Transcript Dodd-Frank Overview - American Bankers Association

The Impact on Housing Finance
How Financial Regulatory Reform Legislation Will Impact Banks
ABA Telephone Briefing/Webcast Series
Wednesday, July 28, 2010 ∙ 2:00 – 4:00 p.m. ET
Speakers
Co-moderators:
• Robert Davis, American Bankers Association
• Robert H. Ledig, Dechert LLP
Panelists:
• Oliver I. Ireland, Morrison & Foerster LLP
• Laurence E. Platt, K&L Gates LLP
• Andrew L. Sandler, BuckleySandler LLP
Effective Date of Mortgage Reform and AntiPredatory Lending Act – Title IV of Dodd-Frank Act
Rule Making Authority
• Role of Bureau of Consumer Financial
Protection versus Banking Agencies
Loan Origination
Prohibition on Steering Incentives
No mortgage originator shall receive from
any person, and no person shall pay to a
mortgage originator, directly or indirectly,
compensation that varies based on the
terms of the loan (other than the amount
of the principal).
Loan Origination
Restructuring Of Financing Origination Fee
A mortgage originator may not receive from any
person other than the consumer any origination
fee or charge except bona fide third party
charges not retained by the creditor, mortgage
originator, or their affiliate.
What does that mean?
Loan Origination
Mortgage Originator Anti-Steering Prohibitions
The Board[/Bureau] shall prescribe regulations to
prohibit mortgage originators:
– from steering any consumer to a residential mortgage loan
that…has predatory characteristics or effects and from a
“qualified mortgage” to a non-“qualified mortgage”;
– from abusive or unfair lending practices that promote disparities
among consumers of equal credit worthiness but of different
race, ethnicity, gender, or age; and
– from mischaracterizing the credit history of a consumer, the
residential mortgage loans available to a consumer, or the
appraised value of the property.
Loan Origination
Ability To Repay
In accordance with regulations prescribed by the Board/[Bureau],
no creditor may make a residential mortgage loan unless the
creditor makes a reasonable and good faith determination based on
verified and documented information that, at the time the loan is
consummated, the consumer has a reasonable ability to repay the
loan, according to its terms, and all applicable taxes, insurance
(including mortgage guarantee insurance), and assessments.
Agencies may exempt “streamlined refinancings” (i.e., non-cash out
refinancings) from this new income verification requirement subject
to certain requirements.
Loan Origination
Ability To Repay(continued)
A creditor and any assignee may presume that the loan has met
these new ability to repay requirements if the loan is a “qualified
mortgage”:
– The regular periodic payments for the loan may not:
• Result in an increase of the principal balance; or
• Except for certain balloon loans, allow the consumer to defer
repayment of principal;
– The terms of the loan do not result in a balloon payment,
except under certain circumstances;
Loan Origination
Ability To Repay(continued)
– The income and financial resources relied upon to qualify the
obligors on the loan are verified and documented;
– In the case of a fixed rate loan, the underwriting process is
based on a payment schedule that fully amortizes the loan over
the loan term and takes into account all applicable taxes,
insurance, and assessments;
– In the case of an adjustable rate loan, the underwriting is based
on the maximum rate permitted under the loan during the first 5
years, and a payment schedule that fully amortizes the loan
over the loan term and takes into account all applicable taxes,
insurance, and assessments;
Loan Origination
Ability To Repay (continued)
– The loan complies with any guidelines or regulations the Board
establishes relating to debt-to-income ratios or alternative measures of
ability to pay regular expenses after payment of total monthly debt,
taking into account the borrower’s income levels and such other factors
the Board establishes;
– The total points and fees payable in connection with the loan do not
exceed 3 percent of the total loan amount (the Board is required to
prescribe a points and fees threshold for “smaller loans” to meet the
requirements of this presumption, considering the potential impact on
rural areas and other areas where home values are lower); and
– The loan term does not exceed 30 years, except as such term may be
extended under certain circumstances, such as in high-cost areas.
Loan Origination
Restrictions Against Negative Amortization
No creditor may make a residential mortgage
loan, other than a reverse mortgage, that
provides or permits a payment plan that may, at
any time over the term of the extension of credit,
result in negative amortization unless, before
such transaction is consummated, certain
disclosures are provided.
