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Regulation Revolution
The document summarizes key topics from a presentation on regulatory compliance given by PolicyWorks LLC. It discusses the impact of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) and its director Richard Cordray, CFPB priorities including complaints, student loans, credit cards, mortgages, and overdraft fees. It also covers the CFPB's work on ability-to-repay rules, mortgage disclosures, and fair lending laws.
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Regulation Revolution
- 1. Regulation Revolution: Compliance Hot Topics Presented by PolicyWorks LLC The services of PolicyWorks and this presentation, including all materials, should not be construed as legal services, legal advice, or in any way establishing an attorney-client relationship. Credit unions should contact their own legal counsel for advice. Copyright© 2012 by PolicyWorks. All rights reserved. These materials may not be reproduced in whole or in part, in any form whatsoever, without the express written consent of Jami Weems and PolicyWorks. 1
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- 3. Christopher Dodd Barney Frank
- 4. Impact of Dodd-Frank •As of May 10, 2012, Dodd-Frank’s impact includes: – 3,911 pages of proposed rules* – 3,639 pages of final rules and guidance* *Note that some rules and guidance may not apply to credit unions. Source: http://regreformtracker.aba.com/ 4
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- 8. Statutory objectives • Toensure that consumers have timely and understandable information to make responsible decisions about financial transactions; • To protect consumers from unfair, deceptive, or abusive acts or practices, and from discrimination; • To reduce outdated, unnecessary, or overly burdensome regulations; • To promote fair competition by enforcing the Federal consumer financial laws consistently; and • To advance markets for consumer financial products and services that operate transparently and efficiently to facilitate access and innovation. 8
- 9. Acts in CFPBjurisdiction CFPB Jurisdiction – Alternative Mortgage – Home Mortgage Disclosure Act Transaction Parity Act of 1982 – Home Ownership and Equity – Consumer Leasing Act of 1976 Protection Act of 1994 – Electronic Fund Transfer Act – Real Estate Settlement and – Equal Credit Opportunity Act Procedures Act of 1974 – Fair Credit Billing Act – S.A.F.E. Mortgage Licensing – Fair Credit Reporting Act Act of 2008 – Home Owners Protection Act of – Truth in Lending Act 1998 – Truth in Savings Act – Fair Debt Collection Practices – Omnibus Appropriations Act Act – Interstate Land Sales Full – Federal Deposit Insurance Act Disclosure Act – Gramm-Leach-Bliley Act
- 10. CFPB Top 10 10
- 11. 1. Complaints • Indicativeof rule-making and focus • Where can consumer submit complaints? – http://www.consumerfinance.gov/complaint/ • What happens to the complaints? – Addressed by regulatory authority – CFPB reports 11
- 12. 2. Comments/Consumer Testing •Where can I view and comment on proposed regulations? – http://www.consumerfinance.gov/notice-and- comment/ • Consumer Testing – TILA/RESPA – Mortgage Statements – Escrow – Small Business Review 12
- 13. 3. Student Loans •Student loans – ―Know before you owe‖ for student loans – http://www.consumerfinance.gov/studen ts/knowbeforeyouowe/ 13
- 14. Student Loans: Studyand Legislation • CFPB plans to release a study this summer regarding the private student loan market. • Concern is that student loans lack the income- based repayment and deferment options of federal student loans. • Durbin proposed legislation recently that would allow private student loans to be discharged in bankruptcy, but not federal student loans.
- 15. 4. Credit cards •―Know before you owe‖ for credit cards • New prototype for credit card agreement – NOT MANDATORY – NOT EVEN A MODEL • Credit Card Agreement Database • Proposed rule on fees in 1st year – Capped at 25% of account’s initial credit limit 15
- 16. 5. Home-secured loans •TILA/RESPA disclosures • Escrow disclosures and higher priced escrows • Ability to repay and underwriting—―qualified mortgages‖ • Mortgage statements • Notices for forced placed insurance • ARM reset disclosures
- 17. TILA/RESPA 17
- 18. Disclosures • ―Know BeforeYou Owe‖ • Combine TILA and RESPA disclosures for closed-end, home secured loans • Early disclosures • Consummation disclosures • Model forms in final stages; rule writing beginning • Proposed rules: July 2012 18
- 19. Possible Issues tobe Addressed • ―Application‖ definition • Tolerance levels • Settlement disclosure timing and delivery • Record retention • Finance charge 19
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- 21. Proposed Reg ZAmendments • Expand minimum period for mandatory escrow accounts from 1 to 5 years • Extend the exemption for certain loans secured by a condo • Create an exemption from the escrow requirement for higher-priced mortgages if in ―rural or underserved,‖ community, among other requirements • Establish new disclosure requirements
- 22. Disclosures • Closed-end transactionsecured by a first- lien on real property or a dwelling • New disclosures for mandatory or voluntary escrow accounts if established or not established • In writing in a form the member can keep • Substantially similar to model forms
- 23. Timing of Disclosures •Provide disclosures regarding establishment/non-establishment of escrow account so they are received no later than three business days prior to consummation • Business days: all calendar days except for Sundays and specified legal public holidays. • Mailed: assume received 3 business days after mailed
- 24. Cancellation of Escrow •Closed-end transaction secured by a first lien on real property or a dwelling—if escrow will be cancelled, disclosure required • Required if member cancels or if credit union cancels • Provide so that member receives no later than 3 business days prior to closure of the escrow account
