FRB Issues Proposed Rule on Dodd-Frank "Ability to Repay," "Qualified Mortgage," PPPs

The Federal Reserve Board issued a proposed rule to implement the Dodd-Frank Act amendments to TILA that would require creditors to determine a consumer's ability to repay closed-end mortgage loans generally, and would establish minimum mortgage underwriting standards.



The FRB is also soliciting comment on two alternative approaches for defining a "qualified mortgage."

The FRB's notice is available at:


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

As you may recall, Regulation Z currently prohibits a creditor from making a "higher-priced" mortgage loan without regard to the consumer's ability to repay the loan. The Dodd-Frank Act expanded the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan). The Dodd-Frank Act also placed limits on prepayment penalties.

The proposal would apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans), and provides the following four options for complying with the ability-to-repay requirement:

(1) A creditor can meet the general ability-to-repay standard by considering and verifying certain specified underwriting factors, such as the consumer's income or assets, debt obligations, and credit history.
Underwriting the payment for an adjustable-rate mortgage loan is to be based on the fully indexed rate;

(2) A creditor can make a "qualified mortgage" (which provides the creditor with special protection from liability provided the loan does not have certain features such as negative amortization, the fees are within specified limits, and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years). Importantly, the FRB is soliciting comment on two alternative approaches for defining a "qualified mortgage."

(3) A creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where banks originate balloon loans to hedge against interest rate risk for loans held in portfolio.

(4) A creditor can refinance a "non-standard mortgage" with risky features into a more stable "standard mortgage" with a lower monthly payment. This option is meant to preserve access to streamlined refinancings.

The proposal would also implement the Dodd-Frank Act's limits on prepayment penalties. In addition, the proposal would require creditors to retain evidence of compliance with this rule for three years after a loan is consummated.


http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419b1.pdf

Under Dodd-Frank, the proposal would provide four options for complying with the ability-to-repay requirement.



http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110419a1.pdf

First, a creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer’s income or assets.



Second, a creditor can make a “qualified mortgage,” which gives the creditor special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years.


Regulators are currently soliciting comment on alternative approaches for defining a “qualified mortgage.”


Third, a creditor operating predominantly in rural or underserved areas can make a balloon-payment qualified mortgage.


a creditor can refinance a “non-standard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment.

The FRB reminds that general rulemaking authority for TILA is scheduled to transfer to the Consumer Financial Protection Bureau (or, "CFPB") on July 21, 2011. Accordingly, the FRB states that this rulemaking will become a proposal of the CFPB and will not be finalized by the FRB.







The comments deadline is July 22, 2011.

Big Banks Face Fines for Foreclosure Mess

The Federal Reserve Board and banking regulators yesterday formally accused 14 mortgage servicers  ( Bank of America Corporation; Citigroup Inc.; Ally Financial Inc.; HSBC North America Holdings, Inc.; JPMorgan Chase & Co.; MetLife, Inc.; The PNC Financial Services Group, Inc.; SunTrust Banks, Inc.; U.S. Bancorp; and Wells Fargo & Company) of engaging in "unsafe and unsound" practices in residential loan and foreclosure processing, announcing settlements that immediately require major procedural changes and will eventually include monetary damages, the Deal Pipeline reported yesterday. The Fed joined with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in taking the action. The agencies required the mortgage servicers to act immediately to remedy the problems even as they and state attorneys general continue working out the exact damages of the fines that will be imposed. Under the settlements, each firm has to develop a plan to give borrowers a single point of contact; stop foreclosures of loans approved for modification; establish robust controls over third-parties providing loss mitigation or foreclosure services; provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures and strengthen programs to ensure compliance with state and federal law.

http://www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm

http://www.dsnews.com/articles/regulators-hand-down-enforcement-actions-to-servicers-and-their-vendors-2011-04-13

http://www.occ.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html

http://www.ots.treas.gov/?p=PressReleases&ContentRecord_id=4fe2bb15-be56-5d95-6c9c-dfd680b1c6a3&ContentType_id=4c12f337-b5b6-4c87-b45c-838958422bf3

Federal Reserve System's final loan officer compensation rule

The U.S. Court of Appeals for the District of Columbia Circuit entered  an order dissolving the administrative stay of the Board of Governors of the Federal Reserve System's ("FRB”) final loan officer compensation rule.  The Court held that the appellants did not satisfy the stringent standards required for a stay pending appeal. As the administrative stay is now dissolved, the FRB's final loan officer compensation rule is now in force.

