Safe act 8 hour comprehensive live for all states final ginger's september 20 2012


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Safe act 8 hour comprehensive live for all states final ginger's september 20 2012

  1. 1. National 8 Hour SAFEComprehensive - 2012 OriginatorEssentials
  2. 2. WelcomeThe course consists of three primary sections:• Understanding Dodd-Frank Act (3 hours)• Ethics, Fraud and Fair Lending Laws that Affect the Mortgage Industry (2 hours)• VA Program(2 hours)• Understanding the SAFE Act (1 hour) 2
  3. 3. Welcome• This course is designed to guide Mortgage Loan Originators in the development, adoption, and implementation of specific regulatory and fair housing procedures and strategies. In addition, attendees will gain an understanding of VA programs that may not have been previously considered a viable option.• The comprehensive curriculum will prepare MLOs to deal efficiently and effectively with compliance regulations.• Participants develop a better understanding of the laws governing mortgage banking, how to remain in compliance, and how to anticipate and prevent violations. MLOs will also gain insight into valuable VA loan programs. 3
  4. 4. About this CourseApproval of this course by state agencies does not constitute an endorsement ofthe views or opinions which are expressed by the course sponsor, instructor,authors or lecturers. While this publication is designed to be accurate informationabout the subject matter it covers, it is sold with the understanding that thedistributor, author, and publisher are not engaged in rendering legal, accountingor other professional advice. If such advice or other expert assistance is required,the services of a competent professional should be sought. The recipient iscautioned to check with their managing supervisor before acting on anysuggestion or recommendation, or before using any sample form containedherein. 4
  5. 5. Class Participation• Case Studies• Group Discussion• Encourage Interaction 5
  6. 6. Classroom Behavior• No tape recorders will be permitted at any time.• All cell phones and pagers are to be turned off at the beginning of each class. (At the very least we ask that they be placed on “silent” mode.)• Students are not allowed to send texts or emails during the course.• Students are not allowed to read material other than course material while in class (for example newspapers, emails, texts, etc. )• No “photo” cell phones will be allowed in the classroom.• Students are expected to conduct themselves in a professional manner.• Students are required to provide identification upon arrival.• Time for meals and intermittent breaks may be provided. 6
  7. 7. Steps to Receive NMLS CE Credit• Sign in• Verify Identification and provide valid NMLS Number and Name• Sign out at lunch /Sign in after lunch• Must be in attendance and participate for entire class• Cannot be out of classroom, outside of scheduled breaks and/or lunch for more than 5 minutes• Cannot be more than 5 minutes late either at beginning of course or after scheduled breaks and lunch• Sign out at completion of course 7
  8. 8. Test• Test is given at end of class• Written test• 30 questions• Passing score is 70% or higher to receive NMLS Credit• Will only communicate failures• If you fail you can take test second time• The test will be administered via an online link at OnlineEd• You will need to verify identification when re-taking the test 8
  9. 9. NMLS CE Credit• Online Ed will Upload Your Information into NMLS.• 8 Hours of NMLS Continuing Education Credit. 9
  10. 10. Module One – Session OneThe Dodd-Frank Act
  11. 11. The Dodd-Frank Act – HR 4173• Provide a better understanding of the Dodd- Frank Act.• How these changes impact the mortgage industry.• How the Dodd-Frank Act can help protect consumers. 11
  12. 12. Objectives1.Identify changes made as a result of the Dodd- Frank Act.2.List various Titles of the Dodd-Frank Act and how they relate to the mortgage industry.3.Define the compliance standards regarding the newly appointed Consumer Finance Protection Bureau (CFPB). 12
  13. 13. The Dodd-Frank Act• H. R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.• Enacted in July 2010.• End “Too Big to Fail”.• Protect consumers from abusive financial services practices. 13
  14. 14. Objective of Dodd-Frank Act• Impost stricter standards.• Restore responsibility and accountability in the financial system.• Prevent future financial collapse.• Promote consumer education, protection and transparency. 14
  15. 15. Titles in the Law Impacting Industry• Title IX (Title 9) - Investor Protections and Improvements to the Regulations of Securities Provides provisions which include authorizing stricter regulation of investors and credit rating agencies. 15
  16. 16. Titles in the Law Impacting Industry• Title X (Title 10) - The Consumer Financial Protection Act of 2010 Authorizes the creation of the Consumer Financial Protection Board (CFPB), provides for the transition of regulatory authority from other agencies to the CFPB, and outlines the Bureau’s regulatory and enforcement responsibilities. 16
  17. 17. Titles in the Law Impacting Industry• Title XIV (Title 14) - The Mortgage Reform and Anti-Predatory Lending Act Includes provisions which apply directly to mortgage loan originators, servicers, and appraisers. 17
  18. 18. About this Course• Cite the provisions of the Dodd-Frank Act.• Where they are located within the Act.• Which provisions of the Dodd-Frank Act are amendments to existing laws.• Reference various sources to assist in explaining this complex law. 18
  19. 19. Title IX (Title 9)• Title IX, sections 901 to 991 - “Investor Protections and Improvements to the Regulation of Securities.”• Revises the powers and structure of the Securities and Exchange Commission, (SEC), credit rating organizations. 19
  20. 20. Title IX (Title 9)•Greater transparency for investors.•Measures to mitigate conflicts of interest at credit ratings agencies.•Credit risk retention requirements in Section 941. 20
  21. 21. Subtitle C“In the recent financial crisis, the ratings on structuredfinancial products have proven to be inaccurate. Thisinaccuracy contributed significantly to themismanagement of risks by financial institutions andinvestors, which in turn adversely impacted the health ofthe economy in the United States and around the world.Such inaccuracy necessitates increased accountability onthe part of credit rating agencies.”(H.R. 4173 Section 931(5)) 21
  22. 22. Subtitle C• The Dodd-Frank Act assigns the responsibilities of oversight to the Securities and Exchange Commission (SEC).• Regulatory control will come from the newly established Office of Credit Ratings and the credit rating entities that this office will oversee are Nationally Recognized Statistical Rating Organizations (NRSROs) including Standard & Poors, Fitch, and Moodys. 22
  23. 23. Subtitle C• Does not limit the SEC’s ability to bring forth a fraud action.• Imposes requirements for NRSROs to submit an annual report to the SEC. 23
  24. 24. Subtitle C - Reforms• Risk retention requirements.• Credit rating agency reform and conflicts of interest.• Improved transparency and issuer due diligence.• Consumer protection.• Improved monitoring of systemic risks throughout the financial system. 24
  25. 25. Subtitle D• Reduce the risks associated with securities such as Mortgage Backed Securities (MBSs).• Establishes an incentive for issuers of these securities to perform research and due diligence.• Risk retention requirements may reduce risks to financial stability arising from earlier securitization participants.(H.R. 4173 Section 941, adding SEA Section 15G(3)) 25
  26. 26. Law Applies to Originators• “originators,” defined as a person that “...through the extension of credit or otherwise, creates a financial asset that collateralizes an asset-backed security; and sells an asset…to a securitizer.”• Includes banks, thrifts, subsidiaries of bank or thrift holding companies, independent finance companies.(SEA Section 15 G(4)) 26
  27. 27. Law Applies to Originators• Instructs drafting regulations that will “…require any securitizer to retain an economic interest in a portion of the credit risk for any asset that the securitizer, through the issuance of an asset- backed security, transfers, sells, or conveys to a third party.”(SEA Section 15G(b)) 27
  28. 28. QRM and QM• Retention of a 5% credit risk in securitized assets.• The only exception under the rule is the exception for what is referred to as “Qualified Residential Mortgages.” 28
  29. 29. QRM and QM• The task of defining a “Qualified Residential Mortgage” (QRM) has been left to the agencies.• “…be no broader than the definition ‘qualified mortgage’ (QM) as the term is defined in section 129(c)(2)….”(SEA Section 15 G (4) (C)) 29