- 25. Model Forms • Eightparticipants in consumer testing • H-24: Establishment of escrow account • H-25: Non-establishment of escrow account • H-26: Cancellation of escrow account
- 26. New Section 1026.45 •Escrow requirements for higher-priced mortgage loans • Definition of higher-priced mortgage loans uses transaction coverage rate instead of APR – Transaction coverage rate is a transaction specific rate that would be used solely for coverage determinations; not disclosed to consumer— calculate same as APR except for modified value for prepaid finance charge
- 27. Exemption • Operate predominantlyin a rural or underserved area • Originate and retain servicing rights to 100 or fewer loans secured by a first lien on real property or a dwelling in the preceding two calendar years • Don’t currently escrow 27
- 28. Higher-priced: Escrow Duration •Maintain escrow for a minimum of 5 years following consummation, unless the underlying obligation is terminated earlier • Prohibits cancelling unless at least 20% of the original value is unencumbered and the consumer is not delinquent or in default • May, but not required to, cancel escrow 28
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- 30. Scope • ―Underwriting 101‖ •Rule applies to most consumer mortgages secured by a dwelling (no HELOCs) • Four compliance options – General ability to repay standard – Qualified mortgage – Balloon payment qualified mortgage in rural and underserved areas – Refinancing of a non-standard mortgage 30
- 31. 1st Option: GeneralAbility to Repay Eight factors to consider in underwriting: 1. Current or reasonable expected income or assets 2. Current employment status 3. The monthly payment on the covered transaction 4. The monthly payment on any simultaneous loan 5. The monthly payment for mortgage related obligations 6. Current debt obligations 7. Monthly DTI ratio or residual income 8. Credit history 31
- 32. General Ability toRepay • Must calculate the payment using: – Fully indexed rate; and – Monthly, substantially equal payments that amortize the loan amount over the loan term • Must underwrite the payment based on the intro rate if it is greater than the fully indexed rate • For interest only, negative amortization, and balloon loans, the payment calculation has special requirements 32
- 33. 2nd Option: “QualifiedMortgage” • The loan does not contain negative amortization, interest- only payments, or balloon payments; • The term does not exceed 30 years • The points and fees generally do not exceed 3% of the total loan amount • The income or assets are considered and verified • The underwriting is (1) based on the max rate during the first 5 years; (2) uses a payment schedule that fully amortizes the loan over the loan term; and (3) takes into account all mortgage related obligations. 33
- 34. Qualified Mortgage (cont) •Alternative 1: Does not include a requirement to consider DTI or residual income. (safe harbor) • Alternative 2: Requires consideration and verification of ability to repay requirements, specifically: employment status, simultaneous loans, current debt obligations, DTI and credit history. (presumption) 34
- 35. 3rd Option: Balloon-paymentqualified mortgage (rural or underserved areas) • Allows lenders to make a balloon-payment qualified mortgage of 5 years or longer duration if the lender complies with the requirements for a qualified mortgage and underwrites the mortgage based on the scheduled payment other than the balloon payment. 35
- 36. 4th Option: Refinancingof nonstandard mortgage • Allows same creditor to refinance a nonstandard mortgage with risky features such as negative amortization, interest-only payments or balloon payments into a standard mortgage. • Standard mortgage must follow ability to repay criteria except for verification of income and assets so long as based on max interest rate in first 5 years for ARM 36
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- 38. DFA Requirements • Dodd-FrankAct requires a periodic statement for residential mortgage loans • No statement necessary if coupon book contains required info • Closed-end mortgage loans – No HELOCs – No timeshares – Considering exempting reverse mortgages *NO proposed rule yet
- 39. What’s included? • Theprincipal loan amount • The current interest rate • The date on which the interest rate may next reset • A description of any late payment fees and any prepayment fee to be charged • Information about housing counselors • Phone number and email address for borrower to obtain information about the mortgage • Other information the CFPB may prescribe in regulation • http://www.consumerfinance.gov/wp- content/uploads/2012/02/20120213_cfpb_draft-periodic-mortgage- statement.pdf
- 40. Other Info BeingConsidered • Loan account number and property address • Servicer name and address • Amount and due date of next payment • Amount of, and date after which, any late fees will be assessed • Loan maturity date • Recent transaction activity, including itemization of fees and charges
- 41. Other Info BeingConsidered (cont.) • Current, most recent, and YTD payments by principal, interest, escrow, fees and partial payment • Policy regarding additional payments and partial payments • Amortization information for Payment Option loans • Delinquent borrower alerts
- 42. Timing • CFPB isconsidering that the periodic statement is sent no later than four days after the end of the late fee grace period
- 43. Cost Considerations • Developingnew forms or modifying existing forms • Software for calculations • Training and additional staff • Paper, printing and other production costs • Record keeping • Mailing costs
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- 45. DFA Amendment • AmendsRESPA to prohibit a servicer from obtaining force-placed insurance unless there is a reasonable basis to believe the borrower has failed to comply with agreement • Mandatory process to follow before imposing any charge 45
