May 24th, 2013
DocuTech’s Chief Operations Officer, Scott K. Stucky, published in AMERICAN BANKER Magazine, addresses how GSE’s and the Private Mortgage market need each other for future growth and sustainability.
“It’s been five years since the mortgage meltdown. Mistakes were made and expectations were lowered. It’s now time we look . . . ” Read More: http://www.americanbanker.com/bankthink/gses-private-mortgage-market-need-each-other-1059326-1.html?zkPrintable=1&nopagination=1
May 13th, 2013
April’s “Compliance Matters” blog post written by Fred Gooch, general counsel and vice president of Compliance, focuses on the costs of complying with the CFPB. The CFPB’s mission is to make the consumer financial products and services marketplace as fair and transparent as possible. But often ignored is what the cost of additional oversight means to the consumer.
Lenders are charged with consistently educating themselves on what the CFPB is proposing – since they must adhere and adopt the rules in order to continue business and engage in legal practices. The CFPB has been transparent as to how long a rule will be in the adaptation stage and when implementation will be enforced. Lenders have that amount of time to update technologies, evolve business practices, alert clients and third-party vendors and comfortably practice new Bureau standards.
The cost of doing business – origination, servicing, closing, etc. – will continue to increase as lenders adopt and evolve processes to comply with CFPB rulemakings. These costs are being passed onto the consumer to guarantee their safety and the safety of their money; something they have no direct control over.
DocuTech’s recent closing cost study reveals that closing costs have increased 0.4 percent from December 2012 to March 2013, following a 0.5 percent decrease experienced from April to November 2012. As the industry continues to adapt, consumers will begin to front the extra costs.
If lenders are not equipped to handle new compliance processes, outsourcing to a vendor that specifically focuses on these areas will ensure compliance standards, updates and performance are adequate and accurate. Predatory lending and loan documentation are common compliance areas that are outsourced, however third-party relationships are closely monitored by the CFPB and will result in fines if not managed responsibly.
Compliance costs will automatically increase for a business and the borrower if a compliance violation occurs. Time is money and money is time when facing regulators and the processes they demand. Audits are undoubtedly expensive that will consume all internal and external compliance resources until completion; which adds further complication and time consuming tasks in your daily business practices.
Focus on your internal compliance management process – does your business have one? If not, consider a well-respected third-party vendor to handle the work. An experienced compliance staff – in-house or outsourced – will monitor, update and implement regulatory changes so that your everyday routine doesn’t have to include reading the CFPB’s website. Select a vendor that will reduce your costs and focus on the areas of expertise in which your consumers need.
Mr. Gooch’s posts are available each month online at www.nationalmortgagenews.com. Read April’s full post here.
May 13th, 2013
As the cost of originating a loan has increased in 2013, consumers are shouldering more closing costs. In its quarterly study on closing costs, DocuTech found that the median closing costs in Q1 2013 increased by 0.4 percent from December 2012 to March 2013. Closing costs had decreased by 0.5 percent from April to November 2012.
“Overall, settlement charges are still down from a year ago. However as reported by a recent Mortgage Bankers Association (MBA) study, the cost of origination has slightly increased,” said Scott K. Stucky. “A large part of that increase is lenders spending more money on compliance costs due to changing regulations within the industry – with these costs now being passed onto the borrower.”
In December 2012, the median settlement charge was 2.561 percent of the loan value. The charges continued to increase each month until it reached 2.940 percent in March 2013. These findings are a part of a quarterly effort to highlight how changes in the mortgage industry are impacting the cost for consumers to obtain a mortgage.
“We are starting to see firsthand through our quarterly tracking reports of our nationwide lender base that it’s not just the typical originator, servicer or lender feeling industry change; the consumer is beginning to feel it in their wallet too,” said Stucky. “The uncertainty looming in the industry will continue to have a direct correlation onto the consumer until a level of confidence is reinforced and implementation dates take effect.”