  30. 30. Why the Change?• When the originator and the securitizer of Alt-A mortgage-backed securities were affiliated, they were less likely to experience losses.• The originator of the loan is less likely to sell poorly underwritten loans to its own affiliate for securitization. 30
  31. 31. Risk Retention• May help to avoid deterioration in underwriting standards.• Prevent a recurrence of credit expansion that led to the mortgage meltdown.• Could stifle a renewed real estate market.• Could eliminate all but the best qualified borrowers. 31
  32. 32. Defining Qualified Mortgages• Reasonable• Good Faith Determinations 32
  33. 33. Defining a Qualified Mortgage• January 2013 Final Rule Deadline• Impacts Basic Underwriting Standards• Building Block for other Dodd-Frank Act Rulemakings 33
  34. 34. Final Rules• Origination and Servicing Practices• Loan Originator Compensation• Anti-Steering Rules• Restrictions on High-cost Loans• Escrow Accounts• Appraisals• Final Rules – January 21, 2013 34
  35. 35. Title X – CFPB• Creates the Bureau of Consumer Financial Protection (the “CFPB”).• The CFPB is an independent regulatory agency empowered with broad authority to issue new regulations, supervise depository and non-depository institutions, enforce consumer financial protection laws, and prevent “unfair,” “deceptive,” and “abusive” acts by financial service firms. 35
  36. 36. Establishing the CFPB•The Consumer Financial Protection Bureau (CFPB) 36
  37. 37. Independent Director• Rich Cordray 37
  38. 38. CFPB Structure 38
  39. 39. Independent Budget• Federal Reserve System 39
  40. 40. Independent Rule Writing• Write Rules for Consumer Protections• Consumer Financial Services or Products 40
  41. 41. Protection for Consumers• CFPB is a compilation of the consumer financial protection functions of a number of federal agencies, including the Federal Reserve and FDIC.• Designed to prevent unfair, deceptive, and abusive practices. 41
  42. 42. Who Does the CFPB Regulate?• Extending consumer credit and servicing loans.• Extending or brokering leases of property that are the functional equivalent of purchase finance arrangements.• Providing real estate settlement services (other than appraisal of real or personal property).• Providing payments or other financial data processing products or services to a consumer by any technological means. 42
  43. 43. Examination and Enforcement•Authority to Examine and Enforce Regulations 43
  44. 44. Consumer ProtectionConsumer Protection 44
  45. 45. Ability to Act QuicklyBad Deals and Schemes 45
  46. 46. EducateOffice of Financial Literacy 46
  47. 47. Enumerated Consumer Laws1. Alternative Mortgage Transaction Parity Act of 19822. Consumer Leasing Act of 19763. Electronic Fund Transfer Act4. Equal Credit Opportunity Act5. Fair Credit Billing Act6. Fair Credit Reporting Act (FCRA)7. Homeowners Protection Act of 1998 47
  48. 48. Enumerated Consumer Laws1.Fair Debt Collection Practices Act2.§43(b)-(f) of the Federal Deposit Insurance Act (FDIA) – governing disclosures by depository institutions that lack federal deposit insurance3.Gramm-Leach-Bliley Act (GLBA)4.Home Mortgage Disclosure Act of 19755.Home Ownership and Equity Protection Act of 1994 48
  49. 49. Enumerated Consumer Laws1.Real Estate Settlement Procedures Act of 19742.Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)3.Truth in Lending Act4.Truth in Savings Act 49
  50. 50. Enumerated Consumer Laws1.§626 of the Omnibus Appropriations Act of 2009 – allows states to bring TILA actions and actions under certain FTC regulations regarding mortgage loans2.Interstate Land Sales Full Disclosure Act(H.R. 4173 Section 1002(12)) 50
  51. 51. Definition of Dodd-Frank Act Terms• The stated purpose of establishing the CFPB is to implement and enforce “federal consumer financial laws” to ensure that all consumers have access to “consumer financial products and services” and that that these products and services are “fair, transparent, and competitive.”(H.R. 4173 Section 1021(a)) 51
  52. 52. Definition of Dodd-Frank Act TermsConsumer Financial Products and ServicesThese are financial products and services offeredfor use by consumers primarily for personal, family,or household use.(H.R. 4173 Section 1002(5)) 52
  53. 53. Definition of Dodd-Frank Act TermsCovered PersonsThis includes individuals and entities that offerconsumer products or services and their affiliates.(H.R. 4173 Section 1002(6)) 53
  54. 54. Definition of Dodd-Frank Act TermsFederal Consumer Financial LawsThese include the provisions of the ConsumerFinancial Protection Act of 2010 and the“enumerated consumer laws.”(H.R. 4173 Section 1002(12)) 54
  55. 55. Definition of Dodd-Frank Act TermsFinancial Products and ServicesThe definition of this term includes, but is notlimited to extending credit, servicing loans,providing real estate settlement services (exceptfor performing appraisals), modifying the terms ofcredit, and forestalling foreclosure.(H.R. 4173 Section 1002(15)) 55
  56. 56. Module One – Session Two
  57. 57. How will the CFPB Enforce Laws?• Has the authority to enforce UDAAP and promulgate rules identifying unfair, deceptive and abusive practices.• Will likely follow established guidelines for what constitutes “unfair” and “deceptive” practices.• Can pursue both administrative and judicial remedies for violations of such laws, which include civil penalties (ranging from $5,000 - $250,000 - $1 million per day of the violation.) 57
  58. 58. Primary Functions of CFPB•Conducting financial education programs•Investigating and responding to consumer complaints•Identifying risks to consumers in the market for consumer financial products and services•Supervising the compliance of “covered persons” with federal consumer financial laws 58
  59. 59. Primary Functions of CFPB•Bringing enforcement actions for violations of the law•Writing rules and guidance documents pursuant to federal consumer financial laws•Monitoring for risks to consumers from consumer financial products and services 59
  60. 60. Combined Mortgage Loan Disclosure• The law authorizes the CFPB to “…ensure that the features of any consumer financial product or service are….fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits and risks associated with the product or service….” 4173 Section 1302(a)) 60
  61. 61. Consumer HotlineNational Consumer Complaint Hotline• Single Toll-free Number 61
  62. 62. AccountabilityConsumer Protection 62
  63. 63. Works with Bank Regulators• Prevent Undue Regulatory Burden• Consults with Regulators before a Proposal is Issued• Appeal Regulations 63
  64. 64. Clearly Defines OversightProtects Small Business 64
  65. 65. The CFPB 65
  66. 66. CFPB Examination Procedures• Released Supervision and Examination Manual Oct. 2011.• Guide to how the CFPB will supervise and examine.• Three parts 66
  67. 67. The CFPB Manual• Module 1 Company Business Model• Module 2 Advertising and Marketing• Module 3 Loan Disclosures and Terms• Module 4 Underwriting, Appraisals, and Originator Compensation• Module 5 Closing• Module 6 Fair Lending• Module 7 Privacy 67
  68. 68. Examiners May Obtain and Review• Organizational charts and • Loan applications process flowcharts • Loan account documentation• Board minutes • Notes• Annual reports, or the • Disclosures equivalent to the extent • Other contents of loan available underwriting and closing files• Relevant management • Operating checklists reporting • Worksheets• Policies and procedures • Review documents• Rate sheets 68
  69. 69. Examiners May Obtain and Review• Relevant computer program • Historical examination and system details information• Wholesale and correspondent • Audit and compliance reports lending agreements • Management’s responses to• Due diligence and monitoring findings procedures • Training programs and• Lending procedures materials• Underwriting guidelines • Third-party contracts• Compensation policies • Advertisements • Consumer complaints 69
  70. 70. Transaction Testing• Use of a judgmental or statistical sampling.• Conduct interviews to determine understanding and consistently to follow policies, procedures, and regulatory requirements; manage changes appropriately; and implement effective controls.• Observing customer interactions. 70
  71. 71. Management System• The goal is to maintain legal compliance.• Must develop and maintain a sound compliance management system that is integrated into the overall framework for product design, delivery, and administration.• Supervised entities are also expected to manage relationships with third-party service providers to ensure that these providers effectively manage compliance with Federal consumer financial laws applicable to the product or service being provided. 71
  72. 72. Compliance Management System• The CFPB expects every regulated entity under its supervision and enforcement authority to have an effective compliance management system adapted to its business strategy and operations.• Each CFPB examination will include review and testing of components of the supervised entity’s compliance management system. 72
