7 New Rules from the CFPB - Are You Ready? (1 of 3)

As we celebrate the start of 2013, financial institutions and their compliance departments have been crushed under a deluge of new regulations and amendments, and it’s still January.

The CFPB has been busy the past couple weeks issuing, socializing, presenting and discussing the new mortgage rules. At last count, there have been over 2,600 pages of new rules released in January alone.

Recognizing the volume of changes, and the need for our clients' compliance departments to stay abreast of these changes, we decided to provide a synopsis of each rule as well as the necessary links and access to both the rule summaries and the full details behind each.

There is a lot of material to absorb, so in an effort not to overwhelm you, we’ve divided this material into three separate posts that we will provide over the next several days.

Since 1/1/2013 there have been seven (7) new rule additions or changes that compliance officers and bank leadership must be aware of. The 7 new rules include:

1. Ability-to-Pay Rule
2. Higher Cost Mortgage Rule
3. Rule Amending Escrow Requirements under Truth in Lending Act (Reg Z) 
4. Mortgage Servicing Rule
5. Appraisals for Higher Priced Mortgages Loans 
6. Reg B Appraisal Rule
7. Mortgage Loan Originator Qualification and Compensation Practices 

In this first post we will cover the first 3 rule changes or amendments:  1) Ability to Pay Rule, 2) Higher Cost Mortgage Rule, and 3) Amendment to the Truth in Lending Escrow Requirements. Post 2 of 3 will address rule 4) Mortgage Servicing Rule, and 5) Appraisals for High Priced Mortgages. The final post will shed some light on the 6) Reg B Appraisal Rule, and 7) Originator Qualification and Compensation. 

Rule #1:  Ability-to-Pay Rule

• Dodd-Frank Requirement: Congress required that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms.
• CFPB Quote: “When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” said CFPB Director Richard Cordray. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”
• New Rule Overview:  All new mortgages must comply with basic requirements that protect consumers from taking on loans they don’t have the financial means to pay back. Features of the new rule include:
• Financial Information has to be supplied and verified (document employment status; income and assets; current debt obligations; etc.)
• A borrower has to have sufficient assets or income to pay back the loan (lenders must look at the total monthly debt divided by their total monthly gross income)
• Teaser rates can no longer mask the true cost of a mortgage (lenders can’t base their evaluation of a consumer’s ability to repay on teaser rates)
• Lenders will be presumed to have complied with the Ability-to-Repay rule if they issue “Qualified Mortgages.” Among the features of a qualified Mortgage:
• No excess upfront points and fees (generally if the points and fees paid exceed three percent of the total loan amount)
• No toxic loan features (e.g. terms that exceed 30 years, interest only payments, or negative-amortization payments where principal amount increases)
• Cap on how much income can go toward debt (debt-to-income ratios less than or equal to 43 percent) 
• No loans with a balloon payment except those made by smaller creditors in rural or underserved areas (the law generally prohibits loans with balloon payments from being a Qualified Mortgage; however, there is a small credit in rural/underserved areas exception)
• Effective Date of New Rule: 1/10/2014
• More from CFPB (links): 
• Press Release – Issued 1/10/2013
• Ability-to-Pay Rule Summary
• Fact Sheet
• The Rule and Proposed Amendments (Full Document – 804 Pages)

Rule #2:  Higher-Cost Mortgage Rule

• Dodd-Frank Requirement: Expand the Home Ownership and Equity Protection Act (HOEPA) by adding protections for high-cost mortgages, including a requirement that borrowers receive homeownership counseling before obtaining a high-cost mortgage.
• CFPB Quote: “Addressing problems in the mortgage market is critical to helping our economy recover,” said CFPB Director Richard Cordray. “Today’s changes will better help consumers to understand the real costs of owning a home while protecting them from harmful practices that can trap them into high-cost mortgages.”
• New Rule Overview:   
• Bans potentially risky features (for mortgages that qualify as high-cost, the rule generally bans balloon payments, with some exceptions for loans made by creditors serving rural or underserved areas, and bans penalties for paying the loan early)
• Bans and limits certain fees and practices (bans fees for modifying loans, caps late fees at four percent of the payment that is past due, prohibits closing costs from being rolled into the loan amount, and restricts the charging of fees when consumers ask for a payoff statement)
• Requires housing counseling (consumer to receive housing counseling before taking out a high-cost mortgage)
• Effective Date of New Rule: 1/10/2014
• More from CFPB (links): 
• Press Release – Issued 1/10/2013
• High-Cost Mortgage Summary
• The High-Cost Mortgage and Homeownership Counseling Rule (Full Document – 431 Pages)

Rule #3:  Rule Amending Escrow Requirements under Truth in Lending Act (Reg Z)

• Dodd-Frank Requirement: Creditors must establish escrow accounts for certain mortgage transactions to help ensure that consumers set aside funds to pay property taxes, and premiums for homeowners insurance, and other mortgage-related insurance required by the creditor.
• New Rule Overview:
• The rule has three main elements:
1. Creditors are required to establish escrow accounts for certain higher-priced mortgage loans for five years (up from a minimum of one year). 
2. To preserve access to credit, the rule exempts loans made by certain small creditors that operate predominantly in rural or underserved areas. 
3. Finally, the rule expands an existing exemption from escrowing for insurance premiums for condominium units to extend the exemption to other situations in which an individual consumer’s property is covered by a master insurance policy.
• Effective Date of New Rule: 6/1/2013
• More from CFPB (links):
• Press Release – Issued 1/10/2013
• Escrow Requirements Summary
• The Escrow Requirement Rule (Full Document – 116 Pages)

Other things to keep in mind from the supervisory report:

• Mortgage Servicing Concerns – The new mortgage servicing rules will not go into effect until January of 2014.  However, it appears that those new rules are already influencing the approach and thought process.  The CFPB points to issues with servicing transfers, payment processing and loss mitigation management.

• Fair Lending (provision of adverse action notices) – In the Fall 2012 Supervisory Highlights, Fair Lending was an acknowledged top priority.  Continuing upon that same theme, the CFPB states that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B.  Common errors include:
• Not providing notice of adverse action.
• Not providing reasons for the adverse action.
• Not providing notice within 30 days of receipt of a completed application.

• Supervision Program Developments & Priorities – Recent guidance from the CFPB has been focused on Fair Lending (see TRUPOINT Partners’ blog) as well as bulletins concerning auto finance and mortgage servicing.
• New Fair Lending Exam Procedures – launched new baseline procedures with the hopes of helping financial institutions identify fair lending risks.
• Indirect Auto Finance – A compliance bulletin was released in order to remind lenders of their responsibility in the lending process (managing and monitoring dealer markups).
• Mortgage Servicing – A compliance bulletin was released to provide guidance to servicers and sub-servicers relating to transfer of service (including policies and procedures).
• Risk Based Approach to Exams – They note that exams will be prioritized based on the areas of greatest risk to consumers.  Therefore, risk assessments are an essential component to this prioritization.  The risk assessments should just focus on an organization-wide level (market size and risk) review.  Risk assessments should also consider the risk at the product line level (product size and market intelligence) when appropriate.

TRUPOINT Viewpoint: In the next installment (#2 of 3), we’ll tackle rule number four and five on the list, Mortgage Servicing Rule and Appraisals for Higher-Priced Mortgage Loans (HPML).

Until then, take two aspirin and a deep breath.