Loan Origination
Liability and Enforcement
– Defense To Foreclosure
When a creditor, assignee, or other holder of a residential mortgage loan or
anyone acting on behalf of such creditor, assignee, or holder, initiates a
judicial or nonjudicial foreclosure of the residential mortgage loan, or any
other action to collect the debt in connection with such loan, a consumer
may assert a violation by a creditor of the anti-steering compensation and
ability to repay provisions as a matter of defense by recoupment or set-off
without regard for the statutory time limit on a private action for damages.
The amount of recoupment or set-off shall equal the amount to which the
consumer would be entitled for damages for a valid claim brought in an
original action against the creditor, plus costs.
Loan Origination
Liability and Enforcement
– Civil Actions
Mortgagor can sue for “enhanced” damages (an amount equal to the sum
of all finance charges and fees paid by the consumer) for the new
restrictions on mortgage originator compensation and the requirements for
determining a consumer’s ability to repay. (Enhanced damages presently
are available under TILA only for violations of HOEPA with respect to “highcost” loans and for certain violations in connection with “higher-priced
mortgage loans.”)
– Administrative Enforcement by the Bureau
Loan Origination
Prohibition on Certain Prepayment Penalties
– Prohibits prepayment penalties for non-“qualified mortgages”.
– Limits prepayment penalties for “qualified mortgages” to an
amount equal to 3 percent of the outstanding balance on the
loan in the first year, 2 percent in the second year and 1 percent
in the third year.
– A creditor may not offer a consumer a residential mortgage loan
product that has a prepayment penalty without offering a
product without a prepayment penalty.
Loan Origination
Prohibition Against Single Premium Credit Insurance
– Prohibits financing of any credit life, credit disability, credit
unemployment, or credit property insurance, or any other
accident, loss-of-income, life, or health insurance, or any
payments directly or indirectly for any debt cancellation or
suspension agreement or contract.
Loan Origination
Prohibition Against Mandatory Arbitration
Prohibits loan terms which require arbitration
or any other nonjudicial procedure as the
method for resolving any controversy or
settling any claims arising out of the
transaction.
Loan Origination
Revision of High Cost Mortgage Loan Thresholds
– Amends the definition of “high cost” loans under
HOEPA in three ways:
• Includes purchase money loans.
• Total points and fees other than bona fide third party charges
not retained by the mortgage originator, creditor, or an
affiliate of the creditor or mortgage originator, exceed, in the
case of a loan for $20,000 or more, 5 % of loan.
• Loan documents permit creditor to collect prepayment fees
that exceed 2 % of amount prepaid.
Loan Origination
Adverse Action Disclosure of Credit Scores
If any person takes any adverse action based in whole or in part on
any information contained in a consumer report, must provide to the
consumer the credit score used in taking the action.
If any person uses a consumer report in connection with an
application for a loan on material terms that are materially less
favorable than the most favorable terms available to a substantial
proportion of consumers from or through that person, based in
whole or in part on a consumer report, must inform the consumer of
the numerical credit score used in making the credit decision.
Loan Origination
Copy of Appraisal
At no cost to the applicant, each creditor shall furnish to
an applicant a copy of any and all written appraisals and
valuations developed in connection with the applicant’s
application for a loan promptly upon completion, but in
no case later than 3 days prior to the closing of the loan,
whether the creditor grants or denies the applicant’s
request for credit or the application is incomplete or
withdrawn.
Loan Origination
Home Mortgage Disclosure Act
– Adds to HMDA a new data itemization element for age and
requires itemization of the number and dollar amount of
mortgage loans grouped according to measurements of the total
points and fees, an APR spread, the term of any prepayment
penalty, and other information as the Bureau may require.
Loan Origination
Home Mortgage Disclosure Act (continued)
– Requires the itemization of the number and dollar amount of
mortgage loans and completed applications grouped according
to measurements of property value, any introductory period, the
ability to make nonamortizing payments, the loan term, the
origination channel, the loan originator’s unique identifier, the
property parcel number, credit score, and other information as
the Bureau may require.
Loan Servicing
Policy Regarding Acceptance Of Partial Payment
A creditor shall disclose prior to settlement or, in the
case of a person becoming a creditor with respect to an
existing residential mortgage loan, at the time such
person becomes a creditor: (1) the creditor’s policy
regarding the acceptance of partial payments; and (2) if
partial payments are accepted, how such payments will
be applied to such mortgage and if such payments will
be placed in escrow.
