Massachusetts Bankers Association Consumer Mortgage Lending Annual Review 2003 Stanley V. Ragalevsky
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Massachusetts Bankers Association Consumer Mortgage Lending Annual Review 2003 Stanley V. Ragalevsky Stephen E. Moore Sean P. Mahoney 617.261.3100 www.kl.com ECOA and Regulation B ¾ Mandatory Compliance Date – April 15, 2004 Notice of Adverse Action is required unless substantially all of the bank’s customers for the loan product are affected by the bank’s action Pre-approvals constitute an application when the bank receives sufficient information to make a decision on the request for pre-approval for a loan Gathering of information with respect to a customer’s race, national origin, etc. is now permitted for non-mortgage credit if the bank is using it to self-test its compliance 2 ECOA and Regulation B CONTINUED ¾ Mandatory Compliance Date – April 15, 2004 Effective January 1, 2004, when gathering information for a home mortgage/home equity loan, bank must use the term “ethnicity” when asking for the national origin or race of the applicant FNMA/FHLMC Uniform Residential Loan Application has been changed to conform to this requirement Banks must retain records with respect to prescreened programs for twenty five months Any disclosure or information required to be provided in writing must be made in a clear and conspicuous manner and, with a few exceptions, in a form that the applicant may retain 3 ECOA and Regulation B CONTINUED ¾ Effective May, 2004 Impact of same sex marriages on rules prohibiting discrimination based on marital status • Creditors must not take into account the fact that applicants who have married may be of the same sex in Massachusetts 4 HMDA / Regulation C ¾ Regulation C was amended in 2002 to make a number of significant changes in reporting and data collection obligations ¾ The 2002 Regulation C Amendments were originally scheduled to take effect on January 1, 2003 but implementation was delayed until January 1, 2004 5 HMDA / Regulation C CONTINUED ¾ New January 1, 2004 reporting requirements should have been included in reports submitted to federal supervisory agency by March 1, 2004 ¾ FFIEC has finally posted 2004 Preliminary Census Data which reflect 2002 Census information and new OMB census tracts 6 HMDA / Regulation C CONTINUED ¾ Covered Lenders Nonbank lender volume test • Nonbank lender (i.e., mortgage company) is now subject to Regulation C reporting if their home mortgage originations exceeded 10% of their total loan originations or $25,000,000 in the prior year 7 HMDA / Regulation C CONTINUED ¾ New Data Reporting Requirements Rate Spread • HMDA lenders must report the spread between a • • loan’s APR and the yield on U.S. Treasury securities with a comparable maturity if the spread exceeds • 3 percentage points on first mortgages • 5 percentage points on subordinate mortgages Applies to originated mortgage loans Does not apply to purchased loans or nonmortgage loans 8 HMDA / Regulation C CONTINUED ¾ New Data Reporting Requirements HOEPA Status • Home Ownership Equity Protection Act of 1994 • • (HOEPA) covers certain high cost mortgages whose APRs are more than 8 points over comparable Treasury Securities yields on a first mortgage and 10 points on a second, or points and fees exceed the greater of 8% of total loan amount or $499 Lenders must now report whether a loan is subject to HOEPA Applies to both originated and purchased loans 9 HMDA / Regulation C CONTINUED ¾ New Data Reporting Requirements Lien Status • Old rules required lender to identify whether a • • loan was secured by a lien New rules require lenders to identify on the loan application register whether a loan is secured by a first lien or second lien Applies only to originated loans 10 HMDA / Regulation C CONTINUED ¾ New Data Reporting Requirements Manufactured Home Status • Lenders must identify on the loan application register whether a loan involves a manufactured home (i.e., choices are 1-4 family, manufactured housing or multi-family dwelling) 11 HMDA / Regulation C CONTINUED ¾ Pre-approval Requests as Applications Under pre-January 1, 2004 rules preapprovals were not reported Now pre-approvals may be subject to reporting Difference between “pre-approval” and “pre-qualification ” • Pre-qualification (no binding obligation) • Pre-approval (binding obligation to lend up to specified amount made after credit underwriting) 12 