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Patton Boggs Mortgage Banking Update - Week of August 17, 2009
August 17, 2009

PB Takes Part in 20th Annual AARMR Conference

The American Association of Residential Mortgage Regulators (AARMR) held its 20th Annual Regulatory Conference from August 10-14, 2009 in Savannah, Georgia. Patton Boggs partner John Socknat, who serves on the AARMR Industry Advisory Council, and Haydn Richards, who is a member of the Nationwide Mortgage Licensing System and Registry (NMLS) Industry Development Work Group, attended the conference and has provided a summary of certain key issues that were high points of discussion.

SAFE Act and NMLS Update
One of the principal agenda items of this year’s AARMR conference was to update the state mortgage regulators and industry participants regarding the continued implementation of the NMLS. By the end of this year’s legislative season, it is anticipated that each state other than Minnesota will have passed legislation that implements the requirements of the SAFE Act. That state legislation will require that mortgage loan originators (MLOs) meet the minimum requirements set forth in the SAFE Act (such as fulfilling prelicensure education requirements) and potentially meet more restrictive state requirements to the extent a state law goes beyond the SAFE Act’s requirements.

Pursuant to the SAFE Act, the NMLS is tasked with establishing standards for MLO examination and education requirements. Prior to the AARMR conference, NMLS completed its development of the national examination that is required under federal law and MLOs are now permitted to register for and take the examination. The NMLS continues to work with state regulatory agencies in connection with preparing and releasing state-specific examination components. With regard to pre and postlicensing education courses for MLOs, it is anticipated that the NMLS will publish an initial list of approved prelicensure education courses in late August 2009, with information pertaining to continuing education coursework to follow thereafter.

State Regulatory Examinations
This year’s AARMR conference included the announcement of the further development and implementation of a strengthened and modernized system of state examination and supervision. The Conference of State Bank Supervisors (CSBS) and AARMR have established the Nationwide Cooperative Protocol and Agreement for Mortgage Supervision (Agreement), the purposes of which are to bring uniformity to examination and supervision, modernize the mortgage examination process, and improve the effectiveness of examinations. To implement the Agreement, CSBS and AARMR have jointly established the Multistate Mortgage Committee (MMC), which will act as the body in charge of oversight and will direct the processes set forth in the Agreement.

The Agreement likely will drive dramatic changes to mortgage supervision as state regulatory agencies will now enjoy an unprecedented level of cooperation in connection with examinations. The MMC will establish a pool of state examiners that will jointly conduct examinations on behalf of several agencies. Prior to a joint examination, licensees will be required to provide detailed electronic information on a loan-by-loan basis to the various agencies using a secure Web site. Upon receiving that information, the regulatory agencies will utilize ComplianceEase software to prescreen the loan data provided by the licensee. After prescreening such information, the joint examiners will elect to focus on the loans that the software has identified as having a greater risk for compliance issues.

The MMC intends to modify current examination processes by shifting towards models of examination involving, among others, safety and soundness reviews. Moving forward, licensees whom the regulatory agencies deem to have greater risk will likely experience examinations more frequently than those who have lesser perceived risk. In addition, agencies intend to monitor the ongoing mortgage compliance efforts of licensees by requesting periodic uploads of data for review by compliance software. Since the changing examination model will increasingly focus on loans originated today and in the near future, we encourage licensees to promptly conduct reviews of their compliance efforts so that they are prepared for future joint examinations.

Loan Modification Matters
One common theme expressed at the AARMR conference by representatives of the state regulatory agencies and, in certain instances, consumer groups, was that the unfortunate circumstances experienced by many borrowers has led to the creation of a cottage industry of loan modification providers – individuals or entities paid by borrowers to assist in the modification of existing loans. Many regulatory agencies generally took the position that for-profit loan modification companies do not provide value to borrowers in distress. Because of this perception, regulatory agencies are working together to root out pay-to-play loan modification companies, in part by enforcing existing state licensing statutes, which require licenses for third-party modification companies, and by enacting new licensing obligations for such entities.



