1Copyright © 2012 Tata Consultancy Services Limited

Mortgage Compliance in Today’s Turbulent Regulatory Environment

Amy AvitableDirector of Regulatory Compliance, TCS BaNCS

2

Amy Avitable is a nationally known compliance expert through both her frequent speaking engagements for state bankers associations, state mortgage associations and the American Bankers Association, and articles in banking and compliance publications.Amy is the Director of Regulatory Compliance for the TCS BaNCS system at Tata Consultancy Services. She began her career at Deloitte & Touche, LLP and has served financial institutions and other organizations as legal counsel at Lowndes, Drosdick, Doster, Kantor & Reed, PA. Most recently, she has supported software products for financial institutions and engaged in lobbying efforts in Congress as well as with the FDIC, CFPB, and NCUA.She was previously the National Director of Compliance Services at Sheshunoff Consulting + Solutions, where she managed a team of compliance professionals who performed compliance audits and consulting for financial institutions of all sizes. Before joining Sheshunoff, she was the Director of FIS Regulatory Advisory Services (formerly Kirchman/Metavante Regulatory Service), where she was the Editor-In-Chief for the renowned “Big Orange Book” compliance manual and served hundreds of financial institutions throughout the country as well as the FDIC, Federal Reserve and OCC.

Amy Avitable, JD, CPA

3

Pace of Regulatory Change

2008 2009 2010 2011 2012 2013-20140

50

100

150

200

250

4 10 20 2612

200

Major New Regulatory Requirements

4

What Can You Do?

1. Understand The New Rules

2. Identify Your Areas of Risk

3. Make Policy Decisions About Your Risk Tolerance

4. Mitigate Your Risk

5. Implement the New Regulatory Requirements

5

Understand the New Rules

January 2013 Regulation Z and RESPA Final Rules CFPB Bulletin 2013-01 on Mortgage Servicing Servicemembers Civil Relief Act Revisions Biggert-Waters Flood Insurance Reform Act

6

New Rules: January 2013 Mortgage Reform

1. Homeownership Counseling Disclosure 2. Homeownership Counseling for Negative Am

Loans3. Ability to Repay and Qualified Mortgage

Standards4. Disclosure and Delivery Requirements for Copies

of Appraisals and Valuations5. Appraisals for Higher-Priced Mortgage Loans6. Escrow Requirements7. High-Cost Mortgage Requirements8. Mortgage Servicing9. Loan Originator Compensation

Application

Loan Processing

Closing

Post-Closing

7

Ability to Repay andQualified Mortgage Standards

Effective January 10, 2014

8

Legal Risks

TILA Section 129C has special remedies under Dodd-Frank– Special statutory damages

• All finance charges and fees paid by the consumer• Do not apply if the creditor can show that the violation was

immaterial– Actual damages– Statutory damages in individual and class action lawsuit– Court costs and attorneys fees– Recoupment or setoff in foreclosure action

• If special statutory damages claimed, setoff limited to 3 years of finance charges and fees

Statute of limitations for civil liability – Extended to 3 years

9

General Rule

For closed end consumer loans that are secured by a dwelling, the creditor must make a reasonable and good faith determination

at or before consummationthat the consumer will have a

reasonable ability to repay the loanaccording to its terms

10

Ability to Repay

Subject to Rule– Consumer loans secured by a dwelling (1-4), including real

property attached to a dwelling• Including Qualified Mortgages

Not Subject to Rule– Loans not subject to Regulation Z– Change to existing loan that is not a refinancing (e.g.,

modification)– Home equity lines of credit– Mortgages secured by a timeshare– Reverse mortgages– 12 month or shorter temporary or “bridge” loans– Refinancings of non-standard mortgages into standard mortgages

11

Overview of Rule

12

Ability to Repay

Must consider eight factors in determining if consumer has “reasonable ability to repay”1. Current or reasonably expected income or assets2. If income relied on, current employment status3. Monthly payment on the covered transaction4. Monthly payment on simultaneous loan that the lender knows or

has reason to know will be made5. Monthly payment for mortgage-related obligations6. Current debt obligations, alimony and child support7. Monthly debt to income ratio or residual income8. Credit history

