Transcript CFPB Overview - Oklahoma Mortgage Bankers Association

Preparing for January 2014
Oklahoma MBA
August 22, 2013
Mitchel H. Kider
[email protected]
1
CFPB Overview
Introduction to the CFPB
• CFPB created by the Dodd-Frank Act and became operational on
July 21, 2011
– Independent agency within the Federal Reserve System
– Independent director
– Independent budget ($500 million paid by Federal Reserve System)
– Independent rulemaking, research, congressional testimony,
enforcement & litigation
• Broad consumer-protection mandate
– Objective to have a single federal agency to receive, manage and
respond to consumer financial complaints
– Ensure consumers are protected from unfair, deceptive or abusive
acts and practices and from discrimination
• Guided by Title X mandate that markets should be “fair,
transparent, and competitive”
2
CFPB Overview
Supervision & Enforcement Authority
• CFPB has supervisory and enforcement authority over
– Very large depository institutions and credit unions with
over $10 billion in assets
– Non-bank financial institutions
• Limited authority over smaller institutions & credit unions
– Can require reports to support CFPB’s responsibilities
– Can include examiners on a “sample basis” to assess
compliance
– Can recommend enforcement action to prudential regulator
when appropriate
• Prudential regulators retain authority over institutions with less
than $10 billion in assets
Rulemaking Authority
• Enumerated Consumer Laws
• Title X: Unfair, Deceptive and Abusive Acts or Practices
3
CFPB Overview
Specific Statutes & Regulations
• Unfair, Deceptive or Abusive Acts or Practices (UDAAP)
• Truth in Lending Act (TILA & Reg Z)
• Real Estate Settlement Procedures Act (RESPA & Reg X)
• Home Owners Protection Act (HOPA)
• Privacy/Gramm-Leach-Bliley Act (GLBA & Reg P)
• Equal Credit Opportunity Act (ECOA & Reg B)
• Fair Credit Reporting Act (FCRA & Reg V)
• Home Mortgage Disclosure Act (HMDA & Reg C)
• SAFE Mortgage Licensing Act
• Mortgage Acts & Practices (MAPS)
• Fair Debt Collection Practices Act (FDCPA) (if applicable)
4
CFPB Overview
CFPB Has Broad Investigatory & Enforcement Powers
• CFPB can issue:
– Subpoenas
– Civil Investigative Demands (CIDs)
• Must state nature of conduct constituting the alleged violation and
applicable provision of law
• Subject can petition CFPB to modify or set aside
• CFPB can petition Federal district court to enforce
– Cease & Desist Orders (C&D)
• CFPB can commence:
– Civil Actions – CFPB litigates on its own behalf; it does not need
the Administration’s permission
– Administrative Proceedings (based on C&D Orders)
• Administrative hearing with appeal to Court of Appeals
• CFPB can issue temporary C&D where violation is likely to cause
the person to be insolvent or otherwise prejudice the interests of
consumers before the completion of the proceedings
• CFPB can enforce FTC regulations defining unfair/deceptive
practices
5
CFPB Overview
If the CFPB Finds Problems, Very Broad Remedies:
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Rescission or reformation of contracts
Refund of moneys
Return of real property
Restitution
Disgorgement of profits
Compensation for unjust enrichment
Damages
Public notification of violations (with costs to be borne by the
violator)
• Limits on activities or functions, including suspension &
termination
• Civil money penalties
– Up to $5,000/day (any violation)
– Up to $25,000/day (reckless)
– Up to $1 million/day (knowing)
6
CFPB Regulatory Authority
CFPB Rules Effective January 2014:
• Ability to Repay (TILA)
• Loan Originator Compensation (TILA)
• High-Cost Mortgages (HOEPA) & Homeownership
Counseling Amendments to TILA & RESPA
• Escrow Accounts for Higher-Priced Loans (TILA)
(effective as of June 1, 2013)
• Appraisals for Higher-Priced Mortgages (TILA & FIRREA)
• ECOA Appraisals Requirements
• Mortgage Servicing under TILA & RESPA
7
Ability to Repay Rule
Scope & Overview
• Creditors must make a reasonable & good faith determination,
at or before consummation, that the consumer will have a
reasonable ability to repay the loan according to its terms
• Applies to all consumer credit transactions secured by a
dwelling
– Except: HELOCs, investment properties (business purpose
loans), timeshare plans, reverse mortgages, temporary or
“bridge” loans of 12 months or less, or construction-topermanent loan with a construction phase of 12 months or less
• Recordkeeping Requirements
– Records must be kept for 3 years after consummation
• Though records should be retained longer because defense
to foreclosure claims have no statute of limitations
– Actual paper records not required, as long as records can be
reproduced
• Effective Date: January 10, 2014
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Ability to Repay Rule
General ATR Option
• Must consider & verify 8 specific underwriting factors to make a
reasonable & good faith determination of ability to repay using
reasonably reliable third-party records
1) Borrower’s current or reasonably expected income or assets,
except for value of the dwelling that secures the loan
2) Borrower’s current employment status (assuming creditor relies
on employment income in determining repayment ability)
3) Borrower’s monthly payment on the covered transaction,
calculated in accordance with the ATR final rule
4) Borrower’s monthly payment on any simultaneous loan the
creditor knows or has reason to know will be made, calculated in
accordance with the ATR final rule
5) Borrower’s monthly payment for mortgage-related obligations
6) Borrower’s current debt obligations, alimony and child support
7) Borrower’s monthly debt-to-income ratio (DTI) or residual income,
calculated in accordance with the ATR final rule
8) Borrower’s credit history
9
Ability to Repay Rule
General ATR Option (continued)
• Creditors given flexibility in developing their own underwriting
standards & changing those standards over time
• Evidence that determination was reasonable & in good faith:
– Length of time a borrower successfully makes timely payments
without modification or accommodation
– Underwriting standards adopted by the creditor & how it was
applied to the facts & circumstances of the loan
• Based on statistically sound models, historically resulted
in low rates of default, applied consistently, etc.
