On May 12, 2015 Senator Richard Shelby (R-AL) released a draft of a regulatory reform bill entitled the Financial Regulatory Improvement Act of 2015. The draft bill addresses various residential mortgage lending issues, a number of which are summarized below. The draft bill is scheduled for markup on May 21, 2015.
TRID Safe Harbor. Section 117(b) of the draft bill would effectively allow lenders to continue to provide the existing Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosures for residential mortgage loans even after the scheduled August 1, 2015 effective date of the TILA/RESPA Integrated Disclosure (TRID) rule. Under the section an entity that provides the existing TILA and RESPA disclosures would not be subject to any civil, criminal, or administrative action or penalty for failure to fully comply with the Dodd-Frank provision under which the CFPB adopted the TRID rule.
The safe harbor would apply until 30 days after the date that the CFPB Director publishes a certification in the Federal Register that the TRID rule model disclosures (the Loan Estimate and Closing Disclosure) are accurate and in compliance with all state laws. The concept of federal disclosures being “in compliance” with state laws is interesting given federal preemption. Potentially the concept is intended to address a concern raised by the industry that many state laws in some fashion incorporate the existing disclosures under TILA and RESPA, and have not been updated to reflect the Loan Estimate and Closing Disclosure under the TRID rule.
The industry also has raised concerns about the requirement under the TRID rule to disclose the cost of the lender’s title insurance policy and the owner’s title insurance policy in a manner that differs from the actual pricing of the policies. Potentially the requirement that the Director certify that the Loan Estimate and Closing Disclosure are “accurate” is intended to address the concern.
TRID Waiting Period. A summary of the draft bill provides that section 117 would remove the three business day waiting period under the TRID rule in cases in which the only change from the prior disclosure is that the annual percentage rate (APR) is lowered. Under the TRID rule, the Closing Disclosure must be received by the borrower at least three business days before consummation, and a revised Closing Disclosure with a new waiting period is required if the APR becomes inaccurate, a prepayment penalty is added or the loan program (or certain loan features) change.
The TRID rule uses the same standard in effect today for determining if the APR becomes inaccurate, which triggers the need to provide a revised Truth in Lending Disclosure with a new three business day waiting period. One element of the standard is the regulatory APR overstatement tolerance. Under that tolerance, if the finance charge is overstated and the APR is also overstated, but by no more than the equivalent finance charge overstatement, the APR is deemed to be accurate. Because the availability of the APR overstatement tolerance depends on the relationship of the disclosed APR to the disclosed finance charge, many industry participants do not rely on the overstatement tolerance. It is believed that many industry members will adopt the same approach to determining whether a new Closing Disclosure with a new waiting period must be provided under the TRID rule. Apparently, the intent of the draft bill is to eliminate this uncertainty by making clear that if the only change is a decrease in the APR, no new waiting period is required under the TRID rule.
Unfortunately, the current version of section 117(a) in the draft bill would not achieve the apparent intent. The draft bill would modify the separate disclosure requirement under TILA that applies to high-cost mortgage loans. The waiting period under the TRID rule is not contained in TILA—it is set forth in Regulation Z. Section 117(a) would need to be modified to achieve what appears to be the intent of the draft bill. The change could be accomplished during the May 21, 2015 mark-up.
Ability to Repay Safe Harbor. Section 106 of the draft bill would modify the ability to repay provisions under TILA by creating a safe harbor with respect to a loan if the creditor retained the loan in portfolio since origination or a person acquiring the loan has continued to hold the loan in portfolio since the acquisition, and certain conditions were satisfied. The conditions are that (1) the loan was not acquired through a securitization, (2) any prepayment penalties comply with the phase out requirements for prepayment penalties that apply to qualified mortgages, (3) the loan does not have a negative amortization feature, interest-only features, or a term of more than 30 years, and the (4) the creditor documented the consumer’s income, employment, assets and credit history.
Loan Originator Licensing. Section 118 of the draft bill would create a temporary license for a loan originator who (1) is a registered loan originator (i.e., a loan originator who works for a depository institution) and then becomes employed as a loan originator with a state-licensed mortgage lender, banker or servicer or (2) is a registered loan originator or loan originator licensed in one state and then becomes employed as a loan originator with a state-licensed mortgage lender, banker or servicer in another state. The temporary license would be effective for 120 days. The mortgage industry has long sought a transitional license to allow loan originators to continue to perform loan origination functions when they move from a depository institution to a state-licensed mortgage entity, or from one state (working as a loan originator for a state-licensed mortgage entity) to a state-licensed mortgage entity in another state. Currently, loan originators who change employment from a depository institution to a state-licensed mortgage entity cannot perform loan originator functions until they become licensed. Similarly, with the exception of six states that have implemented a transitional license structure, loan originators who move from one state to a state-licensed mortgage entity in another state cannot perform loan originator functions until they become licensed in that state. This impedes freedom of movement by individual loan originators, and requires state-licensed entities to bear the costs of employing a loan originator during the period that the originator can perform no loan origination functions. A number of state regulators in states that have not adopted a transitional license structure have taken steps to facilitate the movement of loan originators from one state-licensed entity to another, such as by the adoption of the Uniform State Test and use of the Approved-Inactive status for loan originators. However, a more global solution is necessary to ensure uniformity among the states.
Points and Fees. Section 107 of the draft bill would amend the definition of “points and fees” for purposes of qualified mortgage loans and high-cost mortgage loans to exclude amounts that are escrowed for the future payment of insurance and exclude premiums for accident insurance. The exclusion of amounts escrowed for the future payment of insurance is viewed as a conforming change, as amounts escrowed for the future payment of taxes are already excluded from points and fees.
Unlike the Mortgage Choice Act of 2015 (H.R. 685), which the House passed in April 2015 (and prior versions were also passed by the House), the draft bill would not exclude from points and fees any fees or premiums for title examination, title insurance or similar purposes when received by an affiliate of the creditor. Current law excludes such fees and premiums from points and fees if received by a party that is not an affiliate of the creditor, even if the fees and premiums are the same as or exceed the fees and premiums that would be charged by an affiliate of the creditor. However, section 107 would require the Comptroller General of the United States, who is the head of the General Accountability Office (GAO), to conduct a study on various access to credit issues and also “on the ability of affiliated lenders to provide mortgage credit.” The study may be a compromise approach to address the different treatment of title charges, and certain other real estate related charges, for points and fees purposes based on whether the charges are received by an affiliate or non-affiliate of the creditor.
Studies. Among other provisions, the draft bill also would (1) require the GAO to conduct a study and provide a report to Congress regarding whether the data published under the Home Mortgage Disclosure Act (HMDA) creates various privacy and identity theft risks (section 111), and (2) require the federal banking agencies to conduct a joint study and provide a report to Congress regarding the appropriate capital requirements for mortgage servicing assets of banking institutions, including the effect of the Basel III capital requirements. The HMDA data study likely is intended to address the expanded data reporting requirements under Dodd-Frank that are expected to be finalized later this year when the CFPB adopts the final version of a rule proposed by the CFPB in July 2014 and published in the Federal Register in August 2014. The industry has raised privacy concerns regarding the expanded data elements, and a backdrop to the concerns is a GAO finding that the CFPB needs to improve its privacy and data security procedures.