  73. 73. Compliance Management System• Compliance may be managed on a firm or an enterprise-wide basis.• Supervised entities may engage outside firms to assist with compliance management.• The CFPB expects that compliance management activities will be organized within a firm, legal entity, division, or business unit in the way that is most effective for the supervised entity. 73
  74. 74. The Compliance Manual 74
  75. 75. Supervision and Examination Cycle ision/manual/supervision-examination-process- overview/ 75
  76. 76. Pre-Examination/Scoping• Review and Analyze• Request and Review Documents• Make the Initial Plan 76
  77. 77. Examination• Conduct Interviews• Observation• Comparisons 77
  78. 78. Conclusions and Required Actions• Communicated• Corrective Actions Delivered• Corrective Actions 78
  79. 79. Monitoring• Nonbanks - Product and/or Market Analysis• Banks - Periodic Checks• Both - Additional Risk Assessments, Review and Status• Next Exam 79
  80. 80. Three Principles1. Focus on Consumers2. Data Driven3. Consistency 80
  81. 81. Compliance Management System isHow a Company…• Establishes its compliance responsibilities.• Communicates those responsibilities to employees.• Ensures that responsibilities for meeting legal requirements and internal policies are incorporated into business processes.• Reviews operations to ensure responsibilities are carried out and legal requirements are met.• Takes corrective action and updates tools, systems, and materials as necessary. 81
  82. 82. Compliance Management SystemWill Provide•Board and management oversight.•Compliance program.•Response to consumer complaints.•Compliance audit. 82
  83. 83. Compliance Program• The CFPB advises in its Manual that “A sound compliance program is essential to the efficient and successful operation of the supervised entity, much as business plan.” 83
  84. 84. Compliance ProgramA compliance program includes the followingcomponents:•Policies and procedures•Training•Monitoring and corrective action 84
  85. 85. Compliance Program• The CFPB outlines that a supervised entity should establish a formal, written compliance program.• Program should be a planned and organized effort to guide the entity’s compliance activities.• Should be a written program that represents an essential source document that may serve as a training and reference tool for employees. 85
  86. 86. Compliance Policy and ProceduresP&P should be documented and in sufficient detail to implementthe board-approved policy documents. Examiners will seek todetermine whether compliance policies and procedures:1.Are consistent with board-approved policies.2.Address compliance with applicable Federal consumer financial laws in a manner designed to prevent violations and to detect and prevent associated risks of harm to consumers.3.Cover product or service lifecycles.4.Are maintained and modified to remain current and to serve as a reference for employees in their day-to-day activities. 86
  87. 87. Policy & ProceduresExaminers will also request and review compliancepolicies and procedures. Examiners will look for thefollowing:1. Request and review policies and procedures related to consumer compliance, including Federal consumer financial laws and policies and procedures related to offering consumer financial products and services. 87
  88. 88. Policy & Procedures2. Review policies and procedures for changesmanagement committed to make following recentmonitoring, audit, and examination findings andrecommendations. 88
  89. 89. Policy & Procedures3. Review policies and procedures to determinewhether and how they address new or amendedFederal consumer financial laws and regulationssince the preceding examination or since the mostrecent consumer compliance examination by astate or prudential regulator, if applicable, if this isCFPB’s first examination. 89
  90. 90. Policy & Procedures4. Request and review policies and procedures todetermine whether they cover consumer financialproducts or services introduced since thepreceding examination or since the most recentconsumer compliance examination by a state orprudential regulator, if applicable, if this is CFPB’sfirst examination. 90
  91. 91. Policy & Procedures5. Review policies and procedures relating tocompliance with specific regulatory requirements(such as the privacy of consumer financial information)and their implementing procedures.6. Review for outdated content, the names ofunaffiliated entities, or other indicators that policiesare overly general or not tailored to the needs andactual practices of the supervised entity beingexamined. 91
  92. 92. Policy & Procedures7. Review policies and procedures for productswith features that may inhibit consumerunderstanding or otherwise pose heightened risksof unfair, deceptive, or abusive practices.8. Review policies and procedures for products inwhich employee compensation structures, pricingor underwriting discretion, or other features maypose heightened risk of unlawful discrimination. 92
  93. 93. Policy & Procedures9. Review policies and procedures designed to ensurethat the entity’s third-party service providers complywith legal obligations applicable to the product orservice of the examined entity and the provider.210. Review policies and procedures maintained bydifferent regional, business unit, or legal entitiessubject to the same corporate or board-level policiesfor consistency. 93
  94. 94. Policy & Procedures11. Review policies and procedures for recordretention and destruction timeframes to ensurecompliance with legal requirements. 94
  95. 95. Policy & Procedures12. If compliance procedures are embedded inautomated tools or business unit procedures,determine that a qualified compliance officer orcontractor reviewed these tools for consistencywith policies and procedures and compliance withapplicable Federal consumer laws and approvedthem for the purpose for which they are utilized. 95
  96. 96. Policy & Procedures13. Draw preliminary conclusions regarding thestrength, adequacy, or weakness of policies andprocedures, and identify business units, deliverychannels, or offices for transaction testing. Test toconfirm that actual practices are consistent withstrong or adequate written policies andprocedures. Test to determine the impact ofapparently weak procedures. 96
  97. 97. Basic Monitoring Activities• New Products/Services• Events• Questions 97
  98. 98. Basic Monitoring Activities • Prudential and State Regulator Examination Reports • Community Reinvestment Act (CRA) Performance Evaluations • Current Enforcement Actions • Call Report Data • Complaint Data 98
  99. 99. Basic Monitoring Activities • Home Mortgage Disclosure Act • Home Affordable Modification Program Data • SEC Filings • Licensing or Registration Information • Reports from the Entity to Prudential or State Regulators • CFPB Research Analyst Reports • Institution Website 99
  100. 100. Compliance Training for EVERYONE!1.Compliance training is current, complete, directed to appropriate individuals based on their roles.2.Training is consistent with policies and procedures and designed to reinforce those policies and procedures.3.Compliance professionals have access to training that is necessary to administer a compliance program that is appropriate for that supervised entity and its business strategy and operations. 100
  101. 101. What Will Examiners be Looking for in aCompanies Training Program?• Request and review the schedule, record of completion, and materials for recent compliance training of board members and executive officers.• Determine the involvement of compliance officer(s) in selecting, reviewing, or delivering training content. 101
  102. 102. What Will Examiners be Looking for in aCompanies Training Program?• Request and review policies, standards, schedules, and records of completion for compliance-specific training of compliance professionals, managers, and staff, and documents demonstrating that third-party service providers who have consumer contact or compliance responsibilities are appropriately trained. 102
  103. 103. What Will Examiners be Looking for in aCompanies Training Program?• Request and review samples of the content of training materials and comprehension tests, including training related to new regulatory requirements, new products or channels of distribution, and marketing (including scripts).• Request and review training developed as a result of management commitments to address monitoring, audit, or examination findings and recommendations or issues raised in consumer complaints and inquiries. 103
  104. 104. What Will Examiners be Looking for in aCompanies Training Program?• Request and review training developed as a result of management commitments to address monitoring, audit, or examination findings and recommendations or issues raised in consumer complaints and inquiries.• Determine whether the program is designed to provide training about the specific regulatory requirements relevant to the functions of particular positions, such as the Truth in Lending Act for loan officers. 104