– Commentary emphasizes that whether a decision was
reasonable & in good faith will be highly individualized & specific
to the transaction
10
Ability to Repay Rule
Penalties
• TILA contains severe penalty provisions for failure to consider
Ability to Repay & for violation of LO compensation provisions
– Consumer may be able to recover special statutory damages
equal to sum of all finance charges & fees paid by the
consumer, unless creditor demonstrates failure to comply is not
material (in addition to actual damages, statutory damages, and
court costs & attorneys fees)
– Statute of limitations: 3 years from date of violation
• Defense by recoupment or set-off in a foreclosure action by
the creditor, any assignee of the creditor, or anyone acting as
servicer on behalf of the holder of the loan
– No time limit on use of defense, but consumer cannot
recover more than first 3 years of finance charges & fees
plus actual damages & fees (including reasonable attorney’s
fees)
• Recordkeeping will be crucial for evidencing compliance
11
Ability to Repay Rule
QM Option – Loan Characteristics
• Concern about availability & affordability of credit led to QM standard
• QMs must meet the following requirements:
– Product features:
• Provide regular periodic payments
• Not include negative amortization, interest-only or balloon
features (except for balloon QM)
• Loan term of 30 years or less
– Underwriting requirements
• 43% DTI limitcalculated using Appendix Q
– Appendix Q sets forth what income & debt creditors must
consider when calculating the DTI ratio
• Monthly payment using maximum interest rate that may apply in
first 5 years & periodic principal & interest based on that rate
– Points & fees not exceeding 3% for loan amount of $100,000 or more
• $3,000 for loans $60,000 to less than $100,000 (adjusted for inflation)
• 5% for loans $20,000 to less than $60,000
• $1,000 for loans $12,500 to less than $20,000 (adjusted for inflation)
• 8% for loans less than $12,500
– Percentages calculated using “total loan amount” – amount of credit extended
without taking into account any financed points & fees
12
Ability to Repay Rule
QM Option – Underwriting Requirements
• Appendix Q sets forth what income & debt creditors must consider
when calculating the DTI ratio
– Income: can only be used if it comes from a source that can be
verified, is stable, and no indication that it will likely cease
• Standards on how to consider employment income & nonemployment income, such as:
– Overtime & bonus only if received for the past 2 years & no
indication it will likely cease (must create an earnings trend)
– Part-time & seasonal if uninterrupted for past 2 years &
expects to continue
– Alimony, child support & trust income only if payments are
likely to be consistent for first 3 years of mortgage as
evidenced by documentation
• Stricter rules on how to analyze tax returns/forms & records
– Employment: must verify for most recent 2 full years & borrower
must explain any gaps
• Must obtain employer’s confirmation of current, ongoing
employment status with no statement that it will likely cease
13
Ability to Repay Rule
QM Option – Underwriting Requirements (continued)
• Appendix Q sets forth what income & debt creditors must consider
when calculating the DTI ratio
– Debt: standards on how to consider:
• Recurring obligations(e.g., revolving accounts, alimony, child
support)
– Monthly payments on revolving or open-end accounts
included regardless of balance
– Debts of less than 10 months included if amount of debt
affects ability to pay during months after closing
• Contingent liabilities (e.g., assumptions, cosigned obligations)
• Projected obligations: debt payments to begin or come due
within 12 months of closing (e.g., student loan, balloon payment)
– DTI calculation: cannot exceed 43%
• Must include monthly mortgage-related obligations &
simultaneous loans that creditors knows or has reason know
about at or before consummation for the current transaction
14
Ability to Repay Rule
Revisions to Appendix Q (July 10 Final Rule)
• CFPB recognizes that Appendix Q is adopted from FHA’s
standards that are designed to be more flexible
• Revises Appendix Q to provide more bright-line standards
– Removes requirement to determine that income is reasonably
expected to continue through at least the first 3 years
• Instead can assume income is reasonably expected to
continue if no indication it will soon end
– Eliminates requirement to analyze consumer’s training,
education & qualifications for the job
– Removes requirement to obtain an employer’s confirmation of
continued employment
• Instead can assume employment is ongoing if employer
verifies current status & does not indicate it will soon end
– Removes requirement to evaluate general economic outlook of
similar businesses in the area to verify self-employment income
15
Ability to Repay Rule
QM Option – 3% Points & Fees Cap
• Points & fees includes, if known at or before consummation:
– Finance charge items other than interest
– Real estate-related fees if creditor receives direct or indirect
compensation or if paid to an affiliate of the creditor (e.g., fees
for title insurance, appraisal fees, credit report fees)
– Portion of the upfront PMI premium above the FHA amount
– Points charged to consumer to offset loan-level price
adjustments (LLPAs)
– Credit insurance, debt cancellation premiums payable at or
before consummation
– Broker compensation paid by the creditor that can be
attributed to that transaction at the time the interest rate is set
• CFPB issued final rule clarifying how compensation is
included
16
Ability to Repay Rule
QM Option – 3% Points & Fees Cap (continued)
• Points & fees does not include:
– Third-party charges not retained by the creditor, originator or an
affiliate of either (except otherwise included mortgage/credit
insurance premiums & real estate related fees)
– Government mortgage insurance or guarantee fees
– PMI payable after closing & portion of the up-front PMI not in
excess of FHA standards if the premium is refundable on a pro rata
basis & automatic when loan is paid in full
– Bona fide discount points that are knowingly paid to reduce the
rate & actually reduces the rate consistent with established
industry practices, limited to:
• 2 points if undiscounted rate does not exceed the APOR by
more than 1 percentage point
• 1 point if undiscounted rate does not exceed the APOR by more
than 2 percentage points
17
Ability to Repay Rule
How is LO Comp Included in Points & Fees? (May 29 Rule)
• No double counting when creditor pays employee LOs
– Example: consumer pays creditor $3,000 fee & creditor passes $1,500 to
creditor’s LO employee  only the consumer’s payment of $3,000 is
included in points & fees
• Double counting compensation in points & fees when consumer pays
creditor & creditor pays mortgage broker
– Example: consumer pays creditor $3,000 fee & creditor pays $1,500 to
mortgage broker  $4,500 is included in points & fees
– CFPB took this approach because mortgage brokers can steer
consumers to more costly transactions and the burden of calculating
these payments is minimal
• No double counting payments by mortgage broker firm to employees
– Example: consumer or creditor pays $1,000 to a mortgage broker firm,
that passes $500 of the amount to its employee  only the $1,000 direct
payment is included in points & fees
• No double counting consumer payments to mortgage brokers
– LO compensation paid by a consumer to a mortgage broker is not
included in points & fees if it has already been included in points & fees
as part of the finance charge
18
Ability to Repay Rule
Proposed Points & Fees Clarifications (July 2 Proposed Rule)
• Seller’s Points
