Archive for category Compliance News Alert

By Richard J. Andreano, Jr., On February 5th, 2013
Reprinted With Permission From Ballard Spahr Posted In CFPB Monitor

Posted in CFPB Rulemaking, MortgagesOn May 29, 2013, the CFPB adopted amendments to the final ability to repay rule. The CFPB had proposed the amendments on the same day that it issued the ability to repay rule in January 2013. The amendments are effective on January 10, 2014, the same date that the ability to repay rule becomes effective.

Among other changes, the amendments:

• Carve out from the inclusion of loan originator compensation in points and fees, the compensation paid by a mortgage broker to an employee loan originator and the compensation paid by a creditor to an employee loan originator. Although the CFPB had proposed to tie the ability to exclude compensation paid by a creditor to an employee loan originator to the amount of origination fees imposed by the creditor, the CFPB decided to simply exclude the compensation from points and fees without conditions. Compensation paid by a consumer or creditor to a mortgage broker will still be included in points and fees.
• Create a broader qualified mortgage for small creditors. The small creditor qualified mortgage is not subject to the strict 43% debt-to-income limit that applies to the general qualified mortgage. Also, the small creditor qualified mortgage is eligible for the safe harbor as long as the annual percentage rate does not exceed the applicable average prime offer rate by 3.5 or more percentage points for a first or subordinate lien loan. In contrast, the general qualified mortgage is eligible for the safe harbor only if the annual percentage rate does not exceed the applicable average prime offer rate by 1.5 or more percentage points (3.5 percentage points for a subordinate lien loan). To be a small creditor, a creditor must have assets less than $2.0 billion and make (together with its affiliates) 500 or fewer first lien loans per year that are subject to the rule.
• Create a transition period in which small creditors may make balloon qualified mortgages even if they do not satisfy the requirement that most of their transactions subject to the rule are made in rural or underserved areas. The transition period will end January 10, 2016. Balloon qualified mortgages also will be eligible for the safe harbor if the annual percentage rate does not exceed the applicable average prime offer rate by 3.5 or more percentage points for a first or subordinate lien loan. During the transition period the CFPB intends to assess whether the definitions of “rural” and “underserved” should be modified, and to work with small creditors to transition to alternative products, such as adjustable rate loans.
• Exempt from the ability to repay rule are loans:
• Made by a housing finance agency, or by private creditors pursuant to a program administered by a housing finance agency.
• Made by certain community development creditors and certain non-profit creditors, subject to conditions.
• Made pursuant to certain homeownership stabilization and foreclosure prevention programs authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 (12 USC 5211, 5219), such as a State Hardest Hit Fund program.

The CFPB decided not to adopt a proposed exemption for a refinance loan made pursuant to an eligible targeted refinancing program and that was eligible to be purchased for Fannie Mae or Freddie Mac while they remain in conservatorship. The exemption would have covered HARP loans.

May’s “Compliance Matters” blog post, written by Fred Gooch, general counsel and vice president of Compliance, takes a closer look at maintaining vendor relationships under the Consumer Financial Protection Bureau’s (CFPB) unprecedented and stringent vendor management policies. The goal of this new mandate is to ensure financial institutions are communicating and monitoring their third party relationships, and also have effective policies in place to guarantee its vendors are complying with consumer protection laws.
A lender cannot delegate its responsibility for ensuring compliance by outsourcing to a vendor – it simply assumes the vendor’s in addition to their own. A CFPB bulletin (2012-03) and subsequent enforcement actions, make it clear the Bureau will hold lenders responsible for the actions of their vendors. The CFPB expects all lenders to implement a comprehensive compliance management system. It considers oversight of affiliate and third party service providers to be a key component of an effective compliance management system. Vendor management guidelines are not a new issue for banks, but it is a relatively new requirement for other entities that are now regulated.

When comparing past vendor management guidance with current Bureau standards, it is important to note that guidance the Bureau provides expands the coverage and responsibility for vendor management to many other financial institutions. The prior guidance was focused on safety and soundness of financial institutions, while recent Bureau guidance is targeted on consumer protection – a focus that is consistent with their purposes and goals.

The CFPB requires supervised entities to “oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer financial law.” Once you have identified your applicable service providers, consider how critical they are to your ongoing business, how to gauge the risks associated with their service and outline any potential contact the service provider will have with your customers. This analysis will help you determine the applicable level of supervision if necessary.

Effective supervision generally requires you to conduct thorough due diligence; Request and review the service providers’ policies, procedures, internal controls and training materials; Include terms in your contracts with vendors that provide clear expectations regarding compliance and contain enforceable consequences for compliance violations and unfair and deceptive practices; Establish internal controls for ongoing monitoring; and adopting processes and procedures that take prompt measures if problems occur.

Ensure your third party vendors are able to perform the services required in a manner that is in compliance with all applicable laws and in a way that is not deceptive or unfair to the consumer. Establish relationships with vendors that have a proven track record of success, are financially secure and have employees that are experts in their particular field with a commitment to adapting changing rules and requirements.

Mr. Gooch’s posts can be found online each month at www.nationalmortgagenews.com. Read the May “Compliance Matters” Full Post.

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.

By Timothy Raty, DocuTech Corporation – Regulatory Compliance Specialist

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 [2010]), there are three regulations which take effect on June 1, 2013. The three regulations, applicable to transactions subject to Regulation Z, are:

1. Revised requirements for higher-priced mortgage loans, particularly in regards to escrow accounts;
2. A prohibition against mandatory arbitration clauses; and
3. A prohibition on the financing of certain up front credit insurance premiums.

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.

New Higher-Priced Mortgage Loans Rules

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][3]). Specifically exempt from this requirement are:

1. Loans secured by shares in a cooperative; and
2. In regards to the escrowing of insurance premiums, loans secured by condominium units, where the condominium association is obligated to maintain a master policy of insurance (an escrow account is still required to be created and maintained for taxes, however).

The following are also exempt from this requirement, since they cannot be considered HPMLs (see current 12 CFR § 1026.35[a][3]):

1. A transaction to finance the initial construction of a dwelling;
2. A bridge loan with a term of twelve months or less;
3. A reverse mortgage transaction; or
4. A home equity line of credit (HELOC).

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:

1. During the preceding calendar year the creditor extended more than 50% of its total first lien, covered transactions on properties located in counties that are considered either “rural” or “underserved” (as practically determined by the CFPB in their proposed clarifying rules);
2. During the preceding calendar year the creditor (and its affiliates) originated 500 or fewer first lien, covered transactions;
3. The creditor had total assets of less than two billion dollars at the end of the preceding calendar year (this dollar amount adjusts each year);
4. Neither the creditor (or its affiliates) maintains escrow accounts that it currently services, other than: (a) accounts established between April 1, 2010 and June 1, 2013 pursuant to the current regulations; or (b) accounts established after consummation as an accommodation to distressed consumers.

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.”

Prohibition Against Mandatory Arbitration

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][1])

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][2])

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.

Single-Premium Credit Insurance

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][1])

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][2])

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.

Conclusion to the Beginning

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.

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”