  105. 105. What Will Examiners be Looking for in aCompanies Training Program?1.Review records of follow-up, escalation, and enforcement for units with training completion rates that do not meet the supervised entity’s standards or deadlines.2.Request and review the supervised entity’s plans for additions, deletions, or modifications to compliance training over the next 12 months and any plans for changes to the overall training resources and compare actual training activities to prior plans. 105
  106. 106. What Will Examiners be Looking for in aCompanies Training Program?1.Draw preliminary conclusions about the strength, adequacy, or weakness of the training element of the compliance program, and select lines of business, organizational units, or other areas for more detailed review and testing.This means that companies will need to have a completeand comprehensive training program in place that not onlydelivers training but also provides for the accountability toshow Examiners content delivered in training programs,who attended and how often training is received. 106
  107. 107. Monitoring and Corrective Action• Provide elements that offer an organized risk- focused way to identify procedural or training weaknesses.• Provide a high level of compliance by promptly identifying and correcting weaknesses that may exist within an organization. 107
  108. 108. What is the CFPB Looking For?1.Monitoring is scheduled and completed and leads to timely corrective actions where appropriate.2.Determining that transactions and other consumer contacts are handled according to the entity’s policies and procedures.3.Monitoring and testing consider the results of risk assessments.4.Monitoring addresses deficiencies5.Findings are escalated to management and to the board of directors if appropriate. 108
  109. 109. Examiners Will Be Looking For• Determine the chief • Request and review the risk compliance officer’s role. assessments or other• Request and review the documents that led to the monitoring and testing monitoring and testing schedule for the current year program plan. or next 12 months, and • Discuss with the compliance review the currency of officer or monitoring manager reviews in process against the the coverage of third-party current schedule. service providers that have contact with consumers. 109
  110. 110. Examiners Will Be Looking For• Determine whether and to • Review reports for indications what extent monitoring of systemic weaknesses, includes calculation tools, the repeat violations of law and content of consumer resulting risks or harms to disclosures and notices, consumers. marketing materials, and • Review a sample of reports scripts or guides for employee and supporting documents contacts with consumers. covering potential unfair,• Request and review all deceptive, or discriminatory compliance monitoring, practices or related matters testing and corrective action that pose heightened risks to reports completed. consumers. 110
  111. 111. Examiners Will Be Looking For1.Determine whether monitoring results in corrective action that is timely and appropriate in size and scope.2.Draw a preliminary conclusion regarding the strength, adequacy, or weakness of the monitoring and corrective action element of the compliance program, and select areas for further review either because of lack of coverage by the monitoring program or to confirm monitoring or corrective action findings. 111
  112. 112. Consumer Complaint Response• System should ensure responsiveness and responsibility in handling consumer complaints and inquiries. 112
  113. 113. Consumer Complaints•Weaknesses – Compliance Management System – Training – Internal Controls – Monitoring 113
  114. 114. Red Flags• Numerous Complaints• Omission• Act• Deceptive Practice 114
  115. 115. Complaints• Subsidiaries• Affiliates• Third Parties 115
  116. 116. Analysis• Potential Unfair, Deceptive or Abusive Practices• Charge-Backs• Refunds 116
  117. 117. Focus on Consumers• The CFPB will focus on the risks to consumers when it evaluates the policies and practices of financial institutions.• Expected that companies will maintain effective systems and controls to manage their compliance responsibilities. 117
  118. 118. Module One – Session Three
  119. 119. Title XIV• Title XIV of the Act was drafted for the purpose of assuring “that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.” 119
  120. 120. Minimum Standards for Borrowers’Ability to Pay• Will require that lenders make a “reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance … and assessments.” 120
  121. 121. Internal Revenue Transcripts• In order to “safeguard against fraudulent reporting,” lenders are now required to use Internal Revenue transcripts of tax returns or another method that “quickly and effectively verifies income” by a third party who is also subject to the rules promulgated as a result of this legislation. 121
  122. 122. Title XIV - Eight Subtitles:• Subtitle A: Residential • Subtitle E: Mortgage Mortgage Loan Servicing Origination Standards • Subtitle F: Appraisal• Subtitle B: Minimum Activities Standards for Mortgages • Subtitle G: Mortgage• Subtitle C: High-Cost Resolution and Mortgages Modification• Subtitle D: Office of • Subtitle H: Miscellaneous Housing Counseling Provisions 122
  123. 123. Definition of Consumer Transactions•Transactions that are secured by a mortgage•Transactions that are secured by a deed of trust•Transactions that are secured by other consensual security interest on a dwelling or on residential real estate that includes a dwelling 123
  124. 124. Application of Title XIV• Mortgage Loan Originators• “Entities or individuals earning or expecting to earn compensation by taking residential mortgage loan applications, assisting or offering to assist consumers in negotiating the terms of a mortgage loan, or advertising their services as mortgage loan originators to the public.”(H.R. 4173 Section 1401, adding TILA Section 103(cc)(2)(A)) 124
  125. 125. Table Funding• The term includes those entities and individuals who table fund residential mortgage loans.(TILA Section 103(cc)(2)(F)) 125
  126. 126. Exclusions• Those who perform purely clerical or administrative tasks.• Creditors who provide loan funding(TILA Section 103 (cc)(2)(C-G)) 126
  127. 127. Exclusions• Licensed real estate brokers who are not compensated by a lender, mortgage broker, mortgage loan originator or the agent of any of these entities or individuals.(TILA Section 103 (cc)(2)(C-G)) 127
  128. 128. Exclusions• A person, estate or trust that provides mortgage financing for the sale of no more than three properties within a 12-month period.(TILA Section 103 (cc)(2)(C-G)) 128
  129. 129. Exclusions• Loan servicers and their employees, including those who renegotiate or modify loan for borrowers who are in default or likely to default on their mortgages.(TILA Section 103 (cc)(2)(C-G)) 129
  130. 130. Does NOT Include•Consumer credit transactions under an open end credit plan•Extensions of credit for timeshare plans(TILA Section 103(cc)(5)) 130
  131. 131. Subtitle A• The stated purpose of Subtitle A, “Residential Mortgage Loan Origination Standards,” is “…to assure that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive.”(H.R. 4173 Section 1403, adding TILA Section 129B(a)(2)) 131
  132. 132. Subtitle AThis section of the law also creates a duty of carefor mortgage loan originators to:•Complete applicable licensing requirements under state and federal law.•Include their NMLS unique identifier on all loan documents.(TILA Section 129 (b)(1)(A-B) 132
  133. 133. Subtitle A and Mortgage LoanOriginator Comp1.A prohibition against incentives for loan originators to earn additional compensation by steering consumers towards particular loans or loans with particular lending terms.2.Limitations on loan originator compensation.3.FRB issued a “Compliance Guide”. 133
  134. 134. Anti-Steering• TILA prohibits certain practices relating to payments made to compensate mortgage brokers and other mortgage loan originators.• The primary goal of the amendments is to protect consumers in the mortgage market from unfair practices involving compensation paid to loan originators. 134
  135. 135. Rule Does Not Apply to•Open-end home equity lines of credit (HELOCs).•Time-share transactions loans secured by real property if the property does not include a dwelling.Section 226.36 135
  136. 136. Prohibited Acts with Credit Securedby a Dwelling• Applies to both mortgage loan originators and companies or mortgage brokers. This includes companies that close loans in their own names but use table-funding from a third party. The term “loan originator” also includes employees of creditors and employees of mortgage brokers that originate loans.Section 226.36 136
