The Consumer Financial Protection Bureau recently issued an updated version of the TILA-RESPA Integrated Disclosure Guide to the Loan Estimate and Closing Disclosure forms. The revised Guide incorporates the changes to the TRID rule that were issued in July 2017 and published in the August 11, 2017 Federal Register.
On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas. The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015. According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate. According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate. Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers. Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.
Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.” Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points. This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.
The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.” But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment. This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.
Last week, members of the Senate Banking Committee announced that they had reached bipartisan agreement on “legislative proposals to improve our nation’s financial regulatory framework and promote economic growth.” Following the announcement, Committee members released a draft of a bill (S. 2155), the “Economic Growth, Regulatory Relief, and Consumer Protection Act.” A markup of the bill is scheduled for December 5, 2017. Many observers believe that due to its bipartisan support, there is a strong likelihood that the bill will be enacted as part of a regulatory relief package.
Provisions of the bill relevant to providers of consumer financial services include the following:
Small Depository Qualified Mortgage (Section 101). For an insured depository institution or insured credit union, the bill would create a qualified mortgage loan entitled to the safe harbor under the ability to repay rule. In general, the depository institution or credit union would need to hold the loan in portfolio, and the loan could not have an interest-only or negative amortization feature and would need to comply with limits on prepayment penalties. While the creditor would need to consider and document the debt, income and financial resources of the consumer, it would not have to follow Appendix Q to the ability to repay rule.
Appraisal Exemption for Rural Areas (Section 103). The bill would provide an exemption from any appraisal requirement for a federally related transaction involving real property if (1) the property is located in a rural area, (2) the loan is less than $400,000, (3) the originator is subject to oversight by a federal financial institution regulator, and (4) no later than three days after the Closing Disclosure under the TRID rule is given to the consumer, the originator has contacted at least three state certified or licensed appraisers, as applicable, and has documented that no state certified or licensed appraiser, as applicable, is available within a reasonable period of time. The applicable federal financial institution regulator would determine what constitutes a reasonable period of time. The exemption would not apply to high-cost loans under the Truth in Lending Act (TILA), or when the applicable federal financial institution regulator requires the financial institution to obtain an appraisal to address safety and soundness concerns.
Home Mortgage Disclosure Act Triggers (Section 104). The bill would increase the loan volume trigger to be a reporting company under the revised Home Mortgage Disclosure Act (HMDA) rule from 25 closed-end mortgage loan originations in each of the preceding two calendar years to 500 such loans in each of the two preceding calendar years. The 25 closed-end loan trigger went into effect in 2017 for depository institutions, and goes into effect on January 1, 2018 for non-depository institutions.
The bill also would make permanent under the revised HMDA rule a trigger of 500 open-end mortgage loan originations in each of the preceding two calendar years. As reported previously, the revised HMDA rule provided for a trigger effective January 1, 2018 of 100 open-end mortgage loan originators in each of the preceding two calendar years, and in August 2017 the CFPB temporarily raised the trigger for 2018 and 2019 to 500 open-end mortgage loans in each of the preceding two calendar years. The bill includes a requirement for the Comptroller General of the United States to conduct a study after two years to evaluate the impact of the amendments on the amount of data available under HMDA, and submit a report to Congress within three years.
Loan Originator Transition Authority (Section 106). Subject to various conditions, the bill would establish temporary transition authority for an individual loan originator to conduct origination activity for up to 120 days from when the individual submits an application to be licensed in a state in cases in which the individual is (1) registered and then becomes employed by a state-licensed mortgage company or (2) licensed in a state and then seeks to conduct loan origination activity in another state.
TRID Rule Provisions (Section 110). The bill includes a provision that apparently is intended to eliminate the need for a second three business day waiting period under the TILA/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule in cases in which the annual percentage rate decreases and becomes inaccurate after the initial Closing Disclosure is provided, thus triggering the need for a revised Closing Disclosure. Currently, the TRID rule requires both a revised Closing Disclosure and a new three business day waiting period before consummation may occur. As drafted, however, the bill would amend the TILA timing requirements for high-cost mortgages under the Home Ownership and Equity Protection Act. The TRID rule timing requirements are set forth in Regulation Z and not TILA. Thus, revisions to the bill are necessary to achieve the intended goal.
