Federal Prohibition of Predatory Lending

1. Chapter 5: Federal Prohibition of Predatory Lending Federal Prohibition of Predatory Lending Chapter 5

2. Chapter 5: Federal Prohibition of Predatory Lending Chapter Objectives • Describe regulations put in place to address predatory lending. • Describe the rules for compensation for an MLO, a registered MLO, and the rules regarding seller financing of owner-occupied residences. Refer to page 103

3. Chapter 5: Federal Prohibition of Predatory Lending Home Ownership and Equity Protection Act • 1994 amendment to the Truth in Lending Act • Establishes disclosure requirements and prohibits deceptive and unfair practices in lending • Establishes requirements for loans with high interest rates and/or fees • Enforced by: • FTC for non-depository lenders • Each state’s attorney general • CFPB for federally regulated depository institutions • Lender who violates may be sued by consumer or consumer may rescind loan for up to three years Refer to page 104

4. Chapter 5: Federal Prohibition of Predatory Lending Regulation Z and HOEPA • Lenders  must provide a list of homeownership counseling organizations to consumers within three (3) business days after they apply for a mortgage loan • Excludes reverse mortgages and mortgage loans secured by a timeshare • Lender must obtain the list from • A website that will be developed by the CFPB • Data that will be made available by the CFPB • HUD   Refer to page 104

5. Chapter 5: Federal Prohibition of Predatory Lending Regulation Z and HOEPA (cont.) • Before making a loan that permits negative amortization to the borrower creditors confirm a first-time borrower has received homeownership counseling from a: • Federally certified/approved homeownership counselor, or • Counseling organization Refer to page 104

6. Chapter 5: Federal Prohibition of Predatory Lending High Cost Loans • HOEPA provisions: Must be complied with after the triggers for a “high cost loan” have been met • High Cost Loan: A closed-end loan secured by a borrower’s principal residence • The rules primarily affect refinancing and home equity installment loans that also meet the definition of high-rate or high-fee loans • Most types of mortgage loans, refinances, closed-ended home equity loans, and open-end credit plans are potentially subject to HOEPA coverage Refer to page 104

7. Chapter 5: Federal Prohibition of Predatory Lending HOEPA Loan Definition • Original mortgage on the property - APR exceeds the value of the APOR Index by more than 6.5 percentage points • Second mortgage - (APR) exceeds the value of the APOR Index by more than 8.5 percentage points, or • Total fees and points payable by the borrower at or before closing that will exceed (a) 5 percent of the total loan amount for a transaction of $20,000 or more or (b) the lesser of 8 percent of the total loan amount or $1,000 for a transaction of less than $20,000 • HOEPA does not regulate construction loans or reverse mortgages Refer to page 104

8. Chapter 5: Federal Prohibition of Predatory Lending Required HOEPA Disclosures • 3 business days prior to transaction, must disclose (in addition to the other required Truth in Lending disclosures): • APR • Regular payment amount • Loan amount, when includes credit insurance premiums • For variable rate loans, amount of the maximum monthly payment (which may increase) • For mortgage refinancing, total amount borrowed, including premiums and other charges for optional credit insurance or debt cancellation coverage • Intended to protect consumers from pressure tactics Refer to page 105

9. Chapter 5: Federal Prohibition of Predatory Lending Higher Priced Loans • Regulation Z: Amended to set forth the specific requirements for higher priced loans (Housing and Economic Recovery Act of 2008). • Effective January 18, 2014 • Higher priced loans: • Closed-end mortgage loans secured by borrower’s principal dwelling • Loan where the APR, as disclosed by the Truth In Lending statement, of a mortgage loan exceeds the average prime offer rate by: • 1.5% for a first mortgage lien, • 2.5% for a first lien Jumbo loan (loan amount over $417,000), or • 3.5% for a subordinate mortgage lien. Refer to page 107

10. Chapter 5: Federal Prohibition of Predatory Lending Higher Priced Loans (cont.) • MLO may verify if loan is a HOEPA or higher priced loan by determining the APR and entering data at FFIEC Rate Spread Calculator website • APR calculation based on the locked interest rate of the prospective loan. This site will calculate the rate spread between the APR and the APOR in effect. • If “higher priced loan”, MLO must establish: • Borrower’s ability to repay the mortgage loan, and • An escrow account for property taxes, homeowners insurance, private mortgage insurance, etc. for a five-year term Refer to page 107

11. Chapter 5: Federal Prohibition of Predatory Lending 5.1 Knowledge Check An example of a higher priced loan is a first mortgage loan that exceeds the yield on the applicable corresponding Treasury Bill by 1.5%. • True • False Refer to page 108