  137. 137. Title XIV and the SAFE Act• Title XIV expands upon the definition of a “loan originator” in the SAFE Act.• The SAFE Act definition is limited.• Most of the state laws that implement the SAFE Act define the term to include persons who perform the services in previous slide.• Title XIV, will cover more individuals than are covered by the SAFE Act.• Some individuals will be subject to the new TILA restrictions relating to mortgage loan originators but who will not be required to be licensed or registered in accordance with the SAFE Act. 137
  138. 138. Exclusions• Creditors are excluded from the definition of a “loan originator” when they do not use table funding, whether they are a depository institution or a non-depository mortgage company, but employees of such entities are considered “loan originators.” What this means is that a table-funding lender will be treated as a “loan originator” for purposes of the new TILA restrictions on mortgage loan originators. 138
  139. 139. Exclusions• The definition of “loan originator” excludes a person who performs purely administrative or clerical tasks for a mortgage loan originator, or an employee of a retailer of manufactured homes, so long as he/she does not advise a consumer on loan terms and a person who performs only real estate brokerage activities and is licensed/registered under state law to do so, so long as he/she is not compensated by a lender, mortgage broker, mortgage originator, or their agents. These exclusions are similar to those contained in the SAFE Act. 139
  140. 140. Exclusions• Exclusions include loan servicers and their employees and agents. This exclusion is directed toward those who offer or negotiate terms in connection with renegotiating, modifying, replacing and subordinating principal of existing loans for borrowers who are delinquent, in default, or have a reasonable likelihood of defaulting. 140
  141. 141. Mortgage Transactions Terms orConditions• Prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other mortgage loan originator that is based on a mortgage transactions terms or conditions, except the amount of credit extended.• Prohibits any person from paying compensation to a mortgage loan originator for a particular transaction if the consumer pays the mortgage loan originators compensation directly. 141
  142. 142. Steering• Steering rule prohibits a mortgage loan originator from steering a consumer to consummate (fund) a loan that provides the mortgage loan originator with greater compensation, as compared to other transactions the mortgage loan originator offered or could have offered to the consumer, unless the loan is in the consumers best interest.• Provides a safe harbor to facilitate compliance with the prohibition on steering. 142
  143. 143. Record Retention• Creditors who compensate mortgage loan originators must retain records to evidence compliance with Regulation Z for at least two years after a mortgage transaction is consummated.Section 226.25 143
  144. 144. Understanding the Rule• Section 1403 of the Dodd-Frank Act adds a new section (§ 129B(c)) to TILA and is designed to prohibit the payment of yield spread premiums “YSPs” and other steering incentives.• Compensation cannot be increased or decreased. 144
  145. 145. Compensation• Amount of compensation is not subject to change.• Does not specify that compensation may be subject to a minimum or maximum dollar amount. 145
  146. 146. Case Study• Read page____• Break into groups and discuss the advantages and disadvantages of the loan originator compensation changes that you have experienced in the past year. 146
  147. 147. Third-Party Closing Costs• Thus, the rule does not prohibit creditors or mortgage loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the mortgage loan originator does not vary based on the transactions terms or conditions. 147
  148. 148. Payment by Person Other thanConsumer• If a mortgage loan originator receives compensation directly from a consumer in a transaction, no other person may provide compensation to a mortgage loan originator, directly or indirectly, in connection with that particular credit transaction. 148
  149. 149. Prohibition on Steering• Title XIV prohibits a mortgage loan originator from "steering" a consumer to a lender offering less favorable terms in order to increase the loan originators compensation. 149
  150. 150. Loan Options Must Include a. The loan with the lowest interest rate for which the consumer qualifies; b. The loan with the lowest total dollar amount for origination points or fees, and discount points, and c. The loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation. 150
  151. 151. Safe Harbor• Mortgage loan originators must obtain loan options from a number of creditors with which they regularly do business.• The mortgage loan originator may present fewer than three loan options and satisfy the safe harbor rule as long as the loan options presented to the consumer otherwise meet the criteria in the rule. 151
  152. 152. Civil Liability ProvisionsSection 1404 of the Dodd-Frank Act adds a new § 129B(d) to TILA, toextend the civil liability provisions of TILA to mortgage originators.• New § 129B(d) of TILA applies the civil liability provisions of TILA to mortgage loan originators by substituting the term “mortgage originator” for “creditor” wherever the latter term appears in § 130 of TILA.• Imposes civil liability for actual damages, statutory damages equal to twice the finance charge (with a minimum of $400 and a maximum of $4,000 in an individual action for a credit transaction not under an open- end credit plan that is secured by real property or a dwelling, and a maximum of the lesser of $1,000,000 or 1% of the creditor’s net worth in a class action), costs and reasonable attorneys’ fees. 152
  153. 153. SteeringSubtitle A includes directive to draft rules that prohibitmortgage loan originators from steering consumers toresidential mortgage loans that have any of the followingcharacteristics:• Loans that consumers cannot reasonably repay.• Loans that have “predatory characteristics.”• Steering consumers away from “qualified mortgages.”• Loans with terms based on irrelevant factors such as race, ethnicity, gender, or age. 153
  154. 154. Prohibitions• Mischaracterizing of a consumer’s credit history.• Mischaracterizing of the appraised value of property used to secure a loan.• If unable to offer a consumer a mortgage loan, discouraging the consumer from seeking a loan from another loan originator.(TILA Section 129(b)(3)) 154
  155. 155. Subtitle B and Repayment Ability• Subtitle B, covers the Minimum Standards for Mortgages• Also addresses loan suitability and the assessment of a borrowers’ ability to repay.(TILA Section 129C(a)(1)) 155
  156. 156. Determination of Repayment MustMeet•Verified income•Credit history•Existing obligations•Debt-to-income ratio•Employment status•Must be based on a repayment schedule that fully amortizes the loan(TILA Section 129C(a)(3-4)) 156
  157. 157. Non-Traditional Mortgage• Negative Amortization Loans• Certain Variable Rate Loans• Interest-Only Loans(TILA Section 129C(a)(6)) 157
  158. 158. Qualified Mortgage Standards• Section 1412 establishes a “safe harbor” for compliance with the ability to repay requirements of § 129C(a). A creditor and its assignees may “presume” that a loan meets the ability to repay requirements if the loan is a “qualified mortgage.” 158
  159. 159. Qualified Mortgage Standards• The periodic payments will not • The underwriting is based on a result in an increase in the payment schedule that fully principal balance. amortizes the loan over the loan• The borrower cannot defer term. payment of the principal. • The underwriting is based on the• There are no balloon payments. maximum interest rate permitted• The verification and during the first five years of the documentation of the income and loan term and on a payment financial resources of those who schedule that fully amortizes the are obligated to repay the loan is loan over the loan term. complete. 159
  160. 160. Qualified Mortgage Standards• The term of the loan does not • The loan complies with exceed 30 years.(some guidelines, established by the exceptions allowed.) Board, for debt to income• If a residential mortgage loan ratios or with other measures meets these characteristics, it of ability to pay that the Board is considered as a qualified establishes. mortgage, and the creditor • The total points and fees for can assume that the borrower the loan do not exceed three has the ability to repay the percent of the total loan loan. amount.(H.R. 4173, adding TILA Section129C(b)(2)(A)) 160
  161. 161. Authority• The Dodd-Frank Act provides regulators (the Federal Reserve Board and the CFPB) with the authority to revise the criteria for a “qualified mortgage.”(TILA Section 129C(b)(3)(B)) 161
