the Act for which no regulation is specifically required took effect immediately upon the signing of the Act by the President on July 21, 2010. We believe do not believe that to be a plausible interpretation.
Under the best interpretation of the Act, those provisions for which no regulations are issued would take effect 18 months after the designated transfer date. The designated transfer date is the date on which the various consumer protection functions are transferred from the federal banking agencies to the Consumer Financial Protection Bureau (the “Bureau”). Where regulations are required by the Act, they must be issued in final form within 18 months of the designated transfer date, and the regulation and corresponding Act provision then would take effect within 12 months thereafter.
The Consumer Financial Protection Bureau. The majority of the Mortgage Act’s provisions will be included in the “enumerated consumer laws” that the Bureau will implement and enforce. However, most of the regulations that the Act requires would be written by the Federal Reserve, presumably due to the delay until the designated transfer date.
Qualified Mortgage. The definition of qualified mortgage is important for many of the new provisions discussed in this summary. In general, a qualified mortgage is any residential mortgage loan that:
- does not allow for negative amortization or deferral of principal payments,
- does not provide for a balloon payment that is more than twice as large as the average of earlier scheduled payments,
- for which the income and financial resources of the borrower have been verified,
- in the case of a fixed rate loan, for which the underwriting process is based on a payment schedule that fully amortizes the loan over the loan terms taking into account all applicable taxes, insurance and assessments,
- in the case of an adjustable rate loan, for which the underwriting is based on the maximum rate permitted under the loan during the first 5 years, and a payment schedule that fully amortizes the loan over the loan terms taking into account all applicable taxes, insurance and assessments, and
- for which total points and fees do not exceed 3 percent of the total loan amount.
(There are other elements of this definition that the creditor also would need to comply with, but the foregoing captures many of the main points.)
Prohibition on Steering Incentives.
YSPs and Similar Originator Payments. The Act generally prohibits “mortgage originators” of “residential mortgage loans” from being paid compensation that varies based on the terms of the loan, other than the principal amount of the loans. This will prohibit, for example, yield spread premiums. The term “mortgage originator” generally includes loan brokers and generally does not include creditors; a “residential mortgage loan” is generally a closed-end consumer loan secured by a dwelling or by real property that includes a dwelling.
The Act also will prohibit a mortgage originator from receiving an origination fee or charge from anyone other than the consumer, though an exception allows someone other than the consumer to pay the origination fee or other charge if the originator is not being compensated directly by the consumer and the consumer does not make any upfront payment of discount or origination points or other fees other than bona fide third party charges that are not retained by the mortgage originator, creditor, or an affiliate of the originator or creditor.
Other Prohibited Steering Incentives. The Act requires the Federal Reserve to issue regulations to prohibit mortgage originators from:
- steering any consumer to a mortgage loan that the consumer lacks a reasonable ability to repay;
- steering any consumer to a mortgage loan that has predatory characteristics or effects such as equity stripping, excessive fees, or abusive terms;
- steering any consumer from a mortgage for which the consumer is qualified and that is a “qualified mortgage” to a mortgage loan that is not a qualified mortgage;
- abusive or unfair lending practices that promote disparities based on race, ethnicity, gender or age;
- mischaracterizing the credit history of a consumer or the loans available to the consumer;
- mischaracterizing or suborning the mischaracterization of the appraised value of the property; and
- if unable to offer a less expensive loan, discouraging the consumer from seeking a mortgage loan from another provider.
Increased TILA Liability. TILA is amended to impose liability on mortgage originators for violations of the foregoing steering prohibitions in an amount not to exceed the greater of the consumer’s actual damages or 3 times the total amount of direct and indirect compensation or gain accruing to the mortgage originator in connection with such loan, plus costs and attorneys’ fees.
Ability to Repay.
No creditor may make a residential mortgage loan unless the creditor makes a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan, including all applicable taxes, insurance, and assessments. These TILA amendments include requirements with respect to what documentation and factors need to be considered.
There is a limited exemption for refinance loans made, guaranteed, or insured by HUD, the VA, the Department of Agriculture, or the Rural Housing Service, if such agencies exempt such loans and the loans meet other specified conditions.
The creditor also may presume an ability to repay if the loan is a qualified mortgage.
Defense to Foreclosure.
TILA is amended to allow a consumer in connection with a foreclosure or collection action to raise a violation of the anti-steering and ability to repay rules as a defense by way of recoupment or set off, without regard to the TILA statute of limitations for civil liability. The statute of limitations for raising these violations as affirmative complaints also is increased from one year to three years.
