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Patton Boggs Mortgage Banking Update - Week of January 4, 2010
January 4, 2010
Click here to download this update. [PDF]
Final Risk-Based Pricing Rule Issued
The Federal Reserve Board (Fed) and Federal Trade Commission (FTC) issued joint final rules in late December 2009 to implement the risk-based pricing notice requirement under the Fair Credit Reporting Act (FCRA). The final rules are effective on January 1, 2011.
Background
The risk-based pricing notice requirement was added to the FCRA by Section 311 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act). The FACT Act directs the Fed and FTC to jointly issue rules to implement the risk-based pricing notice requirement. The Fed and FTC (the “Agencies”) issued proposed rules in May 2008.
Section 615(h) of the FCRA, which contains the risk-based pricing notice requirement, provides that, subject to the rules adopted by the Agencies, if any person uses a consumer report in connection with an application for, or a grant, extension or other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through that person, based in whole or in part on a consumer report, the person must provide a notice to the consumer containing specified information. The FCRA uses the term “consumer report” to refer to what is more commonly known as a “credit report”.
Another FCRA provision (Section 609(g)) requires persons who make or arrange loans that use a credit score in connection with a residential mortgage loan application to provide the applicant with information regarding the applicant’s credit score and a prescribed form of credit score notice. This provision is already in effect. The risk-based pricing notice requirement under FCRA Section 615(h) applies to residential mortgage loans and other forms of closed-end and open-end credit that is primarily for personal, household or family purposes.
The final risk-based pricing rules are substantively identical, and compliance with either the Fed’s rule or the FTC’s rule constitutes compliance with the risk-based pricing notice requirements.
The requirements of the final risk-based pricing rules apply to the person to whom the credit obligation is initially payable. Assignees of credit obligations are not subject to the requirements of the final rule, even if the assignee funds the credit transaction. However, the Agencies explain that the parties to a credit transaction may determine by contract which party provides the notice.
As noted above, a key factor in triggering the notice requirement is that the credit be on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of the creditor’s consumers. The final rules primarily use the annual percentage rate as the material terms. The final rules also provide that the material terms would be materially less favorable to a consumer if the cost of credit to the consumer would be significantly greater than the cost of credit to another consumer. Factors relevant to this determination include the type of credit product, the term of the credit extension (if any) and the extent of the difference in the material terms.
The final rules establish different methods that a person may use to determine if a risk-based pricing notice is required. A person may on a case-by-case basis assess if a consumer has received material terms that are materially less favorable than terms other consumers have received from or through the person. The assessment would be performed by comparing the material terms offered to the consumer to the material terms offered to other consumers for a specific type of credit product. The Agencies recognize that engaging in such comparisons may not be operationally feasible and, therefore, they created alternative methods that persons may use to determine if a consumer must receive a risk-based pricing notice.
One alternative method is the credit score proxy method. Under this method, a creditor may establish a cutoff credit score at a point that approximately 40 percent of its consumers have higher credit scores and 60 percent of its consumers have lower credit scores. Consumers with the lower credit scores would receive the risk-based pricing notice. However, if more than 40 percent of the creditor’s consumers receive credit on the most favorable material terms, then the creditor could establish the cutoff score at the point at which the approximate percentage of consumers who historically have been granted credit, extended or provided credit on material terms other than the most favorable terms would the receive risk-based pricing notice.
Another alternative method is the tiered pricing method. Under this method, a creditor that sets the material terms of credit by assigning each consumer to one or more of a discrete number of pricing tiers, based in whole or in part on a consumer report, would provide a risk-based pricing notice to each consumer who is not assigned to the top pricing tier or tiers (depending on the total number of tiers). While creditors may opt to use the direct comparison method or either of the two alternative methods, for purposes of consistency only one of the methods may be used for a specific credit product.
A special alternative method is available for credit card issuers. Under the special alternative method, a credit card issuer would provide a risk-based pricing notice to a consumer if the consumer applies for a credit card in connection with a multiple-rate offer and, based in whole or in part on a consumer report, the consumer is granted credit at a specific annual percentage rate (generally the rate for purchases) that is higher than the lowest annual percentage rate available under that offer.
A specific method of determining which consumers must receive a risk-based pricing notice will apply to creditors that conduct account reviews. Generally, a creditor would need to provide a risk-based pricing notice to a consumer if the creditor increases the consumer’s annual percentage rate in an account review based in whole or in part on a consumer report.