– Charges paid by the seller for items specifically included in points
and fees as LO compensation, 4(c)(7) real estate related fees paid to
an affiliate or if creditor compensated (e.g., title, appraisal, document
preparation fees), credit insurance premiums & prepayment
penalties are included in points and fees
– Otherwise, seller’s points that are excluded from the finance charge
definition are not included in points & fees under the finance charge
• Example – seller paid upfront PMI premiums above FHA
amount may be excluded because that upfront PMI is only
included in points & fees as part of the finance charge
• Creditor-Paid Charges
– Charges paid by the creditor are excluded from points and fees,
except for LO compensation paid by the creditor that is otherwise
required to be included in points and fees
• Charges Paid By Third Parties
– Charges that fall within the definition of points & fees are included in
points & fees regardless of if the charge is paid by a third party
• Comments were due July 22, 2013
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Ability to Repay Rule
Temporary QM
• Because of the fragile state of the mortgage market, CFPB
provided for a second, temporary category of QMs with more
flexible underwriting requirements
• Temporary QM must:
– Satisfy the general QM criteria for regular periodic
payments, maximum 30 year term, and 3% points & fees
limit)
– Satisfy the underwriting criteria of/eligible for purchase,
insurance or guarantee by:
» Fannie Mae/Freddie Mac while they operate under
Federal conservatorship or receivership or
» HUD, VA, USDA, RHS
• Temporary QM will expire on the earlier of:
– Date the Federal agency issues its own QM rules
– After 7 years (January 10, 2021)
20
Ability to Repay Rule
TemporaryQM Clarifications (July 10 Final Rule)
• Clarifies that a repurchase or indemnification demand does not
automatically revoke QM status, must look at facts &
circumstances to determine whether the loan satisfied the
relevant eligibility requirements at the time of consummation
– Example: if income documentation provided & verified to comply
with GSE requirements did not actually support the reported
income and the loan would not have been approved with the
accurate income, then the loan was never a QM
• Clarifies that the loan can conform to the relevant GSE guides in
effect at the time, or to different standards set forth in a written
agreement between the GSE and the creditor
21
Ability to Repay Rule
QM Liability Protection
• Safe Harbor if QM is not a higher-priced transaction
– APR is less than 1.5 percentage points over APOR (Average
Prime Offer Rate) (less than 3.5 for junior lien)
– Borrower can always challenge whether loan actually met the QM
standards (i.e., points & fees test, compliance with Appendix Q)
• Rebuttable Presumption if QM is a higher-priced transaction
– APR exceeds the APOR by 1.5 percentage points or more (3.5 or
more for junior lien)
– Borrower can rebut presumption by showing creditor did not make a
reasonable, good faith determination of repayment ability because
consumer’s income, debt, alimony, child support & monthly
payments would leave insufficient residual income or assets to meet
living expenses & other non-debt obligations creditor was aware of
• But the longer borrower is able to pay, less likely able to rebut
– Borrower can again always challenge whether loan met QM
standards
22
Ability to Repay Rule
Special Small Creditor Portfolio Balloon QM Exception
• Standard definition of QM excludes loans with balloon payments
• Exception for small creditors in rural/underserved areas
– Less than $2 billion in assets, originated more than 50% of
transactions in rural or underserved areas, but fewer than 500 total
(with affiliates)
– Loan generally cannot be sold, assigned, or transferred (unless 3
years after consummation or to another small creditor)
• Balloon QM Requirements:
– Satisfy the standard QM requirements except for prohibitions on
balloon payments & deferment of principal
– Consider & verify current or reasonably expected income/assets,
current debt obligations & DTI/residual income
– Determine consumer can make monthly mortgage payments &
mortgage-related obligations excluding the balloon payment
– Must have substantially equal scheduled payments calculated using
an amortization schedule that does not exceed 30 years
– Loan term of 5 years or more
– Fixed rate only
23
Ability to Repay Rule
Refinance Non-Standard Mortgage into Standard Mortgage
• Exempt from general ATR requirements if:
– New creditor is current holder or servicer of the non-standard loan
– New monthly payment is materially lower
– Creditor receives application no later than 2 months after nonstandard mortgage has recast
– Consumer has made no more than one 30-day late payment in
preceding 12 months & no late payment in preceding 6 months
– Creditor must consider whether the consumer is likely to default on
existing non-standard mortgage when the loan is recast & whether
standard mortgage would likely prevent consumer’s default
• Non-standard mortgage: an ARM with an introductory fixed rate for a
period of 1 year or longer, an interest only loan, or a negative
amortization loan
• Standard mortgage:
– Provides for regular payments & cannot have negative amortization,
interest-only or balloon payment features
– Fixed interest for first 5 years & term cannot exceed 40 years
– 3% points & fees cap & no cash out
24
Ability to Repay Rule
Other Significant Amendments (May 29 Final Rule)
• Additional exemptions to Ability to Repay requirements
– Exemption for loans made pursuant to Housing Finance Agency
programs & Emergency Economic Stabilization Act programs (e.g.,
HAMP or a State Hardest Hit Fund program)
– Exemption for certain loans to low-to-moderate income consumers:
• Non-profits that extend credit no more than 200 times a year
• Creditors designated by Treasury as Community Development
Financial Institutions & HUD as Community Housing Development
Organizations or Downpayment Assistance Provider of Secondary
Financing
– Declined to exempt Federal & GSE refinancing programs
• For points & fees, CFPB specifically declined to reconsider:
– Decision to include real-estate related charges paid to affiliates in
points & fees
– Inclusion of LLPAs in points & fees when a creditor recovers the
costs of LLPAs through up-front charges to the consumer
– Decision that creditors may exclude no more than 2 bona fide
discount points from points & fees
– Other restrictions on compensation in the LO Comp Rule
25
Ability to Repay Rule
Other Significant Amendments (May 29 Final Rule)
• New QM Category for Small Creditor Portfolio Loans
– CFPB added a new QM category for certain non-balloon
payment loans made by small creditors and either held for at
least 3 years or transferred to another small creditor
• Must meet general QM requirements for loan features and
points & fees and must evaluate DTI or residual income
• Not required to meet 43% DTI or comply with Appendix Q
– Shifts safe harbor & rebuttable presumption threshold to 3.5
percentage points above APOR for both small creditor balloon &
portfolio QMs
– Adds 2 year transition period for small creditors that do not
operate predominantly in rural or underserved areas to offer
balloon payment QMs if the loan is held in portfolio
26
Key Operational Issues
3% Points & Fees Cap
• LO Compensation
– Broker compensation will by necessity decrease because of
inclusion in 3%
• Affiliated Businesses (e.g., title, credit reports, appraisals)
– Adversely impacted because of inclusion in points & fees
• Temporary QM
– Reliance on Fannie/Freddie & FHA
• Fannie will issue updates to eligibility requirements in the Selling