May 12th, 2013
Among the more than 2,530 pages of final rules (and their analyses, history, and commentary) promulgated by the Consumer Financial Protection Bureau (CFPB), pursuant to the requirements of the estimated 920 page Dodd-Frank Wall Street Reform and Consumer Protection Act (124 Stat. 1376 ), there are three regulations which take effect on June 1, 2013. The three regulations, applicable to transactions subject to Regulation Z, are:
The Compliance and Legal staff at DocuTech have been working diligently to ensure that, where applicable to the disclosure aspect of a mortgage transaction, clients will be in compliance with these new regulations when they take effect. The following provides a summary of these new regulations and what DocuTech is doing to modify its system and documents to help clients comply with them.
The new regulations affecting higher-priced mortgage loans (HPMLs) are promulgated in 78 FR 4726 (with proposed, clarifying rules set forth in 78 FR 23171). These rules revise Subsection (a), (b), and create a new Subsection (d) of 12 CFR § 1026.35 and changes certain aspects of HPMLs substantively.
The CFPB summarizes their new rules as having three main elements: (1) changing the general requirement that an escrow account be maintained for first lien HPMLs for one year to requiring it for five years; (2) providing an exemption to the escrow account requirement for small creditors who operate predominately in rural or underserved areas; and (3) certain exemptions for escrowing insurance premiums for condominium units wherein the subject property is covered by a master insurance policy (see 78 FR 4726).
Other changes include a more streamlined regulatory structure for determining whether a loan is a HPML or not and a reiteration of the prohibition against structuring a loan to be an open-end credit plan in order to evade the provisions of the section.
In regards to escrow accounts, the current version of the regulations require that an escrow account for the payment of taxes and certain insurance premiums be establish for HPMLs secured by a first lien on the consumer’s principal dwelling and that such an account should be maintained for at least one year (see current 12 CFR § 1026.35[b]). Specifically exempt from this requirement are:
The following are also exempt from this requirement, since they cannot be considered HPMLs (see current 12 CFR § 1026.35[a]):
Under the new regulations, these exemptions are largely left intact. There are, however, a few differences. The exemption applicable to condominium units concerning the escrowing of insurance premiums has been expanded to also include planned unit developments (PUDs) and other common interest communities.
In addition, the general exemption towards bridge loans, construction loans, reverse mortgages, and HELOCs no longer exists under the new regulations – meaning that they can be considered HPMLs (except HELOCs, since the definition of a HPML restrict HPMLs to closed-end transactions). These exempt transactions are now, however, specifically exempt from the escrow account requirements, thus this difference is largely one of regulatory structure.
The one major difference is the inclusion of a new exemption which applies not to the nature of the loan, but to the nature of the creditor. A creditor is exempt from establishing an escrow account if all of the following apply:
However, such a creditor is not exempt if there is a commitment to sell the loan to another person who is not also exempt.
The proposed clarifying rules aforementioned would also include a new, temporary Subsection (e), which would reiterate the current prepayment penalty prohibitions and repayment ability requirements currently set forth in 12 CFR § 1026(b)(1) & (b)(2), which are deleted under the final version of the rules. This Subsection (e) would be in effect between June 1, 2013 and January 10, 2014, when these provisions would be substantively replaced by new 12 CFR § 1026.43.
No new disclosures are required or necessitated by these new rules. DocuTech does, however, provide a data integrity check for HPMLs submitted through the ConformX system, to determine whether an escrow account will be established for the loan or not. If an account is not being established, then a so-called “hard stop” warning is triggered which alerts clients of the fact that Section 35 of Regulation Z requires that an account must be established.
DocuTech is planning on updating its data integrity check to reflect these new, yet few, changes. One change is to include a check as to whether the loan is secured by shares in cooperative property. We will also be adding prompts informing clients of the exemption to “rural creditors.”
The new rules promulgating the prohibition of mandatory arbitration provisions were snuck into the final rules concerning loan originator compensation which generally take effect in January, 2014, although the prohibition on arbitration provisions takes effect six months earlier. This prohibition is promulgated in 78 FR 11280 and will be codified as new 12 CFR § 1026.36(h).