Notices
The final rules set forth the required content for a general risk-based pricing notice and a notice in connection with account reviews. The final rules include model forms. Although use of the model forms is optional, creditors are deemed to be in compliance with the risk-based pricing notice and account review notice requirements if they use the appropriate model forms. Creditors may make limited formatting changes to the model forms and still rely on the safe harbor. The final rules do not require that a risk-based pricing notice be provided in a form that the consumer may keep.
The risk-based pricing notice must contain a statement informing the consumer of the right to obtain a free copy of his or her credit report from the consumer reporting agency identified in the notice. The Agencies explain that they read FCRA Section 615(h) to grant consumers the right to a separate free credit report upon receipt of a risk-based pricing notice.
Creditors may, but are not required to, add to a risk-based pricing notice the consumer’s name, transaction identification numbers, a date and other information that will assist in identifying the transaction.
In general when a notice is required (1) for closed-end credit the notice must be provided before consummation of the transaction but not earlier than the time the approval decision is communicated to the consumer, and (2) for open-end credit the notice must be provided before the first transaction is made but not earlier than the time the approval decision is communicated to the consumer. For account reviews, the notice must be provided at the time the decision to increase the annual percentage rate is communicated to the consumer or, if no notice of the increase in the annual percentage rate is provided prior to the effective date of the change (to the extent permitted by law), no later than five days after the effective date.
Special timing rules can be used for automobile financing when the automobile dealer helps to arrange the credit but is not a party to the financing transaction. The rules allow the creditor to have the dealer provide the notice on the creditor’s behalf. The Agencies also adopted special timing rules for instant credit purchase transactions conducted in person or by telephone.
Only one risk-based pricing notice is required to be provided per credit extension, although a subsequent account review can trigger the need for an additional notice. If there are multiple consumers, a risk-based pricing notice must be provided to each consumer. However, if the consumers reside at the same address, a single notice addressed to both consumers is sufficient.
Exceptions
The final rules include the statutory exceptions to the requirement to provide a risk-based pricing notice for cases in which (1) the consumer applies for and receives specific material terms, and (2) the consumer has been or will be provided an adverse action notice under the FCRA. The Agencies used their authority to create additional exceptions, including a significant credit score notice exception.
Pursuant to the credit score notice exception, in lieu of a risk-based pricing notice, a creditor could provide a notice consisting of the consumer’s credit score and certain additional information. For residential mortgage loans, a creditor could provide a notice containing the credit score disclosures required by FCRA Section 609(g) plus certain additional information that provides context for the credit score disclosure. A key requirement to rely on the exception is that a creditor must provide a credit score notice to each consumer who requests credit for a product for which the creditor uses risk-based pricing, unless another exception to providing a risk-based pricing notice applies to the consumer. Thus, even certain consumers who are not entitled to a risk-based pricing notice would need to receive a credit score notice. The Agencies note that because of the timing requirements for the credit score notice (which are addressed below), in some cases a creditor may need to provide the notice before it determined if another exception would apply. The final rules include model forms of credit score notices. The use of the model form for residential real estate transactions also satisfies the requirements for the FCRA Section 609(g) disclosure. (There is no separate model form that exists for such disclosure.)
Significantly, because the notices provided under the credit score notice exceptions are not risk-based pricing notices, the notices do not trigger a right of the consumer to receive a free copy of his or her credit report. However, the model notice includes a description of the general right of a consumer to obtain a free copy of his or her credit report every 12 months.
If there are multiple consumers, a separate credit score notice must be provided to each consumer, even if the consumers reside at the same address. Additionally, the notice provided to a consumer must contain only that consumer’s credit score(s). A credit score notice must be provided in a form the consumer may keep.
The final rules require that a credit score notice be provided concurrently with the notice required by FCRA Section 609(g), and in any event at or before consummation of a closed-end transaction or before the first transaction under an open-end plan. The Agencies explain that they understand industry practice is to generally provide the Section 609(g) notice within three business days of obtaining a credit score, and they expect the credit score notice (which contains the Section 609(g) information) to be provided within the same timeframe.
For creditors that regularly provide a credit score notice with mortgage or non-mortgage credit, the final rules contain an additional exception for cases in which a credit score is not available for a consumer. The final rules also contain an exception for prescreened solicitations.
Enforcement
The risk-based pricing requirements under FCRA Section 615(h) and the final rules are enforceable by federal agencies and appropriate state officials pursuant to FCRA Section 621. There is no private right of action applicable to the requirements.