- 46. Process • Send upto 2 notices to the borrower – Notices must include certain information • Must accept any reasonable form of written confirmation from borrower • Within 15 days of confirmation of existing coverage, must terminate force-placed insurance and refund premiums if covered 46
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- 48. DFA Requirements • AmendsTILA by adding new requirement to notify borrower regarding the initial interest rate reset or adjustment of a hybrid ARM at end of intro period – Between 6 and 7 months prior to such reset, or – At consummation if first reset occurs during the first 6 months after consummation • Notice has required content 48
- 49. 6. Checking Accounts/Overdrafts •On 2/22/2012, the CFPB launched an inquiry into checking account overdraft programs to determine how these practices are impacting consumers. • Comment period extended to June 29, 2012. • The inquiry includes four parts. o A data request sent to a number of banks; o A notice and request for Information from the public; o A prototype ―penalty fee box‖ that the CFPB is seeking public comment on; and o The launching of ―What’s your overdraft status?‖ campaign. 49
- 50. CFPB Checking/Overdraft Focus#1 • Transaction Re-ordering that Increases Consumer Costs: o The CFPB is concerned that overdraft practices employed by some financial institutions increase consumer costs. One such practice is commingling of all checks, bill payments, debit card transactions, and ATM withdrawals each day and processing the largest transactions first. This maximizes the number of transactions that will trigger an overdraft fee. The CFPB will examine how prevalent this practice is and how it impacts consumers. 50
- 51. CFPB Checking/Overdraft Focus#2 • Missing or Confusing Information: o The CFPB is exploring whether consumers can anticipate and avoid overdraft fees. The CFPB will examine how clearly overdraft terms are disclosed and the extent to which consumers are made aware of, qualify for, and take advantage of, alternative means of covering overdraft transactions. 51
- 52. CFPB Checking/Overdraft Focus#3 • Misleading Marketing Materials: o The CFPB is looking into reports that consumers are receiving misleading marketing materials about overdrafts. Initial data suggests that opt-in rates differ widely among institutions. The CFPB seeks to understand how differences in the way institutions explain and promote overdraft programs may affect opt-in rates. 52
- 53. CFPB Checking/Overdraft Focus#4 • Disproportionate Impact on Low-Income and Young Consumers: o The CFPB is revisiting the 2008 FDIC study that found that 9 percent of checking account customers bear about 84 percent of overdraft fees. Evidence suggests that overdraft programs disproportionately impact low-income and young consumers. According to this study, 46.4 percent of young adult accountholders incurred overdraft fees, and of those, 15 percent recorded more than ten overdrafts in one year. 53
- 54. Checking Accounts and Overdrafts • Penalty Fee Box • http://files.consumerfinance.gov/f/2012/02/ Sample_Fee_Penalty_Box.pdf • PEW proposed model disclosure – http://www.pewhealth.org/reports- analysis/reports/hidden-risks-85899367666 • CUNA Survey 54
- 55. 7. Fair Lending •Dodd-Frank Act (DFA) defines ―fair lending‖ as: – Fair, equitable, and nondiscriminatory access to credit for consumers. • DFA mandates the creation of the Office of Fair Lending and Equal Opportunity • CFPB coordinates fair lending efforts with Federal agencies and state regulators 55
- 56. Federal Laws andRegulations • Equal Credit Opportunity Act (ECOA)/ Regulation B • Fair Housing Act (FHA) – HUD 24 CFR Part 100 – NCUA 701.31 • Home Mortgage Disclosure Act (HMDA)/ Regulation C • Servicemember Civil Relief Act (SCRA) 56
- 57. Supervisory Authority • CFBPOffice of Fair Lending and Equal Opportunity – http://www.consumerfinance.gov/fair-lending/ • Department of Justice fair lending unit • NCUA Office of Consumer Protection and fair lending exams 57
- 58. NCUA Exams • NCUAOffice of Consumer Protection – Consumer Compliance and Outreach Division • Conducts approximately 25 fair lending exams per year at federal credit unions • Use FFIEC examination procedures • CFPB will include fair lending as part of exams for CUs over $10Billion 58
- 59. 8. Servicemembers • Officeof Servicemember Affairs Headed up by Holly Petraeus – All complaints by servicemembers handled by OSMA • Servicemember Civil Relief Act – Debt incurred prior to active duty – Stay of proceedings – Be careful about foreclosures – Limitation on interest • Prohibited bases argument under ECOA & FHA 59
- 60. Recent Headline –April 18, 2012 • NORFOLK, Va. – A member of NAE FCU who enlisted in the Army after the credit union financed his pick-up truck is suing the credit union in federal court here for allegedly violating the Servicemembers Civil Relief Act by failing to reduce the terms of his loan and repossessing his vehicle. 60
- 61. 9. Resources • CFPB’swebsite – http://www.consumerfinance.gov/ • CFPB Guidance – http://www.consumerfinance.gov/guidance/ • Supervision and Examination Manual – http://www.consumerfinance.gov/guidance/supervision/manual/ – SAFE Act: • http://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Proce dures.pdf – Mortgages: • http://files.consumerfinance.gov/f/2012/01/Mortgage-Origination-Examination- Procedures.pdf 61
- 62. 10. CFPB Timeline2012 • Late June: Ability to Repay final rule • July: High Cost Mortgages proposed rules; Mortgage Originator Standards proposed rules; Mortgage Servicing Proposed rules; Mortgage statement proposed rule • September: Escrow disclosure final rule 62
- 63. CFPB Timeline 2012-2013 •October: Business Lending Data collection; Home Mortgage Disclosure Act rules; and Appraisal rules • January 2013: Final rules for TILA/RESPA anticipated • January 2013: Disclosure changes mandatory for RBPN and credit cards amendments reflecting CFPB 63
- 64. Session presented by jamiw@policyworksllc.com 1-866-499-7350 www.policyworksllc.com 64
- 65.