12. Chapter 5: Federal Prohibition of Predatory Lending HOEPA Prohibited Loan Terms • Payment schedule that provides for regular periodic payments that do not fully amortize and result in a balloon payment on loans having terms of less than five years • Negative amortization • Repayment schedule that consolidates more than two periodic payments that are to be paid in advance from the proceeds of the loan • Default interest rates higher than pre-default note rates and increase due to a default of the borrower Refer to page 108

13. Chapter 5: Federal Prohibition of Predatory Lending Prohibited Loan Terms (cont.) • Rebate by a method less favorable than the actuarial method for rebates of interest arising from a loan acceleration due to default • Prepayment penalties, unless: • Limited to the first two years of the loan or if the source of the prepayment funds is a refinancing by the lender or affiliate. • The amount of the periodic payment of principal, interest, or both will not change at any time during the first four years. • Borrower’s debt-to-income ratio does not exceed 50%. • Demand clauses, including any provision that enables the creditor to call the loan before maturity Refer to page 108

14. Chapter 5: Federal Prohibition of Predatory Lending HOEPA Prohibited Acts and Practices • Selling or otherwise assigning the loan without furnishing the HOEPA statement to the purchaser or assignee • Refinancing a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in the borrower’s best interest. The prohibition also applies to assignees holding or servicing the loan • Granting loans solely on the collateral value of the borrower’s property without regard to the borrower’s ability to repay the loan • Disbursing proceeds from home improvement loans to anyone other than the borrower, jointly to the borrower and the home improvement contractor, or, in some instances, to a third-party escrow agent Refer to page 108

15. Chapter 5: Federal Prohibition of Predatory Lending Verifying Repayment Ability • Must determine the borrower’s repayment ability using the largest payment of principal and interest scheduled in the first 5 years • Must consider current and mortgage-related obligations and assess borrower's repayment ability, based on: • Account ratio of total debt to income, or • Income left after paying debt • May not grant loans solely based on the collateral value of the property without regard to borrower’s ability to repay the loan. • Amounts used to verify repayment ability cannot be greater than the amounts the creditor could have verified when the loan was consummated. Refer to page 109

16. Chapter 5: Federal Prohibition of Predatory Lending Verifying Repayment Ability • A creditor is not presumed to be in compliance if: • Regular periodic payments for the first 5 years of the transaction would cause the principal balance to increase • The term of the loan is less than 5 years and the regular periodic payments when aggregated do not fully amortize the outstanding principal balance • Does not apply to temporary or "bridge" loans with terms of 12 months or less Refer to page 109

17. Chapter 5: Federal Prohibition of Predatory Lending Escrow Requirements • 2008 rule requires the lender to establish and maintain an escrow account for a minimum of five years (applies to all higher priced loans unless meet certain exemptions) • Prohibits a creditor from extending a next mortgage loan unless an escrow account is established • Excluded if hazard insurance is paid through homeowners association or property taxes for a cooperative are paid by the corporation Refer to page 109

18. Chapter 5: Federal Prohibition of Predatory Lending Escrow Requirements (cont.) Rule effective April 1, 2011: Provides higher APR threshold for determining whether jumbo mortgage loans secured by a first lien on a consumer's principal dwelling are next mortgage loans for which an escrow account must be established. • 2.5 percentage points in excess of average prime offer rate for comparable transaction • Eliminates mandatory escrow requirement for loans with APR above existing threshold but below new threshold Revised §1026.35(b)(3) Refer to page 110

19. Chapter 5: Federal Prohibition of Predatory Lending Requirements for Certain Higher Priced Loans Implemented January 18, 2014, requires creditors to: • Use a licensed or certified appraiser who prepares a written report based on physical inspection • Disclose to applicants the purpose of the appraisal and provide consumers with a free copy of any appraisal report (minimum of 3 days prior to close of escrow) • If seller acquired the property for a lower price during the prior 6 months, this is considered a “flip” sale. A second appraisal may be required at no cost to the consumer • If price difference exceeds 10% of the seller’s original acquisition cost during the first 90 days or 20% of the original cost during the first 6 months, creditors are required to obtain a second appraisal 12 CFR, Part 1026,§1026.35(c) Refer to page 110

20. Chapter 5: Federal Prohibition of Predatory Lending Exemptions • Qualified mortgages, • Temporary bridge loans • Construction loans (12 month term or less) • Loans for new manufactured homes, • Loans for mobile homes, trailers, and boats that are dwellings. • Second appraisal requirement to facilitate loans in rural areas and other transactions Refer to page 110