The bill also includes a sense of Congress provision with regard to the TRID rule, which provides that the CFPB should endeavor to provide clearer, authoritative guidance on (1) the applicability of the rule to mortgage assumptions, (2) the applicability of the rule to construction-to-permanent home loans, and the conditions under which such loans can be properly originated, and (3) the extent to which lenders can, without liability, rely on the model disclosures published by the CFPB under the rule if recent changes to the rule are not reflected in sample TRID rule forms published by the CFPB.
Credit Report Alerts (Section 301). The bill would amend the Fair Credit Reporting Act (FCRA) to require consumer reporting agencies to keep a fraud alert requested by a consumer in the consumer’s file for at least one year and allow a consumer to have one free freeze alert placed on his or her file every year and remove that alert free of charge. Consumer reporting agencies would also have to provide free freeze alerts requested on behalf of a minor and remove such alerts free of charge.
Credit Reports of Military Veterans (Section 302). The bill would amend the FCRA to require consumer reporting agencies to exclude from credit reports certain information relating to medical debts of veterans and would establish a dispute process for veterans seeking to dispute medical debt information with a consumer reporting agency.
Protection of Seniors (Section 303). The bill would, subject to certain conditions, provide immunity from civil or administrative liability to individuals and financial institutions for disclosing the suspected exploitation of a senior citizen to various government agencies, including state or federal financial regulators, the SEC, or a law enforcement agency.
Cyber Threats (Section 501). The bill would require the Secretary of the Treasury to submit a report to Congress on the risks of cyber threats to financial institutions and U.S. capital markets that includes an analysis of how the appropriate federal banking agencies and the SEC are addressing such risks. The report must also include Treasury’s recommendation on whether any federal banking agency or the SEC “needs additional legal authorities or resources to adequately assess and address material risks of cyber threats.” (We note that for several years, the FTC has been calling for such additional authority, specifically in the form of rulemaking authority. Due to the limitations of the Banking Committee’s jurisdiction, the bill’s provision focuses exclusively on the federal banking agencies, and gives no recognition to the important role of the FTC—which is under the Senate Commerce Committee’s jurisdiction–in addressing cyber threats.
We will be publishing another blog post in the near future about other provisions of the bill that may be of interest to our blog readers.
A bill to provide a “Madden fix” and three other bills relevant to mortgage lenders were included among the more than 20 bills approved by the House Financial Services Committee on November 15, 2017. With the exception of H.R. 3221, “Securing Access to Affordable Mortgages Act,” the bills received strong bipartisan support.
The “Madden fix” bill is H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017.” In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge. The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”
The bill would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal and state savings associations, federal credit unions, and state-chartered banks. The bill was approved by a vote of 42-17. (A bill with identical language was introduced in July 2017 by Democratic Senator Mark Warner.)
Adoption of a “Madden fix” would eliminate the uncertainties created by the Second Circuit’s Madden decision. However, it would not address a second source of uncertainty for banks that lend with assistance from third parties—the argument that the bank is not the “true lender” and accordingly cannot exercise the usury authority provided to banks by federal law. As we have previously urged, the OCC and its sister agencies should adopt rules providing that loans funded by their supervised financial institutions in their own names as creditor are fully subject to federal banking laws (and not state usury laws). The OCC and FDIC have previously emphasized that their supervised entities must manage and supervise the lending process in accordance with regulatory guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.
The other approved bills relevant to mortgage lenders are:
- H.R. 3221, “Securing Access to Affordable Mortgages Act.” The bill would amend the Truth in Lending Act (TILA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to exempt a mortgage loan of $250,000 or less from the higher-priced mortgage loan and general property appraisal requirements if the loan appears on the creditor’s balance sheet for at least three years. The bill would also exempt mortgage lenders and others involved in real estate transactions from incurring penalties for failing to report appraiser misconduct. The bill was approved by a vote of 32-26.