Fed Proposes Changes to Rules Under TILA
The Federal Reserve Board recently proposed major changes to the rules under the Truth in Lending Act (TILA) for both closed-end mortgage loans and home equity lines of credit (HELOCs). Current rules, contained in Regulation Z, require that a consumer be provided with a combination of general information and information that is specific to their loan. The mortgage industry, consumer groups, the Fed and other regulators are not satisfied with the current approach, prompting the Fed to take action. The current approach, often viewed as burdensome, subjects creditors to liability for technical compliance issues, while not providing consumers with clear and concise information regarding the terms of the transaction. There will be a 120-day period for the public to comment on the proposed changes from the time the proposals are published in the Federal Register.

Closed-End Mortgage Loans. For closed-end mortgage loans the proposed rules would change the requirements for disclosures provided (1) at the time of application, (2) within three business days after application, (3) before consummation and (4) after consummation. Based on consumer testing, the Fed seeks to implement a revised approach that provides for disclosures that better inform consumers of the loan terms, and also highlight if the loan has features that can present risks.

Application Disclosures. At the time of application the Fed proposes that consumers be provided with two one-page disclosures. One disclosure entitled “Key Questions to Ask About Your Mortgage” addresses seven potential risk factors, including that with some loans (1) the interest rate and payment can increase, (2) there may be a prepayment penalty and (3) there may be a balloon payment. The other disclosure entitled “Fixed vs. Adjustable Rate Mortgages” would address basic aspects of the differences between fixed-rate and adjustable-rate loans. Both disclosures would refer the consumer to the Fed’s Web site to obtain additional information.

Creditors still would provide program disclosures at the time of application for each adjustable-rate loan program in which the consumer expressed an interest. The Fed proposes to change the format of the disclosures from the current narrative format to a tabular question and answer format that presents rate and payment information in a more streamlined manner. The adjustable-rate loan program disclosures also would include information on potentially risky features, such as a prepayment penalty and a balloon payment. The Fed also proposes to eliminate the requirement that creditors provide a consumer who expresses an interest in an adjustable rate loan with the Fed’s Consumer Handbook on Adjustable Rate Mortgages.

Post-Application Disclosures. Creditors still will provide a Truth in Lending disclosure three business days after application, but the Fed proposes to change the format and content of the disclosure form. As proposed, the disclosure form would:
  • Include a loan summary section at the top that would set forth the loan amount and term, type of loan, the total settlement charges and, if applicable, the prepayment penalty.
  • Set forth the annual percentage rate, which would be described as the overall cost of this loan, including interest rate and settlement charges. (As discussed below, the Fed also proposes to change the calculation of the annual percentage rate to include more fees.)
  • Include in graph form a range of annual percentage rates from the average prime offer rate to the threshold rate for higher-priced mortgages. (The Regulation Z amendments that are effective on October 1, 2009 define both the average prime offer rate and what constitutes a higher-priced mortgage loan). The annual percentage rate for the loan would be noted on the graph. The approach would be similar to the Energyguide that appears on appliances and shows the range of energy costs for similar appliances and the energy cost for the specific appliance.
  • Replace the current payment schedule with an interest rate and payment summary. For a standard fixed-rate loan, the summary would include the interest rate, the principal and interest payment, the estimated payment for taxes and insurance and the total estimated monthly payment. For a standard adjustable-rate loan, this information would be provided based on the introductory rate, the maximum rate at the first adjustment and the maximum life of loan rate.
  • Include a “Key Questions About Risk” section that would address if the loan has any of the risk factors identified in the “Key Questions to Ask About Your Mortgage” disclosure provided at the time of application.
  • Include a “More Information About Your Payments” section that would address, as applicable, the interest rate calculation, interest rate change limits, payment change limits, escrow payment requirements, private mortgage insurance requirements and the total of all payments that would be made on the loan, including settlement charges.

Pre-Consummation Disclosures. The Truth in Lending disclosure provided before consummation would be in the same format and have the same content as the proposed initial disclosure. Note that the need to disclose the settlement charges will require that the creditor know all settlement charges from the HUD-1 settlement statement in order to prepare the disclosure. A Fed proposal regarding the timing of the Truth in Lending disclosure before consummation is addressed below.