21. Chapter 5: Federal Prohibition of Predatory Lending TILA Update • New restrictions and requirements for mortgages that fall within HOEPA’s coverage test: • Balloon payments generally banned • Late fees are restricted to 4% of the payment that is past due, fees for providing payoff statements are restricted, and fees for loan modification or payment deferral are banned • Most fees for obtaining a payoff statement from the current mortgagee will be banned • Fees for loan modifications, if a borrower has trouble and cannot pay the mortgage, will not be allowed Refer to page 110

22. Chapter 5: Federal Prohibition of Predatory Lending 5.2 Knowledge Check When a seller owns a property that is to be resold during the first 90 days, a second appraisal is required for a conventional loan if the increase in price is • 5%. • 6.5%. • 9.99%. • 12.5%. Refer to page 111

23. Chapter 5: Federal Prohibition of Predatory Lending Mortgage Loan Originator Compensation Rule • Applies to transactions involving closed-end extensions of credit secured by a consumer’s principal dwelling and must be followed by all persons who originate loans • Prohibits creditors from compensating MLOs based on the loan’s interest rate or other terms or • Applies to compensation from a mortgage broker to an employee who originates loans • Creditors can set a minimum and a maximum compensation Refer to page 111

24. Chapter 5: Federal Prohibition of Predatory Lending Prohibition Against Dual Compensation • When a loan originator receives compensation directly from a consumer, Regulation Z states no loan originator may receive compensation from another person in connection with the transaction. • Does not prohibit a consumer from accepting a higher interest rate in return for reducing closing costs, known as yield spread premium (YSP) • Requires creditor to retain evidence of compliance for 3 years after loan consummated Refer to page 112

25. Chapter 5: Federal Prohibition of Predatory Lending Prohibition Against Dual Compensation (cont.) • Prohibits compensation: • Based on a proxy for a term of a transaction • From being reduced to offset the cost of a change in transaction terms (often called a “pricing concession”) • From the mortgage entity organization for referring a borrower to a service provider • Based upon the profitability of a transaction or a pool of transactions • Originators may not be paid by the consumer and another person or entity in connection with a mortgage loan closing, except an MLO may receive compensation from the loan originator organization Refer to page 112

26. Chapter 5: Federal Prohibition of Predatory Lending Bonus Compensation and Non-Deferred Compensation Plans • Mortgage-related business profits can be used to: • Contribute to certain tax-advantaged retirement plans • Make bonuses and contributions to other plans that do not exceed ten (10) percent of the individual loan originator’s total compensation • Even if a profits-based bonus is unrelated to profits on mortgage loans, the bonus must not vary based on whether the loan originator is making higher-rate mortgage loans. Regulation Z § 1026.36(d)(1)(i) Payments Based on a Term of a Transaction Refer to page 113

27. Chapter 5: Federal Prohibition of Predatory Lending Tax-Advantaged Deferred Compensation • A mortgage originator organization may structure tax-advantaged deferred compensation based on mortgage-related profits in two ways: • As a contribution to a defined contribution plan that is a designated tax-advantaged plan • As a benefit under a defined benefit plan that is a designated tax-advantaged plan • If an employer contributes to a defined contribution plan for an individual loan originator, they may not base the contribution on the terms of that originator’s transactions. Refer to page 113

28. Chapter 5: Federal Prohibition of Predatory Lending Defined Contribution and Defined Benefit Plan • Defined contribution plan • A plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and forfeitures of accounts of other participants which may be allocated to such participant’s account. • Defined benefit plan • Any plan which is not a defined contribution plan. Internal Revenue Code Section 414(i), 26 U.S.C. 414(i) Defined Contribution Plan; Internal Revenue Code Section 414(j), 26 U.S.C. 414(j) Defined Benefit Plan Refer to page 113

29. Chapter 5: Federal Prohibition of Predatory Lending Compensation Direct Payment • Non-deferred profits-based compensation plan • Include, but are not limited to, the following types of compensation if they are determined based on the mortgage-related profits of the person paying the compensation, its business unit, or its affiliate:  Bonus pools  Profits pools  Bonus plans  Profit-sharing plans  Awards of merchandise, services, trips, or similar prizes or incentives See Regulation Z, 12 CFR §1026.36(d)(1)-3.ii Refer to page 114