  162. 162. Standards• Standards for lenders to comply with its prohibitions against steering and double compensation and its requirement to assess repayment ability by providing that the violation of any of these provisions is a defense in foreclosure actions.(H.R. 4173 Section 1413, adding TILA Section 120(k)) 162
  163. 163. General Ability-to-Repay Standards • Income and assets • Monthly payments on • Employment status mortgage-related • Monthly mortgage obligations, such as payment taxes and insurance • Monthly payment on a • Debt obligations simultaneous mortgage • Monthly debt-to- • Credit history income ratios • Credit history 163
  164. 164. Ability to Repay• Consumer-Purposed Closed-end Mortgage(H.R. 4173, adding TILA Section 129C(b)(2)(A)) 167
  165. 165. Does not apply to• HELOCs• Loan Modifications• Timeshare Plans• Reverse Mortgages• Temporary Loans(H.R. 4173, adding TILA Section 129C(b)(2)(A)) 168
  166. 166. General Ability-to-Repay• No limits on risky features, loan term, and points and fees.(H.R. 4173 Section 1414, adding TILA Section 129C) 169
  167. 167. General Ability-to-Repay• Fully indexed rate or introductory rate, whichever is greater• Monthly, substantially equal payments that amortize the loan amount over the loan term• Special calculations for loans with negative amortization, interest only payments, or balloon payments(H.R. 4173 Section 1414, adding TILA Section 129C) 170
  168. 168. General Ability-to-Repay• Higher-priced balloon loan – use balloon payment• Balloon loan that is not higher-priced – use the maximum payment scheduled during the first 5 years after consummation(H.R. 4173 Section 1414, adding TILA Section 129C) 171
  169. 169. Consider and Verify• Income or Assets (other than the home)• Employment Status• Mortgage Payment• Simultaneous Loan• Mortgage-related Obligations• Current Debt Obligations• Monthly Debt-to-Income ratio (DTI) or Residual Income• Credit History(H.R. 4173 Section 1414, adding TILA Section 129C) 172
  170. 170. Additional Protections•Restricting onerous lending terms and practices•Creating new disclosure requirements•Broadening the enforcement ability of state attorney generals•Increasing penalties for TILA violations 173
  171. 171. Prohibitions on PrepaymentPenalties• 3% of the outstanding loan balance during the first year of the loan.• 2% of the outstanding loan balance during the second year of the loan.• 1% of the outstanding loan balance during the third year of the loan.• Prepayment penalties are prohibited for any prepayments made after the third year of the loan term. Creditors cannot offer a loan that includes a prepayment penalty provision without also offering a loan that does not include this provision.(H.R. 4173 Section 1414, adding TILA Section 129C(c)) 174
  172. 172. Defining Qualified Mortgages• Reasonable• Good Faith Determinations 175
  173. 173. Defining a Qualified Mortgage• January 2013 Final Rule Deadline• Impacts Basic Underwriting Standards• Building Block for other Dodd-Frank Act Rulemakings 176
  174. 174. Final Rules• Origination and Servicing Practices• Loan Originator Compensation• Anti-Steering Rules• Restrictions on High-cost Loans• Escrow Accounts• Appraisals• Final Rules – January 21, 2013 177
  175. 175. Additional Prohibitions• Single Premium Insurance• Arbitration Agreements• Negative Amortization 178
  176. 176. New Disclosure Requirements• Notice of Reset of • Three business days Hybrid ARM • Information on the• Truth-in-Lending aggregate cost of Disclosures settlement charges• Periodic Statement • Amounts paid to the Form creditor • Total amount of interest paid during the loan terms. 179
  177. 177. Broader Enforcement Capacity• The law expands the enforcement authority of state attorneys general to enforce more provisions of TILA.(H.R. 4173, amending TILA Section 130(e)) 180
  178. 178. Subtitle C: High-Cost Mortgages• Title XIV, Subtitle C of the Dodd-Frank Act amends HOEPA by extending its coverage.• Creates new restrictions for high-cost home loans. The law today applies to a broader range of loans secured by the borrower’s principal dwelling. These include: 1.Purchase money mortgages 2.Open-end home equity lines of credit• At this time the law does not apply to reverse mortgages. 181
  179. 179. Revised HOEPA Provisions• Interest Rate Threshold• Points and Fees Threshold – $20,000 or more – $20,000 or less• Loans with Prepayment Penalties 182
  180. 180. High-Cost Mortgage Counseling• Creditors cannot offer a borrower a high-cost mortgage until receiving certification from a HUD-approved counselor.• The certification must state that the borrower has received counseling on the advisability of accepting the mortgage.• The counselor must be an independent counselor who is not employed by the creditor or by an affiliate of the counselor.• HOEPA continues to require the disclosures that alert consumers to the risks of accepting a high-cost home loan. 183
  181. 181. Prohibited Terms and Practices• Prepayment Penalties• Balloon Payments• Recommending Default• Limitation on Late Fees• No Acceleration after Default• No Financing of Points and Fees• No Fees for Loan Modification or Deferral• Evading Provisions of the Law(H.R. 4173 Section 1432, amending TILA Section 129(e)) 184
  182. 182. Interest Rate Threshold• The interest rate threshold used to be calculated by determining whether a loan’s interest rate exceeded a set number of points above Treasury securities with a comparable rate. However recent revisions to HOEPA changed that. Now the interest rate threshold is calculated using a new index.• This new index is the average prime offer rate. 185
  183. 183. Average Prime Offer Rate• The law defines “average prime offer rate” as the following:• “…the average prime offer rate for a comparable transaction as of the date on which the interest rate for the transaction is set, as published by the Board.”(H.R. 4173 Section 1412, adding TILA Section 129C(b)(2)(B)) 186
  184. 184. New FFIEC Rate Spread Calculator• FFIEC “New FFIEC Rate Spread Calculator” 187
  185. 185. Definition of Points and Fees• Mortgage loan originator • All prepayment fees and penalties compensation, paid directly or that the borrower must pay if the indirectly to the originator. loan refinances a loan made or held• Premiums paid at or before closing by the same creditor or one of its for any optional insurance products affiliates. or debt cancellation coverage, other • The recent revisions also include than those fees that are paid in full guidelines on excluding from the on a monthly basis. calculation of points and fees and• The maximum prepayment fees and any bona fide discount points that a penalties that the creditor may borrower knowingly pays in order to collect under the terms of the reduce the interest rate. transaction. 188
  186. 186. Open-End Transactions• Revisions to the law also provide that HOEPA will now apply to open-end transactions.(TILA Section 103(c)(2)) 189
  187. 187. Subtitle D: Office of HousingCounseling• Subtitle D is also known as the “Expand and Preserve Homeownership through Counseling Act.” It establishes a new Office of Housing Counseling within the Department of Housing and Urban Development (HUD). 190
  188. 188. Office of Housing Counseling• Computer software programs for • A mortgage information booklet, consumers. which will provide more information• A multimedia campaign that will than is contained in the current HUD encourage vulnerable consumers to Information Booklet. seek unbiased and reliable • Education materials for vulnerable homeownership counseling if they consumers, including immigrants, are facing default or foreclosure or it minorities, and the elderly. they are considering a subprime • HUD is also directed to establish and loan. maintain, along with the CFPB, a• Foreclosure rescue education database on defaults and programs for geographic areas that foreclosures. have high foreclosure rates. 191
  189. 189. Subtitle E: Mortgage Servicing• Mandatory Escrow or Impound Accounts for Certain Mortgages• Applies to all first-lien mortgages on a consumer’s principal residence (other than a reverse mortgage). The provisions outline the circumstances in which an escrow account is required, establish that mandatory escrow accounts must continue for five years, and develop the standards for a mandatory escrow account. 192
  190. 190. Subtitle E: Mortgage Servicing• Escrow Waiver Disclosure• Addresses circumstances in which an escrow account is not mandatory and those in which consumers may elect to close an escrow account. Requires loan servicers to provide a disclosure that states the responsibility of the consumer for non-escrowed expenses, such as taxes and insurance, and the consequences of failing to pay these expenses. 193
