On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Act”), S. 2155, which was passed by Congress on May 22, 2018, was signed into law. The Act represents the first major rewrite of the financial regulations legislated under the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Act contains several parts applicable to the financial industry. This note provides a summary of key provisions of the Act provisions applicable to the residential mortgage lending industry.
As summarized below, the Act contains several provisions applicable to the mortgage industry and impacts both origination and servicing of residential mortgage loans. Although the majority of relief provided by the Act is provided to depository institutions, the Act also contains some provisions providing relief to non-depository lenders.
The following is a summary of the Act’s key provisions applicable to the mortgage industry:
Qualified Mortgage (“QM”) Status For Certain CIDI’s Mortgages
The Act amends the Truth In Lending Act (“TILA”) and grants QM loan status to certain mortgages originated and held in portfolio by community insured depository institutions (i.e., banks and credit unions with assets of less than 10 billion) (“CIDI”). Such mortgages cannot have: (i) negative amortization feature, (ii) interest only feature, or (iii) total points and fees that exceed three percent of the total loan amount; and can only have prepayment penalties subject to the limitation described in TILA for QM loans. These mortgage must also be underwritten with consideration and documentation of the borrower’s debt, income and assets, and if fixed rate must be based on fully amortized payment of PITI. Importantly, the Act exempts these mortgages from compliance with the debt to income ratio specified in Regulation Z and from the documentation requirements specified in Appendix Q to Regulation Z.
However, these QM loans only maintain their QM status if kept in portfolio or if transferred under any of the following circumstances: (i) bankruptcy or failure of the CIDI, (ii) transfer to another CIDI to hold in its portfolio, (iii) transfer pursuant to merger with or acquisition by another CIDI, provided loan stays in the successor CIDI’s portfolio, or (iv) if transferred to wholly owned subsidiary of the CIDI, provided the loan is considered an asset of the CIDI for regulatory accounting purposes after such transfer.
Noticeably missing from the Act are provisions allowing transfers by CIDI to Federal Home Loan Banks (“FHLBs”) to retain QM status. CIDIs constitute the majority of members of FHLBs and many CIDIs rely on FHLBs mortgage purchase programs, i.e., MPF and MPP, to free up liquidity and to transfer credit and market risk. If transfer to FHLBs would have been allowed to maintain QM status it would have provided CIDI working with FHLBs with some parity of QM exemptions to institutions working with the two other larger GSEs, namely, Fannie Mae and Freddie Mac. The absence of a provision allowing transfers by CIDI to FHLBs to maintain QM status may be a signal that Congress wants to see the exemptions currently enjoyed by Fannie Mae and Freddie Mac, expire as currently prescribed by the regulation. It may also be a signal that Congress may deal with this issue as part of an upcoming greater initiative to reform the mortgage market and the role of the GSEs.
Safeguarding Access to Homes Through Charitable Organizations
The Act amends TILA appraisal independence rules to allow voluntary donations of appraisal services to tax exempt charitable organizations in connection with the extension of credit for home sold or financed by such institutions. The Act deems such donation of appraisal services “customary and reasonable” for the purpose of the payment for the appraisal services requirement under TILA.
Exemption From Appraisal Requirement for Properties in Rural Areas
The Act amends Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and therefore applies to institutions covered under FIRREA, by providing an exemption from appraisal requirement for residential properties located in rural areas provided that: (i) the loan is less than $400,000, (ii) the lender is subject to federal oversight, and (iii) no later than three days after a Closing Disclosure is provided to the borrower the lender contacts at least three state certified appraisers and documents that none of them were available within 5 business days beyond the customary fee and timeliness for comparable appraisal assignments.
However, the Act contains an exception from the exemption when prudential regulator requires an appraisal or if the loan is high-cost under TILA. The Act also places certain limitation on the transfer of loans without appraisal similar to the QM requirements above. Finally, the Act also contains an anti-evasion provision requiring prudential regulators to ensure that a lender making significant number of loans without appraisals is complying with the documentation requirement for the exemption.
Exemption From Certain HMDA Reporting For Small Depository Lenders and Study
The Act amends the Home Mortgage Disclosure Act (“HMDA”), and provides relief for small insured depository lenders from the requirements to provide certain itemized loan data with respect to either category of closed-end or open-end mortgage loan. More specifically, the exemption applies, with respect to the information required under either category of closed-end or open-end mortgage loan, if insured depositories originate fewer than 500 closed end or open-end loans in the two prior calendar years.
However, the Act contains an exception of from the exemption for such institutions with low ratings in compliance with Consumer Revilement Act in the 2 most recent examinations.
The Act also requires the Comptroller General to study and evaluate the impact of the data available under the HMDA and to report its findings and conclusions to certain Congressional housing and finance committees.
Easing Mortgage Loan Originator Job Mobility
The Act amends the S.A.F.E. Mortgage Licensing Act of 2008, by granting temporary authority for a mortgage loan originator (“MLO”) to continue and act as MLO when moving from a depository institution to a non-depository institution or when moving to a different state. The Act generally grants such MLOs the ability to continue and act as MLO for a period of no later than 120 days after the date the MLO submits the application for state license, if application is still listed as incomplete on the Nationwide Mortgage Licensing System and Registry (“NMLS”).