Must also verify using reasonably reliable third party records

13

You May Be Reasonable and In Good Faith If:

Customer was able to make timely payments without modification or accommodation for a significant period of time after consummation or recast

Underwriting standards have historically resulted in comparatively low rates of delinquency and default during adverse economic conditions

Underwriting standards based on empirically derived, demonstrably and statistically sound models

14

You May Not Be Reasonable and In Good Faith If:

Customer defaulted a short time after consummation or recast Underwriting standards have historically resulted in comparatively

high levels of delinquency and default during adverse economic conditions

Underwriting standards inconsistently applied Different underwriting standards used for similar loans without

reasonable justification Creditor disregarded evidence that:

– Underwriting standards are not effective at determining repayment ability

– Consumer may have insufficient residual income to cover other recurring obligations and expenses

– Consumer could only repay if subsequently refinanced the loan or sold the collateral

15

What is a Qualified Mortgage?

Three possible scenarios:1. Regular Qualified Mortgage2. Qualified Mortgage during transition period3. Qualified Mortgage with a balloon payment for creditors that

operate in rural or underserved areas

Protection for a Qualified Mortgage If not a higher priced covered transaction – Safe harbor of

compliance If a higher priced covered transaction – Rebuttable presumption

of compliance

16

Regular Qualified Mortgage

Six Required Components1. Regular periodic payments that are substantially equal2. Term no longer than 30 years3. Total points and fees don’t exceed specified limit4. Specially calculated monthly payments for mortgage-related

obligations are taken into account in underwriting5. Income, assets, current debt obligations, alimony, and child

support are verified under Appendix Q of Regulation Z6. At closing, total monthly debt / total month income does not

exceed 43%

17

Qualified Mortgage In Transition Period

Four Required Components1. Regular periodic payments that are

substantially equal2. Term no longer than 30 years3. Total points and fees don’t exceed

specified limit4. Must be eligible for one of the following:• To be purchased or guaranteed by Fannie

or Freddie, or by any successor agency• To be insured by HUD• To be guaranteed by VA, USDA or Rural

Housing Service

First 3 requirements

from QM definition PLUS one

18

Transition Period

Agencies expected to issue their own QM definition– Once issued, those QM

requirements supersede transition QM

No matter what, will expire on January 10, 2021

19

Balloon Payments for Rural or Underserved

A creditor can make a loan with a balloon payment if:– Creditor meets certain requirements and– Loan meets certain requirements

Requirements for Creditor:– In prior calendar year, made more than 50% of first-lien

covered loans on properties located in “rural” or “underserved” counties• CFPB will publish a list annually

– In prior year, creditor and affiliates originated 500 or fewer first-lien covered loans

– As of end of prior year, had assets that do not exceed CFPB’s asset threshold• $2B in 2013

All Must Be Met

20

Requirements for Balloon Loan

1. Regular, periodic, substantially equal payments2. Loan term of 5-30 years3. Fixed rate4. Points and fees don’t exceed QM limit5. DTI, residual income, and income asset and debt verification must

meet certain requirements6. Not subject to commitment to be acquired

– Exception: Can be acquired by another creditor that meets the rural or underserved requirement

7. Creditor determines at or before closing that consumer can make all scheduled payments and mortgage-related obligations:– Consumer can make all scheduled payments + monthly mortgage-related

obligations– Ignoring balloon payment– Can be covered by consumer’s current or reasonably expected income or

assets (other than dwelling and underlying land)

All m

ust b

e m

et

21

Consumer’s Rebuttal of Presumption

At the time of consummation, no ability to repay because of insufficient residual income

Income- debt obligations

- alimony- child support

- monthly loan and mortgage-related obligation payments insufficient residual income or assets