- 66. Disclaimer Information providedin this presentation, including all materials, should not be construed as legal Section Heading services, legal advice, or in any way establishing an attorney-client relationship. Credit unions should contact their own legal counsel for advice.
- 67. Thank you The servicesof PolicyWorks and this presentation should not be construed as legal services, legal advice, or in anyway establishing an attorney-client relationship. 67
Editor's Notes
- #4 These 2 guys give us job security if you have compliance in your job descriptionsChris Dodd – Democrat from Connecticut, was chairman of Senate banking committee. He did not rerun in 2010Barney frank – Democrat from Massachusettes, US House of Representatives, served as Chairman of House financial services committee 2007 -2011 Due to their extensive involvement with the bill the committee voted to name the bill after them
- #5 Fun Facts comes from American Bankers AssociationThe Act itself was a daunting 2,319 pages long
- #6 The most historical piece of Dodd-Frank was obviously the creation of the CFPB our newest federal regulatorPrimary Responsibility is protecting and educating consumers
- #7 It has been an interesting couple of years watching the creation of this huge government agency unfold. If you remember in 2010 Obama appointed Elizabeth Warren as Special Advisor to the Secretary of Treasury so she was very instrumental in laying the groundwork in setting up the Bureau. But there was concern that she wouldn’t overcome Republican opposition. Then Obama nominated Cordray but in December 2011 the Senate Republicans blocked the confirmation. At the time Cordray was in charge of the Bureaus Enforcement Division. Then Obama gave Cordray a recess appointment in January. So finally there is a Director in place and the flurry of proposals and final rules is underway. Fun Facts: First job was McDonalds, In 1987 he was undefeated 5 time champ on jeopardy and won $45,000, carried torch in 1996 Atlanta Olympics.
- #8 Cordray named Raj as the Deputy Director of CFPB after he was appointed. Raj was already working at Bureau. Elizabeth Warren had hired him to serve as Associate Director for Research, Mkts and Regulations. After she left he took over the day to day. No fun facts…was a Harvard Law grad
- #9 Conduct rule-making, supervision, and enforcement for Federal consumer financial protection lawsRestrict unfair, deceptive, or abusive acts or practicesTake consumer complaintsPromote financial educationResearch consumer behaviorMonitor financial markets for new risks to consumersEnforce laws that outlaw discrimination and other unfair treatment in consumer financeBefore the CFPB we had 7 different federal agencies charged with protecting consumers Bd of Governors, FDIC, FTC, NCUA, OCC, OTS and HUD (OCC & OTS have since merged)But really none of them had enough rule making authority over the entire market. We now have federal regulation of non-banks = payday lenders, private mortgage lenders, debt collectors, credit reporting agencies, and private student loan companies
- #10 Truth in Saving stay with the NCUA as credit unions are uniqueCFPB regs are found in Title 12 Banks & Banking, Chapter X
- #11 So lets go through what we see as the CFPB’s top 10 issues. They have issued approximately 7,000 pages of rules and guidance already so we want to make sure you are up to speed and ready for the next 7000. We want to remind you that may of these issues are in the proposed stage or even in the consumer testing phase however we want to make sure you are aware and to plan for the changes. Things are happening so fast in the regulatory compliance arena that we want to make sure you are ready for when these rules become final. Some of these could have a significant dollar impact to your budget with data processing, forms, and training.
- #12 One of the first areas the CFPB highlighted on their website was where to submit complaints Consumers can now submit complaints specifically for mortgages, credit cards, “bank account or service”, vehicle loans/consumer loan, or student loan There is also a catch-all category of “Tell your story”It is important to pay attention to the reports the CFPB issues. They provide report and guidance documents on their website (reports – keep you engaged on work of bureau, Supervision and Examination manual along with bulletins) These complaints will be indicative of where CFPB focuses its rule makingThe CFPB says the complaints provide insight into issues with in the marketplaceThe CFPB issued an interim report on its credit card complaint data in Nov. 30, 2011The 3 highest percent of complaints were related to APR or interest rate, billing disputes and identity theft CFPB noted the complaints also show consumers struggle to understand the terms of credit cards. You know what that means…..
- #13 We wanted to provide you with this link bc like the consumer complaint section, the section for you to submit comments is also relatively user friendlyPerhaps not as user friendly as the complaint section, but it is close From this page you can view and submit comments on all CFPB rules You can also view the notices and comments on closed notices *Streamlining of inherited regsYou had until June 4th to submit comments If you know of a rule that is outdate, unduly burdensome or unnecessary we encourage you to commentAnother unique aspect of the CFPB is consumer testing In its effort to be a 21st century agency, the CFPB has been putting the proposed forms, really pre-proposed forms through extreme? consumer testingGenerally a positive development, but note there is not extreme FI – testing. This only strengthens the importance of comments That is your one chance to express you thoughts on a model form/regulation So far CFPB has tested….