This prohibition covers two subjects, which are set forth in two subsections. The first subject prohibits arbitration clauses, as follows:
“A contract or other agreement for a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not include terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction. This prohibition does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.” (12 CFR § 1026.36[h])
The second subject further prohibits inclusion in any contracts or agreements of clauses that would bar a consumer from “his day in court,” as follows:
“A contract or other agreement relating to a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law. This prohibition does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.” (12 CFR § 1026.36[h])
DocuTech has researched all of the documents in its library and determined that all of its generic disclosures do not violate these prohibitions. There are some Department of Housing and Urban Development (HUD) forms which are given in connection with so-called Section 203(k) mortgages in which HUD suggests that the borrower should include a binding arbitration provision in contracts with the contractors performing the rehabilitation work on the subject property (see form HUD-92700-A). However, such contracts are not ones made for a consumer credit transaction (i.e. they are for performing construction work), so HUD’s encouragement for an arbitration provision in such contracts does not run contrary to the new prohibition.
The only generic document which will be affected by this change is the Maryland DLLR Disclosure (Cx13900), given pursuant to Md. Code Regs. 09.03.10.03(B)(3) (2013), which contains a notice (among others) informing and cautioning the borrower that their loan contains a provision concerning mandatory arbitration (which language only prints where a client has requested it). Because this notice will no longer apply to any loans submitted through the ConformX system, we will be configuring this notice to no longer print for any clients. Other notices in Cx13900 concerning balloon payments and additional payments will continue to print, when applicable.
We have also researched custom documents which contain arbitration clauses, which may or may not be in violation of this new prohibition. We will be contacting clients who use these documents, informing them about this new restriction on their business practice, and inquiring as to whether they would like any changes made to these documents or not.
Like the prohibition against mandatory arbitration, the new rules prohibiting the financing of single-premium credit insurance were snuck into the final rules concerning loan originator compensation in 78 FR 11280. This prohibition will be codified as new 12 CFR § 1026.36(i).
Also similar to the prohibition against mandatory arbitration, this prohibition is divided into two subsections. The first sets forth the prohibition, as follows:
“A creditor may not finance, directly or indirectly, any premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling). This prohibition does not apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis.” (Ibid. § 1026.36[i])
The second subsection provides a definition of “credit insurance” – as well as a caveat to the prohibition, as follows:
“For purposes of this paragraph (i), ‘credit insurance’:
(i) Means credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract, but
(ii) Excludes credit unemployment insurance for which the unemployment insurance premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the unemployment insurance premiums, and the unemployment insurance premiums are paid pursuant to a separate insurance contract and are not paid to an affiliate of the creditor.” (Ibid. § 1026.36[i])
Taken together, this new rule basically prohibits the financing (not charging) of any up-front premiums for credit insurance, except for credit unemployment insurance when the premiums are reasonable, the creditor receives no compensation in connection with the premiums, and the premiums are paid pursuant to a separate contract than the loan contract.
DocuTech has conducted a search of our disclosures (particularly state disclosures) and determined that none of them require changes in connection with this rule. Most of these disclosures deal with matters besides the premiums of the credit insurance (e.g. the rights of the consumer to choose their own insurance agent). What few which do specify the premiums of the credit insurance do not contain any stipulations that the premiums will be financed by the creditor.
DocuTech is prepared and ready for the first of the massive wave of changes created by Dodd-Frank and in helping to ensure that its clients may continue to perform their trade with little-to-no problems from Federal agencies and auditors.
DocuTech is also preparing for the other upcoming changes taking effect in January, particularly the ones that effect disclosures, such as the new appraisal rights disclosures and list of homeownership counselors, and will be posting updates concerning what actions will be taken.
April 7th, 2013
March’s National Mortgage News Compliance Matters blog post, written by Fred Gooch, general counsel and vice president of Compliance, was a continuation of February’s blog post that took a look at the first three Consumer Financial Protection Bureau (CFPB) announced rules. March’s post focused on the next two CFPB rules that are effective June 1, 2013: Escrow requirements for HPML’s and LO Comp amendments found under § 1026.36(h) and (i).
The CFPB has addressed lenders’ wrongful steering of borrowers into loans they could not afford to pay back through its Ability-to-Repay rule. Prior to the establishment of this rule, originators were making loans without considering the borrower’s ability to repay and selling loans that were not in the consumer’s best interest. The LO Comp Reform rule’s intention is to set standards and require originators to meet certain qualifications in order to practice in the industry and to ensure they are not compensated based on certain loan terms.