Post-Consummation Disclosures. For the post-consummation period, the Fed proposes to change the timing of payment adjustment notices in connection with adjustable-rate loans. Currently when a payment on an adjustable-rate loan will change, the creditor must provide the consumer with a notice of the change at least 25 days before the new payment amount is due. The Fed proposes to require that such a notice be provided at least 60 days before the new payment amount is due. As proposed, the requirement would apply to existing loans and the Fed seeks comments on the ability of creditors to comply with a 60-day requirement. The Fed also proposes that the notice contain additional information, including the limits on increases to the rate or payment per adjustment and the maximum rate or payment.

The Fed proposes to require disclosures when a creditor seeks to force place property insurance. For payment-option loans with negative amortization, the Fed proposes to require monthly statements that will set forth details regarding the payment options.

Annual Percentage Rate Calculation. The Fed proposes to revise the calculation of the annual percentage rate to include many fees that currently are not treated as finance charges. The intent is twofold—to better reflect the true cost of credit in the annual percentage rate and to simplify the determination of which fees are and are not treated as finance charges. The Fed does not propose to revise the annual percentage rate threshold for determining if (1) a loan is a higher-priced mortgage loan under the Regulation Z amendments that are effective on October 1, 2009, or (2) a loan is subject to the Homeownership and Equity Protection Act (HOEPA). The Fed estimates that the proposed change to the annual percentage rate would increase by about 3 percent the number of loans that are higher-priced mortgage loans. The Fed also estimates that the proposed change would increase the share of first-lien refinance and home improvement loans that are subject to HOEPA by about 0.6 percent, but that this change would represent a 350 percent increase in the actual number of covered loans.

Currently under Regulation Z the annual percentage rate threshold for a first-lien loan to be covered by HOEPA is a rate that exceeds by more than eight percentage points the yield on Treasury securities having comparable periods of maturity to the loan term. However, the threshold set by HOEPA is 10 percentage points over the yield on Treasury securities having comparable periods of maturity. Previously, the Fed used its authority under HOEPA to lower the threshold in Regulation Z to eight percentage points. Thus, even though the Fed could increase the threshold, it does not propose to do so.

The Fed notes that the change in the computation of the annual percentage rate also will affect the number of first-lien loans that are subject to state high-cost loan laws that are similar to HOEPA.

Loan Originator Compensation. Previously the Fed proposed to prohibit a creditor from paying compensation to a mortgage broker that exceeded the amount that the consumer previously agreed in writing that the broker would receive. Based on comments, the Fed decided not to include the prohibition in the Regulation Z amendments that are effective October 1, 2009. The Fed now proposes to prohibit for any real estate-secured loan the payment to, or receipt by, a loan originator of compensation that is based on any of the transaction’s terms or conditions. For purposes of the prohibition, a loan originator would include both loan officer employees of a creditor and independent mortgage brokers. As proposed, the loan terms would include the principal amount of the loan. However, the Fed also proposes an alternate prohibition under which the principal amount of the loan would not be a loan term, and compensation could be based on the loan amount. An exception to the prohibition would permit a loan originator to receive compensation directly from the consumer, without restriction as to the basis of the compensation, as long as the loan originator did not receive additional compensation from any other source. The proposal does not expressly address if the consumer could finance the compensation paid to the loan originator.

Loan Originator Steering Prohibition. The Fed also proposes a corollary prohibition under which a loan originator could not, in connection with any real estate-secured loan, direct or steer a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the transaction is in the consumer’s interest. A safe harbor is proposed that would require that the consumer be presented with at least three loan options for each type of transaction (i.e., fixed rate or adjustable rate) from a significant number of creditors with whom the originator does business, and the options would have to satisfy certain conditions.

Corrected Disclosure Delivery Requirement. As amended by the Mortgage Disclosure Improvement Act effective for applications received on or after July 30, 2009, a corrected Truth in Lending disclosure must be received by the consumer at least three business days before consummation, if the annual percentage rate in the most recent disclosure is no longer within tolerance. The Fed proposes to require that a corrected Truth in Lending disclosure be received by the consumer at least three business days before consummation for all real estate-secured loans (whether or not there is a dwelling on the property). In the alternative, the Fed proposes that a corrected disclosure be received by the consumer at least three business days before consummation for all real estate-secured loans only if the annual percentage rate in the most recent disclosure is no longer within tolerance or a variable rate feature is added, and that a corrected disclosure be provided at consummation in all other cases.