30. Chapter 5: Federal Prohibition of Predatory Lending Compensation Direct Payment(cont.) • This compensation cannot be paid directly to the loan originator unless: • The bonus does not exceed 10% of the originator’s gross pay for the previous year, or • The individual loan originator was a loan originator for ten or fewer transactions, consummated during the 12-month period preceding the date of the compensation determination • The bonus may only be 10% of the originators total compensation, including the amount of the bonus.   Regulation Z, 12 CFR §1026.36 (d)(1) (iii). See also “2013 Loan Originator Rule: Small Entity Compliance Guide,” January 13, 2014, Page 47, http://files.consumerfinance.gov/f/201401_cfpb_complaince-guide_loan-originator.pdf Refer to page 114

31. Chapter 5: Federal Prohibition of Predatory Lending 5.3 Knowledge Check • The MLO is required to obtain a unique identifier number from the • CFPB. • Nationwide Mortgage Licensing System & Registry (NMLS). • Social Security Administration. • state where they wish to obtain a license. Refer to page 115

32. Chapter 5: Federal Prohibition of Predatory Lending 5.3 Knowledge Check • The MLO’s name and NMLS Number is required to appear on all of the following documents EXCEPT the • Appraisal. • Loan Application. • Promissory Note. • Security Instrument. Refer to page 115

33. Chapter 5: Federal Prohibition of Predatory Lending 5.3 Knowledge Check • An MLO may be compensated • additional basis points for closing a government-insured loan. • based on the interest rate offered to the consumer. • based upon the loan amount. • with a bonus for steering a consumer to an affiliate for a settlement service. Refer to page 115

34. Chapter 5: Federal Prohibition of Predatory Lending Steering and Safe Harbor • Have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies • Present loan options that include: • Lowest interest rate • Lowest interest rate without risky features • Lowest total dollar amount for origination fees and discount points • Prohibits MLO’s from “steering” consumers to accepts the terms to receive greater compensation unless the loan is in their best interest. • MLO must: • Obtain loan options from three or more creditors Refer to page 115

35. Chapter 5: Federal Prohibition of Predatory Lending Steering and Safe Harbor (cont.) • “Type of transaction” refers to: • One with an annual percentage rate that cannot increase • One with an annual percentage rate that may increase • Reverse mortgage • Does not apply to a home equity line of credit or a loan secured by a consumer’s interest in a timeshare plan • For each type of transaction, if an MLO presents to the consumer more than three loans, the MLO must highlight the loans that satisfy the criteria specified in the rule Refer to page 115-116

36. Chapter 5: Federal Prohibition of Predatory Lending 5.4 Knowledge Check Since 2011, MLOs cannot receive compensation based on the type or terms of a loan. • true • false Refer to page 116

37. Chapter 5: Federal Prohibition of Predatory Lending Upfront Points and Fees • CFPB decided against a prohibition on consumer payment of upfront points and fees • 1403 of Dodd-Frank Act contains a section that would have prohibited consumers from paying upfront points or fees on transactions when the loan originator compensation is paid by a person other than the consumer. • Also authorizes the CFPB to waive or create exemptions from the prohibition on upfront points and fees if the CFPB determines that doing so would be in the interest of consumers and in the public interest Refer to page 116

38. Chapter 5: Federal Prohibition of Predatory Lending Guidelines for Registered MLOs • Require that a loan originator organization that is NOT a government agency or state housing agency must: 1. Comply with all State law requirements for legal existence. 2. Ensure that each individual loan originator is licensed or registered, as required under the SAFE Act Refer to page 116

39. Chapter 5: Federal Prohibition of Predatory Lending Guidelines for Registered MLOs (cont.) 3. Provide: • Criminal background check • Credit report • Check about any administrative, civil, or criminal findings • Information that the MLO has not been convicted of, or pleaded guilty or nolo contendere to a felony in a domestic or military court in the preceding seven-year period or in the case of a felony involving an act of fraud, dishonesty, a breach of trust, or money laundering at any time • Information to demonstrate financial responsibility, character, and general fitness 4. Provide periodic training covering Federal and State law requirements that apply to the individual loan originator’s loan origination activities Refer to page 116

40. Chapter 5: Federal Prohibition of Predatory Lending Mandatory Arbitration • A mandatory requirement to submit to arbitration in the event of a dispute between a mortgage creditor and a borrower is prohibited. • The parties can agree to submit to an arbitrator’s decision at a later date, but the consumer cannot be required to. • A consumer credit transaction secured by a dwelling cannot contain any provisions that bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with an allegation of violating any Federal law • A borrower cannot relinquish their right to sue in court Refer to page 117