Mortgagee Letter Regarding New RESPA Rules
On December 30, 2009 the Department of Housing and Urban Development (HUD) issued a long-awaited Mortgagee Letter addressing Federal Housing Administration (FHA) loan issues in connection with the revised rules under the Real Estate Settlement Procedures Act (RESPA) that were implemented on January 1, 2010.
The Mortgagee Letter first notes that the new forms of good faith estimate (GFE) and HUD-1 settlement statement must be used for loans that close on or after January 1, 2010. This position conflicts with advice provided by HUD in the Frequently Asked Questions (FAQs). HUD advises in the FAQs that if GFE is the old-form GFE issued by December 31, 2009, then the loan must close with the old form of HUD-1, even if the closing occurs on or after January 1, 2010. Apparently, FHA recognizes the error and will issue a revised version of the Mortgagee Letter.
Origination Charge
The Mortgagee Letter notes that the 1 percent cap on origination fees was removed for standard, forward FHA mortgage loans. The Mortgagee Letter then addresses the requirement under the new RESPA rules that all originator compensation be disclosed as a single origination charge as follows:
Mortgagees are instructed that the sum of all fees and charges from origination-related services must be included in Box 1 on Page 2 of the new Good Faith Estimate (GFE). The figure in Box 1 represents all compensation to the lender and/or broker for originating the loan and will most often exceed the specific origination fee caps set for government programs. Although the new GFE requires that lenders provide an aggregated cost for origination services, if a government program or state law requires that lenders provide more detailed information to specify distinct origination fees and charges, lenders may itemize these charges in the empty 800 lines of the HUD-1, to the left of the column.
FHA then advises that it expects lenders to continue to charge fair and reasonable fees for all origination services and that it will continue to monitor fees to ensure that FHA borrowers are not overcharged. While FHA still has authority to set limits on fees, it advises that at least for now it does not intend to issue further guidance on the subject.
Good Faith Estimate
FHA advises that when a loan is submitted for insurance endorsement, case binders must now include the final and any prior GFEs that were issued on the right hand side of the binder. The GFEs will become part of the pre-endorsement review.
Seller Credits
The Mortgagee Letter notes the approach under the revised RESPA rules to disclosing typical borrower fees that are paid by the seller. In the GFE the fees are shown as being paid by the borrower, with no indication of any seller credit. In the HUD-1, the specific fees are shown as being paid by the borrower, but a credit from the seller to the borrower in the amount of the applicable fees is included in the 200 series, with a corresponding charge to the seller in the 500 series. FHA advises that “[w]hen the seller contributes to more than one expense, the seller credit shown on the HUD-1 must reflect the lump sum payment.” FHA does not address whether there must be any itemization of the fees covered by the seller credit.
Updated FAQs on RESPA Rules
On December 30, 2009 the Department of Housing and Urban Development (HUD) issued the latest version of its Frequently Asked Questions (FAQs) on the revised rules under the Real Estate Settlement Procedures Act (RESPA) that were implemented on January 1, 2010. HUD officials had advised informally that they hoped to issue about 12 to 18 new FAQs by the end of the year. The new version of the FAQs has two revised FAQs.
One revised FAQ reflects that HUD has posted a new version of the Settlement Cost Booklet on the HUD RESPA website (see the article below).
The other revised FAQ addresses the list of providers that an originator must issue when the originator permits the borrower to shop for the provider of one or more settlement services. Previously, HUD advised that title services must be treated as a single service, even though HUD defines “title services” to include various sub-services, including the conducting of the settlement. The industry noted this approach presented issues, particularly in jurisdictions in which it is common for one party to provide the primary title services and one party to conduct the settlement. Based on HUD’s approach, an originator could identify only the title services provider, and not any available provider who could conduct the closing. Also, the approach presented concerns regarding the application of the tolerances and the completion of the HUD-1.
Under the revised RESPA rules, if a borrower may shop for the provider of a settlement service, the fee for the service is subject to the 10 percent bucket tolerance if the borrower uses a provider identified by the originator on the list of providers. If the borrower selects a provider that the originator did not identify, then the fee for the service is not subject to a tolerance—the fee can increase without limitation under RESPA. As a result, if a borrower selects the title company identified by the originator and selects another party to conduct the settlement, the question arose as to whether the fee for conducting the settlement is subject to the 10 percent bucket tolerance or no tolerance. In short, under the HUD approach, the originator had to treat title services as a single service and so only a title company was identified. Did the selection of the identified title company mean that all title services fees, including the fee for conducting the settlement, are then subject to the 10 percent bucket tolerance, or is the fee for conducting the settlement subject to no tolerance when a party other than the identified title company conducts the closing?