Guide during the fall of 2013
• Freddie may issue similar updates in guidance bulletins
– But still has 3% points & fees cap
27
Key Operational Issues
Availability & Affordability of Credit
• Significant liability if court finds creditor’s determination of ATR was
wrong
– Even for QMs with a Safe Harbor, borrower can always challenge
whether the loan met QM standards (e.g., points & fees cap, DTI
cap)
• Defense to Foreclosure
– If defense raised, foreclosures in non-judicial states will effectively
become judicial foreclosures
– Increases costs, resources, and time
• Fannie Mae & Freddie Mac – QMs only
– To only purchase Qualified Mortgages (standard, temporary, or
special) and loans that are exempt from the Rule
• Secondary market will also likely only accept QMs
– Non-QMs and QMs with Rebuttable Presumption with have to be
priced for the liability
– Potential fair lending concerns
28
Key Operational Issues
Ability to Repay Implementation Challenges
• Determine what products you are going to offer
– For non-QM products, must adopt appropriate underwriting
standards to consider the 8 factors for the general ATR assessment
• Standards must be applied consistently and periodically
reevaluated & adjusted as necessary
– For QMs, compensation agreements and use of mortgage brokers &
affiliates will have to be reviewed to meet points & fees test
• Fair lending concerns if only offering QM loans
– Secondary market and servicing processes and systems may be
affected for refinancing a non-standard loan into a standard loan
• Identify necessary business, operational & technology changes
– Update compliance management systems including risk
assessments and compliance-testing plans
– Develop an implementation plan & establish senior-level committee
to monitor implementation of new rules across the business
– Update policies & procedures, training & record management
– Create new data fields to define loan and level of liability protection
29
LO Compensation Rule
Loan Originator Standards/Compensation under TILA
• Effective Date of Jan. 1, 2014
– July 2 Proposed Rule to move effective date to Jan 1, 2014
– Effective June 1, 2013 for prohibition on mandatory arbitration
• Generally keeps 3 basic principles of the current provisions
– No compensation based on a transaction’s terms or a proxy (fixed
percentage of amount of credit extended is allowed)
– No dual compensation
– No steering
• “Loan Originator” definition is expanded to include referring a
consumer to a loan originator through directed actions that can
affirmatively influence the consumer
– The term does not include: a person that performs purely
administrative or clerical tasks, real estate brokers unless
compensated by a creditor or loan originator, servicer employees or
contractors for loan modifications, or seller financers that meet
certain criteria
– July 2 Proposed Rule provides clarifications & examples on who is
and is not covered as an LO
• Violations are subject to same TILA penalties as Ability to Repay
30
LO Compensation Rule
Payments Based on Loan Terms or a Proxy for Loan Terms
• Clarifies the definition of a proxy to focus on whether:
– The factor consistently varies with a transaction term over a significant
number of transactions, and
– The loan officer has ability, directly or indirectly, to add, drop or change
the factor in originating the transaction
• Example: whether a loan is held in portfolio or sold on the secondary
market is not a term but may be a proxy if LO is paid a higher commission
for loans sold & only loans with certain terms, such as interest rate or
product features (e.g., ARM vs. fixed), are held – LO has incentive to steer
Defined Contribution Plans
• Allows for profit-sharing and bonus plans if it is not based on the terms of
the individual originator’s transactions AND
– Compensation paid in the aggregate does not exceed 10% of the
originator’s total compensation during the time period the non-deferred
profits based compensation is paid OR
– Originated 10 or fewer transactions during the previous 12 months
• Allows for contributions to designated tax-advantaged plans if it is not
based on the terms of the individual originator’s transactions AND it is one of
the enumerated plans in the rule that meets IRS requirements (annuity plans,
simple retirement accounts, etc.)
31
LO Compensation Rule
Pricing Concessions
• Permits decrease in originator compensation to defray the cost of an
unforeseen increase in an actual settlement cost over an estimated
settlement cost disclosed to the consumer or an unforeseen actual
settlement cost not disclosed to the consumer
Dual Compensation
• LO cannot receive compensation from both the consumer & the creditor
– Allows mortgage brokerage firms paid by the consumer to pay
commissions to their individual brokers, so long as commission is
not based on transaction terms
• Requires that parties closely track & document each payment
– Payments from the consumer to the LO include:
• Payments to the LO from loan proceeds
• Payments to the LO pursuant to an agreement by a person other than
creditor or its affiliates (i.e., non-affiliated seller or homebuilder)
– Payments from the consumer to the LO do not include:
• Payments derived from an increased interest rate
• Funds from the creditor to reduce the consumer’s settlement charges,
including origination fees paid by a creditor to the LO
• Payments to the creditor, whether paid directly by the consumer or
out of loan proceeds
32
LO Compensation Rule
Upfront Points & Fees
• Creditors can charge consumers upfront points & fees
• CFPB declined to put the proposed No-Point, No-Fee loan option
requirement in the Final Rule
No Point Banks
• CFPB briefly indicated that it believes there are no circumstances under
which point banks are permissible
Record Keeping Requirements
• Creditors are required to maintain records sufficient to evidence all
compensation paid to an originator & the compensation agreement that
governs those payments for 3 years after the date of payment
– LO organizations have the same requirements plus records of all
compensation received from creditors, consumers or another party
Personal Liability for Loan Originators for Violations
• Limited to the greater of actual damages or 3 times the total amount of
direct or indirect compensation received, plus costs of the action &
reasonable attorney’s fees
33
LO Compensation Rule
Originator Qualification & Screening Standards
• Individual loan originators & their employers must be qualified
– Employers must ensure their loan originator employees are
licensed or registered under the SAFE Act where applicable
– Employers of loan originators not required to be licensed
under the SAFE Act must ensure that loan originators meet
character, fitness and criminal background check
standards equivalent to those in the SAFE Act
• Requires the loan originator receive appropriate training
• Requires individual loan originators’ & their employers’ names
& license or registration numbers to be included on the
following mortgage loan documents:
– Credit application
– Note or loan contract
– Security instrument
34
LO Compensation Rule
Additional Requirements
• More Steering Provisions in the Future
– Dodd-Frank requires the CFPB to prescribe regulations to prohibit
certain kinds of steering, abusive or unfair lending practices,
mischaracterization of credit histories or appraisals & discouraging
consumers from shopping
– CFPB to address such regulations in a future rulemaking
• Ban on Mandatory Arbitration Clauses
– Contract cannot include terms that require arbitration or any other
non-judicial procedure to settle claims arising from the transaction
