On May 24, the first major financial institution bill with substantial bipartisan support in more than ten years was signed into effect by President Donald Trump. Known as The Federal Economic Growth, Regulatory Relief, and Consumer Protection Act (“Act”), it recognized that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) must be amended.
The passage of Dodd-Frank in 2010 – spearheaded by Congressman Barney Frank and Senator Christopher Dodd – was designed to address the 2008 financial crisis with far-reaching reforms, including the creation of the Bureau of Consumer Financial Protection (CFPB) and tighter supervision of financial markets and institutions. Prior to the CFPB, consumer regulations were the responsibility of federal agencies such as the Federal Reserve Board and the Department of Housing and Urban Development.
Under Dodd-Frank, community banks with limited resources and large institutions with significant legal and compliance staffs became subject to a number of new regulations issued by the CFPB. The mandatory time frames for the CFPB to issue regulations resulted in rules that were confusing and misinterpreted. Consequently, mortgage lenders provided fewer loan options to limit their liability associated with noncompliance.
Compliance departments at large banks rapidly expanded to keep up with the increasing number of new requirements. Banks and mortgage providers located in smaller cities and towns had limited to no compliance talent pool to draw from even if they could afford the staff. To offset the rising cost of managing compliance, local community banks sought acquisitions, closed, or merged with other banks.
What Reforms Mean For Local Mortgage Providers
The amendments include relief for community banks struggling to maintain profitability and the staffs required to implement CFPB regulations or offer new products due to uncertainty and liabilities.
Smaller banks are now exempt from many requirements that previously hindered growth.
For example, finding certified or licensed appraisers in rural areas can be difficult and often those resources do not exist. Now, banks located in more rural communities are exempt from conducting appraisals of real estate property with a transaction value of less than $400,000. The lenders must also provide proof that certified or licensed appraisers are not readily available.
For areas with high concentrations of community banks, this could mean the difference between the banks’ survival and closing. Laws and reforms move along a sliding scale. Because of the 2008 financial crisis, the scale shifted towards protecting consumers; a decade later, the lending industry hopes the reforms can find a balance between consumer protection and a thriving housing and financial economy.
Summary of Mortgage Lending Revisions in the 2018 Dodd-Frank Reform
Although the Act addresses banks, student borrowers and capital formation, we are specifically addressing only mortgage lending revisions and improving consumer access to mortgage credit as well as protections for veterans, consumers and homeowners.
THE FEDERAL ECONOMIC GROWTH, REGULATORY RELIEF AND CONSUMER PROTECTION ACT (“ACT”)
Truth-in-Lending Act (“TILA”)
Definitions were added to the qualified mortgage (ability to repay) provisions related to “Safe Harbor.”
“Covered institution” is an insured depository institution or an insured credit union that, together with its affiliates, has less than $10,000,000,000 in total consolidated assets.
“Qualified mortgage” includes any residential mortgage loan:
>>That is originated and retained in portfolio by a covered institution;
>>That is in compliance with the limitations with respect to prepayment penalties;
>>That complies with any guidelines or regulations established by the CFPB relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the CFPB may determine relevant and consistent with the purposes of the statute;
>>That does not have negative amortization or interest-only features; and
>>For which the covered institution considers and documents the debt, income, and financial resources of the consumer as required.
A residential mortgage loan described above will be deemed to meet the ability to repay requirements.
A residential mortgage loan described above does not qualify for the safe harbor if the legal title to the residential mortgage loan is sold, assigned, or otherwise transferred to another person unless the residential mortgage loan is sold, assigned, or otherwise transferred:
>>To another person by reason of the bankruptcy or failure of a covered institution;
>>To a covered institution so long as the loan is retained in portfolio by the covered institution to which the loan is sold, assigned, or otherwise transferred;
>>Pursuant to a merger of a covered institution with another person or the acquisition of a covered institution by another person or of another person by a covered institution, so long as the loan is retained in portfolio by the person to whom the loan is sold, assigned, or otherwise transferred; or
>>To a wholly owned subsidiary of a covered institution, provided that, after the sale, assignment, or transfer, the residential mortgage loan is considered to be an asset of the covered institution for regulatory accounting purposes.
Any loan made by an insured depository institution or an insured credit union secured by a first lien on the principal dwelling of a consumer is exempt from TILA higher priced mortgage escrow requirements if:
>>The insured depository institution or insured credit union has assets of $10,000,000,000 or less;
>>During the preceding calendar year, the insured depository institution or insured credit union and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling; and
>>The creditor meets certain other criteria.
Exemption from Appraisals of Real Property Located in Rural Areas
An appraisal in connection with a federally related transaction involving real property or an interest in real property is not required if:
>>The real property or interest in real property is located in a rural area, as defined by Regulation Z;
>>Not later than 3 days after the date on which the Closing Disclosure is given to the consumer, the mortgage originator, directly or indirectly:
A. Has contacted not fewer than three State certified appraisers or State licensed appraisers, as applicable, on the mortgage originator’s approved appraiser list in the market area; and
B. Has documented that no State certified appraiser or State licensed appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator;
>>The transaction value is less than $400,000; and
>>The mortgage originator is subject to oversight by a Federal financial institution’s regulatory agency.