Loan Servicing
Mandatory Escrow/Impound Accounts for
First-Lien Closed End Loans
– Obligates a creditor on a first lien residential mortgage loan to establish
an escrow or impound account for the payment of taxes and hazard
insurance, and, if applicable, flood insurance, mortgage insurance,
ground rents, and any other required periodic payments or premiums
with respect to the property or the loan terms.
Loan Servicing
Mandatory Escrow/Impound Accounts for
First-Lien Closed End Loans (continued)
– Limited to when the escrow account is required by Federal or State
law; a loan is made, guaranteed, or insured by a State or Federal
governmental lending or insuring agency; the transaction is secured by
a first mortgage or lien on the consumer’s principal dwelling having an
original principal obligation amount that does not exceed Freddie Mac
conforming loan limits and the APR will exceed the average prime offer
rate by 1.5 or more percentage points; or exceeds the Freddie Mac
conforming loan limit, and the APR will exceed the average prime offer
rate by 2.5 or more percentage points; or “so required pursuant to
regulation.”
Loan Servicing
Mandatory Escrow/Impound Accounts for
First-Lien Closed End Loans (continued)
– The Board may exempt creditors that operate predominantly in rural or
underserved areas.
– Must remain for a minimum period of 5 years, unless PMI is no longer
required; the borrower is delinquent; the borrower otherwise has not
complied with the legal obligation, as established by rule; or the
underlying mortgage establishing the account is terminated.
Loan Servicing
Other – A Servicer Must:
– Credit a payment on the date received when a delay in crediting
would result in a charge or in the reporting of negative
information to a consumer reporting agency.
– Deliver an accurate payoff statement within a reasonable time,
but in no case more than seven business days of a written
request from the borrower or borrower’s agent.
Loan Servicing
A Servicer Must:
– Return to the borrower any balance in an escrow account that is
within the servicer’s control within 20 business days of payoff, or
must credit to an escrow account for a new mortgage loan if the
mortgage is with the same lender.
– Not obtain force-placed insurance, unless there is “a reasonable
basis to believe the borrower has failed to comply with the loan
contract’s requirements to maintain property insurance,” and the
servicer complies with certain statutory requirements.
Loan Servicing
A Servicer Must:
– Not fail to take timely action to respond to a borrower’s requests
to correct errors relating to allocation of payments, final
balances for purposes of paying off the loan, or avoiding
foreclosure, or other standard servicer’s duties.
– Acknowledge receipt of a QWR within 5 days of receipt.
Loan Servicing
A Servicer Must:
– Not charge fees for responding to valid QWRs (as defined in
regulations that the Bureau shall prescribe).
– Not fail to respond within 10 business days to a request from a
borrower to provide the identity, address, and other relevant
contact information about the owner or assignee of the loan.
Appraisals
– Sunsets the HVCC when FRB issues interim
final regulations on appraiser independence
within 90 days.
– Does not restrict lenders’ use of appraisals
from a mortgage broker, loan originator, or
other interested party or from an AMC.
Appraisals
– Prohibits a person with an interest in the underlying
transaction from compensating, coercing, extorting,
colluding, instructing, inducing, bribing, or intimidating
a person, appraisal management company, firm or
other entity conducting or involved in an appraisal for
the purpose of causing the appraised value to the
property to be based on any factor other than the
independent judgment of the appraiser.
Appraisals
– Requires any mortgage lender, mortgage broker,
mortgage banker, real estate broker, AMC, employee
of an AMC, or any other person involved in a real
estate transaction involving an appraisal in
connection with a consumer credit transaction
secured by the principal dwelling of a consumer who
has “a reasonable basis to believe” that an appraiser
has failed to comply with the Uniform Standards of
Professional Appraisal Practice (“USPAP”), is
violating applicable laws, or is otherwise engaging in
unethical or unprofessional conduct to report the
matter to the applicable state appraisal boards.
Appraisals
– Requires lenders and their agents to compensate fee appraisers
(as opposed to staff appraisers) at a “customary and
reasonable” rate for appraisal services in the market area of the
property being appraised, without regard to AMC rates.