The industry has already seen a decrease in the number of loan originators due to the education and licensing requirements that have become more extensive. A simple shift in market forces has also caused a decrease in loan originators. Originators with good skills and strong business ethics have been able to weather the mortgage crisis and the influx of recent CFPB regulations.
Under amendments §1026.36(h) and (i) of the LO Comp Reform rule, mandatory arbitration clauses and the wavering of consumer rights are prohibited as well as financing premiums and fees for credit insurance. In the past, mandatory arbitration has not been common among most lenders, so this new regulation will have minimal impact. However, this amendment will ensure that consumers will not be able to waive their day in court if they choose to proceed with legal action and sue their lender. The CFPB is also declaring it illegal for creditors to force borrowers to waive their rights, but it will still allow credit insurance to be paid on a monthly basis. However, the Bureau will no longer allow lenders to have it financed into the loan.
Higher-priced mortgage loans (HPML) have faced scrutiny in the past due to its higher rates and fees than non-HPML. A typical escrow account – including funds for insurance, property taxes and fees – has always been maintained by the lender. Escrow Requirements under the Truth in Lending Act (Regulation Z), states that creditors are currently required to establish escrow accounts for HPML secured by a first lien on a principal dwelling. Under this new regulation, borrowers are required to have an escrow account on their HPML for at least five years, as opposed to the past regulation of one year.
In order for lenders to maintain compliance, they will need to implement policies and procedures to ensure their HPML with an on or after June 1 application date has an escrow account for at least five years. Lenders should check with their document and compliance vendors well before the deadline to run tests guaranteeing their software is up-to-date with the new rule.
April 7th, 2013
Richard Cordray, the Consumer Financial Protection Bureau (CFPB) director, reiterated at a recent Consumer Advisory Board Meeting in February the Bureau’s efforts on how to improve the way consumer financial markets operate for the American people – specifically focusing on holding financial institutions accountable for its service providers’ actions.
Financial institutions must do their research when choosing to contract with a vendor. Identifying the type of relationship the bank wishes to contract with the vendor will set the stage as to how the two will operate day-to-day. The reputation, experience, effectiveness, security and products are all factors financial institutions must consider when establishing a vendor relationship. Different size vendors are able to offer different capabilities that might or might not fit a financial institution’s business goals or meet customer demands or standards.
However, third party relationships do not come without risk. Updates and details simply fall through the cracks and can damage the relationship, compromise compliance and cost money. Constructing a remediation action plan, and having it ready for deployment at any given minute in the event of a crisis or compromised situation, will address the issue from both sides and keep the bank’s and vendor’s strategies and takeaways in mind. Separate, yet cohesive crisis communication plans to address how the issue arose, how each party will initiate efforts to resolve it and how they will overcome it, will make for a stronger relationship that is capable of overcoming unforeseen problems.
Constant lines of communication between a financial institution and its third party vendors is the only dependable way to guarantee objectives are met, regulatory changes are addressed and associates are aware of updates and strategy shifts. Vendors should notify the financial institution associates directly associated with maintaining the relationship of all regulatory changes and document revisions to ensure compliance. Individual changes are frequent, time consuming and require adherence by a set deadline. Monitoring and assessing the status of the relationship, as well as guaranteeing both parties are in line with governing bodies’ standards will compose a fluid relationship.
Read the full article: “Maintaining Compliant Third Party Vendor Relationships”
March 10th, 2013
Could the CFPB be worried that its ability-to-repay/qualified mortgage rule is already contracting the availability of mortgage credit? In his remarks earlier this week to the Credit Union National Association, Director Richard Cordray told mortgage executives that “the current mortgage market is so tight that lenders are leaving good money on the table by not lending to low-risk applicants seeking to take advantage of the current favorable interest rate climate.”
Commenting that “plenty of responsible lending remains available outside of the Qualified Mortgage space,” Mr. Cordray stated that the CFPB “encourage[s] you to continue to offer mortgages to those borrowers you can evaluate as posing reasonable credit risk.” He also urged executives to overcome their concerns about regulatory scrutiny. Stating that they may be “initially inclined to lend only within the Qualified Mortgage space, maybe out of caution about how the regulators would react,” Mr. Cordray told the executives they “should have confidence in your strong underwriting standards, and you should not be holding back.”