A mortgage originator that makes a loan without an appraisal as described above may not sell, assign, or otherwise transfer legal title to the loan unless:
>>The loan is sold, assigned, or otherwise transferred to another person by reason of the bankruptcy or failure of the mortgage originator;
>>The loan is sold, assigned, or otherwise transferred to another person regulated by a Federal financial institution’s regulatory agency, so long as the loan is retained in portfolio by the person;
>>The sale, assignment, or transfer is pursuant to a merger of the mortgage originator with another person or the acquisition of the mortgage originator by another person or of another person by the mortgage originator; or
>>The sale, loan, or transfer is to a wholly owned subsidiary of the mortgage originator, provided that, after the sale, assignment, or transfer, the loan is considered to be an asset of the mortgage originator for regulatory accounting purposes.
A rural loan may not be made without an appraisal if:
>>A Federal financial institution’s regulatory agency requires an appraisal; or
>>The loan is a high-cost mortgage, as defined by TILA.
Home Mortgage Disclosure Act (“HMDA”)
An insured depository institution or insured credit union that originated fewer than 500 closed end mortgages or open-end lines of credit is exempt from the requirement to itemize certain loan data under HMDA unless they have received a rating of “needs to improve record of meeting community credit needs” during each of its two most recent examinations of a rating of “substantial noncompliance in meeting community credit needs” on its most recent examination under the Community Reinvestment Act.
Credit Union Residential Loans
A loan secured by a lien on a 1-4 family dwelling that is not the primary residence of a member of a credit union will not be considered a member business loan under the Federal Credit Union Act.
Protecting Access to Manufactured Homes
Retailers of manufactured homes or employees of such retailers are not required to be licensed as mortgage originators unless:
>>They receive compensation or gain for acting as a mortgage originator that is in excess of any compensation or gain received in a comparable cash transaction;
>>They fail to provide certain disclosures to consumers; or
>>They directly negotiate with the consumer or lender on loan terms.
No Wait for Lower Mortgage Rates
If a creditor extends to a consumer a second offer of credit with a lower annual percentage rate, the transaction may be consummated without regard to the 3 day waiting period requirements in the TRID disclosures.
Congress instructed the CFPB to provide clearer, authoritative guidance on:
>>Applicability of TRID to mortgage assumption transactions;
>>Applicability of TRID to construction to permanent home loans and the conditions under which those loans can be properly originated; and
>>The extent to which lenders can rely on model disclosures if the recent TRID changes are not reflected in the TRID forms published by the CFPB.
Identification for Opening an Account
When an individual initiates a request through an online service to open an account with a financial institution or obtain a financial product or service from a financial institution, the financial institution may record personal information from a scan of the driver’s license or personal identification card of the individual, or make a copy or receive an image of the driver’s license or personal identification card of the individual, and store or retain such information in any electronic format for the following purposes:
>>To verify the authenticity of the driver’s license or personal identification card;
>>To verify the identity of the individual; and
>>To comply with a legal requirement to record, retain or transmit the personal information in connection with opening an account or obtaining a financial product or service.
A financial institution that makes a copy or receives an image of a driver’s license or personal identification card of an individual must, after using the image for the purposes described, permanently delete:
>>Any image of the driver’s license or personal identification card, as applicable; and
>>Any copy of any such image.
This provision preempts and supersedes any state law that conflicts with this provision.
Reducing Identity Theft
“Fraud protection data” means a combination of the following information with respect to an individual:
>>The name of the individual (including the first name and any family forename or surname of the individual);
>>The social security number of the individual; and
>>The date of birth (including the month, date, and year) of the individual.
“Permitted entity” means a financial institution or a service provider, subsidiary, affiliate, agent, subcontractor, or assignee of a financial institution.
Before providing confirmation of fraud protection data to a permitted entity, the Commissioner of the Social Security Administration (“Commissioner”) must ensure that the Commissioner has a certification from the permitted entity that is dated not more than two years before the date on which that confirmation is provided that includes the following declarations:
>>The entity is a permitted entity;
>>The entity is in compliance with these provisions;
>>The entity is, and will remain, in compliance with its privacy and data security requirements, as described in the Gramm-Leach-Bliley Act, with respect to information the entity receives from the Commissioner;
>>The entity will retain sufficient records to demonstrate its compliance with its certification and these provisions for a period of not less than two years.
A permitted entity may submit a request to a database or similar resource only:
>>Pursuant to the written, including electronic, consent received by a permitted entity from the individual who is the subject of the request; and
>>In connection with a credit transaction or any circumstance described in the Fair Credit Reporting Act.
For a permitted entity to use the consent of an individual received electronically, the permitted entity must obtain the individual’s electronic signature, as defined by the Electronic Signatures in Global and National Commerce Act.
No provision of law or requirement will prevent the use of electronic consent for purposes of these provisions or for use in any other consent based verification under the discretion of the Commissioner.