In the new FAQs, HUD revises its approach and states as follows:
The preferred method of disclosing the GFE Block 4 charges on the Written List of Service Providers is to list a set of single providers where each is capable of coordinating or performing all of the services provided within the “Title Services and lender’s title insurance” category. Due to a wide variety of practices across the country, an alternate option is explained below that allows for the separate identification of providers to conduct settlement (or closing) and providers of lender’s title insurance and the related services on the Written List of Providers and the HUD-1/1A.
HUD then provides details regarding the completion of the GFE and HUD-1 based on the revised approach. For GFE purposes, title services still are treated as a single item with a single charge in Block 4 (although owner’s title insurance is included in Block 5). However, the written list of providers may disclose title services as a single service or may disclose title services and conducting the settlement as separate services with separate providers.
For tolerance and HUD-1 purposes, if the written list of providers disclosed title services and closing services as separate services, the fee for the applicable service is subject to the 10 percent bucket tolerance only if the borrower selects an identified provider for the service. For example, if the borrower selects a title company identified on the list and selects a party to conduct the settlement that is not one of the closing agents identified on the list, the fee of the title company would be subject to the 10 percent bucket tolerance and the fee of the party conducting the settlement would not be subject to a tolerance and could increase without limitation. The revised FAQ also provides detail on how to complete the HUD-1 in various situations.
New Settlement Cost Booklet
In the middle of December 2009 HUD posted on its Web site a new form of the Settlement Cost Booklet. The new Booklet reflects the new form of good faith estimate and HUD-1, as well as the accompanying revisions to the rules under the Real Estate Settlement Procedures Act (RESPA), that were implemented on January 1, 2010. The RESPA rules provide that HUD may revise the Booklet by publishing a new version in the Federal Register. HUD published notice in the Federal Register on January 5, 2010 that the Booklet is available on HUD’s Web site.
HMDA Threshold Unchanged
The Federal Reserve Board published a notice in the December 28, 2009 Federal Register announcing that the asset-size exemption for depository institutions under the Home Mortgage Disclosure Act (HMDA) remains at $39 million for 2010. Depository institutions with assets of $39 million or less as of December 31, 2009 do not have to collect data under HMDA for 2010. The asset-size exemption is subject to annual adjustment based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPIW). The CPIW decreased by 0.98 percent for the 12-month period ending in November 2009, and the minor decrease did not require a change in the exemption amount.
HUD Issues Guidance on Short Sales and Short Pay Offs
On December 16, 2009, the Department of Housing and Urban Development (HUD) issued a mortgagee letter summarizing changes to its policies regarding borrower eligibility when the borrower’s previously owned property was subject to a short sale. Effective immediately, borrowers who pursued a short sale of their principal residence simply to take advantage of declining market conditions and purchase a similar or superior property within a reasonable commuting distance at a reduced price will not be eligible for a new FHA-insured mortgage. Interestingly, the Treasury’s Home Affordable Foreclosure Alternatives Program, which becomes effective on April 5, 2010, offers incentive payments to servicers who permit short sales as alternatives to foreclosure for borrowers who do not qualify for loan modification under the Home Affordable Modification Program.
The Mortgagee Letter provides that not all borrowers who pursue a short sale will be ineligible for future FHA-insured financing. If, at the date of loan application for the new mortgage, the borrower had made all mortgage payments on the prior mortgage within the month due for the 12-month period preceding the short sale and had made all installment debt payments within the month due for the 12-month period preceding the short sale, the borrower will be eligible for a new FHA-insured mortgage. If the borrower was in default at the time of the short sale, he or she will not be eligible for a new FHA-insured mortgage for three years from the date of the sale. For borrowers whose previous mortgage was FHA-insured, the three-year period does not start until the date that FHA pays the claim associated with the sale. HUD will permit lenders to make an exception to the three-year rule if the borrower’s default was due to circumstances beyond the borrower’s control and the borrower’s credit report evidences satisfactory credit prior to the occurrence of the event that caused the default.
