Massachusetts Bankers Association Consumer Mortgage Lending Annual - - PowerPoint PPT Presentation

Massachusetts Bankers Association Consumer Mortgage Lending Annual Review 2003

Stanley V. Ragalevsky Stephen E. Moore Sean P. Mahoney 617.261.3100 www.kl.com

2

ECOA and Regulation B

Mandatory Compliance Date – April 15, 2004

Notice of Adverse Action is required unless substantially all of the bank’s customers for the loan product are affected by the bank’s action Pre-approvals constitute an application when the bank receives sufficient information to make a decision on the request for pre-approval for a loan Gathering of information with respect to a customer’s race, national origin, etc. is now permitted for non-mortgage credit if the bank is using it to self-test its compliance

3

Mandatory Compliance Date – April 15, 2004

ECOA and Regulation B

Effective January 1, 2004, when gathering information for a home mortgage/home equity loan, bank must use the term “ethnicity” when asking for the national origin or race of the applicant FNMA/FHLMC Uniform Residential Loan Application has been changed to conform to this requirement Banks must retain records with respect to pre- screened programs for twenty five months Any disclosure or information required to be provided in writing must be made in a clear and conspicuous manner and, with a few exceptions, in a form that the applicant may retain

CONTINUED

4

ECOA and Regulation B

Effective May, 2004

Impact of same sex marriages on rules prohibiting discrimination based on marital status

• Creditors must not take into account the fact that

applicants who have married may be of the same sex in Massachusetts

CONTINUED

5

HMDA / Regulation C

Regulation C was amended in 2002 to

make a number of significant changes in reporting and data collection obligations

The 2002 Regulation C Amendments

were originally scheduled to take effect

• n January 1, 2003 but implementation

was delayed until January 1, 2004

6

HMDA / Regulation C

New January 1, 2004 reporting

requirements should have been included in reports submitted to federal supervisory agency by March 1, 2004

FFIEC has finally posted 2004

Preliminary Census Data which reflect 2002 Census information and new OMB census tracts

CONTINUED

7

HMDA / Regulation C

Covered Lenders

Nonbank lender volume test

• Nonbank lender (i.e., mortgage company) is now

subject to Regulation C reporting if their home mortgage originations exceeded 10% of their total loan originations or $25,000,000 in the prior year

CONTINUED

8

HMDA / Regulation C

New Data Reporting Requirements

Rate Spread

• HMDA lenders must report the spread between a

loan’s APR and the yield on U.S. Treasury securities with a comparable maturity if the spread exceeds

• 3 percentage points on first mortgages
• 5 percentage points on subordinate mortgages
• Applies to originated mortgage loans
• Does not apply to purchased loans or non-

mortgage loans

CONTINUED

9

New Data Reporting Requirements

HMDA / Regulation C

HOEPA Status

• Home Ownership Equity Protection Act of 1994

(HOEPA) covers certain high cost mortgages whose APRs are more than 8 points over comparable Treasury Securities yields on a first mortgage and 10 points on a second, or points and fees exceed the greater of 8% of total loan amount or $499

• Lenders must now report whether a loan is

subject to HOEPA

• Applies to both originated and purchased loans

CONTINUED

10

New Data Reporting Requirements

HMDA / Regulation C

Lien Status

• Old rules required lender to identify whether a

loan was secured by a lien

• New rules require lenders to identify on the loan

application register whether a loan is secured by a first lien or second lien

• Applies only to originated loans

CONTINUED

11

New Data Reporting Requirements

HMDA / Regulation C

Manufactured Home Status

• Lenders must identify on the loan application

register whether a loan involves a manufactured home (i.e., choices are 1-4 family, manufactured housing or multi-family dwelling)

CONTINUED

12

HMDA / Regulation C

Pre-approval Requests as Applications

Under pre-January 1, 2004 rules pre- approvals were not reported Now pre-approvals may be subject to reporting Difference between “pre-approval” and “pre-qualification ”

• Pre-qualification (no binding obligation)
• Pre-approval (binding obligation to lend up to

specified amount made after credit underwriting)