- #14 Student loans are a priority product for the CFPBKnow Before You Owe Initiative The bureau is testing various documents with consumers, most recently a cost comparison worksheetThis doesn’t directly affect FIs yet, but it will
- #15 In 2005 legislation was passed that prohibited private student loans from being discharged. “While the overall growth in student indebtedness is troubling, the most pressing concern is private student loans,” durbin, said during a senate hearing last week. “These private student loans are a far riskier way to pay for an education than federal loans.”Dick Durbin is also getting involved legislatively with student loans Fairness for Struggling Students Act The Know Before You Owe Act of 2012 in the senateDurbin and Harkin School would be required to confirm enrollment, cost of attendance and estimated federal financial aid before private student loan is approved and will require a number of loan disclosures Also need to update students frequently on status of loan
- #16 The second in the “Know Before You Owe” series is credit cards Credit Cards are very consumer-oriented so you can bet that they’ll be a focal point for the CFPB1st thing they did on CC was release a “prototype cc” agreement Only a prototype, Not mandatory?Not even model, there is no safe harbor We encourage you to take a look at the CFPB prototype. Perhaps there are some formatting changes that could be made to your agreement and make it more consumer friendlyBefore you tinker with your agreement, however, you should contact your legal advisor Credit Card Database 300 issuers May be a useful resource CARD Act capped fees changed in 1st year to 25% of initial credit limit $400/$100FRB extended limitations and fees paid prior to opening?, such as a application fee Struck down in S.D. ???????? – Statutory language applies only to fees after opening CFPB on April 12 sought comments on whether it should amend the rule to do away with the extension to pre-account opening fees Closes June 11Reg Z limits total amount of fees required to 25 percent of the credit limit in effect when the account is openedLimitation applies prior to account opening and during the first year after account is openedProposal amends Reg Z to apply the limitation only during the first year after account opening
- #17 July will be a busy month for mortgage lenders TILA/RESPA part of Know Before You Owe redoing early disclosures and those for consummation to combine TILA/RESPA disclosures So a new GFE and settlement statement again!In addition to new disclosures, new rules will accompany the timing, content, and delivery, etc. There are also two proposed rules from the Fed that the CFPB will finalize in 2012 – escrow and ability to repayEscrow will require additional disclosures Ability to repay relates to closed-end home secured loans and determining a member can repay at consummation We call that underwriting 101, however, it may affect products and documentation standards In addition, the CFPB is working on a whole bunch of mortgage servicing issuesCordray has been quoted as stated he wants to put the service back in servicing This will result in new rules……
- #19 Is everyone familiar with the Know before you Owe Project for Mortgages? Apply to closed-end home secured loans. Excludes HELOCs and reverse mortgages.The loan estimate would be provided within 3 biz days after application.CFPB plans to provide “extensive samples” with the proposed and final rules for different possible sets of loan terms.Testing: more than 27,000 comments. 75 consumers in one on one testingCOSTS: New or updated software and compliance systems as well as staff training (one-time costs)Obtaining legal advice regarding the integrated forms. In the HUD analysis, it was estimated that at $200 per hour would get 10 hours of legal advice.
- #20 “Application”Current: borrower’s name, monthly income, SSN, property address, estimate of value of property, loan amount, and other info. Concerns that GFE provided too late in process and doesn’t help shop.CFPB proposing to remove “other info required by lender” from the definition of application.Also considering removing additional items from application to limit it to requiring only the information needed to obtain a credit report and estimate the loan to value ratio.CFPB considering to require that any preapplication, consumer-specific written estimate of loan terms or settlement charges contain a disclaimer indicating that the document is not the loan estimate required by regs.Tolerance levelsCFPB considering applying the zero tolerance to a larger range of charges, including charges for a service that is owned by or affiliated with the lender, and services provided by a company selected by the lender. (choosing from list of providers prepared by the lender)Would not have to reissued Loan Estimate unless and until the costs subject to the 10% limitation increase based on valid changes in circumstance by more than 10% total. Can only reissue based on valid change in circumstance.Incorporate FAQs into rule or commentarySettlement Disclosure DeliveryReceipt of settlement disclosure three business days before closing in all circumstances.Limited changes permitted after providing Settlement Disclosures. Reissuance and an additional 3 day waiting period would be required if during the 3 days after issuance the APR increases by more than 1/8 of 1 percent; an adjustable rate feature, prepayment penalty, negative amortization feature, interest only feature, balloon payment or demand feature is added; or the amount needed to close increases beyond a specific tolerance (TBD). Responsibility for providing disclosure—2 alternatives. (1) Lender solely responsible for delivery. (2) Lender responsible for TILA info and settlement agent responsible for RESPARecord RetentionConsidering requirement to retain “standardized, machine-readable, electronic versions” of the Loan Estimate and Settlement Disclosure delivered to a consumer and the reasons for any changes. Considering exempting “small entities.”Potentially significant one-time costs.Definition of Finance ChargeCurrent finance charge is mostly interest and includes certain one-time chargesCurrent definition excludes many of the charges for mortgage transactions.Considering removing many of the exclusions similar to the Fed’s 2009 proposal. Only excluded charges would be property insurance premiums if certain conditions are met and late fees or similar default/delinquency charges. Everything else would be included.Costs: new or updated software, training, legal adviceWould increase APR and trigger more high cost/higher priced loansTiming: Final regs January 21, 2013. Final rules would take effect not later than 12 months after date of issuance. Any rules not issued by 1-21-13 will take effect by operation of law. “It may not be possible to issue a final TILA-RESPA rule by January 21, 2013.” Considering to exempt lenders from compliance until disclosure rule takes effect.