  191. 191. Subtitle E: Mortgage Servicing• RESPA Amendments• Revisions include new requirements that servicers must meet prior to arranging for force-placed insurance and new penalty provisions. Also shortens the time a loan servicer has to respond to a written request or dispute from a borrower. Servicers must now acknowledge the receipt of letters from consumers within five days of receipt and provide a response to issues raised by consumers within 30 days. 194
  192. 192. Subtitle E: Mortgage Servicing• TILA Amendments• Relates to crediting payments on the date of receipt and providing an accurate payoff balance within seven business days of a written request for the information. 195
  193. 193. Subtitle E: Mortgage Servicing• Including Escrow Amounts in TILA Disclosures• This is applicable to all first-lien mortgages and to subordinate mortgages secured by a consumer’s principal residence. The provisions require payment schedule disclosures to include escrow amounts. 196
  194. 194. Subtitle F: Appraisal Activities• The Dodd-Frank Act addresses the following concerns regarding appraisals: • Poor appraisal practices which are associated with higher-risk mortgages, such as high-cost or subprime home loans. • Interference with the independent and professional judgment of appraisers. 197
  195. 195. Higher-Risk Mortgages• First lien mortgages with principal amounts that do not exceed the Freddie Mac conventional loan limits, the threshold is 1.5 percentage points above the average prime offer rate for a comparable transaction.• First lien mortgages with principal amounts that exceed the Freddie Mac conventional loan limits, the threshold is 2.5 percentage points above the average prime offer rate for a comparable transaction.(H.R. 4173 Section 1471, amending TILA Section 129H(f)) 198
  196. 196. Higher-Risk Mortgage AppraisalRequirements• The appraisal is based on a physical visit that includes examination of the interior of the dwelling.• A second appraisal must be conducted, at no cost to the borrower, if the transaction involves the resell of a property that the seller purchased within 180 days of the current transaction, and it the current sale price exceeds the amount paid by the seller. The second appraisal must consider factors that have contributed to a cost increase. These may include market changes and property improvements. The purpose of this provision is to discourage property flipping.• The appraisal must be performed by a certified appraiser in accordance with the requirements the requirements of the Uniform Standards of Professional Appraisal Practice and Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act.(TILA Section 129H(b)(1-3)) 199
  197. 197. Provide Free Copy of AppraisalConsumer Rights• The law also requires creditors to provide loan applicants with the following:•One free copy of the appraisal.•Notification that the appraisal is for the creditor’s benefit and that the loan applicant can obtain a separate appraisal.(TILA Section 129H(b)(4)(c-d)) 200
  198. 198. Special Remedies for Violations toHOEPA• A consumer who brings a timely action against a creditor for a violation of rules issued under TILA may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer this is often referred to as “HOEPA damages”, unless the creditor demonstrates that the failure to comply is not material. This recovery is in addition to actual damages; statutory damages in an individual action or class action, up to a prescribed threshold; and court costs and attorney fees that would be available for violations of other TILA provisions. 201
  199. 199. Special Remedies for Violations toHOEPA• Third, a consumer has a right to rescind a transaction for up to three years after consummation when the mortgage contains a provision prohibited by a rule adopted under the authority of TILA. Any consumer who has the right to rescind a transaction may rescind the transaction as against any assignee. The right of rescission does not extend, however, to home purchase loans, construction loans, or certain refinancings with the same creditor. 202
  200. 200. Special Remedies for Violations toHOEPA• If a creditor assigns a high-cost mortgage to another person, the consumer may be able to obtain from the assignee all of the foregoing damages.• Consumer may assert a violation of TILA Section 129C(a) as a defense to foreclosure by recoupment or set off.• There is no time limit on the use of this defense. 203
  201. 201. Compliance• Creditors who willfully fail to comply with these requirements are liable to the loan applicant or the borrower in the amount of $2,000.(TILA Section 129H(b)(4)(e)) 204
  202. 202. Appraisal Independence1.Coercing, bribing, extorting, instructing, or intimidating an appraiser or appraisal firm.2.Mischaracterizing the value of property.3.Encouraging an appraiser to deliver a target value.4.Threatening to withhold payment for an appraisal.(TILA Section 120E(b)(1-4)) 205
  203. 203. Prohibitions to Protect AppraisalIndependenceThe law includes additional prohibitions to protectappraisal independence. These include:• Appraisers and appraisal companies are prohibited from having a financial or other interest in the property that is subject to the appraisal.• Creditors are prohibited from extending credit if the creditor knows that the appraisal misstates the value of the principal dwelling securing the loan.(TILA Section 129E(d) and (f)) 206
  204. 204. Setting Professional Standards• Any mortgage or real estate professional who is involved in a real estate transaction that involves a borrower’s principal dwelling and who has a reasonable basis to believe that an appraiser is failing meet or is violating professional standards or the law is required, by law, to “…refer the matter to the applicable State appraiser certifying and licensing agency.”(TILA Section 129E(e)) 207
  205. 205. Subtitle G: Mortgage Resolution andModification• The law defines a “multi-family property” as one with five or more dwelling units. • (H.R. 4173 Section 1481 (a))• The law specifically directs HUD to create a program that will do the following: • Encourage “sustainable financing” of multi-family properties • Preserve federal, state, and local subsidies • Provide funds for rehabilitation • Transfer multi-family properties to responsible new owners • (H.R. 4173 Section 1481(c)) 208
  206. 206. Mortgage Assistance Program• Subtitle G also addresses issues related to mortgage assistance programs such as the Making Home Affordable Program and the Home Affordable Modification Program. These programs were established under the Emergency Economic Stabilization Act of 2008. The law prohibits assistance to any individual under these programs who has been convicted within the past ten years for felony, money laundering, or tax evasion if these crimes relate to a real estate or mortgage transaction.(H.R 4173 Section 1481(d)(1)) 209
  207. 207. Requirements Under Subtitle G• Require mortgage servicers participating in the program to provide the data that was used in performing a net present value analysis to borrowers if their requests for loan modifications are denied.• Make an NPV (Net Present Value) calculator available on the Internet that homeowners can use to determine whether their mortgages would be accepted or rejected for modification.• Make reasonable efforts to provide a website that homeowners can use to apply for mortgage modifications.(H.R. 4173 Section 1482(b)(1-3)) 210
  208. 208. Public Access to Information• The Secretary of the Treasury must release the information each month and must include the following: • The number of requests of loan modifications. • The number of these requests that were processed and approved or denied.• The Secretary must also write regulations regarding data compilation and publication.(H.R. 4173 Section 1483(b)(1-2)) 211
  209. 209. Subtitle H: Miscellaneous• Chronology• Inter-agency Study 212
  210. 210. The Road Ahead• Dodd-Frank Act is to impose stricter standards• Provide consumer protection and education 213
  211. 211. Treat Customers Fairly• Broadest power of new Bureau is its ability to regulate “abusive practices”.• This means ANYTHING YOUR CUSTOMER DOES NOT UNDERSTAND! 214
  212. 212. Module Two – Session OneEthics, Fraud and Fair Lending
  213. 213. Ethics, Fraud and Fair Lending• Purpose of Ethics in Lending• Red Flags of Fraud• Appraisal Independence 216
  214. 214. Objectives• Identify top red flags for mortgage fraud in the mortgage industry.• List various types of mortgage fraud.• Define the new appraisal independence regarding Dodd-Frank Act. 217
  215. 215. Ethics and Compliance• Ethical framework• Guidelines and reference to compliance standards• Goal is to protect the consumer• Awareness of industry laws and regulations 218
  216. 216. Ethics• Set of values• Conduct and principles• Deliver honest and fair services• Required 2 hours of annual instruction on Fraud, Ethics and Fair Lending 219
  217. 217. Focus of CFPB• Provide transparency in lending• Increased support of fair and honest lending practices• Result of greed and abuse of power• Victims left defenseless• Establish high level conduct in our industry• Rebuild trust 220