CONTINUED

13

Pre-approval Requests as Applications

HMDA / Regulation C

Pre-approvals on home purchase loans are now reportable Lenders now required to identify home purchase loans where a pre-approval request was involved Denials of pre-approval requests must be reported like a denial of an application Optional reporting of pre-approval requests approved by a lender but not accepted by the applicant

CONTINUED

14

HMDA / Regulation C

Borrower Information Changes Applicant Information — Race and Ethnicity

Race and national origin categories simplified to conform to revised OMB Guidelines New “ethnicity” category added Hispanic or Latino “Hispanic” and “other” deleted from race categories Pacific Islanders and Native Hawaiians differentiated from “Asians” Applicant can select more than one race

CONTINUED

15

HMDA / Regulation C

Changes to Definitions

Refinancing

• Refinancings of home purchase and home

improvement loans are reportable

• Pre-January 1, 2004 refinancing was a loan that

satisfied and replaced an existing loan from the same borrower

• Effective January 1, 2004, the definition of what

is a refinancing narrows by requiring that both the

• riginal and the new loans be secured by a

dwelling

CONTINUED

16

Changes to Definitions

HMDA / Regulation C

Home Improvement Loan

• Prior to January 1, 2004, a “home improvement

loan” for Regulation C purposes was a loan to improve a dwelling which was classified by the lender as a home improvement loan

• Effective January 1, 2004, a loan which is to

improve a dwelling and is secured by a mortgage lien must be reported on the loan application register even if the lender does not classify it as a home improvement loan

CONTINUED

17

FNMA / FHLMC Changes

Effective January 1, 2004, FNMA and

FHLMC amended the Uniform Residential Loan Application (Form 1003)

2004 changes reflect

• Section 326 of USA PATRIOT Act Customer

Information Program Modifications

• Date of birth, not age
• Mailing address
• Various HMDA changes

18

FNMA / FHLMC Changes

FHLMC / FNMA Loan Limits for 2004

increased to:

$333,700 – 1 Family $427,150 – 2 Family $516,300 – 3 Family $641,650 – 4 Family

CONTINUED

19

FCRA and the FACT Act of 2003

Effective 12/31/03 FCRA was amended to

preempt state laws regulating information sharing among affiliated companies

FCRA will prohibit the sharing of consumer

information with affiliates for marketing purposes unless the consumer has been given notice and an opportunity to opt out

Lenders will be required to provide “Risk-Based

Pricing Notices” to consumers who receive materially less favorable credit terms based on information in a consumer report

20

FCRA and the FACT Act of 2003

Banks will be required to disclose credit scores

to residential mortgage loan applicants

New policies and procedures will be imposed

• n banks that furnish information to consumer

reporting agencies

Once a bank has been notified that a debt was

created through identity theft:

it will be restricted from selling or transferring such debt it is not permitted to report such information to third parties including consumer reporting agencies

CONTINUED

21

FCRA and the FACT Act of 2003

Banks will be required to furnish a notice

to consumers whenever the bank reports negative information about the consumer to nationwide consumer reporting agencies

FCRA will prohibit banks from obtaining

• r using medical information for

determining a consumer’s eligibility for credit

CONTINUED

22

FCRA and the FACT Act of 2003

Most provisions will not become effective until

regulations have been issued by the Federal Trade Commission and Federal Reserve Board

Recently the Agencies set the effective date for

the preemption rules at December 31, 2003, March 31, 2004 for certain rules that do not require new policies and procedures and December 1, 2004 for all other rules

It is expected, however, that some of the

regulations will set a later effective date for certain requirements

CONTINUED

23

TILA and Regulation Z

Changes to official commentary effective April

1, 2003 with compliance date of October 1, 2003

Fees for expediting a single payment on a credit account are not finance charges, nor “other charges” Fees for expediting delivery of a credit card are not finance charges nor “other charges” The issuance of more than one card when a credit card expires is permitted but conditions on issuance

• f more than one renewal credit card are imposed

24

Changes to official commentary effective April

1, 2003 with compliance date of October 1, 2003

TILA and Regulation Z

Mortgage guaranty insurance payments must be set forth in the payment schedule for closed-end loans Clarifying language relating to the applicable treasury security rate for determining whether a loan is a high cost loan subject to the provisions of HOEPA