– Contract cannot be interpreted to bar a consumer from bringing a
claim
• Restriction on Financing of Credit Insurance Premiums
– Creditors cannot finance any premiums or fees for credit insurance
• Does not apply to credit insurance paid in full on a monthly basis
or certain credit unemployment insurance if premiums are not
paid to an affiliate & the creditor receives no compensation on it
35
Key Operational Issues
LO Comp Implementation Challenges
• Clearly define employee responsibilities
– Definition of LO is broader than the SAFE Act
– Includes employees referring consumers to LO when the action can
affirmatively influence the consumer to select a particular LO or
creditor (incentive to steer to benefit the referrer)
• The more an advertisement is specifically directed at &
communicated to a particular consumer, the more it could
constitute a referral
• Update policies & procedures
– Recordkeeping & management processes to evidence
compliance and track payments for dual compensation
– Compliance with new qualification & screening requirements
– Update systems & documents to include company & LO license
numbers on loan documents (application, note & security instrument)
– Adopt clear policies & procedures on pricing concessions under the
new rule & ensure LOs are trained (must be unforeseen)
• Must maintain records of decrease & reasons
36
Key Operational Issues
LO Comp Implementation Challenges (continued)
• Review all LO & branch manager compensation agreements
– Ensure compensation & bonus plans are compliant
• Compensation includes salaries, commissions, annual or other
periodic bonuses, awards of merchandise, services trips, or
other financial or similar incentives
– Determine if a factor is a proxy under the new proxy analysis
• Basing compensation on whether the loan is sold on the
secondary market or held in portfolio
• Rule removes “legitimate business expense, such as fixed
overhead costs” from listed examples of permissible factors to
base compensation
– Factor should be subject to the proxy test because of
steering concerns
– Ensure changes to compensation plans are not based on terms
or a proxy
37
New Developments
CFPB Sues Castle & Cooke for Compensation Violations
• Mortgage bank with approx. 1.3 billion in loans in 2012, 330
employees, and 45 branches
– Includes 2 senior officers in individual capacity for materially
participating in violations
• Covered as a “related person” under Dodd-Frank – a director,
officer, or employee with managerial responsibility
• Allegations
– Company knowingly & recklessly awarded quarterly bonuses
based on interest rates since April 2011
• Over 500 bonuses paid to over150 LOs, totaling over $4 million
– Failure to maintain written compensation agreements/policies
governing the methods used to calculate bonuses and record what
portion of each bonus was attributable to a particular loan
• Each bonus payment constitutes a discrete violation of the Rule
– Seekingcivil money penalties provided under Dodd-Frank:
• Up to $5,000 for any violation
• Up to $25,000 for reckless violations
• Up to $1,000,000 for knowing violations
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High-Cost Mortgage Rule
Final Rule for High-Cost Mortgage & Homeownership Counseling
• Expands HOEPA coverage (High-Cost Mortgage)
– To include purchase-money loans & open-end credit plans
• Reverse mortgages remain excluded
– Revisions to HOEPA triggers
• APR Test:Loan APR exceeds the APOR by:
– 6.5 percentage points for first-lien mortgages (8.5 if dwelling is
personal property & total transaction amount is less than $50,000)
– 8.5 percentage points for subordinate lien mortgages;
• Points & Fees Test:Loan points & fees exceed 5% of the total loan
amount, or 8% for loans below $20,000; or
• Prepayment Penalty Test: Loan provides that creditor may charge:
– a prepayment penalty more than 36 months after loan
consummation or account opening or
– penalties that exceed more than 2% of the amount prepaid
– New restrictions on HOEPA
• Ban fees for modifying loans, cap late fees and restrict the charging of
fees for payoff statement
• Require housing counseling before taking out a high-cost mortgage
– New general RESPA requirement – list of homeownership counseling
organizations must be provided within 3 business days of application
• Effective Date: Jan. 10, 2014
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Appraisals for Higher-Priced Loans
Final Rule on Appraisals for Higher-Priced Mortgage Loans
• Final Rule Amends TILA/Reg Z
– Effective Date: Jan. 18, 2014
• Before making “higher-priced mortgageloan” creditors must:
– Obtain a written appraisal performed by a certified appraiser and
based on a physical inspection of a property’s interior
– Provide applicant a statement regarding the purpose of the
appraisal at time of application and a free copy of any written
appraisals obtained 3 business days prior to closing
– Obtain a second written appraisal at no cost to the borrower in
connection with certain “flipped” properties if
• Seller acquired the home less than 180 days prior, and
• New sales price is 10% higher (if seller acquired less than 90
days prior) or 20% higher (if 91-180 days)
• Excludes: Qualified Mortgages, open end credit plans, reverse
mortgage loans, initial construction loans, bridge loans, loans secured
by new manufactured homes & transactions secured by a mobile home,
boat or trailer
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ECOA Appraisals Rule
Equal Credit Opportunity Act (Reg B) – Appraisals
• Final Rule requires notice and copy of appraisals
– Effective Date: Jan. 18, 2014
• Requires creditors to:
– Notify applicants within 3 business days of receiving an
application of their right to receive a copy of written
appraisals & valuations
– Provide applicants a copy of written appraisals & valuations
no later than 3 business days before consummation
• Prohibits creditors from charging a fee for providing a copy of
the appraisal or valuation
• Requirements apply only to appraisals & valuations made in
connection with applications for loans secured by a first lien
on a dwelling
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Escrow Account Rule
Final Rule on Escrow Accounts for Higher-Priced Mortgage
Loans (TILA/Reg Z)
• Final rule issued Jan. 10, 2013 (Board issued Proposed Rule Mar. 2, 2011)
• Effective Date: June 1, 2013
• Implements Dodd-Frank changes that extend the length of time escrow
accounts must be maintained for certain higher-priced mortgage loans
– Requires accounts to be maintained for at least 5 years (instead of
existing 1 year requirement) for closed-end, higher-priced mortgage
loans secured by a first lien on a consumer’s principal dwelling
• Account may be cancelled upon termination of the underlying debt
obligation, including by repayment, refinancing, rescission and
foreclosure
• After 5 years, account may be cancelled at consumer’s request if:
(a) the unpaid principal balance is less than 80% of the original
value of the property, and (b) the consumer is not currently
delinquent or in default
– Continued exemption for open-end loans, loans secured by shares in a
cooperative, loans to finance initial construction of a dwelling, temporary
bridge loans with a loan term of 12 months or less & reverse mortgages
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Servicing Rules
TILA (Reg Z) Mortgage Servicing Rule
• Implements Dodd-Frank mandated requirements under TILA
– Effective Jan. 10, 2014
• Monthly Mortgage Statements
– Requires servicers to send a periodic statement for each billing cycle
that includes summary of mortgage terms, breakdown of payments
by principal, interest, fees & escrow, recent transaction activity, etc.
