Caution: New Mortgage Rules Require New Attention

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HOLLYWOOD, Calif.-There are a number of new rules and regulations relating to mortgage lending that credit unions must track closely, or risk penalties, fines, or even civil or criminal liability.

That was the message from Terri Fowlkes, director of Community Development Investments for the National Federation of Community Development Credit Unions. During the Federation's recent conference here, Fowlkes said the mortgage reform provisions mandated in the Dodd-Frank Act continue to be phased in almost one year after the legislation was signed into law on July 21, 2010, meaning CUs have to work hard to keep up.

There are eight subtitles of the Dodd-Frank Act that pertain specifically to mortgage lending, and some are of particular interest to credit unions, Fowlkes noted. Those eight subtitles are:

Subtitle A

Subtitle A covers residential mortgage loan origination standards. In this first section the term "originator" is defined as any person who received compensation for taking a residential loan application, assists a consumer in obtaining a loan or negotiates terms for a loan.

"This subtitle says mortgage originators may not receive compensation that varies based on the terms of the loan," she pointed out. "The Dodd-Frank Act bans payment of yield spread premiums or other originator compensation that is based on the interest rates or other terms of the loan."

In addition, Subtitle A mandates the originator must verify the consumer's ability to pay back the loan, Fowlkes added.

Subtitle B

Subtitle B, which sets minimum standards for mortgages, defines a "qualified mortgage." Fowlkes said the intent is for loan originators to make a "reasonable and good faith effort" to make loans that are regarded as "acceptable or prudent" by the financial institution's regulator.

The second subtitle takes a provision from Subtitle A one step further by mandating to be a "qualified mortgage" the consumer must have the reasonable ability to replay, including all terms, taxes, insurance and assessments. To ensure this, the borrower's income must be verified.

"This means the days of the no-doc or low-doc loan are gone," Fowlkes said.

Finally, Subtitle B prohibits prepayment penalties and mandatory arbitration requirements on all residential loans.

Subtitle C

Subtitle C defines a "high-cost mortgage" as having an interest rate 6.5% more than the prime rate for comparable loans. For second mortgages the threshold is 8.5% higher than comparable loans. Banned are balloon payments and prepayment penalties.

When receiving a "high-cost mortgage" the consumer must obtain pre-loan counseling from a certified counselor, she said.

Subtitle D

Subtitle D, known as the "Expand and Preserve Home Ownership Through Counseling Act," establishes the Office of Housing and Counseling within the Department of Housing and Urban Development. The Secretary of HUD is authorized to provide grants to HUD-approved counseling agencies.

Subtitle E

Mortgage servicing is addressed in Subtitle E.

"This [Subtitle E] is, I think, very critical for mortgage lending," said Fowlkes. "It details rules for escrow and settlement procedures for people who are in trouble repaying their mortgages."

Subtitle E requires the servicer establish an escrow and impound account for taxes, insurance and other required periodic payments. If the consumer chooses to close the account for any reason, the servicer must provide a written disclosure document that details consumer responsibilities to maintain these periodic payments and the potential consequences if, for example, tax payments are missed.

Fowlkes said the annals of lending are filled with examples of borrowers losing their homes due to missed property tax payments.

Subtitle F

Subtitle F spells out property appraisal requirements. It says a written appraisal is required before making a mortgage loan, including a physical property visit. If the deal takes too long to complete, and the appraisal become more than 180 days old, a second appraisal is required.

Further, the appraisal must be performed by a "certified appraiser"; one who is certified or licensed by the state.

Subtitle G

Subtitle G covers mortgage resolution and modification. Fowlkes said the Secretary of HUD must ensure protections for consumers seeking a modification.

Subtitle H

Subtitle H includes reforms of Fannie Mae and Freddie Mac, as well as several miscellaneous components.

Other Pending Updates To Laws

Other mortgage-related laws or changes to forms scheduled to come online include a requirement to integrate the disclosures from the Truth in Lending Act (TILA) and the Good Faith Estimate (GFE). Fowlkes said the new Consumer Financial Protection Bureau (CFPB) must issue rule changes regarding the updated and combined disclosure form by July 21.

"The Consumer Financial Protection Bureau is attempting to simplify mortgage disclosures," she said. "People can go to the CFPB's website and vote between two different versions."

Speaking of the GFE, Fowlkes said the first words no longer apply, especially the last one.

"The Good Faith Estimate is no longer an estimate," she explained, noting in too many cases would-be borrowers went through the entire mortgage process, only to be ambushed at the 11th hour with a settlement statement containing terms substantially different from the GFE they had been shown days or weeks earlier. "Broker estimates are now binding on the lender unless the lender denies the loan. And the lender cannot issue a corrected GFE unless there are changed circumstances."

In Regulation Z of the Federal Reserve Board, Fowlkes said the Fed has updated the TILA to say some originators are restricted.

The SAFE Act requires mortgage loan originators to be licensed by the state (for those employed by state chartered CUs) or federally registered (in the case of MLOs at FCUs). Fowlkes characterized this as an attempt to increase uniformity in licensing and reporting requirements.

Not So Nice Things

"A lot of brokers were doing some not-so-nice things," she said. "People could become a mortgage broker with no training or experience. Now, tests are required... and the tests are difficult. People fail them. They must know what they are doing."

In conjunction with the licensing/registration and testing requirements, CUs must develop policies and procedures that ensure mortgage loan originators are in compliance. Also, CUs must ensure no non-registered/licensed employee performs loan officer duty. In the case of changes, such as new hires, CUs have 30 days to update information on the registry.

"Internal audits are a good idea to make sure the credit union is in compliance," Fowlkes counseled. "If not, there are fees, penalties and the potential for paying borrower damages. Also, not being in compliance can get into the press and hurt a credit union's reputation."

Fowlkes recommended credit unions that are writing mortgages or are interested in doing so get in contact with the American CU Mortgage Association, which publishes an "informative" quarterly newsletter.

"ACUMA is led by Bob Dorsa, a credit union living legend who is committed to credit union mortgage lending like you wouldn't believe," she told the audience.

If credit unions are unsure about the many compliance requirements mandated by new laws and regulations, Fowlkes said they might consider hiring a consultant or even outsourcing.

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