41. Chapter 5: Federal Prohibition of Predatory Lending 5.5 Apply Your Knowledge A borrower is seeking a FHA insured loan. He will put the minimum 3.5% down payment and pay the Up Front Mortgage Insurance fee of 1.75%. He will pay the annual mortgage insurance fee of .85% for the life of the loan. His interest rate is 5%, the APOR (as of the date the loan interest rate is locked) is 4.672%, and his APR for this loan is 6.474%. 1. Is this a higher priced loan? Explain your answer. 2. If this loan is a higher priced loan, what must be done? 3. Is this a high cost loan? Explain your answer. 4. If the finance charge includes two points origination, two discount points, and 1.5 percent of the loan amount as closing costs, using the above information, is this a high cost loan if it was refinance transaction? Explain your answer. 5. If so, what must be done? Refer to page 117-118

42. Chapter 5: Federal Prohibition of Predatory Lending Financing of Credit Insurance • A creditor may not finance, directly or indirectly, any premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling • The consumer may purchase credit insurance so long as the premiums are calculated and paid on a monthly basis by the borrower Refer to page 118

43. Chapter 5: Federal Prohibition of Predatory Lending Written Policies and Procedures • A depository institution must establish and maintain written policies and procedures to ensure and monitor the compliance of the institution, its employees, its subsidiaries and the subsidiaries’ employees • In addition to MLOs engaged by depository institutions, all mortgage lenders and brokers actively engaged in mortgage lending activities in other roles must comply with the Loan Officer Compensation Rules Refer to page 118

44. Chapter 5: Federal Prohibition of Predatory Lending Summary • The Home Ownership and Equity Protection Act (HOEPA) was implemented to prevent deceptive practices and predatory lending in the mortgage industry. • Updated regulations to HOEPA require a homeowner counseling list to be provided to the applicant, require a borrower with a negative amortization to complete home ownership counseling, and changed parts of the HOEPA definition and statute. • Higher Priced Mortgage Loans (HPML) reference the Average Prime Offered Rate, which is added to a set percentage to determine if a loan is a HPML. • There are certain aspects of a mortgage loan that are prohibited, such as balloon payments (within the first five years of the loan), negative amortization, demand clauses, etc. Refer to page 119

45. Chapter 5: Federal Prohibition of Predatory Lending Summary (cont.) • A lender must verify that a borrower has the ability to repay a mortgage debt using one of several approaches. • A HPML requires an escrow account be established for all higher priced loans for a minimum of five years. • An appraiser must make a physical inspection of the interior and exterior of the subject property. A copy of the appraisal (if the borrower has paid the lender for the appraisal) must be given to the borrower within 3 business days prior to loan closing. A second appraisal is required if the property is sold within 180 days at a specified profit above the acquisition cost of the seller. • High cost loans apply to owner-occupied refinance loans and second mortgage loans. The average prime offered rate is the index used to calculate if a loan is considered high cost. Refer to page 119

46. Chapter 5: Federal Prohibition of Predatory Lending Summary (cont.) • High cost loans require an additional disclosure to be signed by the borrower prior to signing loan documents. This also gives the borrower an additional 3-day rescission period. • A loan originator may never be compensated for loan origination activities based on any other term other than the loan amount. The interest rate or program type of the loan must never be a basis for compensating an MLO. • A borrower may accept a higher interest rate resulting in a yield spread premium/lender credit to offset closing costs. • A creditor may compensate an MLO by contributing to a tax-advantage plan in an amount no greater than 10% of the MLO’s total gross income for the previous year. Refer to page 119

47. Chapter 5: Federal Prohibition of Predatory Lending Chapter 5 Quiz 1. The Home Ownership and Equity Protection Act amends which regulation? • Regulation B • Regulation C • Regulation X • Regulation Z Refer to page 120

48. Chapter 5: Federal Prohibition of Predatory Lending Chapter 5 Quiz 2. Within three business days of the receipt of a fully completed application, a lender must provide • a copy of the appraisal performed on the subject property. • a copy of the credit report used in the loan decision. • a list of home ownership counseling organizations. • Section 32 disclosures, according to HOEPA. Refer to page 120

49. Chapter 5: Federal Prohibition of Predatory Lending Chapter 5 Quiz 3. A higher priced loan is a one that • has an APR greater than 6.5%. • includes finance charges greater than 5% of the loan amount. • is also known as a Section 32 loan. • uses the average prime offer rate as an index. Refer to page 120

50. Chapter 5: Federal Prohibition of Predatory Lending Chapter 5 Quiz 4. The borrower’s ability to repay a mortgage loan may be based on • anticipated earnings from projected overtime pay. • current or expected income. • the equity in the subject property. • sporadic bonus income. Refer to page 120