The mortgagee letter also addresses HUD’s policy on no cash-out refinances where there is a short pay off. To be eligible, the borrower must be current on his or her mortgage. FHA will refinance a first mortgage where the existing note holder writes off the amount of indebtedness that cannot be refinanced if there is insufficient equity in the home based on its current appraised value and/or the borrower has experienced a reduction in income and does not have the capacity to repay the existing mortgage. If the existing note holder does not wish to write down the existing indebtedness to permit a refinancing, the note holder and borrower may execute a subordinate lien in the amount by which the payoff is short. Payments on the subordinate lien must be included in the qualifying ratios unless the payments have been deferred for at least 36 months.
Washington Department of Financial Institutions Amends Consumer Loan Act and Mortgage Broker Practices Act Regulations
Effective January 1, 2010, the Washington Department of Financial Institutions (Department) adopted a number of revisions to its regulations implementing the Consumer Loan Act and the Mortgage Broker Practices Act. In a number of instances the updates merely clarify language or bring language consistent with federal law. Other changes to the regulations were more substantial. Among others, changes to the Consumer Loan Act’s existing regulations include:
- updating the Consumer Loan Act's surety bond requirements so that the penal sum on each surety bond will be tied to a licensee's loan origination volume and that licensees will need to determine whether their surety bond meets applicable bonding requirements annually by March 1;
- clarifying that applicants for new Consumer Loan Licenses will be required to provide a surety bond with a penal sum that either corresponds to the licensee's volume of loans originated in Washington during the previous year or provide a surety bond with a penal sum in the amount of $100,000;
- clarifying that the requirements pertaining to loan modifications apply only to residential mortgage loans;
- clarifying that, effective July 1, 2011, any individual that services mortgage loans for entities exempt from the Consumer Loan Act will be required to be licensed as a mortgage loan originator;
- requiring that licensees affirmatively notify the Department of any instance where a claim is made upon the company's surety bond;
- permitting a licensee to collect the actual amount that their financial institution charges such licensee in the event an individual provides them with a dishonored check, ACH or similar instrument; and
- clarifying that a licensee's underwriting analysis of a borrower's residential mortgage loan application will meet the requisite ability to repay analysis if the loan is underwritten to the guidelines of Fannie Mae, Freddie Mac, FHA, VA or USDA, and provided that the licensee meets the underwriting standards of an ability to repay analysis for those loan types.
The regulations implementing the Mortgage Broker Practices Act also were revised to provide further clarification to licensees. Among others, changes to the existing regulations include:
- defining the term "loan modification" as a change in one or more residential mortgage loan terms or conditions, including forbearances; repayment plans; modification of an interest rate, loan term or loan type; the capitalization of arrearages and/or principal reductions;
- defining the term "material litigation" as any instance of litigation that would be relevant to having the Department rule on an application for licensure, including but not limited to, a criminal or civil action involving dishonesty or financial misconduct;
- clarifying that loan originators may not be compensated based upon a loan's interest rate or other terms, but stating that loan originators may be compensated based upon the principal balance of the loan;
- updating the Mortgage Broker Practices Act's surety bond requirements so that the penal sum on surety bonds will be tied to a licensee's loan origination volume;
- amending certain regulations to ensure consistency with the SAFE Act;
- clarifying that continuing education is not required in the same year in which an individual completes applicable pre-licensing education; and
- updating the regulations to advise that the Department will begin an enforcement action against a licensee that fails to file its mortgage broker annual report in a timely manner.
Did You Know?
- The South Carolina Mortgage Lending Act (SCMLA) became effective on January 1, 2010, and requires licensing for Mortgage Lenders, Mortgage Servicers and Mortgage Loan Originators. Additionally, all loan processors or underwriters acting as independent contractors for licensed entities must be licensed as Mortgage Loan Originators. All Mortgage Lenders, Mortgage Servicers and Mortgage Loan Originators now requiring a license under the SCMLA must apply through the Nationwide Mortgage Licensing System (NMLS) no later than April 30, 2010. Mortgage Loan Originators must complete the additional SAFE Act compliant requirements (e.g., education, examination, background checks, etc.) by July 31, 2010. The South Carolina Licensing of Mortgage Brokers Act will also be administered through the NMLS. Current Mortgage Broker Licensees and Mortgage Broker Loan Originators must transition their licenses onto the NMLS no later than April 30, 2010. Mortgage Broker Loan Originators must complete the additional SAFE Act compliant requirements (e.g., education, examination, background checks, etc.) by December 31, 2010 if licensed on or before July 30, 2009, or by July 30, 2010 if licensed after July 30, 2009. Application and transition checklists are now available on the NMLS Web site and filings may be submitted through the NMLS as of January 4, 2010.
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