CONTINUED

25

Servicemembers Civil Relief Act of 2003

Servicemembers Civil Relief Act of 2003

(“SCRA”)

Public Law 108 – 189 (50 USC App. 501- 596) Revises Soldiers’ and Sailors’ Civil Relief Act

• f 1940 (“SSCRA”)

Took effect December 19, 2003 Generally broadens protections of SSCRA

26

Servicemembers Civil Relief Act of 2003

Persons Protected by SCRA

Servicemembers called to active duty Members of U.S. armed forces (Army, Navy, Air Force, Marines, Coast Guard, Public Health Service) Members of National Guard called to active service

• For more than 30 consecutive days
• To respond to certain national emergencies
• Certain protections granted to “dependents” (i.e, spouses

and children) of servicemembers

• Some protections available to persons secondarily liable on

servicemember obligations

CONTINUED

27

Servicemembers Civil Relief Act of 2003

Period of Protection

Generally during and shortly after the period of military service

Waiver of Protection

Servicemember can waive any rights under SCRA

• The waiver must be in writing and refer to the legal

instrument to which it applies

Persons secondarily liable for a servicemember’s

• bligations can waive

Must be in writing and be separate from the

• bligations to which the waiver applies

CONTINUED

28

Servicemembers Civil Relief Act of 2003

Protections

Maximum interest rate (50 USC App. 527) Capped at 6% per year on obligations incurred before period of military service Extends though period of military service Applied only to obligations incurred solely by servicemember or jointly with spouse Interest in excess of 6% must be forgiven and payments reduced by amount of forgiven interest

CONTINUED

29

Protections

Servicemembers Civil Relief Act of 2003

Servicemember must provide lender with written notice and copy of orders to military service within 180 days after release from military service to get benefit of statute Creditor can petition court to allow it to accrue interest at a rate in excess of 6% per year if the servicemember’s ability to pay interest in excess of 6% is not materially affected by his/her military service

CONTINUED

30

Servicemembers Civil Relief Act of 2003

No Penalty for Exercising SCRA Rights

Lender cannot punish a servicemember for exercising his/her SCRA rights as a basis

• To deny credit to him in the future
• To issue adverse credit report in the future
• To note he/she is a member of the National

Guard or reserves in his/her credit record

CONTINUED

31

Servicemembers Civil Relief Act of 2003

Default Judgments

Default judgments for nonpayment of debts in civil actions against servicemembers who do not make an appearance are more difficult to obtain Affidavits as to military status required Court must appoint attorney for a defendant who “appears” to be a servicemember Non-appearing defendant also has right to stay an action or to reopen any adverse judgment

CONTINUED

32

Servicemembers Civil Relief Act of 2003

Stay of Pending Actions

A servicemember with notice of a civil proceeding can have it stayed until after his/her period of military service is over

Fines and Penalties under Contracts

Late charges, default interest and other penalties for non-performance under contracts are prohibited during any period of time an action against a servicemember has been stayed

CONTINUED

33

Servicemembers Civil Relief Act of 2003

Stay an Enforcement of Judgment

Court can stay the execution of a judgment or an attachment against a servicemember if his/her ability to comply with the judgment is materially affected by his/her military service

Evictions

Court order is required to evict a servicemember or his/her dependents during the period of military service if the premises are a primary residence with a rent of less than $2,400 per month

CONTINUED

34

Servicemembers Civil Relief Act of 2003

Installment Contracts

Terminating a contract for the sale or lease of personal property during a servicemember’s period

• f military service is generally prohibited

Repossession of auto loan collateral is prohibited Benefit of protection extends to dependents if their ability to comply with an obligation is materially affected by servicemember's military service Court can allow three disinterested parties to appraise the value of any collateral and order the creditors to pay any equity to servicemember or his/her dependents

CONTINUED

35

Servicemembers Civil Relief Act of 2003

Mortgages

Creditor cannot foreclose a mortgage of a servicemember during the period of military service

• r within 90 days thereafter without a court order or

waiver agreement Criminal penalties for any creditor who knowingly violates this prohibition

Co-defendants

Allows creditors to pursue co-borrowers who are not servicemembers Should only be done with the approval of court