(other than the dwelling and underlying land)to meet living expenses

Determination based on information available to the creditor– If the creditor did not know about an item, it will not be held

responsible for it

22

High-Cost Mortgage Requirements

Effective January 10, 2014

23

Definition of Section 32 High Cost Mortgages

New Thresholds• Open or closed-end • Secured by principal dwelling

and• Threshold met:

• APR exceeds APOR by specified amount or

• Total points and fees exceed specified amount or

• Prepayment penalty:• Can be charged more than

36 months after closing or• Can exceed more than 2%

of amount prepaid

New Exceptions• Reverse mortgage• Loan to finance initial construction

of dwelling• Loans originated by Housing

Finance Agency• Agency is the creditor

• Loan originated under USDA’s Rural Development Section 502 Direct Loan Program

HELOCs and home purchase loans may now be treated as high cost

mortgages!

24

APR Test

Will be a high cost mortgage if APR exceeds the APOR by more than:

6.5% • 1st lien loans

8.5%• 1st lien loans where dwelling is

personal property and loan amount is less than $50,000

• Subordinate lien loans

25

Points and Fees Test

Will be a high cost mortgage if total points and fees exceed:

Loan amount = $20,000 or

More• 5% of total loan amount

Loan amount < $20,000

• Lesser of:• 8% of total loan amount or• $1,000

*$20,000 and $1,000 will be adjusted annually

26

Requirements for High Cost Mortgages

Many of the same rules and limitations as current HOEPA requirements, such as:– Not allowed to refinance into another high cost mortgage within

12 months– Notice to assignee

Plus new requirements and prohibitions– Underwriting requirements for HELOCs– Disclosure required 3 days before closing– Mandatory homeownership counseling– Limits on late fees, balloon payments and demand clauses– Requirements for providing payoff statements

27

Prohibitions for High Cost Mortgages

Prepayment penalties

Recommending or encouraging default of a current mortgage to refinance all or a portion into a high cost mortgage

Charging any fees to modify, renew, extend, or amend a high cost mortgage or defer a payment

Financing points and fees

28

Mortgage Servicing Under RESPA

Effective January 10, 2014

29

Overview of RESPA Revisions

New requirements for all mortgage servicers:1. Refunding escrows after payoff2. Escrowing for hazard insurance3. Force placement of hazard insurance4. Error resolution5. Handling information requests

New requirements for certain mortgage servicers1. General servicing policies and procedures2. Early intervention for delinquent

borrowers3. Continuity of contact4. Loss mitigation procedures

Not Applicable to “Small Servicer”• 5,000 or fewer

mortgage loans and• Servicer or affiliate

was creditor

30

Handling Hazard Insurance

Escrowing for hazard insurance– Cannot fail to make hazard insurance premium payment merely

because of insufficient funds in escrow account• Must advance funds to escrow account, make timely premium

payments, and then seek repayment of advanced funds– May only force place hazard insurance that has been escrowed

where:• Borrower’s hazard insurance has been canceled or was not renewed

for reasons other than nonpayment of premium charges or• Property is vacant

Obtaining, renewing or replacing force placed hazard insurance– Must provide 45 day notice, certain other notices and wait until

expiration of 45 day period before you can charge the borrower

31

Handling Hazard Insurance

Cancelling force placed insurance– Within 15 days after receiving evidence that borrower has had

hazard insurance coverage in place that meets loan agreement requirements, must do all of the following:1. Cancel force placed insurance purchased by servicer2. Refund to borrower all force placed insurance premium charges

and related fees paid by borrower for any period of overlapping insurance coverage

3. Remove from borrower’s account all force placed insurance charges and related fees assessed for overlapping period

32

Additional Servicing Requirements

Certain servicers must also:– Develop extensive policies and procedures for servicing– Maintain information to produce servicing file– “Intervene early” with delinquent borrowers

• Live contact• Required notice

– Provide “continuity of contact”• Assign personnel to delinquent borrower• Personnel have list of responsibilities and must have easy access to

information about borrower, loan, requests for loss mitigation, etc.– Maintain loss mitigation processes

• Requirements for receiving, reviewing, evaluating and making a determination on a request

• Appeals process

33

New Rules: CFPB Bulletin 2013-01

CFPB is focusing today on servicers with significant servicing transfers Concerns:

– RESPA servicing transfer disclosures– Accuracy and integrity of information reported to credit bureaus

under Fair Credit Reporting Act– Proper disclosures and communications with consumers under

Fair Debt Collection Practices Act– Unfair, deceptive or abusive acts or practices

Detailed and specific areas of focus– Roles and responsibilities of transferor and transferee servicer– How the servicers handled requests for loss mitigation

Effective Now!

