Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act is the Mortgage Reform and Anti-Predatory Lending Act (the “Mortgage Reform Act” or the “Act”). The Act will bring force significant changes to the way mortgage loans are originated and serviced by community banks, whether those loans are kept on the bank’s books or sold into the secondary market.
Some of the most important changes include:
- Rules intended to prevent originators from “steering” applicants to higher cost mortgage loans
- Minimum standards for mortgage loans, including considerations for the borrower’s ability to repay the loan
- Prohibitions on certain prepayment penalties
- Notice requirements for re-setting the interest rate on loans with a fixed interest rate which converts to a variable or adjustable rate after an initial period
- Additional disclosures and substantive limitations related to “high cost” mortgages
- Rules related to escrow accounts, prompt crediting of mortgage loan payments, and loan payoffs
- Rules for residential appraisers and appraisals
When will the mortgage reform provisions of the Act become effective
The Act grants substantial rulemaking authority to the Bureau of Consumer Financial Protection (“Bureau”), a new independent regulator established within the Federal Reserve System, and most of the substantive provisions of the Act will be further defined and implemented by regulations to be adopted by the Bureau over the next few years. In general, the Mortgage Reform Act provisions affecting community banks do not take effect until the Bureau has adopted final rules. Congress has mandated the Bureau to adopt final rules within 12 months after authority is transferred to the Bureau. Such rules must be effective no later than 18 months after they are finalized. However, certain provisions of the Mortgage Reform Act are subject to rulemaking by the Federal Reserve Board, which could - and likely will - propose regulations in the near future.
What are the new prohibitions on steering incentives?
The Act prohibits mortgage originators from being compensated on the basis of any loan term other than the amount of the loan itself. This will prohibit special yield-spread premium compensation bonus for originating higher rate mortgages or more profitable products. In addition, origination fees (other than fees for bona fide services paid to third parties) are generally barred except in limited circumstances.
What minimum standards for mortgage loans are established?
Lenders will be prohibited from making mortgage loans without first making a reasonable determination of the applicant’s ability to repay the loan and all other loans secured by (or anticipated to be secured by) the mortgage. The ability to pay determination must be based on the applicant’s income, credit history, obligations, employment and financial resources other than the equity in the home. Lenders will be required to verify income with appropriate documentation such as tax returns and pay stubs.
How does the Act limit prepayment penalties?
Prepayment penalties on most mortgage loans will be limited to 3% during the first year, 2% during the second year, and 1% in the third year. However, certain mortgage loans, including subprime loans and adjustable rate loans, may not provide for prepayment penalties in any case. Lenders must offer applicants an option of a no-prepayment penalty loan if they offer loans with prepayment penalties.
What are the rules for interest rate re-sets for hybrid loans?If a mortgage loan features an initial “teaser” rate that is fixed and is subject to adjustment after an initial period, the lender may not increase the rate without first providing six months notice to the borrower. Among other things, the notice must contain a list of alternatives the borrower may pursue before the adjustment date.
Are there new requirements for subprime loans?
The Act prohibits prepayment penalties and balloon payments on so called “high-cost mortgages.” In addition, the Act limits the amount of late fees, when the loan may be accelerated, and the financing of points and fees on such mortgage loans. Additional disclosures will be required for high cost mortgages and pre-closing loan counseling by authorized organizations will be mandatory. The Act prohibits originators from steering consumers to mortgage loans with “predatory characteristics,” such as excessive fees or abusive terms.
Will the Act affect loan servicing issues?
The Act requires establishment of escrow accounts for insurance, taxes, and other payments on most mortgage loans that do not meet certain requirements related to loan to value and other criteria. Exclusions will be provided in regulations, including exclusions for lenders operating in rural and underserved markets in certain cases. Loan payments must be credited on the date of receipt unless late crediting will not negatively affect the borrower. Lenders will be required to send payoff letters within a reasonable time, not to exceed seven days from the request.
Are there new rules related to appraisals?
Lenders will be prohibited from extending certain mortgage loans without first obtaining an independent appraisal. The Act mandates appraiser independence and prohibits lenders from directly or indirectly exerting influence over the appraisal. Civil penalties of $10,000 - $20,000 will be applied for violations of the appraisal standards. The federal banking agencies are required to jointly prescribe minimum requirements for States to apply in registration of appraisal management companies. Automated valuation models will be subject to additional quality control standards under regulations to be adopted by the federal banking agencies.
What does this mean for mortgage originators?
The impact of the Act will be largely determined by the implementing regulations so community banks should monitor additional developments as regulations are adopted. But community banks should beware: failure to comply with the new minimum standards opens the door to consumer claims and punitive damages (plus attorneys’ fees.)