HELOCs

For HELOCs, the Fed proposes to change requirements for (1) disclosures at the time of application, (2) disclosures at the time of account opening, (3) periodic statements and (4) change-in-terms notices.

Application Disclosures. The Fed proposes to replace the current important terms disclosure provided at the time of application with a one-page disclosure entitled “Key Questions to Ask About Home Equity Lines of Credit.” The disclosure addresses six basic aspects of a HELOC, including that often the interest rate and payment can increase, and also addresses whether the consumer should obtain a home equity loan instead of a HELOC.

Post-Application Disclosures. The Fed also proposes that within three business days after application, but no later than the opening of the account, a creditor would provide a disclosure specific to the particular transaction. The disclosure would include:
  • A “Borrowing Guidelines” section that would address basic terms of the plan, such as the credit limit, first draw requirements and minimum draw requirements.
  • An “Annual Percentage Rate” section that would address the various annual percentage rates provided for under the plan, including an introductory rate, the maximum rate and the lowest and highest value for the index during the past 15 years.
  • A “Fees” section that would address the consumer’s rights regarding the refund of fees, the fees to open the plan, any annual or monthly fees, any early plan termination fees, any required insurance or debt cancellation or suspension coverage and any other fees.
  • A “Borrowing and Repayment Terms” section that would address the length of the credit plan, including the draw and any repayment period, and any potential for a balloon payment.
  • A “How Your Minimum Monthly Payments Are Calculated” section that would, as the title suggests, address how the minimum monthly payments will be calculated.
  • A “Sample Payments” section that would address, based on the full amount of the credit line, sample payments at the current annual percentage rate and the maximum possible annual percentage rate.
  • A “Fixed Interest Rate Option” section that would briefly address, if applicable, the option to borrow money at a fixed interest rate, and include a statement that the consumer can ask for details.
  • A “Risks” section that would address the risk of losing the home, and the ability of the creditor to terminate or suspend the plan, lower the credit limit or make other changes.

Plan Opening Disclosures. The Fed proposes to retain the requirement to provide a disclosure at the opening of a plan, but the content and format of the disclosure would be changed and would be similar to the content and format of the disclosure provided three business days after application. In addition to containing the terms of the actual transaction, the disclosure would include a “More Information About Fees” section that would itemize the account opening fees, and provide details on penalty fees (such as late payment fees and fees for exceeding the credit limit) and transaction fees.

Periodic Statements. For periodic statements the Fed proposes to revise the content and format of the statements similar to the manner in which the periodic statement requirements for credit cards were revised in the changes to Regulation Z adopted in January 2009. As proposed, a periodic statement would contain the following sections: “Summary of Account Activity,” “Payment Information,” “Transactions,” “Interest Charge Calculation” and, if applicable, “Notice of Changes to Your Interest Rates and Important Changes to Your Account Terms.” The “Notice of Changes to Your Interest Rates” section would address an increase in the rate due to delinquency, default or as a penalty.

Change-in-Terms Notices. The Fed proposes to modify the requirements for change-in-terms notices similar to the manner in which the requirements for credit card accounts were revised in the changes to Regulation Z adopted in January 2009. The timeframe to provide a notice would be lengthened from 15 to 45 days before the effective date of the change.

Plan Termination. With regard to the termination of a HELOC, the Fed proposes to prohibit termination based on the failure to meet payment requirements unless the consumer fails to make the minimum periodic payment within 30 days of the due date.

Plan Suspension and Reinstatement. The Fed proposes to add another definition of what constitutes a “significant decline” in property value that permits a creditor to suspend further draws on a HELOC. For cases in which the combined loan-to-value (LTV) ratio at the time of origination is at least 90 percent, a 5 percent reduction in property value would be a significant decline. For cases in which the combined LTV at the time of origination is less than 90 percent, the existing guidance would continue to apply. Under existing guidance, a significant decline exists if the difference between the credit limit and available equity (based on the property’s value) at the time of origination is reduced by at least 50 percent. However, the Fed proposes to change reference to “appraised value” in the existing guidance to simply “value” and to provide guidance on property valuation tools.