The Act contains several requirements for the MLO to be eligible for the temporary authority, depending on whether the MLO move is from a depository to non-depository or a move to a different state. In general, these requirements include that the MLO: (i) did not have an application denied, or license revoked or suspended, (ii) not subject to a cease and desist order, (iii) has not been convicted of a misdemeanor or felony that would preclude license, and (iv) has submitted an application for the state license. When moving from depository to non-depository employers, in addition, the MLO must have been registered in the NMLS for 1 year prior to the date of application for state license. When moving to a new state, in addition, the MLO needs to be employed by mortgage company in the new state, and must be licensed in the prior state during the 30 days prior to the application for the new state license. The Act further specified that an MLO acting under this temporary authority is subject to the requirements of the state licensing law governing loan originators where the MLO is located.
Relief to Manufactured Home Sellers
The Act amends TILA by revising the exception from the definition of mortgage originator to include a retailer of a manufactured home, or it employee, if it: (i) does not receive compensation for engaging in mortgage originator activities in excess of compensation received in a comparable cash transaction, (ii) discloses to consumer in writing any corporate affiliation with any creditor, which if it has such affiliation, discloses at least one unaffiliated creditor, and (iii) does not directly negotiate with the consumer or lender loan terms (including rates, fees, and other costs).
Relief From Escrow Requirements For Small CIDI Lenders
The Act amends the escrow requirements of TILA to require the CFPB to issue regulation exempting small CIDI lenders that originate 1,000 or fewer first lien mortgage loans secured by principal dwelling during the preceding calendar year if the transaction satisfies certain requirements specified in the escrow regulation under Regulation Z.
Relief from Waiting Period for Lower Mortgage Rates
The Act amends TILA disclosure requirement that provides that if a creditor extends a second offer of credit with lower APR, then no additional waiting period is required to consummate the transaction.
Simplifying Community Banks Capital Requirements
The Act requires federal regulators to simplify capital requirements for community banks (with assets less than 10 billion). Although this requirement is not directly related to mortgages, changes to capital requirement, including reduction in the treatment of residential mortgages and servicing rights held by such community banks under risk-based capital requirements, could have a significant impact on community banks ability to increase their participation in the mortgage market and to serve their customers. Such reduction would also allow community banks to take greater advantage of the relief they received under the Act from the QM requirement, discussed above.
Consumer Credit Reporting Security Freeze and Exception
The Act amends the Fair Credit Reporting Act to allow a consumer to request a “security freeze”, which is a restriction that prohibits a credit bureau from providing a consumer credit report to any person that requests it. If the consumer places a security freeze, a lender would not be able to receive a credit report in connection with a loan application unless the consumer removes the security freeze. The Act sets procedures for the credit bureaus on to process and manage consumer security freeze requests. The Act provides an exception from the security freeze requirement for an owner, assignee or servicer of a financial obligation owed by the consumer or to a potential purchaser of the loan or the collection account, among others for collection, purchase and monitoring of credit purposes.
Restoration of the Protecting Tenants At Foreclosure Act of 2009
The Act repeals the sunset provision in the Protecting Tenants At Foreclosure Act of 2009 (“PTFA”), thus restoring the PTFA. The PTFA protects tenants from evictions due to foreclosure of mortgage on the property they rent. It applies to mortgages on residential properties. The PTFA permits tenants to stay in the property until the end of their lease and requires notice of foreclosure prior to eviction of the tenant, among other protections and requirements. The resection of the PTFA impacts mortgage servicers of delinquent mortgage loans.
Subjects PACE Loans to TILA Ability To Repay Requirements
The Act requires the CFPB to enact regulation subjecting Property Assessed Clean Energy (“PACE”) loans to be subject to the ability to repay requirement, as determined by the CFPB in consultation with the states, local governments and bond-issuing authorities.
Protection of Veterans from Predatory Lending
The Act amends the VA Interest Rate Reduction Refinance Loan (“IRRRL”) program to protect VA borrowers from loan churning by establishing, among other things, requirement for guaranty or insurance eligibility by the VA, which include: certification of borrower recoupment of fees and costs in connection, passage of net tangible benefit test, and loan seasoning requirement. These eligibility requirements are not applicable to cash-out refinances. This amendment was also intended to stem the flood of prepayments of VA loans, which had adverse effect on the value of Ginnie Mae mortgage servicing rights and on FHA/VA loan rates.
CFPB Should Endeavor to Provide Clearer, Authoritative Guidance on TRID
Finally, the Act, Congress proclaims that the CFPB should endeavor to provide clearer, authoritative guidance on (i) the applicability of TRID to mortgage assumption transactions, (ii) the applicability of TRID to construction-to-permanent home loan, and the conditions under which can be properly originated, and (iii) the extent lenders can rely on model disclosures published by the CFBP without liability if changes to regulations are not reflected in the sample TRID rule forms published by the CFPB.
The Act provisions have immediate impact on mortgage market participants, particularly CIDI, mortgage originators and servicers. The Act provides opportunities to CIDI in increasing loan productions particularly in underserved areas. It also provides greater flexibility for loan mortgage originators in recruiting MLOs. Policies and procedures impacted by the Act should be reviewed, or in the case of PTFA should resurrected, and revised to account for the Act’s relief and to ensure compliance with the Act’s requirements.
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