CONTINUED

36

Servicemembers Civil Relief Act of 2003

Statute of Limitations

Statutes of Limitations against servicemembers are tolled during period of military service

Further Relief

“Catch all” provision allows servicemember to apply to a court anytime during the period of military service or within 180 days thereafter for relief from any obligation or liability incurred before the period

• f military service

CONTINUED

37

Do Not Call Registry

New FTC regulations may not apply to

banks, but identical FCC regulations do apply to banks

Regulations being challenged in court by

telemarketing industry

Significant exception for persons with

whom the bank has an existing business relationship

38

Federal Flood Insurance

Temporary reauthorization to March 31,

2004

Effects of sunset uncertain

Increase limit of liability under Coverage

D to $30,000

Coverage for mitigation costs above normal cost of repair Amended 44 CFR Part 61 Effective May 1, 2003

39

Federal Flood Insurance

Change in premiums for Pre-FIRM

buildings

Increase in rates Elimination of “Expense Constant” Amended 44 CFR Chapter 1 and Part 61. Effective May 1, 2003

CONTINUED

40

RESPA and Regulations

No changes in the last year to the Real

Estate Settlement Procedures Act

One change to the RESPA Regulation

increase civil penalties for failure to provide an initial or annual escrow account statement from $55 to $65 for each violation maximum amount against any one servicer in any twelve-month period increased from $110,000 to $120,000

41

RESPA and Regulations

RESPA Reform

2002 HUD proposed changes to the RESPA regulation HUD indicated that it will continue to press forward on proposed changes which are

• Disclosures with respect to mortgage brokers

fees and yield spread premiums

• Certain types of guaranteed mortgage packages

would be allowed and exempt from the anti- kickback rules of RESPA

• Changes to good faith estimates to provide

clearer disclosures and limitations on changes

42

RESPA Litigation

Upcharges of Fees

Issue is whether a lender can charge more for a service than the provider of the service charges Cases decided in 2003 in the 7th and 11th Circuits hold that the lender can upcharge if

• lender provides services and
• the charge is reasonable based on the services

provided

If the lender provides no service, the fee would violate RESPA

43

RESPA Litigation

Yield Spread Premiums

Issue is whether the payment of yield spread premiums violates the anti-kickback rules of RESPA Issue has not been resolved

• 11th Circuit ruled last April that yield spread

premiums did not violate RESPA

• Other cases are yet to be decided and the issue

not yet resolved

CONTINUED

44

Community Reinvestment Act

On February 6, 2004, the federal bank

regulatory agencies proposed revisions to their CRA regulations

Proposal 1 — Regulatory Burden Relief

• Amend the definition of “small institution”
• Increase Eligibility for Streamlined CRA Exam from

banks with $250 million in assets to banks with $500 million in assets

• If adopted, 1,100 additional banks would qualify

for the streamlined “small bank” CRA examination

45

Community Reinvestment Act

Proposal 2 — Predatory Lending

• Require examiners to consider whether a bank is

engaged in “predatory lending” when determining its CRA grade (discriminatory, illegal or abusive credit practices or making of loans that the borrower cannot be expected to pay)

CONTINUED

On February 6, 2004, the federal bank

regulatory agencies proposed revisions to their CRA regulations

46

Appraiser Independence Guidelines

In general

October 27, 2003 — Bank supervisory agencies issued an “interagency guidance” on the independence of appraisal functions (FDIC FIL –84-2003) This “guidance” supplements the Interagency Appraisal and Evaluation Guidelines issued on October 27, 1994 (FDIC FIL-74-94) Guidance is intended to clarify what is required for an appraisal program to have the requisite independence

47

Appraiser Independence Guidelines

Appraiser Selection

A bank cannot allow a borrower to select an appraiser (even from a bank approved appraiser list) A bank cannot use readdressed appraisals (i.e., appraisal done for the borrower or other party and “readdressed” to the bank)

CONTINUED

48

Appraiser Independence Guidelines

Appraisal Independence within the Bank

Loan officer may not

• select or retain the appraiser – appraiser must be

hired by someone independent of the loan approval function

• perform in-house evaluations

Completed appraisals must be reviewed by someone independent of the loan approval process Loan officers should review appraisals but there must be an independent review