Protecting Tenants at Foreclosure
Certain notification and eviction requirements for renters living in foreclosed properties have been reinstated with the repeal of sunset provisions of the Protecting Tenants at Foreclosure Act.
Remediating Lead and Asbestos Hazards
The Secretary of the Treasury may now use loan guarantees and credit enhancements to facilitate loan modifications to remediate lead and asbestos hazards in residential properties.
Property Assessed Clean Energy (“PACE”) Financing
“PACE financing” means financing to cover the costs of home improvements that result in a tax assessment on the real property of the consumer.
The CFPB must prescribe regulations that require a creditor to evaluate a consumer’s ability to repay with respect to PACE financing.
Protecting Veterans from Predatory Lending
A loan to a veteran for the refinance of a loan to purchase or construct a house may not be guaranteed or insured unless:
>>The issuer of the refinanced loan provides the Department of Veterans Affairs (“VA”) with a certification of the recoupment period for fees, closing costs, and any expenses (other than taxes, amounts held in escrow, and certain fees) that would be incurred by the borrower in the refinancing of the loan;
>>All of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance; and
>>The recoupment is calculated through lower regular monthly payments (other than taxes, amounts held in escrow, and certain fees) as a result of the refinanced loan.
A loan to a veteran for the refinance of a loan to purchase or construct a house may not be guaranteed or insured unless:
>>The issuer of the refinanced loan provides the borrower with a net tangible benefit test;
>>In a case in which the original loan had a fixed rate mortgage interest rate and the refinanced loan will have a fixed rate mortgage interest rate, the refinanced loan has a mortgage interest rate that is not less than 50 basis points less than the previous loan;
>>In a case in which the original loan had a fixed rate mortgage interest rate and the refinanced loan will have an adjustable rate mortgage interest rate, the refinanced loan has a mortgage interest rate that is not less than 200 basis points less than the previous loan; and
>>The lower interest rate is not produced solely from discount points, unless:
A. Such points are paid at closing; and
B. Such points are not added to the principal loan amount, unless:
1.) For discount point amounts that are less than or equal to one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 100 percent or less; and
2.) For discount point amounts that are greater than one discount point, the resulting loan balance after any fees and expenses allows the property with respect to which the loan was issued to maintain a loan to value ratio of 90 percent or less.
A loan to a veteran to refinance a loan to purchase or construct a house may not be guaranteed or insured until the date that is the later of:
>>The date that is 210 days after the date on which the first monthly payment is made on the loan; and
>>The date on which the sixth monthly payment is made on the loan.
The above provisions do not apply in a case of a refinance loan in which the amount of the principal for the new loan to be guaranteed or insured is larger than the payoff amount of the refinanced loan.
On May 25, 2018, VA issued a Policy Guidance Update: VA Refinance Loan and the Economic Growth, Regulatory Relief and Consumer Protection Act discussing the Act and its design to protect veterans from predatory lending practices known as “loan churning” or “serial refinancing.”
The Government National Mortgage Association may not guarantee the timely payment of principal and interest on a security that is backed by a refinance mortgage insured or guaranteed by VA and that was refinanced until the later of the date that is 210 days after the date on which the first monthly payment is made on the mortgage being refinanced and the date on which 6 full monthly payments have been made on the mortgage being refinanced.
Credit Score Competition
Fannie Mae and Freddie Mac are required to evaluate other credit models besides FICO for credit scoring to determine whether they may be used for underwriting decisions.
Foreclosure Relief and Extension for Servicemembers
A legal action to enforce a real estate debt against a servicemember on active duty or active service may be stopped by a court if it occurs within one year from the servicemember’s end of active service.
There is speculation that the Act is not the last reform to Dodd-Frank that we will see. Such speculation became reality with the passage of the “JOBS and Investor Confidence Act of 2018” (S.488) which had strong bi-partisan support. The TRID Improvement Act (S.2490) is pending legislation addressing changes for title insurance premiums which may be discounted as allowed by state regulation.
With these bills, there will be more reforms to Dodd-Frank; however, future legislative activity may depend upon mid-term elections.
This article provides an overview of part of the Act by Asurity Technologies based on our understanding of the Act and is not intended to and should not be considered legal advice.
About The Author
Marsha Williams is Senior Attorney at Asurity. She is nationally respected for her expertise in residential mortgage law and is often consulted in the drafting of legislation regarding mortgage law. A prolific author and sought-after speaker, Ms. Williams has made numerous presentations related to regulatory compliance at the national Mortgage Bankers Association Convention and to local, state and national trade association conferences and legal seminars. She has also published articles in various legal and trade journals. Ms. Williams has served on the National Advisory Council of Fannie Mae and on the faculty of the Mortgage Bankers Association’s Mortgage Banking School. A past President of the Dallas Mortgage Bankers Association, she now serves on the Governing Committee of The Conference on Consumer Finance Law and on the State Bar of Texas Business Law Section’s Consumer Financial Services Committee. She also was a member of the Attorney’s Committee of the Texas Conference on Homeowners Rights and the Texas Consumer Credit Commissioner’s Plain Language Task Force. Ms. Williams has chaired the Texas Bankers Association Legal Conference and currently serves on its planning committee.