34

Written Plans for Servicing Transfers

CFPB Bulletin 2013-1 is “advance notice” to servicers that the CFPB may request a written plan detailing servicer’s management of consumer risks– CFPB not required to “approve” transfers but CFPB will use plans to

“inform further examination planning” Information generally expected to be requested:

– Number of loans to be transferred– Total servicing volume (in unpaid principal balance) being transferred– Names about servicers’ servicing systems and info about

compatibility– Detailed description of transaction and system testing– Description of processes for identifying and correcting errors– Customer-service plan for assisting with loss mitigation requests– Training plan

Effective Now!

35

New Rules: Revisions to Servicemembers Civil Relief Act

Veterans’ Benefits Act of 2010– Provides private cause of action for servicemembers to enforce

their rights– Expands civil penalties to cover all provisions of SCRA

• Consequential and punitive damages• Civil penalties of $55,000 for the first violation and $110,000 for

subsequent violations National Defense Authorization Act for Fiscal Year 2013

– “Talent Amendment” portion made technical amendments and revised the definition of “dependent”

Effective Now!

36

More SCRA Revisions

Honoring America’s Veterans and Caring for Camp Lejuene Families Act of 2012– Extends period of relief from foreclosure, sale or seizure of

property on loans secured by real or personal property owned by the servicemember• From February 2, 2013 – December 31, 2014 - Extended for one year

after period of military service• Beginning on January 1, 2015 - Extended to 90 days after period of

military service Revised SCRA Notice – 2/2/2013 Federal Reserve’s Consumer Compliance Outlook – 1st Quarter 2013

– Various clarifications, including reiterating that SCRA is not limited to consumer loans

Effective Now!

37

New Rules: Biggert Waters Flood Insurance Reform Act

Biggert-Waters Act enacted on July 6, 2012– Extends National Flood Insurance Program to September 30, 2017– Increases penalties to $2,000 and removes limit on penalties– Makes additional changes to policies and pricing that may impact

borrower premiums Guidance will be published by FEMA or CFPB to:

– Increase maximum flood insurance coverage for residential structures with 5+ units to $500,000

– Require mandatory escrow for flood insurance• Exception for certain financial institutions with less than $1 billion in

assets

– Provide borrowers with notices about availability of flood insurance, including private insurance

38

More Biggert-Waters Requirements

When servicer that has force placed flood insurance is notified that the borrower has obtained an adequate policy, it must do all of the following:

1. Accept as confirmation of adequate coverage a declarations page with:1. Existing flood insurance policy number2. Identity and contact info for insurance company or agent

2. Cancel force placed policy within 30 days3. Reimburse the borrower for force placed premiums paid while the

borrower’s policy was also in effect

On March 29, 2013, the agencies published the Interagency Statement on the Impact of Biggert-Waters Act and determined that these requirements became effective immediately upon enactment!Effective Now!

39

Identify Your Areas of Risk

Regulation Z RESPA HMDA Flood Fair Lending UDAAP

40

Fair Lending Risk

Contents of your Fair Lending Program– Policy and procedures– Fair lending risk assessment– Training– Board and management reporting

Internal review of lending data to identify potential issues:– HMDA data– If you are subject to

Community Reinvestment Act, compare lending patterns in CRA assessment area for other kinds of loans

41

Fair Lending Risk

Carefully consider FDIC’s common red flags– Lack of clear pricing and underwriting guidance– Discretion in pricing and underwriting with no controls in place– Absence of fair lending training– Complaints– Insufficient documentation regarding lending decisions– Rate sheets without specific criteria for how they are used