– Effectively prohibits BPOs or AVMs for the origination of a
higher-risk mortgage by requiring a licensed or certified
appraiser to conduct an appraisal by visiting the interior of the
mortgage property.
– Amends FIRREA to provide that “in conjunction with the
purchase of a consumer’s principal dwelling, BPOs may not be
used as the primary basis to determine the value of a piece of
property for the purpose of a loan origination of a residential
mortgage loan secured by such piece of property.”
Appraisals
– Amends FIRREA to obligate the federal agencies, in
consultation with the Appraisal Subcommittee and the Appraisal
Standards Board of the Appraisal Foundation to promulgate
regulations to implement the quality control standards for AVMs.
Such standards must, at a minimum: (i) achieve a high level of
confidence in the estimates produced by AVMs; (ii) protect
against the manipulation of data; (iii) seek to avoid conflicts of
interest; and (iv) require random sample testing and reviews of
AVMs (but the sampling does not expressly have to be carried
out by a certified or licensed appraiser).
Risk Retention
– Mandates a rulemaking process to require that “securitizers”
retain at least a five percent economic interest in a portion of the
credit risk in each asset held in a securitization, subject to
certain exclusions and exceptions.
– Permits regulators to allocate retained risk between securitizers
and originators that deliver into securitizations for particular
categories of assets, as determined with reference to the credit
risk of the assets, the characteristics of securitization
transactions involving those assets (e.g., form and volume),
and the potential impact of a risk retention requirement on the
availability of credit to consumers and businesses.
Risk Retention
– Generally prohibits securitizers and originators from hedging
any retained risk directly or indirectly, subject to regulatory
exemptions.
– Excludes from risk-retention requirements single-tranche
securitizations of pools consisting solely of “qualified residential
mortgages,” which will be defined by the SEC, the Bank
Regulators, HUD and FHFA, but which may be no broader than
the definition of “qualified mortgage” under the Mortgage
Reform Act.
Risk Retention
– Provides that the definition of qualified residential mortgages in
applicable regulations must take into account “underwriting and product
features that historical loan performance data indicate result in a lower
risk of default” and also requires regulators to restrict or prohibit in
qualified residential mortgages any feature “demonstrated to exhibit a
higher risk of borrower default.”
– Exempts securitizations of assets issued or guaranteed by the United
States, any state, or any agency of the foregoing (e.g., FHA-insured or
VA-guaranteed). For purposes of these exemptions, neither Fannie
Mae nor Freddie Mac is considered an agency of the United States,
although conforming loans separately may be exempt as qualified
residential mortgages.
Risk Retention
– Regulators will have broad authority to grant any other
exemptions for classes of institutions or assets from the risk
retention requirements or the prohibitions on hedging retained
risk, so long as those exemptions help ensure high underwriting
standards and encourage appropriate risk management
practices by securitizers and originators.
– For securitizations in which risk retention is required, regulations
must specify permissible forms of risk retention and the
minimum duration of that risk retention.
Risk Retention
– With respect to commercial mortgages, authorizes regulators to
allow a securitizer of commercial mortgage loans to transfer the
first loss position retained risk subject to certain conditions.
More specifically, regulations promulgated under the Act would
require any transferee of the first loss position in a commercial
mortgage securitization to: (1) hold adequate financial
resources; (2) provide due diligence on all individual assets in
the pool prior to securitization; and (3) meet the same standards
for risk retention as the securitizer. Additional requirements on
commercial mortgage securitizations would include a
determination by the SEC and the Bank Regulators that the
“underwriting standards and controls for the asset are
adequate,” and specifications for representations, warranties,
and remedies for breach thereof.
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The Department of Justice on the March
• Fair Lending Enforcement “top” priority;
• More than 50 Fair Lending investigations
commenced since January 2009.
41
The BCFP – A New Sheriff
• Primary jurisdiction for consumer protection
for all non-depositories and large banks
( > $10 Billion);
• Significant examination and enforcement
powers and likely budget of $500 million.
State Attorney Generals Take Aim
• State Attorney General mortgage related
actions proliferate;
• “Justice” outsourced: the use of contingency
fee private plaintiffs’ firms by State Attorneys
General.