Prepayment Penalty Limitations.
A residential mortgage loan that is not a qualified mortgage may not provide for prepayment penalties, and even a qualified mortgage can provide for prepayment penalties only if: (a) the loan is fixed rate; and (b) the APR does not exceed the average prime offer rate for a comparable transaction by more than 1.5% to 3.5% (depending on the loan amount and lien priority). The “average prime offer rate” is a rate that the Federal Reserve will publish and update at least weekly.
If the loan meets the foregoing standards such that a prepayment penalty would be permissible, the penalty still will be subject to limitations:
- the penalty may not exceed 3% of the outstanding balance during the first year of the loan;
- the penalty may not exceed 2% of the outstanding balance during the second year of the loan;
- the penalty may not exceed 1% of the outstanding balance during the third year of the loan; and
- no penalty may be charged after the third year of the loan.
In addition, a creditor will not be able to offer a loan with a prepayment penalty unless the creditor will also offer a loan that does not have a prepayment penalty.
Financing of Credit Insurance Prohibited.
No creditor may finance, directly or indirectly, any premiums for credit life, credit disability, or certain other types of insurance in connection with a residential mortgage loan or under an open end consumer credit plan secured by the consumer’s principal dwelling. The only exceptions are that:
- insurance premiums or debt cancellation or suspension fees that are calculated and paid in full on a monthly basis will not be considered to be financed, and
- this prohibition will not apply to credit unemployment insurance so long as the premiums are reasonable, the creditor receives no direct or indirect compensation with connection with such premiums, and the premiums are not paid to the creditor or an affiliate of the creditor.
Pre-Dispute Arbitration Requirements Prohibited.
No residential mortgage loan and no credit under an open end plan secured by the consumer’s principal dwelling may include terms that require arbitration or any other nonjudicial procedure. This provision does not prohibit a consumer and lender from agreeing to arbitration after a dispute has arisen.
Negative Amortization Requirements.
No creditor may extend credit in connection with a consumer credit transaction under an open or closed end credit plan secured by a dwelling (whether principal dwelling or not), other than a reverse mortgage, that provides for negative amortization without providing specified disclosure before consummation of the transaction.
In addition, in the case of a first-time borrower with respect to a residential mortgage loan that is not a qualified mortgage, the borrower must provide the creditor with evidence of receiving homeownership counseling.
Disclosure of Partial Payment Policies.
In connection with every residential mortgage loan, the creditor must disclose prior to settlement the creditor’s policy regarding the acceptance of partial payments and how such payments will be applied. Assignees of such loans must make this disclosure at the time the loan is assigned.
Increased Civil Liability Under TILA.
The ceiling for civil liability under TILA for actions involving a consumer lease is increased from $1,000 to $2,000, and the civil liability ceiling for any class action brought under TILA is increased from $500,000 to $1,000,000. The TILA statute of limitations for civil liability also is extended from one year to three years for violations of the TILA high-cost mortgage provisions, the anti-steering prohibitions, the ability to repay requirement, and certain of the other new TILA rules added by the Mortgage Act.
New Notice Requirement for Hybrid Adjustable Rate Mortgages.
For consumer credit transactions secured by the consumer’s principal residence, if the loan has an introductory fixed-rate period followed by a variable interest rate, the creditor must provide the consumer a written notice of the rate change 6 months prior to beginning of the variable rate period. If the loan adjusts from fixed rate to variable rate within the first 6 months after the loan is consummated, the creditor must provide this notice at consummation of the loan.
Additional Mortgage Disclosures.
TILA also is amended to require new disclosures for residential mortgage loans:
- For variable rate residential mortgage loans for which an escrow impound is required for taxes, insurance and assessments, a disclosure of the initial monthly payment that includes these escrow amounts and the amount of the fully indexed payment that includes these amounts.
- For all residential mortgage loans, the aggregate amount of settlement charges for all settlement services, the amounts included in the loan and the amounts that must be paid at closing, and the aggregate amount of other fees required in connection with the loan. This lender also must disclose the “approximate amount of the wholesale rate of funds” in connection with the loan.
- The amount of fees paid to the mortgage originator, the amount of such fees paid directly by the consumer, and any additional amount received by the originator from the creditor.
- The total interest the consumer will pay over the life of the loan expressed as a percentage of the principal of the loan.
Additional Periodic Statement Disclosure.
Periodic statements for residential mortgage loans will be required to include additional information, including the date on which the interest rate can next change, the amount of any prepayment fee, late fee information, and various contact information.
Numerous High-Cost Mortgage Amendments.
