Residential mortgage transactions used to be simple. That was before the Consumer Credit Protection Act of 1968, which marked the beginning of an avalanche of purportedly consumer-friendly laws that has continued to this day with questionable benefits.
The law's main components were the Equal Credit Opportunity Act and the Truth-in-Lending Act. Lenders have not really had a problem with the former. But TILA, and its implementing Regulation Z, are another story. Over the years, Reg Z – together with official commentary and appendices – has mushroomed into several hundred pages in length. And it is still growing.
Unfortunately, Reg Z is not the only thing with which residential mortgage lenders must contend. The dizzying list of mortgage-related rules and requirements is longer than many people realize.
Before the customer even walks in the door, there are certain regulatory requirements that must be met to lay the groundwork for the business of offering residential mortgages. For example, a bank's board is required to adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens on or interests in real estate, or that are made for the purpose of financing permanent improvements to real estate. They must address such matters as loan-to-value ratios, loan portfolio management, underwriting standards and loan administration. The policies must be approved and reviewed by the bank's board at least annually.
Meanwhile, under the 2008 Secure and Fair Enforcement for Mortgage Licensing Act – known as the SAFE Act – mortgage loan originators must be licensed. The requirement applies to any individual who takes a residential mortgage application and offers or negotiates terms of a residential mortgage for profit or gain. As part of the registration process, the individual must be fingerprinted and must supply certain information, including employment history for the past 10 years. The bank must adopt and follow procedures to assure compliance with the registration requirements. This is an unreasonable requirement, given the extent to which banks ae regulated and examined, and provides a disincentive for anyone thinking about working in the mortgage department.
Then, there are appraisal requirements. A bank's board of directors is responsible for reviewing and adopting policies and procedures that establish an effective real estate appraisal and evaluation program. This is not a new requirement, but the Dodd-Frank Act offered a new twist on the appraisal regulations dealing with higher-priced mortgages, and in March the federal banking supervisors issued an "Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions" to update the rules.
Here's how the update to the appraisal rules has further complicated the process: If a higher-priced mortgage is involved, the appraiser must visit the interior of the property. Consumers must receive an appraisal-related disclosure within three business days of submitting a loan application. Copies of the appraisal must be delivered to applicants no later than three days before consummation of the loan.
As the Consumer Financial Protection Bureau has noted, consummation is determined under state law and does not necessarily occur on the date of the closing. Two appraisals are required if (1) the seller acquired the property 90 or fewer days prior to the date of the consumer's agreement to acquire the property and the price in the agreement exceeds the seller's acquisition price by more than 10%, or (2) the seller acquired the property 91 to 180 days prior to the date of the agreement and the agreement price exceeds the seller's acquisition price by more than 20%.
To make a confusing situation even more confusing, there are two different definitions of "business day" used to calculate the relevant delivery time frames. Lenders must also be cognizant of Regulation B requirements regarding furnishing copies of appraisals to applicants.
All of the requirements I have described up to now are just part of the preliminary mortgage process. There is then the threshold question of whether the property securing the mortgage is located in a flood hazard area. This necessitates seeking a determination from the Federal Emergency Management Agency using a prescribed FEMA form. If the property is in a flood area, a certain notice must be sent to the applicant. The law and implementing regulations are complicated and violations are commonplace, subjecting banks to monetary penalties.
After reviewing the applicant's credit information, the lender must decide on the interest rate. The decision will dictate the particular compliance requirements applicable to the transaction. Some will apply to all, regardless of the rate, and some only to certain high cost mortgages. For example, as required by the Real Estate Settlement Procedures Act, all applicants must be furnished with a list of qualified home ownership counseling organizations, but applicants are free to ignore this. It brings to mind the saying, "You can lead a horse to water, but you can't make it drink." However, if the loan rate places the transaction in the high cost category, the applicant can be made to drink the water. The applicant must not only meet with the counselor, but must provide certification in writing that he or she has done so.
I haven't even gotten yet to the CFPB's "qualified mortgage" rules. Through Reg Z, Dodd-Frank required the bureau to write an "ability-to-repay" regulation. The requirements relate to consumer credit transactions secured by a "dwelling." A dwelling is defined as a residential structure that contains one to four units, whether or not the structure is attached to real property and includes an individual condominium unit, cooperative unit, mobile home, or trailer, if it is used as a residence. Yet a loan meeting QM criteria has a conclusive presumption of compliance with the ability-to-repay rules. However, if it is a higher-priced mortgage, consumers still have the opportunity to rebut the lender's claim that it was in compliance.
All of these requirements are set forth in voluminous and complex regulations. They add to the time and expense of residential mortgage closings. Consumers are presented with a mountain of documents that they are supposed to read, but rarely do, their main interest being to have the funds disbursed as expeditiously as possible.
It is time for bankers, individually and through their trade associations, to stop just complaining about the regulatory burden in general terms and to present to members of Congress' banking committees a detailed illustration of the problem, which is providing a disincentive for banks to offer residential mortgage loans and for attorneys from wanting to represent lenders and borrowers in these transactions.
William Aukamp is counsel at the law firm of Werb & Sullivan in Wilmington, Del.