– Includes sample forms & coupon book alternative for fixed-rate loans
• Warning Before Interest Rate Adjustments
– Requires servicer to notify a consumer with ARM 60 to 120 days
before an adjustment which causes the payment to change
• Removes the current annual notice required for ARMs when the
interest rate, but not the payment, changes
– Must notify consumers 210 to 240 days prior to first rate adjustment
– Does not apply to interest rate changes in a loan modification for loss
mitigation
• Payments Immediately Credited
– Requires servicers to credit a consumer’s account as of the date a
payment is received & clarifies the handling of partial payments
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Servicing Rules
RESPA (Reg X) Mortgage Servicing Rule
• Implements Dodd-Frank mandated requirements under RESPA &
additional requirements proposed by CFPB
– Effective Jan. 10, 2014
• Force-placed insurance
– Prohibits servicers from charging borrowers for insurance without
reasonable basis that borrower failed to maintain hazard insurance
– Must provide specific noticesbefore charging for coverage &must
terminate within 15 days if evidence of necessary insurance & refund
the insurance premiums
• Error resolution & information requests
– Servicer must acknowledge notification of an error within 5 days,
conduct reasonable investigation & correct the error or respond to
with results of the investigation, generally within 30 to 45 days
• Early intervention with delinquent borrowers
– Must make good faith efforts to notify delinquent borrowers of loss
mitigation options & about the foreclosure process
• Must attempt to make live contact no later than the 36th day of
delinquency & send written notice no later than 45th day
– Includes model language servicers may use for these notices
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Servicing Rules
RESPA (Reg X) Mortgage Servicing Rule (continued)
• Continuity of contact with delinquent borrowers
– Must assign dedicated contact personnel for a borrower no later than 45
days after missed payment
• Information management policies & procedures
– Servicers must establish reasonable policies & procedures to comply
with servicing rules, provide timely & accurate information
– Create a mortgage servicing file for each loan with specific documents
within 5 days & maintain records for 1 year after discharged/transferred
• Loss mitigation procedures
– Must acknowledge receipt in writing within 5 business days if application
submitted 45 days or more before foreclosure
– Must review & respond within 30 days of receipt of completed application
received more than 37 days before foreclosure
• Must evaluate for & notify of all loss mitigation options borrower
may be eligible for (or of right to appeal if application is denied)
– Dual tracking restrictions: prohibits servicers from proceeding with a
foreclosure sale until review of borrower’s application is complete
• Servicers cannot initiate foreclosure until more than 120 days
delinquent and must not start foreclosure proceeding if loss
mitigation application or other alternative is pending
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Servicing Critical Issues
Implementation Challenges
• Implementing processes, policies and procedures
– Managing timing rules for loss mitigation/foreclosure & how
requirements apply to different activities, divisions, and vendors
– Maintaining required records & reports
• Vendor due diligence and oversight is required
• Heightened scrutiny of servicing transfers
• Consumer Complaints
– CFPB collects & tracks consumer complaints, uses complaint data to
identify examination & enforcement actions, and now publishes complaint
data to the public in its online Consumer Complaint Database
– From July 21, 2011 through February 28, 2013, almost half of the roughly
130,000 complaints received concerned the mortgage industry
• 61% of those mortgage complaints involved servicing issues related
to loan modifications, collections, and foreclosure alternatives
– Encourage consumers to come directly to you instead of the CFPB
• Use consumer complaint data as a risk management tool to detect
regulatory risks and prevent future problems
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CFPB Servicing Guidance
CFPB Issued New Servicing Guidance on Feb. 11, 2013
• Requires mortgage servicers & subservicers to address potential
risks to consumers that may arise in connection with transfers of
servicing
• CFPB has particular concerns related to servicing transfers that arise
from consumer complaints & supervisory work
– CFPB examiners will carefully review servicers’ compliance with
federal laws applicable to servicing (e.g., RESPA, FCRA, FDCPA,
UDAAP)
– Will focus on particular concerns related to servicing transfers:
• Policies, procedures, systems and controls in place to address
the risks to consumers in connection with servicing transfers
• Adequate staffing and employee training to handle consumer
communications in the context of servicing transfers
• Servicers engaged in significant servicing transfers should expect
that the CFPB will, in appropriate cases, require them to prepare and
submit informational plans describing how they will be managing the
related risks to consumers
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CFPB Servicing Guidance
CFPB Issued New Servicing Guidance (continued)
• CFPB putting servicers on notice that it may require such plans in the
course of its supervisory activities
• Information to be included in the plan depends on the circumstances, but
generally will require:
– Number of loans involved in transfer & total servicing volume being
transferred (by unpaid principal balance)
– Name(s) of and information about transferor’s servicing platform(s) &
information about compatibility with transferee’s systems
– Detailed description of transaction & system testing to be conducted to
ensure accurate transfer of information & a description of the summary report
to be generated as a result of this testing
– Description of how transferee will identify & correct errors identified in
connection with the transfer, including a specified time period for reviewing
files and resolving errors
– Description of the training plan & actual training materials for staff involved
in reviewing, assessing, utilizing or communicating information regarding the
transferred loans
– Customer-service plan specific to the transferred loans that provides for
responding to loss mitigation requests or inquiries & identifying whether a
loan is subject to a pending loss mitigation resolution or application
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Upcoming Regulatory Changes
Other Rules on the Horizon
• Integrated Mortgage Disclosures Rule under TILA & RESPA
– Final Rule expected in Oct. 2013
– Proposed 2 new disclosures:
• Loan Estimate: 3 page replacement for GFE/Initial TIL
• Closing Disclosure: 5 page replacement for HUD-1/Final TIL
– Proposed expanded definition of Finance Charge to include the
4(c)(7) real estate related fees currently exempt
• HMDA Changes
– Not effective until CFPB issues final regulation
– Will require collection of additional data including: points & fees,
difference between the loan APR & benchmark rate for all loans,
prepayment penalty term, value of any collateral, loan term in
months, applicant’s age & credit score, originators ID number
• Credit Risk Retention (QRM)
– New Proposed Rule expected by the end of August
– The last Proposed Rule required 5% credit risk retention of all but
least risky mortgages
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Current Examination Trends
Compliance Management Systems (CMS)
• Regulators evaluate the understanding & application of
company’s compliance management program by its managers
and employees
• Common Findings:
– Established policies, but policies not followed
– Necessity of an effective CMS not fully appreciated by
management or employees
– Failure to implement effective employee training in consumer
protection laws
• Regulators expect company to take action to ensure that its
CMS is effectively understood & implemented
– Must have more than a simple CMS policy
– Must be followed, and managers & employees must understand
the CMS system in place
– Must be appropriately staffed & resourced for the size of your
company
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Current Examination Trends
Third Party Vendor Oversight
• Regulators are finding that many companies simply do not
monitor their third party vendors
– E.g., company fails to adequately coordinate with its vendor
on correspondence with the consumer
• Has caused problems such as:
– Conflicting interest rate information
– Improper application of penalty rates to outstanding
balances
• CFPB and FDIC consider an appropriate plan to include:
– Consistent, risk-based procedures governing retention and
monitoring of service providers
– Policies and procedures to monitor and test service
providers’ compliance with federal consumer financial law
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Current Examination Trends
Third Party Vendor Oversight (continued)
• CFPB Bulletin on Service Providers (April 13, 2012)
– Consistent with prior guidance from prudential regulators
– CFPB expects supervised banks & non-banks to have
effective processes for managing the risks of service provider
relationships
– Steps to ensure business arrangements do not present
unwarranted risks to consumers, including:
• Due diligence to verify service provider is complying with
consumer laws
• Request and review service provider’s policies,
procedures, internal controls & training materials
• Include in the contract clear expectations about
compliance & enforceable consequences for violating
compliance responsibilities
• Establish internal procedures to monitor service providers
• Take prompt action to address problems
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Current Examination Trends
Fair Lending
• Regulators spending a lot of time on fair lending
– Looking at pricing & UW criteria and whether company has a
fair lending monitoring program and whether it is effective
• Finding many companies with no appropriate policy
• Appropriate policy to include:
– Up to date requirements
– Regular training
– Ongoing monitoring
• For compliance with fair lending policy
• For compliance with other policies designed to reduce
risk of fair lending violations, e.g., loan originator
discretion
– Regular review of policies
– Regular assessment of marketing
– Meaningful oversight by management
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Fair Lending
Fair Lending – A Compliance Priority
• Most Fair Lending Violations Brought Under:
– Fair Housing Act
– Equal Opportunity Act (ECOA)
– State Fair Lending Laws
• Other Relevant Fair Lending Statutes:
– Home Mortgage Disclosure Act (HMDA)
– Community Reinvestment Act (CRA)
– Fair Credit Reporting Act (FCRA)
• Agencies Reviewing & Enforcing Fair Lending:
– CFPB
– HUD/FHA
– DOJ
– Prudential Regulators (FDIC, OCC, FRB, etc.)