The Act includes a number of amendments to TILA’s high-cost mortgage provisions:
a. High-Cost APR Triggers. The APR triggers that will bring loans under the high-cost provisions are lowered:
- For a first mortgage on the consumer’s principal dwelling, the APR trigger will be 6.5% over the “average prime offer rate” (8.5% if the dwelling is personal property and the transaction is for less than $50,000); and
- For a junior mortgage on the consumer’s principal dwelling, the APR trigger will be 8.5% over the average prime offer rate.
The “average prime offer rate” will be the rate published by the Federal Reserve from time to time for comparable transactions. In calculating the APR triggers for a variable rate loan, the creditor must use the maximum rate that may apply at any time during the loan.
b. High-Cost Points and Fees Triggers. The total points and fees triggers also are lowered:
- 5% of the total transaction amount for transactions of $20,000 or more;
- The lesser of 8% or $1,000 for transactions of less than $20,000; and
- Regardless of the total points and fees, a loan is subject to the high-cost provisions if it provides for prepayment penalties more than 36 months after the loan closing or if such penalties exceed, in the aggregate, more than 2% of the amount prepaid.
The Act also amends what fees must be included in the total points and fees calculations in various ways.
c. Balloon Payments. High-cost mortgages (regardless of their term to maturity) may not provide for balloon payments that are more than twice as large as the average of earlier scheduled payments, except when payments are adjusted to the seasonal or irregular income of the consumer.
d. Other Anti-Predatory Lending Provisions. The Act amends TILA in a number of ways to adopt many of the anti-predatory lending limitations that were common under state laws. The amendments include provisions on the following:
- Prohibition on recommending defaults.
- Limitations on late fee amounts and prohibitions on pyramiding of late fees.
- Prohibition on financing of points and fees, and limits on financing prepayment penalties.
- Prohibition on modification and deferral fees.
- Payoff statement requirements.
Escrow and Impound Account Requirements.
Subject to certain exceptions, creditors will be required to establish an escrow or impound account in connection with a closed-end loan secured by a first lien on the consumer’s principal dwelling, other than a reverse mortgage. The escrow or impound account would be required when such account is required by federal or state law, if the loan is made, guaranteed, or insured by a state or federal governmental lending or insuring agency, or if the loan has an original principal amount in excess of prescribed thresholds.
These amendments also include requirements for disclosures to the consumer at least 3 days prior to consummation of the loan, or in accordance with timeframes set forth in regulations. These disclosures would be required in connection with loans for which there is a mandatory escrow account and for loans secured by real property where an escrow is not established or the escrow is closed at the consumer’s direction.
The Act amends RESPA to prohibit a servicer of a federally related mortgage loan from obtaining force-placed insurance unless there is a reasonable basis to believe that the borrower has failed to comply with the loan’s requirement to maintain hazard insurance. This reasonable belief could arise only after the servicer has provided two notices to the consumer, at prescribed times, and the borrower’s subsequent failure to provide evidence of insurance.
Other Servicer Rules.
The Act also amends RESPA to prohibit loan servicers from charging fees for valid qualified written requests, and to require loan servicers to take timely action to respond to a borrower’s requests to correct errors relating to allocation of payments or final loan payoff balances. In addition, the servicer will be required to refund unused escrow account balances within 20 business days after a loan is paid off.
TILA is amended to require that home loan payoff statements be provided within 7 business days of written request, and to require prompt crediting of home loan payments.
TILA is amended to require all creditors to obtain a written appraisal of the mortgage property in connection with any “higher-risk mortgage.” A higher-risk mortgage is a residential mortgage loan, other than a reverse mortgage loan that is a qualified mortgage, that is secured by a dwelling, and which is not a qualified mortgage and which has an APR that exceeds the average prime offer rate by 1.5% to 3.5% depending on the loan amount and lien priority.
The appraisal must be performed by a licensed or certified appraiser who conducts a physical property visit of the interior of the property. If the purpose of the loan is to finance the purchase of the property from a person who purchased it within the prior 180 days at a price that is lower than the current sale price, then the creditor must obtain a second appraisal that includes an analysis of the price and market differences. This second appraisal may not be charged to the loan applicant.
The Act also amends TILA to impose heightened appraisal independence requirements.
The Act includes many other provisions that are not addressed by this summary. The Act includes requirements for HUD to establish an Office of Housing Counseling and related counseling provisions, modifications to the RESPA mortgage information booklet requirements, Equal Credit Opportunity Act amendments regarding copies of appraisals to loan applicants, and other provisions that loan originators and lenders will want to become familiar with.