CONTINUED

49

Appraiser Independence Guidelines

Small Bank Rule

In small banks, it is often impossible to separate the appraisal and loan approval processes When this happens, anyone involved with the appraisal of a loan should abstain from voting on that loan

CONTINUED

50

Appraiser Independence Guidelines

Effective Real Estate Appraisal and

Evaluation Program

The Board is required to establish an effective real estate appraisal and evaluation program that contains

• Appraiser selection and evaluation procedures
• Procedures for appraiser independence
• Criteria for appraisals
• Timely receipt of appraisal
• Internal controls

CONTINUED

51

New Standards for Notaries in MA

Executive Order 455 signed December

19, 2003

Effective April 19, 2004 (originally

February 19)

Motivation

Fear of fraud by “Notario Publico” National security immigration concerns

52

New Standards for Notaries in MA

Major Changes

Satisfactory evidence of identity required Notary journal Attorney present at all real estate closings

Criticism

Journal error could invalidate mortgages Conflicting regulatory and statutory requirements Inspection of journals may lead to identity theft

CONTINUED

53

New Standards for Notaries in MA

Worst-Case Scenario

Bank takes mortgage on property Mortgage is notarized and filed Some time later (less than 10 years) debtor goes bankrupt Trustee discovers improper recording of mortgage notarization in notary journal Trustee challenges validity of mortgage filing

CONTINUED

54

USA PATRIOT Act

Part 326 Customer Identification Program

Regulations

Effective October 1, 2003 Require financial institutions to have customer identification program CIP requirements apply to loan customers CIP Regulations require banks to slightly modify their data collection on loans

55

Part 326 Customer Identification Program

Regulations

USA PATRIOT Act

Must collect date of birth information, not age Must collect a mailing address if different, from the present address PATRIOT Act changes have been picked up in the standard FHLMC / FNMA Form 1003 (Uniform Residential Loan Application)

CONTINUED

56

Predatory Lending/High Cost Loans

Fairbanks Capital Holding Corp.

settlement with FTC and HUD

$40 million dollars New concept of “predatory servicing”

• Failing to post payments on time
• Charging inappropriate late fees
• Inappropriately force-placing property insurance
• n mortgaged property

57

Predatory Lending/High Cost Loans

HOEPA update

Applicability trigger of total points and closing costs raised from $488 to $499 (or 8% of loan, if greater) Regulation C revised to clarify identification

• f Treasury Security to determine applicable

rate for whether a loan is a HOEPA loan

CONTINUED

58

Predatory Lending/High Cost Loans

New OCC regulations on debt

cancellation/suspension agreements

Disclosures required Must give consumer option of paying per month rather than single premium to be added to amount financed Either DCA allows consumer to terminate at will or bank must offer similar product that gives consumer this option

CONTINUED

59

The Preemption Debate

Introduction

The Supremacy Clause of the U.S. Constitution makes federal law the supreme law of the land (U.S. Const. Art. VI, cl. 2) Federal law preempts or supersedes contrary state and local laws In deciding whether a state law is preempted by a federal law, the Courts generally follow what they believe to be the intent of Congress – this can be quite complicated

60

The Preemption Debate

The Dual Banking System and

Preemption

Since the 1860’s the U.S. has had a dual banking system with national banks and federal savings and loan association chartered and regulated by the United States and local banks chartered and regulated by the states The financial services marketplace is becoming more nationalized every day

CONTINUED

61

The Dual Banking System and

Preemption

The Preemption Debate

National banks claim that they are regulated exclusively by federal law, not the laws of the various states National banks claim that state laws purporting to regulate their banking activities are preempted and therefore inapplicable to them

CONTINUED

62

The Dual Banking System and

Preemption

The Preemption Debate

State officials want to enforce state laws of all kinds, including laws designed to protect consumers OTS and OCC have been aggressive and are getting more so about preempting state laws which they say interfere with a federally chartered bank’s rights to operate interstate

CONTINUED

63

The Dual Banking System and

Preemption

The Preemption Debate

The states, their attorneys general and consumer groups claim that state laws of general application dealing with predatory lending, consumer protection and unfair and deceptive practices should apply to all banks