- H.R. 1153, “Mortgage Choice Act of 2017.” The bill would amend TILA by revising the definition of “points and fees” to exclude escrowed insurance and fees or premiums for title examination, title insurance, or similar purposes, whether or not the title-related charges are paid to an affiliate of the creditor. The bill would direct the CFPB to issue implementing regulations within 90 days of the bill’s enactment. The bill was approved by a vote of 46-13.
- H.R. 3978, “TRID Improvement Act of 2017.” The bill would amend RESPA to require that the amount of title insurance premiums reflect discounts required by state law or title company rate filings. The amendment would override the TRID rule approach to the disclosure of the lender’s and the owner’s title insurance premiums if there is a discount offered on the lender’s policy when issued simultaneously with an owner’s policy. In such cases, instead of requiring the disclosure of the actual owner’s policy premium and the actual discounted lender’s policy premium, the TRID rule currently requires the disclosure of the full, non-discounted amount of the premium for the lender’s policy, and an amount for the owner’s policy equal to the full amount of the owner’s policy premium, plus the amount for the discounted lender’s policy premium, less the full amount of the lender’s policy premium. The bill was approved by a vote of 53-5.
On Friday November 3, 2017 the Consumer Financial Protection Bureau (CFPB) announced the launch of the Internet-based platform that financial institutions will use to submit data under the Home Mortgage Disclosure Act (HMDA).
Each user will need to register online for login credentials and establish an account in order to access the platform. Financial institutions can use the beta period to test login credentials, upload sample HMDA files, perform validation on their HMDA data, receive edit reports, confirm their test data submission, and conclude the test HMDA filing process. There is no limit on the extent to which a financial institution may use the platform for testing purposes during the beta period.
All test accounts that are created during the beta period, and test data that is uploaded during the period, will be removed from the platform when the filing period for 2017 HMDA data opens in January 2018.
The CFPB encourages institutions to provide feedback on their experiences using the platform by sending comments to HMDAfeedback@cfpb.gov.
The CFPB recently posted on its website updated versions of guidance in connection with the revisions to the Home Mortgage Disclosure Act (HMDA) rules that become effective on January 1, 2018, and also posted a new guidance item.
The CFPB updated the chart entitled Collection and Reporting of HMDA Information about Ethnicity and Race, and updated the Filing instructions guide for information collected in and after 2018.
In August 2017, the CFPB issued various technical changes to the revised HMDA rule. The revised materials incorporate changes made in the August amendments.
The CFPB also added a new chart entitled Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart. The new chart is a reference tool for data points required to be collected and reported under the revised HMDA rule, as amended by the August 2017 amendments
The federal banking agencies have issued guidance to financial institutions on the key data fields under the revised Home Mortgage Disclosure Act (HMDA) rules that will be used to test and validate the accuracy and reliability of the HMDA data.
In October 2015, the CFPB adopted significant changes to the HMDA rules that significantly expanded the amount of information that must be collected and reported. The changes are effective January 1, 2018.
The guidance issued by the federal banking agencies lists 110 data fields under the revised HMDA rules, and identifies 37 of such fields as Designated Key HMDA Data Fields. Among the new reporting data fields that the agencies identify as key fields are the applicant’s age and credit score, the origination charges, discount points, lender credits, interest rate, debt-to-income ratio, combined loan-to-value ratio, and the automated underwriting system result.
Despite the identification of certain data fields as key fields for examination purposes, examiners nevertheless may determine that additional HMDA data fields need to be examined.
The Consumer Financial Protection Bureau has issued a second version of the Home Mortgage Disclosure Act (Regulation C) Small Entity Compliance Guide. The updated version incorporates various changes to the HMDA rule that were issued in August 2017 and published in the September 13, 2017 Federal Register, which we reported on previously. One of the main changes incorporated in the revised Guide is the temporary increase in the threshold to report home equity lines of credit (HELOCs) from 100 to 500 transactions in each of the two proceeding calendar years. Based on the temporary increase, financial institutions originating 100 or more HELOCs but fewer than 500 in 2018 or 2019 would not be required to begin collecting and reporting HELOC data until January 1, 2020. However, the CFPB may take further action to amend the threshold.