- #21 According to CFPB final rules expected sometime in September 2012Under the proposal CU’s would generally be required to establish an escrow account for 1st lien on principal dwelling if:Escrow account is required by Federal or state lawThe mortgage is made, guaranteed by state or federal agency (i.e. FHA or VA)The mortgage is closed-end higher priced mortgage that does not fall within exemptions which we will discuss.
- #22 Dodd-Frank added a new section to the TILA Act that requires establishment of escrow accounts for many closed end first and second mortgage loans. First three bullets specific to higher priced mortgage (TIL amended Oct 1, 2009)Reg. Z designates “higher-priced mortgage loans” as closed-end mortgage loans that are secured by the borrower’s principal home (including home purchase loans, refinancing of loans and home equity loans) with an APR greater than the average prime offer rate on a comparable transaction by at least 1.5 percentage points for first lien loans or 3.5 percentage points for subordinate lien loans. Credit unions can determine if a loan lands within this designation by using the federal financial regulators’ online rate spread calculator located at www.ffiec.gov/ratespread/newcalc.aspxIf your credit union does have loans designated as “high-priced mortgage loans” there are several Reg. Z restrictions that must be followed including: Lenders cannot make higher-priced mortgage loans without regard to the consumer’s repayment ability at the time the loan is made. Lenders must verify the borrower’s assets or income that it relies on for repayment and the consumer’s current obligations. Prepayment penalties are prohibited if the payments on a higher-priced mortgage loan can change during the first four years after the loan is made. Even if payments cannot change, a prepayment penalty may only be assessed for two years after the loan is made, as long as the penalty is permitted by other applicable law. Lenders cannot make higher-priced mortgage loans secured by a first lien without an escrow account for property taxes and homeowners insurance. Will see more model forms One thing to note is that escrow accts need not be established for loans secured by shares in cooperatives, Also insurance premiums need not be included in escrow for condo’s, planned unit development if association has master policy in place.
- #23 Purpose: To allow consumers to compare and understand obligation.Includes second home, vacation home or vacant or unimproved landDwelling = mobile homes, boats or trailers used as residenceModel is 10 pt font, 1 page. Cannot contain other material or be in same document as RESPA or TILA. Must be inform can keep.If mandatory such as case of higher priced mortgage then you would provide a disclosureIf you voluntarily set up an escrow then you would provide a disclosureIf you don’t set up an escrow then there is also a disclosure..More forms for our forms vendors to charge us for and our data processors to map into the system…$$$
- #24 Waiting period = close Thursday 6/11. Must have received by Monday 6/8May waive waiting period for bona fide personal financial emergencyBusiness day is everything except Sunday and legal public holidaysMailed includes email and courier serviceMailed June 8th (Tuesday) assume they received June 11th (Fri)
- #25 If consumer decides to cancelNot required if mortgage is terminated including by repayment, rescission, refinance, or foreclosureThe disclosure discusses the risk of not having escrow accounts.
- #26 The federal reserve board retained a research and consulting firm that specialized in designing and testing documents but there were only 8 participants which doesn’t really seem like a representative sampleAddition of 3 new model forms to TIL; requires creditors to provide disclosures with headings, content, order and format substantially similar. (found in appendix H – closed end forms and clauses)Designed to be on 8 ½ x 11 sheet of paper in 10 point font Would permit creditor to use (at its option) OUTSIDE THE TABLECreditor name or logoConsumer nameProperty addressLoan #
- #27 So subpart E – Special rules for certain home mtg transaction would get a new section with TILAverage prime offer rate is limited to contract interest rate and points. APR is based on broader set of charges.We now have new definition – Transaction Coverage rateTransaction coverage—include only prepaid Finance Charges that will be retained by creditor or broker. Prevent mtg insurance premiums from being included. (REMEMBER THIS IS SOLEY FOR COVERAGE DETERMINATION FOR ESCROW)It would not be disclosed to member, data processors would have to make some changes for CU’s to calculate.
- #28 Proposed Exemption to Escrow requirement for closed end higher priced mortgagesExemption for creditors that lack the economies of scale necessary to cost-effectively escrow.Predominantly rural or underserved: more than 50% of total 1st lien HP mortgage loans in counties that are rural or underservedRural – county: 1. not in a MSA or micropolitan SA; 2. not adjacent to MSA 3. adjacent MSA with less than 1 million , contains no town more than 2500 peopleUnderserved – if no more than 2 creditors extend credit 5 ore more times secured by a 1st lien in the county (identify with HMDA data)
- #29 20% equity based on value at time loan was made and at least five years have passed and consumer makes a requestLooking at original value, modeled after the Homeowners Protection Act for private mortgage insuranceJust allows credit to cancel but not required to.