Prior info.
The U.S. District Court for the District of Columbia denied the motions of the National Association of Independent Housing Professionals, Inc. (“NAIHP”) and the National Association of Mortgage Brokers (“NAMB”) for a temporary restraining order and preliminary injunction to enjoin the Board of Governors of the Federal Reserve System ("FRB”) from implementing the loan officer compensation rule, effective on April 1, 2011, that restricts certain compensation practices of loan originators relating to mortgage loans. A copy of the District Court's Opinion is attached.


As you may recall, in their consolidated actions against the FRB, the NAMB and NAIHP allege that the FRB exceeded its authority under the Truth in Lending Act (“TILA”) and the Home Ownership and Equity Protection Act (“HOEPA”) in promulgating the loan officer compensation rule. Alternatively, the trade groups assert, if the FRB did have authority to issue the final rule, the final rule is arbitrary and capricious.

Following the denial of their requests for a TRO and preliminary injunction in the lower court, the trade groups appealed the U.S. Circuit Court of Appeals for the District of Columbia Circuit. The trade groups also filed an emergency motion for expedited relief and emergency motion to stay implementation of final rule pending appeal.

The DC Circuit ordered that the implementation of the final rule under review in the consolidated cases be stayed pending further order of the Court, in order to provide "sufficient opportunity to consider the merits of the motions for emergency relief." The Court specifically noted that the stay "should not be construed in any way as a ruling on the merits of those motions." A copy of the Circuit Court's Order is also attached.

MBA Requests Written Guidance re: FRB's Loan Originator Compensation Final Rule

The national Mortgage Bankers Association recently sent a request for written compliance guidance regarding implementation of the Federal Reserve Board’s final rule on loan originator compensation and steering, set to go into effect on April 1, 2011. (The FRB had previously provided oral guidance, but had not reduced its guidance to writing.)


Among other things, the MBA's letter points to:

(1) conflicts between the FRB's final rule and similar provisions in the Dodd-Frank Act;

(2) conflicts between the language of the rule and informal oral guidance provided by the FRB;

(3) the language of the Official Staff Commentary for the final rule stating that compensation may differ where it can be shown based on a bona fide analysis that average costs and time spent to originate these differing products justify compensation differences;

(4) the absence of any reference in the final rule or other justification for prohibiting different compensation for purchase money loans as opposed to refinance loans;

(5) the final rule's exemption for managers from the restriction on compensation based on rate or terms, and a de minimis proposal as to managers who also originate loans; and

(6) a list of Q&A's for consideration and written comment by the FRB.

A copy of the MBA's request is available at:

http://www.mbaa.org/files/Advocacy/2010/MBALettertoFederalReserveonLoanOfficerCompensation.pdf

As you may recall, the Federal Reserve Board earlier this year issued final rules that: (1) prohibit compensation that is based on the interest rate or other loan terms, subject to limited exception for the amount of credit extended; (2) prohibit a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party; and (3) prohibit loan originators from directing or "steering" a consumer to accept a mortgage loan with terms less favorable to the consumer in order to increase the originator's compensation.

The final rules also provide a safe harbor to facilitate compliance with the new anti-steering rule. The safe harbor is met if: (a) the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and (b) the loan options presented to the consumer include the following: (1) the lowest interest rate for which the consumer qualifies; (2) the lowest points and origination fees, and (3) the lowest rate for which the consumer qualifies for a loan with no so-called "risky features," such as a prepayment penalty, negative amortization, interest-only payments, shared equity or appreciation, or a balloon payment in the first seven years.

Compensation that is based on a fixed percentage of the loan amount is permitted under the new rules. The FRB's new rules apply to closed-end consumer loan secured by a dwelling.

The final rules apply to mortgage brokers and the companies that employ them, mortgage loan officers employed by depository and non-depository lenders, and TILA "creditors" that do not lend their own funds, or warehouse line or deposit funds.

The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011.



The final rules are available at:

http://edocket.access.gpo.gov/2010/2010-22161.htm