Fed Proposes TILA Amendments. Includes Fee Cap
The
Federal Reserve is inviting public comment on a rule that would provide
four
options for complying with new amendments to the Truth in Lending Act
(TILA). In an attempt to limit confusion we've written this story using as
much content from the Fed's Proposed Rule as possible. Our recap is
long but we feel that is a necessary evil. HERE is the 474 page document if you'd like to read it yourself. It wasn't an enjoyable experience.....
BACKGROUND INFO
In
2006 and 2007, the Federal Reserve Board held a series of national
hearings on consumer protection issues in the mortgage market. In
response to these hearings, in July of 2008, the Board adopted HOEPA's Final Rule which defined a new class of “higher-priced mortgage loans,” .
DEFINITION:
Under the 2008 HOEPA Final Rule, a higher-priced mortgage loan is a
consumer credit transaction secured by the consumer’s principal dwelling
with an APR that exceeds the average prime offer rate (APOR) for a
comparable transaction, as of the date the interest rate is set, by 1.5
or more percentage points for loans secured by a first lien on the
dwelling, or by 3.5 or more percentage points for loans secured by a
subordinate lien on the dwelling. The definition of a “higher-priced
mortgage loan” includes those loans that are defined as “high-cost
mortgages.”
The Board’s 2008 HOEPA Final Rule also revised the "ability to repay"
requirements for high-cost mortgages, and extended these requirements
to higher-priced mortgage loans. Specifically, the rule:
- Prohibits
a creditor from extending a higher-priced mortgage loan based on the
collateral and without regard to the consumer’s repayment ability.
- Prohibits
a creditor from relying on income or assets to assess repayment ability
unless the creditor verifies such amounts using third-party documents
that provide reasonably reliable evidence of the consumer’s income and
assets
WHY ARE NEW AMENDMENT PROPOSALS NECESSARY?
Over the
years, concerns have been raised about creditors originating mortgage
loans without regard to the consumer's ability to repay the loan.
Beginning in about 2006, these concerns were heightened as mortgage
delinquencies and foreclosures rates increased dramatically, caused in
part by the loosening of underwriting standards. One of the purposes of
TILA is to promote the informed use of consumer credit by requiring
disclosures about its costs and terms. TILA requires additional
disclosures for loans secured by consumers’ homes and permits consumers
to rescind certain transactions that involve their principal dwelling.
Well,
the Dodd-Frank Wall Street Reform and Consumer Protection Act amended
the Truth in Lending Act (TILA) to prohibit creditors from making
mortgage loans without regard to the consumer’s repayment ability. The
Act’s underwriting requirements are substantially similar but not
identical to the ability-to-repay requirements adopted by the Board for
higher-priced mortgage loans in July 2008 under the Home Ownership and
Equity Protection Act.
Unlike the Board’s 2008 HOEPA Final Rule,
the new "ability to repay" proposal as dictated by Dodd-Frank is not
limited to higher-priced mortgage loans or loans secured by the
consumer’s principal dwelling only. The Fed's newly proposed rule applies the "ability-to-repay" requirements to all high-cost mortgage transactions and
any consumer credit transaction secured by a primary residence, second
home, or investment property. not just a primary residence. The
proposed rule would apply to all consumer mortgages including closed-end 2nd mortgages. (The proposal does not apply to home equity lines, open-end credit plans,
timeshare plans, reverse mortgages, or temporary loans with terms of 12
months or less)
Plain and Simple: Regulation Z currently
prohibits a credit or from making a
higher-priced mortgage loan without regard to the consumer’s ability to
repay the loan. This new proposal would implement statutory changes made
by the Dodd-Frank Act that expand the scope of the ability-to-repay
requirement
to cover any consumer credit transaction secured by all dwellings
(excluding an open-end credit plan, timeshare plan, reverse mortgage, or
temporary loan). The Dodd-Frank Act essentially codifies the
ability-to- repay requirements of the Board’s 2008 HOEPA Final Rule and
expands the scope to the covered transactions. More importantly, the
proposal would establish standards for complying with the
ability-to-repay requirement, including by making a “qualified mortgage.” Do
not confuse the use of "Qualified Mortgages" in these TILA reforms with
the debate surrounding "Qualified Residential Mortgages" which are part
of Risk Retention Regs.
They are however related in the sense that Dodd-Frank requires that the
definition of "Qualified Residential Mortgage" be no broader than the definition of "Qualified Mortgage" in the ability-to-repay rules.
Glen Corso, Managing Director
of the Community Mortgage Banking Project clarified the relevance of
each proposal in this statement, “Today’s issuance by the Fed of
proposed regulations on the ability-to-repay provisions of the
Dodd-Frank Act is important for consumers and the mortgage industry
because it will allow for a side-by-side comparison with the proposed
Qualified Residential Mortgage exemption and the Risk Retention
regulations. These two regulations will be influential in determining
the future shape of the mortgage market of the future, thus it is vital
that we achieve the goal of harmonizing those two sets of regulations to
the greatest extent possible.