- #30 Published as proposal back in May 2011, 117 pages long…
- #31 Purpose: Determine and document member’s ability to repay at consummationRules are to implement the minimum underwriting standards required by Dodd-FrankCongress intention was to require some minimal underwriting of mtg loans in response to evidence that our non-depository mtg lenders engaged in unsafe and unsound underwriting practices before the financial crisisRules started by Federal Reserve and will by finalized by CFPBFour options for lenders to do a minimum level of underwriting under the proposed ruleDoes not apply to extensions of credit for business, commercial or agriculture even if secured by dwellingDwelling includes residential structure that contains 1 to 4 units, whether or not the structure is attached to real property – condo, mobile home and trailer includedAbility to repay already applies to higher priced mortgagesQM- 2 alternatives 1) Safe harbor 2) Presumption of ComplianceBalloon Payment QM – in order to preserve credit for consumers in rural or underserved areaRefin non-standard into a so-called standard mortgage
- #32 1st Option - This option would require lenders offering most types of residential mtg products to consider the following 8 factors. For #1 – this must be other than the value of the dwelling securing the mtg. No limits on loan features, terms or points and fees, but must follow certain underwriting requirements and payment calculations. Simultaneous – If you take out 2nd mortgage at same timeMtg Related – taxes, insurance…Current Debt obligations - can consider and verify factors based on widely accepted underwriting standards (i.e. credit reports)
- #33 Fully indexed – in case of adjustable rate you need to underwrite pymt based on fully indexed rateIf higher priced balloon loans have to consider ability to repay balloon without refi. So basically, a creditor would not be able to make a HP balloon loan unless consumer has substantial documented assets or income. Higher priced balloon—must consider ability to repay balloon.For balloons that are not HP, must underwrite using maximum payment scheduled during the first five years after consummation, if term more than 5 yrs won’t capture balloon pymt.
- #34 Definition of qualified mortgage is a loan that cannot have balloon payments, negative amortization, interest only (Remember Ability to repay you can with special payment calculation requirements)So this option limits terms but more flexible underwriting standards.Creditor not required to consider and verify employment, payment of any simultaneous loans, consumers current obligations and consumers credit history.
- #35 Two alternatives for verifying income and assetsAlternative 1 = safe harbor – which is the previous slide; you verify income and assets but not debt to incomeAlternative 2 = same as 1 plus credit must verify: employment status, simultaneous loans, current debt obligations, DTI or residual income, credit history
- #36 Exception to QM—QM with balloon if at least 5 year term and underwrite using all scheduled payments except balloon.Remember under qualified the loan does not contain negative amortization, interest only or balloon payments. Want to preserve access to credit for consumers in rural or underserved areas
- #37 Exception to ability to repay. Same creditor. Must reduce monthly payment.Follow the ability to repay criteria except for verification of income and assets as long as underwriting of standard mortgage was based on maximum interest rate possible during first five years (case of ARM)Intent is to preserve streamlined refinancings
- #38 Dodd-Frank mandates several protections for homeowners in the servicing of their loans including new disclosures (periodic statements, notice prior to reset of adjustable rate mortgages (“ARMs”), and force-placed insurance notices) that will help provide consumers with comprehensive and comprehensible information, when they need it, in a form they can use, so they can better manage their obligations and avoid unnecessary problems;The Dodd-Frank Act imposes certain requirements concerning mortgage servicing that become self-executing and enforceable on January 21, 2013, unless final rules are issued on or before that date. Final rules must take effect no later than 12 months after the dateof issuance (i.e., not later than January 21, 2014). The CFPB plans to implement the mandatory statutory provisions by proposing amendments to Regulation Z and Regulation X, which implement TILA and RESPA respectively.
- #39 DFA TILA Amendments Section 1420: Periodic statement provided each billing cycle for closed-end credit transactions secured by a dwelling, except not required for fixed rate loans with coupon books containing substantially the same information.
- #45 DFA RESPA Amendments - Section 1463 requires the following for federally related mortgages:Two notices must be sent to borrowers with lapsing or lapsed hazard insurance policies alerting them to the servicer obtaining force-placed insurance policies and setting forth requirements and procedures servicers must follow before charging consumers for such coverage. Servicers must terminate such coverage and reimburse borrowers for premiums charged during any period of overlapping coverage
- #47 Two notices: first class mail—if does not receive demonstration of insurance coverage 30 days after sending the first notice must send a second notice. No charge may be imposed until 15 days after the servicer has sent the second notice.Notice content:Reminder of borrower’s obligation to maintain insuranceStatement that servicer does not have evidence of coverageStatement of how borrower may demonstrate existing coverageStatement that servicer may obtain coverage at the borrower’s expense if the borrower fails to provide demonstration in a timely mannerAlso considering requiringGood faith estimate of premium that may be chargedStatement that force-placed insurance may not provide as much coverage and may cost significantly more than borrower’s policyStatement whether servicer has placed or plans on force placing insuranceAnticipates issuing two sets of model forms: one for where servicer has already obtained force placed insurance and one where plans on force placing insurance.
- #48 DFA TILA Amendments - Section 1418: ARM notice provided 6 months prior to the initial reset of the interest rate for closed-end credit transactions secured by a consumer’s principal residence. This rulemaking also would amend the timeframe and content of theperiodic ARM adjustment notices required under current regulations.Applies to Hybrid ARM: The statute defines a “hybrid adjustable rate mortgage” as a consumer credit transaction secured by the consumer’s principal residence with a fixed interest rate for an introductory period that adjusts or resets to a variable interest rate after such period.The CFPB understands the statutory definition of hybrid ARM to encompass the following loan products: 2/1, 3/1, 5/1, 7/1, and 10/112 (or any ARM product with an introductory period of longer duration than its ensuing periods of adjustment). This is consistent with how the banking industry refers to hybrid ARMs. The CFPB is considering proposing that these loan products receive the notice under DFA 1418. The CFPB is considering proposing to use its discretionary authority to require this notice for ARMS that are not hybrid (1/1, 3/3, 5/5, etc.)Considering changing the timing of the adjustment of rate that affects payment to being provided with every interest rate adjustment 2 to 4 months before payment at the new level is due
- #49 Notice must include:Any index or formula used in adjusting or resetting the interest rate and a source of info about the index or formulaAn explanation of how the new rate and payment would be determined, including how the index may be adjusted, such as by the addition of a marginA good faith estimate of the amount of the resulting monthly payment after adjustment or resetA list of alternatives the consumer may pursue, including refinancing, renegotiation, payment forbearance, tecContact information for HUD or state housing agency approved counselorsContact info for state housing finance authority for state where consumer residesOnly contact info and list of alternatives is an addition to current requirementsThe CFPB is considering proposing to include the following loan information in the disclosure: account number and property address; servicer name and address; key terms of the ARM such as length of the introductory period and when future interest rate adjustments will take place; and date of upcoming interest rate adjustment and due date of the first payment after the adjustment. The CFPB is also considering including, if applicable, the amount and expiration date of any pre-payment penalty, any interest rate or payment limits, and amortization information for negatively amortizing and Interest-Only loans. (Much of this additional content was proposed by the Federal Reserve Board in its 2009 proposed rule to amend Regulation Z’s ARM reset notice.)