– FTC
– State Regulators & Attorneys General
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Fair Lending
Different Theories of Discrimination
• Overt Discrimination
– Blatant discrimination on a prohibited basis
• Disparate Treatment
– Different treatment of applicants based on a prohibited factor
• Disparate Impact
– A practice applied uniformly to all applicants that has a
discriminatory effect on a protected class that is not justified
by business necessity
– NCRC complaints re: FHA FICO score overlays
– CFPB Bulletin on Disparate Impact
• CFPB reaffirms that disparate impact theory remains
applicable as CFPB exercises authority under ECOA
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Fair Lending
HUD Final Rule on Disparate Impact
• HUD Disparate Impact Rule: 3 part burden shifting test to determine
when a practice with a discriminatory effect violates the Fair Housing Act
1. Plaintiff to show practice actually or predictably results in a
discriminatory effect on the basis of a protected characteristic
2. Defendant to show the challenged practice is necessary to
achieve a substantial, legitimate, nondiscriminatory interest
supported by evidence (not hypothetical or speculative)
•
A “substantial interest” is a core interest of the organization that
has a direct relationship to its function
3. Plaintiff to show the interest could be served by a practice that
has a less discriminatory effect
• HUD’s rule appears to be in response to Magner v. Gallagher, where
the Supreme Court was to review this issue before the case was
withdrawn in Feb. 2012
• On June 17, the Supreme Court granted cert in the Mount Holly
case to determine whether disparate impact is cognizable under the Fair
Housing Act
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Fair Lending
Most Common Fair Lending Claims
• Pricing
– Minorities pay more on average than non-minorities for same product or
service
– Primarily result of loan officer discretion & use of overages
– May also result from discretionary concessions, use of brokers with different
pricing or use of multiple rate sheets in same lending area (FHA tiered pricing
rule)
• Redlining
– Minorities have limited or no access to credit as compared to non-minorities
– Percentage of loans made to non-minorities as compared to percentage made
to minorities
– Few branch office locations in predominately minority neighborhoods
• Underwriting
– Different standards & overlays that may treat minorities differently or may have
a discriminatory impact
• FICO score restrictions, maternity leave, disability payments
• Steering & Reverse Redlining
– Minority consumers steered to less desirable loan products or terms
– Certain loan products offered only in predominately minority areas
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Fair Lending
HMDA Data Integrity Examination Findings
• Inaccurately reported data
– Application dates on LAR
– Date of disclosures
– Withdraws that may be denials
– Finance charge (often entered as ZERO)
– APR
– Principal amount of loan
• Failure to accurately record and report HMDA data is an indication
of a weak compliance management system
– Data shows “violations” based on data problems but not
violations in loan file
– Has required resubmission of HMDA data where inaccuracies
were found
• Creates significant additional effort & work for the company to rebut
such allegations
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Key Operational Issues
Fair Lending Implementation Challenges
• Heightened scrutiny of fair lending compliance affects how lenders
implement Ability to Repay, LO Compensation and Servicing rules
• Ability to Repay
– Assess the potential impact on protected classes if only offering QM
products
– Assess circumstances under which non-QM products will be offered
• Ensure underwriting standards are validated and applied
consistently
• LO Compensation
– Ensure LOs are not compensated in a way that has a disparate
impact on a protective class
– Look at relationship between compensation and pricing
• Servicing
– Ensure loss mitigation and other foreclosure alternatives are offered
consistently
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New Developments
CFPB Bulletin on Responsible Business Conduct (June 25)
• Identifies 4 factors used to evaluate & acknowledge responsible
conduct in an enforcement investigation
– Self- policing (i.e., self-monitoring or self-auditing)
• Looks for a robust Compliance Management System & topdown culture of compliance
• Evaluates nature of violation (duration, frequency, severity) &
how it was detected (effectiveness of internal mechanisms)
– Self-reporting
• Considers prompt & complete self-reporting of significant &
potential violations of particular importance
• Considers the timeliness of disclosure, and if it was purely
proactive or if a violation was otherwise likely to be discovered
– Remediation
• Reviews if potential misconduct was addressed timely & if it was
quickly remediated
• Internal procedures designed to prevent recurring violations
• If responsible individuals were disciplined & information was
documented & preserved promptly
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New Developments
CFPB Bulletin on Responsible Business Conduct (June 25)
• Factors continued:
– Cooperation
• Looks for substantial & material steps above what the law
requires, such as cooperation from the beginning & identification
of any additional misconduct
• Considers steps taken to complete an objective internal
investigation and encouragement of employee cooperation
• Responsible conduct may be rewarded with:
– Resolution of an investigation with no public enforcement action
– Treatment of conduct as a less severe type of violation
– Reduction in the number of violations pursued or
– Reduction in sanctions or penalties
• Conduct must exceed the standard required by law for the CFPB to
consider awarding “affirmative credit”
– What best protects consumers is ultimately central to the
CFPB’s exercise of its enforcement discretion
• But no consistent formula - CFPB is not limiting its discretion & some
misconduct may be so great that enforcement is necessary
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New Developments
UDAAP – A New Way of Avoiding Rulemaking
• Under Dodd-Frank, CFPB has broad authority to define & enforce
UDAAPs
– CFPB can take any action within its enforcement powers to prevent
UDAAPs and has rulemaking authority over UDAAPs
• CFPB released 2 bulletins on UDAAP & debt collection in July
– CFPB is using its UDAAP authority to hold creditors
accountable for debt collection activities
• Creditors are generally not considered debt collectors under the
FDCPA, which governs debt collection activities
• Provides examples of conduct related to debt collection that
could constitute UDAAPs (e.g., misrepresenting if nonpayment
would be reported to a CRA, revealing debt to employer without
consent, falsely representing amount or legal status of a debt)
– Concerned with potentially deceptive claims to consumers
regarding the impact that paying debts in collection may have
on credit reports & credit scores
• Through supervision or enforcement, CFPB will review
communications, scripts, and training materials
– CFPB to accept consumer complaints related to debt collection
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New Developments
Unfair, Deceptive, or Abusive Acts or Practices Defined
• An act or practice is unfair when:
– It causes or is likely to cause substantial injury to consumers
– The injury is not reasonably avoidable by consumers &
– The injury is not outweighed by countervailing benefits to consumers