WHAT IS BEING PROPOSED BY THE FED?
The expansion of
"high-cost" regs to include vacation and investment properties is fairly
straightforward. The introduction of "Qualified Mortgages" ...not as straightforward. Consistent with the Dodd-Frank Act, the proposal provides four options for lenders to comply with new "ability-to-repay" requirements.
First, a creditor can meet the general ability-to-repay standard by originating a mortgage loan for which:
- The
creditor considers and verifies the following eight underwriting
factors in determining repayment ability: (1) current or reasonably
expected income or assets; (2) current employment status; (3) the
monthly payment on the mortgage; (4) the monthly payment on any
simultaneous loan; (5) the monthly payment for mortgage-related
obligations; (6) current debt obligations; (7) the monthly debt-to-
income ratio, or residual income; and (8) credit history; and
- The mortgage payment calculation is based on the fully indexed rate.
Second,
a creditor can refinance a “non-standard mortgage” into a “standard
mortgage.” This is based on a statutory provision that is meant to
provide flexibility for streamlined refinancings, which are no- or
low-documentation transactions designed to quickly refinance a consumer
out of a risky mortgage into a more stable product. Under this option,
the creditor does not have to verify the consumer’s income or assets.
The proposal defines a “standard mortgage” as a mortgage loan that,
among other things, does not contain negative amortization,
interest-only payments, or balloon payments; and has limited points and
fees. “Non-standard mortgage” is defined as (1) an adjustable-rate
mortgage with an introductory fixed interest rate for a period of years,
(2) an interest-only loan, and (3) a negative amortization loan.
Plain and Simple:
The Dodd-Frank Act provides an exception to the ability-to-repay
standard’s underwriting requirements if: (1) the same creditor is
refinancing a “hybrid mortgage” into a “standard mortgage,” (2) the
consumer’s monthly payment is reduced through the refinancing, and (3)
the consumer has not been delinquent on any payment on the existing
hybrid mortgage. This provision appears to be intended to provide
flexibility for streamlined refinancings, which are no- or
low-documentation loans designed to quickly refinance a consumer in a
risky mortgage into a more stable product. Streamlined refinancings have
substantially increased in recent years to accommodate consumers at
risk of default. Basically this leaves the door open for a "Rapid
Refinance" program.
Third, a creditor can originate a “qualified mortgage,” which provides special protection from liability
for creditors who make “qualified mortgages.” It is unclear whether
that protection is intended to be a safe harbor or a rebuttable
presumption of compliance with the repayment ability requirement.
Therefore, the Board is proposing two alternative definitions of a
“qualified mortgage.”
Alternative # 1: operates as a legal safe harbor and defines a “qualified mortgage” as a mortgage for which:
(a)
The loan does not contain negative amortization, interest-only
payments, or balloon payments, or a loan term exceeding 30 years;
(b) The total points and fees do not exceed 3% of the total loan amount;
(c) The borrower’s income or assets are verified and documented; and
(d)
The underwriting of the mortgage (1) is based on the maximum interest
rate in the first five years, (2) uses a payment scheduled that fully
amortizes the loan over the loan term, and (3) takes into account any
mortgage-related obligations.
Alternative #2: provides
a rebuttable presumption of compliance and defines a “qualified
mortgage” as including the criteria listed under Alternative 1 as well
as the following additional underwriting requirements from the
ability-to-repay standard:
(1) the consumer’s employment status,
(2) the monthly payment for any simultaneous loan,
(3) the consumer’s current debt obligations,
(4) the total debt-to-income ratio or residual income, and
(5) the consumer’s credit history.
YES. That does say a "Qualified Mortgage" would require that total points and fees not exceed 3% of the total loan amount. Definition of “points and fees”: Consistent with the Act, the proposal revises Regulation Z to define
“points and fees” to now include: (1) certain mortgage insurance
premiums in excess of the amount payable under Federal Housing
Administration provisions; (2) all compensation paid directly or
indirectly by a consumer or creditor to a loan originator; and (3) the
prepayment penalty on the covered transaction, or on the existing loan
if it is refinanced by the same creditor. The proposal also provides
exceptions to the calculation of points and fees for: (1) any bona fide
third party charge not retained by the creditor, loan originator, or an
affiliate of either, and (2) certain bona fide discount points
The Board is proposing two alternatives for implementing the limits on points and fees for qualified mortgages. Alternative A is based on certain tiers of loan amounts (e.g., a points and fees threshold of 3.5 percent of the total loan amount for a loan amount greater than or equal to $60,000 but less than $75,000). Alternative A is designed to be an easier calculation for creditors, but may result in some anomalies (e.g., a points and fees threshold of $2,250 for a $75,000 loan, but a points and fees threshold of $2,450 for a $70,000 loan). Alternative B is designed to remedy these anomalies by providing amore precise sliding scale, but may be cumbersome for some creditors.