  218. 218. Setting Ethical Standards• Laws and regulation form solid basis• Encourage and enforce ethical practices• Compliance Approach to ethics 221
  219. 219. Committing to Professional Success• Ethics play building block• Effective communication• Fair pricing• Fair product representation• Meaningful and compliant marketing• Compliant team 222
  220. 220. Setting the Example• Set the standards• Reasons to practice good ethics• Reputation of organization• Reputation of partners, vendors and staff• Everyone sets the example 223
  221. 221. Establishing a Code of Conduct 224
  222. 222. Honesty and Integrity 225
  223. 223. Professional Conduct 226
  224. 224. Honesty in Advertising 227
  225. 225. Confidentiality 228
  226. 226. Compliance with the Law 229
  227. 227. Disclosure of Financial Interest 230
  228. 228. Making a Change• Unacceptable ethics leads to regulatory backlash• Increased regulatory oversight• 2008 to now experienced lawmakers passing over-reaching laws• Prevent the recurrence of the mortgage melt- down and Protect consumers• Fine line between proactive oversight and protection and regulatory overload 231
  229. 229. Best Practice• Build strong base of industry ethics• Combined with make sense regulatory oversight• Transparency is key• Industry goal – build excellent business practices• Support highest standards• Restore faith in our industry 232
  230. 230. 2008 FBI Report on Fraud“Mortgage fraud continues to be an escalating problem in the United States and acontributing factor to the billions of dollars in losses in the mortgage industry.Recent congressional economic stimulus legislation and the proliferation of FHA-insured mortgages are providing funding streams for perpetrators to furtherexploit this industry. Multiple fraud schemes are being conducted by industryprofessionals who are in a position to exploit the current depressed housingmarket. Market conditions are also fueling the use of traditional and emergingschemes which have the potential to multiply across jurisdictions as foreclosuresincrease, the market contracts, access to credit diminishes, and morehomeowners are unable to sell or refinance their homes. Properties affected bythese schemes negatively impact neighborhoods; federally insured loan programs;the mortgage, banking, and securities industries; secondary market investors; taxpayers; homeowners; and the overall US economy.”Source: 233
  231. 231. FBI Mortgage Fraud SARs 234
  232. 232. Professional Conduct• Foundation of ethics in lending is enforced with a compliance approach• Ethics is about fairness, honesty, communication, transparency and full disclosure• Actions must be right and look right 235
  233. 233. Laws and Regulations• Build faith & trust• Actions can bring about new laws & regulations 236
  234. 234. Compliance and Ethics 237
  235. 235. Equal Credit Opportunity Act (ECOA) –Reg B Race Color Religion National Origin Gender Marital Status Age The fact that all or part of an applicant’s income derives from a public assistance program The fact that the applicant has exercised any right under a consumer credit protection act 238
  236. 236. Fair Housing Act Lending decisions can NEVER be based on… Race Color Religion National Origin Handicap Familial Status GenderThe Fair Housing Act - sec. 800. 42 U.S.C. 3601 et seq 239
  237. 237. RESPA• Real Estate Settlement Procedures Act RESPA Regulation X - 24 CFR §3500• Now Reg X – 12 CFR 1024• GFE within 3 business days• HUD-1• HUD’s Settlement Cost Booklet• Prohibits kickbacks• Disclosure of Affiliated Business Arrangements• Transfer of servicing 240
  238. 238. TILA• Truth in Lending Act/Regulation Z (§§ 226.15 and 226.23)• Disclose APR within 3 business days• Consumer Handbook on Adjustable Rate Mortgages• Triggering terms• Right of rescission 241
  239. 239. Gramm-Leach-Bliley Act• Financial Services Act of 1999 (P.L. 106-102)• Allows financial companies to consolidate their services 242
  240. 240. Gramm-Leach-Bliley Act• Financial Privacy Rule (16 CFR Part 313)• What information will be collected• How the information will be used and shared• What procedures the company has to protect the information• Opt-out option 243
  241. 241. Gramm-Leach-Bliley Act• The Safeguards Rule (16 CFR Part 314)• Identifying a specific employee who is in charge of the security plan• Having a program that protects consumer information• Updating and modifying the security system, as necessary 244
  242. 242. Gramm-Leach-Bliley Act• Pretexting Protection• Impersonating an individual• Hacking into file• Develop procedures and training 245
  243. 243. Ethical Standards• Consumer• Appraiser• Mortgage loan originator• Lender• Everyone associated with the transaction 246
  244. 244. What is Mortgage Fraud?• Fraud for profit• Involves groups of people• Initiators receive percentage of profit• Costs the industry, consumers and public 247
  245. 245. Damages Caused by Fraud• 72% spike in loan repurchase requests in 1st quarter 2011 – Fannie Mae Report• Common fraud findings are income exaggerated and credit not fully disclosed – William H. Brewster – Fannie Mae – June 11, 2010 248
  246. 246. 2010 Mortgage Fraud SuspiciousActivity Reports (SARs)• 5% increase in reported fraud from the previous year• 72% involved losses of more than $1 million• The Financial Crimes Enforcement Network (FinCEN) estimated losses in 2010 at more than $1.5 billion• Largest portion involves misrepresentation on loan applications and verification of deposits, along with appraisal and valuation issues• Identity-theft, bankruptcy and income related fraud are on the rise and have been directly associated with mortgage fraud 249
  247. 247. Mortgage Fraud 2010 Mortgage Asset Research Institute Report 25% of originated loans and 33% of post-funding investigations included some type of appraisal fraud and/or misrepresentation. 250
  248. 248. Misrepresentation on the Application 251
  249. 249. February 2011 Fannie Mae FraudFindings 252
  250. 250. Mortgage Fraud Definition Material misstatement, misrepresentation or omission which are relied upon by an enterprise to fund or purchase or not to fund or purchase a mortgage. 253
  251. 251. Mortgage Fraud affects everyone Starting with: Consumers Servicers YOU! 254
  252. 252. Fraud for Housing Schemes1. Perpetrators may include the borrower and/or loan officer2. Normally involves a single loan3. Contains loan-level misrepresentations to qualify4. Borrower intends to repay – the loan usually does not default5. The appraised value is not typically inflated at origination 255
  253. 253. StatisticsPending Fraud Investigations in 2011 involve losses of more than $1 million dollars 256
  254. 254. Mortgage Fraud Statistics from theFBI 257
  255. 255. Examples of Fraud for Housing1. Counterfeit Paychecks2. Invalid Employment3. Unintended Co-Borrower4. Falsifying Information5. Straw buyer6. Identity Theft 258
  256. 256. Fraud for Profit Schemes • Multiple Industry Professionals • Misrepresentations and Omissions • Participants Well Compensated • Straw Borrowers 259
  257. 257. Q2 2011 Mortgage Fraud Risk 260
  258. 258. Q2 2011 Mortgage Fraud Risk 261
  259. 259. Mortgage Fraud Red Flags• Precautions to take• Help identify various incidents make you vulnerable to fraud• Develop programs to help protect you and your company from adverse activities 262
  260. 260. Possible Red Flags of Mortgage Fraud• Inconsistencies in the loan file tips that file may contain misrepresentations 263
  261. 261. Common Red Flags of MortgageFraud Social Security number discrepancies No real estate agent reflected on sales contract Address discrepancies with the file Verifications (VOE, VOD, VOR, etc..) addressed to a specific party’s attention. (Should always be addressed to the HR Dept.) Verifications completed the same day they were ordered Verifications completed on the weekends or holidays 264
  262. 262. Common Red Flags of MortgageFraud Assets or wages are even dollar amounts NAL (Non-arm’s Length) transactions Occupancy on the appraisals is not consistent with the application Cash out transaction on a recently acquired property Different handwriting or font styles within a document Altered looking documents 265
  263. 263. Application Fraud The borrowers home address, phone number, employer address and phone number cannot be validated Marital status and number of dependents are not consistent with the borrowers Tax Returns or other documentation Employers address is a PO Box and not a physical address 266
  264. 264. Application Fraud Employers address is a PO Box and not a physical address Borrower’s education is not consistent with their employment. Example, borrower states that they went to culinary school, but is currently working as a bookkeeper High income borrowers have little or no personal assets Invalid Social Security Number 267