• perating within a state

CONTINUED

64

The Preemption Debate

The Debate Erupts

As states became more aggressive in efforts to subject federally chartered banks to state predatory lending laws, OTS ruled in 2002 that predatory lending laws in Georgia, New Jersey and New York were preempted On January 7, 2004, OCC issued a new regulation which asserted its preemption powers over sate laws in the broadest possible terms

CONTINUED

65

The Debate Erupts

The Preemption Debate

The OCC Preemption regulation allows a national bank to presume that certain categories of state laws which OCC has determined “obstruct, impair or condition” a national bank’s powers granted under federal law are preempted without seeking a prior determination to that effect from OCC

CONTINUED

66

The Debate Erupts

The Preemption Debate

State officials claim that the OCC Preemption regulation is overreaching States claim that OCC’s ability to preempt state laws only applied to state laws which significantly obstruct, impair or condition a national bank’s exercise of this powers granted under federal law

CONTINUED

67

The Debate Erupts

The Preemption Debate

Citing the U.S. Supreme Court’s 1996

• pinion in Barnett Bank v. Nelson, state
• fficials assert that their right to enforce state

predatory lending laws against national banks does not significantly interfere with their right to function as national banks States argue there is no compelling reason why national banks should be exempt from having to comply with legitimate state laws – state law does not conflict with federal law

CONTINUED

68

The Debate Erupts

The Preemption Debate

National banks counter by asserting that lending is a core banking activity for a national bank which only OCC has the right to regulate

CONTINUED

69

The Preemption Debate

Where does the Preemption Debate Go?

It is likely that the OCC will win the preemption debate with the states because the litigation process favors OCC The only way the states can win is to convince Congress to step in

CONTINUED

70

Where does the Preemption Debate Go?

The Preemption Debate

Preemption gives federally chartered banks advantages over state chartered banks because the federally chartered banks can ignore many state laws

• Important for banks actively doing business in

multiple states

• Easier for big players like WAMU to enter new

states — only one national set of consumer mortgage lending laws

• Less of an advantage for banks doing business in

a single state

CONTINUED

71

Where does the Preemption Debate Go?

The Preemption Debate

NY Attorney General Spitzer has brought a test case of OCC preemption powers against a subsidiary of a national bank

• Facts are egregious
• Lender collected 30 years of payments on a 25

year loan but when consumer objected, lender started foreclosure proceedings

• Why can’t NY enforce its consumer protection

laws against the lender?

• OCC’s primary goal is to protect banks not

consumers

CONTINUED

72

Where does the Preemption Debate Go?

The Preemption Debate

OCC generally has no comparable regulations for or track record of protecting consumers from overreaching by national banks Congressional action possible (but not likely)

• House Financial Services Committee has

expressed concern

CONTINUED

73

The Preemption Debate

Possible Solutions

Federal:

• Congressional cut back on OCC and OTS

preemption by requiring it to approve preemption

• f state consumer laws

State:

• States can repeal state laws preempted by OCC
• r OTS
• States can enact “super parity” legislation that

provides either automatic or regulatory override

• f state laws that do not apply to federally

chartered institutions

CONTINUED

74

Massachusetts Legislation — 2003

No major developments

Nuciforo Banking Recodification Bill (Senate 2045) pending

• Rework G.L. c.167E
• Loan Policy largely replaces loan powers

Quinn Bill not adopted

75

Proposed Quinn Bill (H2732, 2003)

Would limit prepayment fees in the first

24 months of a mortgage loan and prohibit them after that time

Would require disclosures relating to

prepayment fees

Would limit points and loan fees to 5% of

the principal amount of a mortgage loan

76

Proposed Quinn Bill (H2732, 2003)

Would prohibit loans made without a

determination of the borrower’s ability to repay the loan if the borrower’s income is less than or equal to 120% of the median family income in the relevant metropolitan statistical area

Borrowers would be presumed to have ability to repay loan if the monthly payments would be less than 50% of the borrower’s monthly gross income

CONTINUED

77

Proposed Quinn Bill (H2732, 2003)

Would prohibit financing credit life or

credit disability insurance premiums with the proceeds of a mortgage loan

Would prohibit default rates of interest on

home mortgage loans

CONTINUED