or to competition
• A representation, omission, act or practice is deceptive when:
– It misleads or is likely to mislead the consumer
– Consumer’s interpretation of the representation, omission, act or
practice is reasonable under the circumstances &
– The misleading representation, omission, act or practice is material
• An abusive act or practice:
– Materially interferes with the ability of a consumer to understand a
term or condition of a consumer financial product or service or
– Takes unreasonable advantage of –
• Consumer’s lack of understanding of material risks, costs or
conditions of the product/service
• Consumer’s inability to protect his/her interests in selecting or
using a consumer financial product/service or
• Consumer’s reasonable reliance on a covered person to act in
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his/her interests
New Developments
Tips for UDAAP Compliance
• Implement robust UDAAP policies and procedures
• Analyze consumer complaints for UDAAP concerns
• Review all advertising, marketing materials (including internet
& social media advertising), and telemarketing scripts to
ensure they are not misleading, unfair, abusive or deceptive
• Provide initial and ongoing training to employees
• Review organizational structure & compensation arrangements
to ensure there are no incentives to engage in UDAAPs
• Monitor third-party vendors for UDAAP compliance
• Review new lending products and changes in terms and
conditions of existing products for UDAAP risks to consumers
• Take prompt corrective action, including disciplinary action
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New Developments
Joint Ventures
• CFPB investigating joint ventures for illegal kickbacks and referral
fees in violation of RESPA § 8
– Sham JVs that are not bona fide providers of settlement services
– Focused on same factors that HUD used to evaluate and enforce
RESPA §8
• CFPB Paul Taylor Consent Order (May 2013)
– Paul Taylor Homebuilder required to turn over more than $100,000
received in kickbacks for referring origination business to Benchmark
Bank & Willow Bend Mortgage Company
– Paul Taylor created sham JV mortgage companies with
Benchmark & Willow Bend
• JVs conducted no origination business outside of referrals and
only brokered to Benchmark & Willow Bend that funded & sold
the loans
• JV with Benchmark did not advertise to the public and work was
performed by Benchmark employees in Benchmark offices
– FDIC separately fined Benchmark Bank a penalty of $15,000 for role
in RESPA violations
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New Developments
Joint Ventures (continued)
• CFPB Consent Order with 4 mortgage insurers (April 4)
– Insurers provided kickbacks to lenders by purchasing captive
reinsurance from the lender’s subsidiary that was essentially
worthless but designed to profit the lenders in violation of RESPA § 8
– Agreed to pay a combined $15.4 million to end investigations
– Followed investigations started by HUD
Marketing Agreements
• RESPA § 8 and HUD’s Interpretative Rule on Marketing Services
– Payments for marketing services that are directed to particular
home buyers or sellers are illegal kickbacks for a referral under § 8
• May pay an agent for services when those services are
– Actual, necessary & distinct from the primary services
provided by the agent, and
– Not nominal & not duplicative services
• Compensation such services must be reasonably related to the
value of those services & not include compensation for referrals
– Expect CFPB to investigate MSAs with consistent or more
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aggressive positions
New Developments
CFPB & FTC Warn Against Misleading Mortgage Ads
• CFPB issued warning letters to approximately 12 mortgage lenders &
brokers & FTC to approximately 20 real estate agents, home builders
& lead generators (Nov. 19, 2012)
– Notified that ads may violate federal laws & that company should
thoroughly review all their advertising
• Indication of opening or continuing an investigation
• Actions stem from a joint “sweep” of about 800 randomly selected
mortgage-related ads across the country, including ads for mortgage
loans, refinancing and reverse mortgages
– Review found potentially misleading advertisements, such as:
• Misrepresentation about government affiliations
• Inaccurate information about interest rates
• Misleading information about reverse mortgages
• Misrepresentation about amount of cash or credit
– Reviewed public-facing ads in newspapers, the Internet & mail
solicitations
• Some came to agencies’ attention from consumer complaints
• Looking for potential violations of the MAPS Rule
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New Developments
FTC Settlement on Marketing to Servicemembers (June 27)
• Ordered a leading veterans home loan refinancer to pay a $7.5 million
civil penalty to resolve alleged violationsof MAPS Rule and
Telemarketing Sales Rules
– Allegedly violated the MAPS Rule by:
• Misleading consumers about its affiliation with the
Department of Veterans Affairs
• Leading consumers to believe that it was offering low interest,
fixed rate mortgages with no costs when it was offering
adjustable rate mortgages with closing costs
– Allegedly violated Telemarketing Sales Rules by:
• Calling more than 5.4 million telephone numbers listed on the
National Do Not Call Registry to offer refinancing services to
current & former military consumers
• Failing to remove consumers from its call list upon demand
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New Developments
MAPS Rule Defines Advertisements Broadly
• No material misrepresentation, express or implicit, in any
commercial communication for any mortgage credit product
• Advertisements or “commercial communications” include:
– Any written or oral statement, illustration or depiction, in English or
any other language, designed to effect a sale or create interest in
purchasing goods or services, whether it appears on or in a
package, insert, radio, television, brochure, newspaper,
magazine, pamphlet, leaflet, circular or any other medium
• Promotional materials & web pages are expressly included
• Includes any communication on product labels, billboards,
blogs other social media & any collateral material handed out
in branch offices
• Rule sets forth a non-exhaustive list of per se deceptive
practices
– Includes deceptive statements regarding interest rate, APR,
payments & other loan terms or conditions
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New Developments
MAPS Rule Imposes Burdensome Recordkeeping
Requirements
• Imposes a 2-year recordkeeping requirement:
– All materially different commercial communications
– Copies of all materials showing what products & rates were
offered
– Copies of all materials showing any additional products or
services offered in conjunction with the mortgage credit
products offered
– Records may be kept in any readable format, and may be
kept in the same manner as all other materials that are
kept in the ordinary course of business
• Failure to keep these records is an independent violation
of the Rule
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Conclusion
What Can You Do?
• Make Compliance Your Top Priority
– Company wide, on every level
– System for employees to report problems to management
• Stay Informed
– Be ready for upcoming changes
– CFPB continues to release clarifications and guidance
• Continual Training
– Significant amount of new regulatory requirements
• Work with Integrity & No Shortcuts
– Personal responsibility & liability
– No second chances
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