The CFPB recently released a revised version of the TILA-RESPA Integrated Disclosure Rule Small Entity Compliance Guide.
The revised version incorporates the recent amendments to the rule that became effective on October 10, 2017. Compliance with the amendments will be required for applications received on or after October 1, 2018.
The amendments also clarified that the separate escrow cancellation notice and partial payment disclosure requirements under Regulation Z will apply to all covered loans on October 1, 2018, regardless of when the application is received.
Among the more than 20 bills that the House Financial Services Committee is scheduled to mark-up this Wednesday, October 11, is a bill to provide a “Madden fix” as well as several others relevant to consumer financial services providers.
These bills are the following:
- H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017. In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge. The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”
This language is identical to language in a bill introduced in July 2017 by Democratic Senator Mark Warner as well as language in the Financial CHOICE Act and the Appropriations Bill that is also intended to override Madden. Like those bills, H.R. 3299 would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks. In the view of Isaac Boltansky of Compass Point, the bill is likely to be enacted in this Congress.
- H.R. 2706, “Financial Institution Consumer Protection Act of 2017.” This bill is intended to prevent a recurrence of “Operation Chokepoint,” the federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed. Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns. The bill includes provisions that (1) prohibit a federal banking agency from (i) requesting or ordering a depository institution to terminate a specific customer account or group of customer accounts, or (ii) attempting to otherwise restrict or discourage a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers. unless the agency has a material reason for doing so and such reason is not based solely on reputation risk, and (2) require a federal banking agency that requests or orders termination of specific customer account or group of customer accounts to provide written notice to the institution and customer(s) that includes the agency’s justification for the termination. (In August 2017, the DOJ sent a letter to the chairman of the House Judiciary Committee in which it confirmed the termination of Operation Chokepoint. Acting Comptroller Noreika in remarks last month, in which he also voiced support for “Madden fix” legislation, indicated that the OCC had denounced Operation Choke Point.)
- H.R. 3072, “Bureau of Consumer Financial Protection Examination and Reporting Threshold Act of 2017.” The bill would raise the asset threshold for banks subject to CFPB supervision from total assets of more than $10 billion to total assets of more than $50 billion.
- H.R. 1116, “Taking Account of Institutions with Low Operation Risk Act of 2017.” The bill includes a requirement that for any “regulatory action,” the CFPB, and federal banking agencies must consider the risk profile and business models of each type of institution or class of institutions that would be subject to the regulatory action and tailor the action in a manner that limits the regulatory compliance and other burdens based on the risk profile and business model of the institution or class of institutions involved. The bill also includes a look-back provision that would require the agencies to apply the bill’s requirements to all regulations adopted within the last seven years and revise any regulations accordingly within 3 years. A “regulatory action” would be defined as “any proposed, interim, or final rule or regulation, guidance, or published interpretation.”
- H.R. 2954, “Home Mortgage Disclosure Adjustment Act.” The bill would amend the Home Mortgage Disclosure Act to create exemptions from HMDA’s data collection and disclosure requirements for depository institutions (1) with respect to closed-end mortgage loans, if the institution originated fewer than 1,000 such loans in each of the two preceding years, and (2) with respect to open-end lines of credit, if the institution originated fewer than 2,000 such lines of credit in each of the two preceding years. (An amendment in the nature of a substitute would lower these thresholds to fewer than 500 closed-end mortgage loans and fewer than 500 open-end lines of credit.)
- H.R. 1699, “Preserving Access to Manufactured Housing Act of 2017.” The bill would amend the Truth in Lending Act and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) to generally exempt a retailer of manufactured housing from TILA’s “mortgage originator” definition and the SAFE Act’s “loan originator” definition. It would also increase TILA’s “high-cost mortgage” triggers for manufactured housing financing.
- H.R. 2396, “Privacy Notification Technical Clarification Act.” This bill would amend the Gramm-Leach-Bliley Act’s requirements for providing an annual privacy notice. (An amendment in the nature of a substitute is expected to be offered.)