- #50 Comment period originally April 30thCFPB authority for EFTA and TISA. Comment period extended. Concern about amount of income from overdraft services. FDIC issued guidance in 2010. OCC issued proposed guidance in 2011.Overdrafts for CFPB include NSF (returned) and paid. Fees for insufficient funds.Lower cost alternativesConsumer alerts: awareness of fees and time to avoid. Processing issuesReg E impact: opt in rates, marketingOrder of processing changesEconomics of overdraft programs. Rely on small groups of frequent overdrafters for disproportionate share of revenueLong term impact on consumers.
- #55 Inquiry launched on February 22, 2012Data request to FIs and seeking comments from the public Focus Transaction Re-orderingMissing or confusing informationMisleading marketingDisproportionate impact on young and low-income consumersAlso seeking comments on prototype fee box Like CC agreement, this in not yet mandatory or a model, but it would be more likely down the road to become a modelOverdraft Protection Act. Representative Carolyn Maloney (and 46 co-sponsors) announced she would introduce legislation that would:Extend the opt-in requirement to paper checks, ACHs and recurring debit transactions;Define overdraft fees as finance charges for Truth in Lending Act disclosures (Ed: Huh??);Prohibit the ordering of transactions to maximize overdrafts;Require that fees be "reasonable and proportional" to the amount of the overdraft;Cap the number of fees at one per month and six per year;Add new disclosures prior to opt-in and whenever an overdraft fee is charged; andRequire the CFPB to study overdraft fees on prepaid debit cards.April 23, 2012 - Credit Union National Association (CUNA) is asking credit unions to share information regarding their overdraft protection programs, and overdraft transfer and marketing practices, through a short, 12-question CUNA survey.
- #56 So what is fair lending?For credit unions fair lending is a little different due to the fact that you only lend to members in your FOM. You must provide fair, equitable and nondiscriminatory access to consumers in your FOM. These red flags could include late HMDA filings, pricing outliers, preapproval programs, or high denial rates.This is a hot topic not only with the CFPB but with the NCUA and the DOJ.Remember, fair lending is applies to all products, including CCs The CFPB office of fair lending is watching and in fact the complaint process talked about earlier specifically asks “Do you believe the issue involves discrimination?”
- #57 When we talk about fair lending we are talking about a variety of laws and regs. We are even talking about SCRA as in a sense the servicemembers are a protected class. HUD, NCUA and CFPB all write some of these rules as well as enforce Dept of Justice also assists with enforcement.
- #59 With respect to fair lending the NCUA has new office to handle fair lending.
- #60 One of the first offices established by the CFPB was the office of Servicemember affairs Headed up by Holly Patreus – wife of former general and current CIA head David Patreus That is a real power couple!!!Office handles all SM complaints ????? by CFPB Presumed? to make SM issues a focal point for examiners Servicemember Civil Relief Act A very detailed law that restricts what CUs can do on loans incurred prior to active duty Limit on foreclosures, IRTread very lightly , engage counsel or other expert that faced with these issues Multiple suits filed, many against big banks, but also some against CUsA CU in Virginia was recently sued for $1million for allegedly repoing a vehicle and failing to reduce the interest rate contrary to the SMCRA Make sure someone in your CU, or a 3rd party you use knows the SCRA
- #61 The member, Michael Martin, borrowed $8,022 from the credit union in 2008 to buy a Dodge Ram 1500 at 10.5% interest. Two years later Martin enlisted in the Army and was sent for basic training, first to Ft. Lee, New Jersey, then to Fort Leonard Wood, Mo. At that point, Martin and his wife petitioned the credit union to abide by the provisions of the Servicemembers Act, which include a maximum loan rate of 6%.NAE, originally the Norfolk (Ford) Assembly Employees FCU, is one of the surving mom-and-pop credit unions and is still run by Palmer Stillman, who chartered it in 1965, and is family, even as it has grown to more than $100 million in assets.The Martins claim in their suit the credit union ignored their requests and instead accelerated their loan and required them to pay the entire balance of the loan to get their truck back, then repossessed the vehicle.In their suit, they say the credit union not only caused them numerous expenses but also threatened Martin’s security clearance because of the negative mark on his credit report. They are asking for a $1 million in damages, as allowed under the terms of the Servicemembers law.Officials with BAE FCU did not respond to a request for comment on the suit.