43
Fair Lending and Fair Servicing Key Focus
• Traditional Fair Lending focus of loan denial
disparity rates and redlining returns;
• Pricing discretion under attack;
• Fair servicing as new focus: increased scrutiny
of default servicing and foreclosure practices.
Focus On Unfair and Deceptive Sales and Collection
Practices by BCFP and State Attorneys General
•
Aggressive enforcement of FCRA,
FDCPA, HPA, HMDA, RESPA, SAFE Act,
TILA, Title XIV and state analogs ahead;
•
Ex post facto enforcement of new rules
becoming trend.
Dilution or Loss of Federal Preemption:
How will this affect residential mortgage lending?
Overview of CFPA Preemption
• Conflict preemption
– Consumer Financial Protection Bureau (“Bureau”) rules and
regulations prescribed under the Consumer Financial Protection
Act of 2010 (“CFPA”)
• State law is preempted only if it is inconsistent and only to the extent
of the inconsistency
• State law is not inconsistent if it affords to consumers greater
protection
– Conflicts between “enumerated consumer laws” and State law
unchanged
• Charter preemption
– Codified preemption standard for conflicts between “state
consumer financial law” and the powers of national banks or
federal thrifts
• Significant procedural changes (e.g., majority-of-state
resolutions, case-by-case determinations)
New Preemption Standard
• Threshold question: is the state law a “state consumer financial
law”?
– Does the law “directly or indirectly discriminate against national
banks,” and
– Does the law “directly and specifically regulate[] the manner, content,
or terms and conditions of any financial transaction . . . or any
account . . . with respect to a consumer”?
• “Directly and specifically” likely limits scope to laws that, by their express
terms, regulate the manner, etc., of consumer financial transactions and
accounts.
– For example, state law predatory lending laws would likely “directly and
specifically regulate” a financial transaction.
– But, state licensing and registration laws would likely not “directly and
specifically regulate” a financial transaction
• If the state law is not a state consumer financial law, preemption
issues should be governed by existing federal preemption
law and precedent
New Preemption Standard
• If the state law is a state consumer financial law, it is
preempted only if:
– Application of the state law has a discriminatory effect
– The state law “prevents or significantly interferes” with national
bank powers (Barnett Bank standard)
– The state law is preempted by other federal law (i.e., other than
the CFPA)
• Barnett Bank Standard
– Colloquy between Senators Dodd and Carper: “There should be
no doubt that the legislation codifies the preemption standard
stated by the United States Supreme Court in [the Barnett Bank]
case”
– An example of a state law that would be preempted under the
Barnett Bank standard is a state law that purports to prohibit a
national bank from making mortgage loans
Case-by-Case Basis
• Initial preemption determinations under the Barnett Bank
standard may made by a court or by the Comptroller “on a
case-by-case basis”
– Comptroller cannot prescribe across the board preemption, similar
to the non-real estate lending (12 C.F.R. 7.4008(d)(1)) and deposittaking preemption provisions (12 C.F.R. 7.4007(b)(1))
– Comptroller must consult with the Bureau if other States have laws
with substantively equivalent terms
– Comptroller must produce substantial evidence to support the
specific finding of preemption “on the record of the proceeding,”
which likely invokes Administrative Procedure Act (APA)
restrictions, including limits on ex parte communications
• Comptroller must publish a periodic review of preempted State
consumer financial law
Treatment of Operating Subsidiaries
• Three separate provisions of the CFPA eliminate Federal
preemption protection for subsidiaries and affiliates
– Rejects the Supreme Court’s holding in Watters v. Wachovia Bank
– Undercuts OCC operating subsidiaries preemption regulation (12
C.F.R. § 7.4006)
• Subjecting operating subsidiaries to state consumer financial
laws may force national banks to reconsider their
organizational structure
– Merge operating subsidiary under the bank charter, thereby
allowing the business of the operating subsidiary to be conducted
in the national bank itself?
– Obtain a national bank charter for the operating subsidiary?
– Raises a number of issues (e.g., compliance, corporate, tax,
personnel, etc.)
Treatment of Operating Subsidiaries (continued)
• However, national bank operating subsidiaries continue to enjoy
exemptions from state law where a separate federal statute
expressly preempts the state law
• For example, 12 U.S.C. § 1701j–3 preempts certain state laws that
purport to restrict the exercise of due-on-sale clauses in mortgage
documents