Don’t forget about third party providers– Consider performing a risk assessment of third party relationships

• http://www.fdic.gov/news/news/financial/2008/fil08044.html• Mortgage brokers• Auto and motorcycle financing through dealers• Rent-a-BIN relationships (e.g., credit cards)

42

Other FDIC Best Practices

Compliance review of all proposed products and services early in development before the product is offered to consumers

“Second review” of credit decisions to ensure consistent application of policies and procedures– Careful monitoring of any exceptions or discretionary decisions

Avoid discouraging applicants– Refrain from discriminatory comments or opinions about location

of a home– Avoid requiring applicant’s social security number and/or pulling

their credit report before providing basic loan product info– Avoid inconsistencies in referrals

Avoid steering to particular products– If there are multiple options, advise consumer of options and

advantages/disadvantages of each

43

UDAAP in Lending

Complaint File– Loan file reviews will be weighted toward branches with more

complaints– CFPB may even interview consumers to get their point of view– When reviewing complaint files:

• Include complaints lodged against subsidiaries, affiliates, and third parties regarding your products and services

• Pay particularly close attention to:• Multiple complaints about the same issue• Any complaints about misleading or false statements, or

missing disclosure information

44

UDAAP in Lending

Review loan ads carefully• Look for RESPA Section 8 and fair lending violations• Be particularly careful about ads with non-traditional mortgage

products Review third parties

• Training and monitoring policies for employees and third parties, including monitoring outbound calls for compliance

• Regular evaluations of third party performance Review compensation arrangements internally and of third parties

• Carefully review compensation for cross-sales of associated products, such as credit life

• CFPB will “interview employees to assess the actual compensation practices”

45

Specific loan products to be reviewed:• Hybrid ARMs (defined as having a fixed period prior to adjusting)• Interest-only loans• Payment option ARMs• Simultaneous second liens• Alt-A loans• Subprime loans• Reverse mortgages (including HECMs)• HOEPA and higher-priced mortgage loans• Loans with an introductory rate that is 200 basis points or more

below the fully indexed rate

45

UDAAP in Lending

46

Make Policy Decisions

47

Policy Considerations

Product Offerings– Are you going to make loans that are not Qualified Mortgages?– Are you going to make Qualified Mortgages that are Higher-

Priced Covered Transactions and only receive a rebuttable presumption of compliance?

– What will your investors require?– Do you plan to continue making mortgage loans with balloon

payments?– Do you offer ancillary products, such as credit life insurance?

Will you continue to offer them?

48

Policy Considerations

Pricing and Features– Will you allow mortgages to be made that trigger the higher-

priced mortgage loan or high cost mortgage requirements?– If you still have prepayment penalties on mortgage loans, will

you continue to in 2014?– Will you retain prepayment penalties on home equity lines of

credit?– Will you allow any mortgages to made with high risk

characteristics such as interest-only payments or negative amortization?

– Do you escrow for mortgage loans? Do you plan to continue?

How will these potential changes affect your profit, strategy, and competitive position?

49

Implement New Requirements

50

Implementation Steps

Determine how you will track and manage implementation of changes– Inventory new requirements and affected policies, procedures,

products, systems, third party relationships– Identify responsible persons and deadlines– Maintain ongoing record of progress for accountability and

management reporting

Prioritize your tasks– First steps should be rules that apply now, such as

Servicemember Civil Relief Act revisions– Many risks, such as fair lending and UDAAP, can and should be

a focus of your compliance efforts today

51

Don’t Wait to Get Started on the New Rules!

New mortgage reform regulations apply as early June 1, 2013

Build in plenty of time at end of 2013 for staff training

Keep a close eye on the CFPB– Regulation Z and RESPA

disclosure rules expected to be published in summer of 2013

– Various proposals issued to assist small creditors and servicers

52Copyright © 2012 Tata Consultancy Services Limited

Questions?Amy Avitable

amy.avitable@tcs.com