Perhaps recognizing that, despite his encouragement, his audience might remain reluctant to lend “outside the Qualified Mortgage space,” Director Cordray also described the increased flexibility available to smaller banks under the QM rule. In particular, he noted the rule’s extension of qualified mortgage status to certain balloon loans held in portfolio by smaller banks operating in rural or underserved areas and the further exemptions the CFPB has proposed to liberalize the qualified mortgage standard for portfolio loans made by smaller banks. He also discussed the exemptions for smaller banks in the CFPB’s new mortgage servicing rules.
Overlooked in Director Cordray’s remarks is the main reason smaller banks and the industry overall will be reluctant to make residential mortgage loans other than QMs. While industry members are concerned about how the CFPB and banking regulators will assess them for compliance with the ability-to-repay rule, the main concern is private lawsuits and claims that will be brought when a lender seeks to foreclose. As adopted, the rule creates significant risk for a lender that operates outside of QMs. While lenders may ultimately be able to defeat many claims, the cost of winning will be expensive. Rather than having to defend against such claims, industry will want to avoid such claims to the extent possible by not making loans outside of the QM safe harbor.
March 10th, 2013
DocuTech announced in February that the median closing cost among the company’s nationwide lender base decreased by 0.5 percent on a baseline from April to November 2012. The findings are the first of a quarterly tracking effort to highlight how changes in the mortgage industry are impacting the cost for consumers to close loans.
In April 2012, the median closing costs of all loans with disclosure and closing documents generated through DocuTech’s system was 3.112 percent of the loan value. Following a small uptick in May, reaching 3.176 percent, the median closing cost dropped each month settling into a low during November at 2.521 percent.
“With the many fees and points associated with closing costs, as well as constant regulatory changes, the consumer is sometimes faced with higher settlement charges than they previously anticipated,” said Scott K. Stucky, chief operating officer. “With the quarterly disclosure of these statistics, we seek to reveal various trends in settlement charges to highlight the upfront costs associated with closing loans and how industry changes impact the consumer.”
DocuTech is able to track the closing costs through the strong integrations between its document compliance system, ConformX, and lenders’ loan origination software. The data files are transmitted from the lender to DocuTech through the loan origination system to generate the documents. As such, DocuTech has access to a significant amount of financial data regarding mortgage lending transactions including all of the fee and collateral information.
“A decrease in price when dealing with loans is never a bad thing,” said Stucky. “This steady decline should ease the industry’s level of uncertainty with the CFPB set to announce new rule requirements for the remainder of 2013.”
March 10th, 2013
DocuTech has continued its company expansion to meet the growing demands of its partners, customers and the industry by hiring nine new employees in the first couple months of 2013 to support larger lender customers and enhance compliance capabilities.
The new employees contribute to the company’s continued success in the Implementation, Professional Services and Support teams. A majority of the additional work is due to several of the industry’s largest lenders becoming new clients in recent months. Furthermore, DocuTech continues to invest in its products and services with innovative product expansion initiatives.
“The mortgage industry is continuing to develop new regulations that complicate compliance, causing many lenders to look for third party assistance to manage the compliance of documents and disclosures,” said Scott K. Stucky, chief operating officer. “DocuTech continues its rapid growth each quarter, year after year, having realized and met the needs for compliance and documentation experts in the industry.”
DocuTech’s continued presence in its headquarters of Idaho Falls has contributed to the local economy by hiring six of the nine new employees from the local area. Stucky adds that with the company’s local and national breadth, implementation specialist roles are crucial to the company’s continued expansion beyond 2013.
“Implementation, Professional Services and other roles are continuing to be created and filled to meet our thriving partner and customer growth,” said Stucky. “DocuTech will continue to expand its staff, services and products into 2013 due to the regulatory and compliance shifts within the industry.”
February 12th, 2013
Last month marked the one-year anniversary of the designated transfer date of authority to the Consumer Financial Protection Bureau (CFPB) that took place on Jan. 21, 2012, when President Barack Obama appointed Richard Cordray as director of the CFPB in a controversial recess appointment. The CFPB was required by the Dodd-Frank Act to release several final rules within one year from this date. Three final rules were released on January 10, 2013, followed by the other four promised final rules on January 22; one day later than the one-year anniversary due to a national holiday.