*Recovery Tips: Dodd-Frank’s Impact*
**By Melanie R. Finkelstein and Marsha L. Williams**
***The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was signed by President Obama on July 21, 2010, radically changes all aspects of the financial industry, especially mortgage lending. Dodd-Frank created the Consumer Financial Protection Bureau (the “Bureau”) to replace the Federal Agencies in regulating consumer laws. On July 21, 2011, the Bureau assumed the consumer protection governance from the Federal Agencies and will begin issuing, implementing, and enforcing future and existing mortgage lending regulations.
****No mortgage disclosure law escaped Dodd-Frank’s reach. This article will discuss the disclosures mandated by such laws, such as the Truth-in-Lending Act (“TILA”), the Equal Credit Opportunity Act (“ECOA”), and the Fair Credit Reporting Act (“FCRA”), which were amended by Dodd-Frank and which govern the loan origination process, although servicing disclosures were also affected.
****Previously under ECOA, a lender was required to promptly mail or deliver a copy of the appraisal after the lender received a borrower’s request for a copy of the report. Under the Dodd-Frank amendments to ECOA, each lender must now furnish to an applicant a copy of the written appraisal or valuation developed in connection with an application for a loan secured by a first lien on a dwelling, whether or not the lender approves the application or the application is incomplete or withdrawn. The lender may require the applicant to pay a reasonable fee as reimbursement to the lender for having the appraisal done. However, the lender must provide a copy of each written appraisal or valuation at no additional cost to the applicant. The applicant must receive a written notice at application of the right to receive a copy of each written appraisal or valuation.
****Prior to the closing of a residential mortgage loan, a lender must disclose its policy regarding the acceptance of partial payments. If the lender accepts partial payments, how the payments will be applied to the mortgage and if the payments will be placed in escrow must be disclosed.
****The disclosure will differ for conventional and VA loans and FHA loans due to FHA’s requirements for applying payments.
****At application, the following is required be disclosed:
****>> The aggregate amount of settlement charges, the amount of charges that are included in the loan and the amount of charges the borrower pays at closing, the approximate amount of the wholesale rate of funds, and the aggregate amount of other fees or required payments.
****>> The aggregate amount of fees paid to the mortgage originator in connection with the loan, whether paid by the borrower or the lender.
****>> The total amount of interest that the borrower will pay over the life of the loan as a percentage of the principal of the loan.
****If a lender requires an escrow/impound account for the payment of all applicable taxes, insurance, and assessments, the borrower must receive written notice of the requirement, as well as details about the account, at least three business days prior to the loan closing or in a timeframe established by regulation.
****If an escrow/impound account is established for a variable rate mortgage loan, the amount of the initial monthly payment of principal and interest and the fully indexed monthly payment of principal and interest plus applicable taxes, insurance, and assessments for both payments must be disclosed at application.
****If an escrow/impound account is not established at closing or if the borrower chooses to then close the account after it is established, the lender must disclose the borrower’s responsibilities for the payment of taxes, insurance, and assessments and the implications of not having the account.
****An “anti-deficiency law” is the law of any state, which provides that, in the event of foreclosure on the consumer’s residential property securing a mortgage, the consumer is not liable for any deficiency between the sale price obtained on the property through foreclosure and the outstanding balance of the mortgage.
****Alaska, Arizona, California, North Carolina, North Dakota, and Oregon have anti-deficiency laws, and if the loan is a Texas Home Equity loan, there is no deficiency judgment.
****If a residential mortgage loan is subject to anti-deficiency protection in the above states or if the loan is a Texas Home Equity loan, before the loan closes, the borrower must receive a written notice describing the protection and the significance for the borrower of the loss of the protection.
****If a lender uses a credit score in making the credit decision, the credit score and related information is now included in the risk-based pricing notice, which is provided to the borrower at closing.
****A “higher-risk mortgage” is a residential mortgage loan with a higher interest rate that is secured by the borrower’s principal dwelling.
****A lender must obtain a written appraisal of the property from a certified or licensed appraiser before making a higher-risk mortgage loan. At application, the borrower must be informed that any appraisal prepared for the mortgage is for the sole use of the lender, and that the borrower may choose to have a separate appraisal conducted at the borrower’s expense. At least three days prior to the loan closing, a lender must provide one copy of the appraisal used for the higher-risk mortgage to the borrower without charge.
****Although few, if any, negative amortization mortgages are currently being originated, if the loan’s payment plan will or may result in negative amortization, the lender must inform the borrower that the pending transaction will or may result in negative amortization and the consequences of negative amortization.
****The Secretary of HUD (the “Secretary”) will take actions as may be necessary to inform potential homebuyers of the availability and importance of obtaining an independent home inspection. FHA-approved lenders must provide prospective homebuyers, at first contact, the following materials available from HUD in either English or Spanish:
****>> HUD/FHA form entitled “For Your Protection: Get a Home Inspection”.
****>> HUD/FHA booklet entitled “For Your Protection: Get a Home Inspection”.
****>> HUD document entitled “Ten Important Questions to Ask Your Home Inspector”.
****In addition, the Secretary is developing a booklet in English and Spanish to be used for all mortgage loans, which does not reference FHA-insured homes, entitled “For Your Protection: Get a Home Inspection.”
****The Director of the Bureau will prepare a new mortgage information booklet in various languages to assist borrowers in applying for mortgage loans. The booklet will be distributed to all lenders for distribution to borrowers in the language most appropriate to the borrower along with a list of homeownership counselors.
****Since its passage one year ago, Dodd-Frank has significantly changed the mortgage lending industry. Long after July 21, 2011, as regulations are issued and implemented by the Bureau, we will continue to see changes that will affect the industry.
****ABOUT THE AUTHOR: Melanie R. Finkelstein is an attorney with Middleberg Riddle & Gianna. Finkelstein is a member of the Dallas Bar Association, the Mortgage Bankers Association of America, the Dallas Mortgage Bankers Association, and the Louisiana Bar Association.
****ABOUT THE AUTHOR: Marsha L. Williams is an attorney with Middleberg Riddle & Gianna. Her practice at the firm’s Dallas office is exclusively related to mortgage banking. Williams is a Past President of the Dallas Mortgage Bankers Association, having previously served as Vice President, Treasurer and Chair of the Judiciary/Legislative Committee.