In connection with the suspension of a HELOC based on a material change in the consumer’s financial circumstances, the Fed proposes to add further guidance on the types of changes that may support a determination that such a change occurred.

The Fed proposes to require that notices of the suspension of a HELOC include additional information regarding the consumer’s ongoing right to request a reinstatement and the obligation of the creditor to address such a request. The Fed also proposes to require that a creditor complete its investigation within 30 days of receiving a reinstatement request and, if no reason to continue the suspension is found to exist, reinstate the HELOC. As proposed, a creditor could not charge the consumer any fees to investigate the consumer’s first reinstatement request, but for subsequent reinstatement requests the creditor could charge the consumer bona fide and reasonable property valuation or credit report fees associated with the investigation.



MortgageDaily.com Continues Its Relationship with PB's New Mortgage Banking Group
Patton Boggs’ recently acquired mortgage banking legal team is continuing its relationship with MortgageDaily.com, a dominant online news publication for the mortgage industry. The team of six, which includes includes Richard Andreano, John Socknat and Michael Waldron, as well as associates Reid Herlihy, Heather Hutchings and Haydn Richards, will provide insight on emerging trends in the financial sector, pressing issues affecting industry professionals nationwide and analysis of key legislation and government regulations.

Having worked with MortgageDaily.com before, the Mortgage Banking Group plans to carry on the tradition of enhancing the publication’s news content with insightful opinions and industry analysis in the lending, secondary market and default servicing space.

“Through this partnership, Patton Boggs will continue down the path of top-notch client service,” said Stuart M. Pape, managing partner of Patton Boggs. “With the ever-changing mortgage banking landscape, it’s important for clients to stay abreast of the latest issues affecting their bottom line, and we’re providing them value by doing this service to the industry.”

Consistent with guidance provided by the group to MortgageDaily.com in the past, topics will include:
  • The Truth in Lending Act (TILA) rule changes that are effective October 1, 2009.
  • The Home Mortgage Disclosure Act rule changes that are effective October 1, 2009.
  • The Real Estate Settlement Procedures Act (RESPA) rule changes that are effective January 1, 2010, including the long-anticipated guidance from the Department of Housing and Urban Development (HUD) on the RESPA rule changes.
  • The major proposed revisions to the TILA rules governing both closed-end mortgages and home equity lines of credit. The Federal Reserve Board proposed the changes on July 23, 2009. There will be a 120-day comment period from the date the proposals are published in the Federal Register.
  • State licensing requirements for lenders, servicers and brokers, including obligations imposed by the S.A.F.E. Act.
  • Trends in enforcement and regulation at the state level, such as Model Examination Guidelines designed by the Conference of State Bank Supervisors (CSBS) and being adopted by various states.

Other topics will include matters such as identity theft/red flags and other issues under the Fair Credit Reporting Act (including FACTA), Federal Trade Commission (FTC) rulemaking and enforcement matters regarding the mortgage industry, and information privacy and safeguarding matters under the Gramm Leach Bliley Act.

In addition, Patton Boggs’ Mortgage Banking Litigation Team – led by Patrick McManemin – will continue to offer the historically successful Quarterly Litigation Overview, an analysis based on active industry-related cases that range from national class actions to single plaintiff cases. Through this update, the firm’s best-in-class litigation team assists clients and industry members with mitigating risks through the tracking of trends and issues.

“By working together, we’re being proactive in providing the industry with an unmatched, value-added service,” said Sam Garcia, publisher of MortgageDaily.com. “Both of these components provide our audience with risk management and preventative strategies in regards to the issues they’re currently facing in the marketplace.”

In addition to MortgageDaily.com's audience benefiting from the Mortgage Banking Group’s expertise and insight, Patton Boggs’ clients will get discounted access to news subscriptions. This continued relationship will also continue to foster Webinars and jointly-sponsored conferences, as well as mortgage industry podcasts.

PRESS RELEASE: Patton Boggs Snares New Mortgage Banking Group
August 3, 2009


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