SEE PAGE 28 OF THE PROPOSAL FOR MORE ON THAT TOPIC. We know it's going to be a hot-button issue as it will make the big banks even bigger, just like the "QRM" proposal.
Finally, a small creditor operating predominantly in rural or underserved areas can originate a balloon-payment qualified mortgage. This standard is evidently meant to accommodate community banks that originate balloon loans to hedge against interest rate risk. Under this option, a small creditor can make a balloon-payment qualified mortgage if the loan term is five years or more, and the payment calculation is based on the scheduled periodic payments, excluding the balloon payment.
Plain and Simple: Consistent with the Dodd-Frank Act, the proposal provides four
options for lenders to comply with the "ability-to-repay" requirement.
Specifically, a creditor can either:
- Originate a covered transaction under the general ability-to-repay standard;
- Refinance a “non-standard mortgage” into a “standard mortgage
- Originate a “qualified mortgage,” which provides a presumption of compliance with the rule; or
- Originate a balloon-payment qualified mortgage, which provides a presumption of compliance with the rule.
WHAT LIABILITIES WOULD BANKS BE PROTECTED FROM BY WRITING "QUALIFIED MORTGAGES"?
HOEPA created three special remedies for a violation of its provisions.
First,
a consumer who brings a timely action against a creditor for a
violation of rules issued under TILA may be able to recover special
statutory damages equal to the sum of all finance charges and fees paid
by the consumer (often referred to as “HOEPA damages”), unless the
creditor demonstrates that the failure to comply is not material. This
recovery is in addition to actual damages; statutory damages in an
individual action or class action, up to a prescribed threshold; and
court costs and attorney fees that would be available for violations of
other TILA provisions.
Second, if a creditor assigns a high-cost
mortgage to another person, the consumer may be able to obtain from the
assignee all of the foregoing damages. For all other loans, TILA limits
the liability of assignees for violations of Regulation Z to disclosure
violations that are apparent on the face of the disclosure statement
required by TILA
Finally, a consumer has a right to rescind a
transaction for up to three years after consummation when the mortgage
contains a provision prohibited by a rule adopted under the authority of
TILA. Any consumer who has the right to rescind a transaction may
rescind the transaction as against any assignee. The right of rescission
does not extend, however, to home purchase loans, construction loans,
or certain refinancings with the same creditor
The
Dodd-Frank Act creates special remedies for violations of TILA. The
Dodd-Frank Act provides that a consumer who brings a timely action
against a creditor for a violation of TILA Section 129C(a) (the
ability-to-repay requirements) may be able to recover special statutory
damages equal to the sum of all finance charges and fees paid by the
consumer (often referred to as “HOEPA damages”), unless the creditor
demonstrates that the failure to comply is not material. This recovery
is in addition to actual damages; statutory damages in an individual
action or class action, up to a prescribed threshold; and court costs
and attorney fees that would be available for violations of other TILA
provisions.
The Dodd-Frank Act also provides that a consumer may
assert a violation of TILA Section 129C(a) as a defense to foreclosure
by recoupment or set off. There is no time limit on the use of this
defense.
Plain and Simple: “The proposed
ability-to-repay regulations present two options for the Qualified
Mortgage. One option reportedly offers lenders and investors in
mortgages a true safe harbor from the significant liability under the
Truth in Lending Act that results from failure to meet the
ability-to-repay rules. If this option does offer a true legal Safe
Harbor, lenders and investors will have the legal certainty necessary to
provide low cost mortgage credit without the added expense of excessive
defensive measures undertaken strictly to ward off class action
attorneys.” -Glen Corso.
The proposal also implements the Dodd-Frank Act’s limits on prepayment penalties, lengthens the time creditors must retain records that evidence compliance with the ability-to-repay and prepayment penalty provisions, and prohibits evasion of the rule by structuring a closed-end extension of credit as an open-end plan. The Dodd-Frank Act contains other consumer protections for mortgages, which will be implemented in subsequent rulemakings.
If you have a problem with the
proposal you must speak your mind. This is not the final rule. Comments on this proposed rule must be received on or before July 22, 2011. All comment letters will be transferred to the Consumer Financial Protection Bureau at that time. You may submit comments, identified by Docket No. R- 1417 and RIN No. AD 7100 AD 75, by any of the following methods:
- Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm
- Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
- E-mail: regs.comments@federalreserve.gov. Include the docket number in the subject line of the message.
- Fax: (202) 452-3819 or (202) 452-3102.
- Snail Mail: Address to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.
All public comments will be made available on the Board’s web site