HMDA / Regulation C CONTINUED ¾ Pre-approval Requests as Applications Pre-approvals on home purchase loans are now reportable Lenders now required to identify home purchase loans where a pre-approval request was involved Denials of pre-approval requests must be reported like a denial of an application Optional reporting of pre-approval requests approved by a lender but not accepted by the applicant 13 HMDA / Regulation C CONTINUED ¾ Borrower Information Changes ¾ Applicant Information — Race and Ethnicity Race and national origin categories simplified to conform to revised OMB Guidelines New “ethnicity” category added Hispanic or Latino “Hispanic” and “other” deleted from race categories Pacific Islanders and Native Hawaiians differentiated from “Asians” Applicant can select more than one race 14 HMDA / Regulation C CONTINUED ¾ Changes to Definitions Refinancing • Refinancings of home purchase and home • • improvement loans are reportable Pre-January 1, 2004 refinancing was a loan that satisfied and replaced an existing loan from the same borrower Effective January 1, 2004, the definition of what is a refinancing narrows by requiring that both the original and the new loans be secured by a dwelling 15 HMDA / Regulation C CONTINUED ¾ Changes to Definitions Home Improvement Loan • Prior to January 1, 2004, a “home improvement • loan” for Regulation C purposes was a loan to improve a dwelling which was classified by the lender as a home improvement loan Effective January 1, 2004, a loan which is to improve a dwelling and is secured by a mortgage lien must be reported on the loan application register even if the lender does not classify it as a home improvement loan 16 FNMA / FHLMC Changes ¾ Effective January 1, 2004, FNMA and FHLMC amended the Uniform Residential Loan Application (Form 1003) 2004 changes reflect • Section 326 of USA PATRIOT Act Customer • Information Program Modifications • Date of birth, not age • Mailing address Various HMDA changes 17 FNMA / FHLMC Changes CONTINUED ¾ FHLMC / FNMA Loan Limits for 2004 increased to: $333,700 – 1 Family $427,150 – 2 Family $516,300 – 3 Family $641,650 – 4 Family 18 FCRA and the FACT Act of 2003 ¾ ¾ ¾ Effective 12/31/03 FCRA was amended to preempt state laws regulating information sharing among affiliated companies FCRA will prohibit the sharing of consumer information with affiliates for marketing purposes unless the consumer has been given notice and an opportunity to opt out Lenders will be required to provide “Risk-Based Pricing Notices” to consumers who receive materially less favorable credit terms based on information in a consumer report 19 FCRA and the FACT Act of 2003 CONTINUED ¾ ¾ ¾ Banks will be required to disclose credit scores to residential mortgage loan applicants New policies and procedures will be imposed on banks that furnish information to consumer reporting agencies Once a bank has been notified that a debt was created through identity theft: it will be restricted from selling or transferring such debt it is not permitted to report such information to third parties including consumer reporting agencies 20 FCRA and the FACT Act of 2003 CONTINUED Banks will be required to furnish a notice to consumers whenever the bank reports negative information about the consumer to nationwide consumer reporting agencies ¾ FCRA will prohibit banks from obtaining or using medical information for determining a consumer’s eligibility for credit ¾ 21 FCRA and the FACT Act of 2003 CONTINUED ¾ ¾ ¾ Most provisions will not become effective until regulations have been issued by the Federal Trade Commission and Federal Reserve Board Recently the Agencies set the effective date for the preemption rules at December 31, 2003, March 31, 2004 for certain rules that do not require new policies and procedures and December 1, 2004 for all other rules It is expected, however, that some of the regulations will set a later effective date for certain requirements 22 TILA and Regulation Z ¾ Changes to official commentary effective April 1, 2003 with compliance date of October 1, 2003 Fees for expediting a single payment on a credit account are not finance charges, nor “other charges” Fees for expediting delivery of a credit card are not finance charges nor “other charges” The issuance of more than one card when a credit card expires is permitted but conditions on issuance of more than one renewal credit card are imposed 23 TILA and Regulation Z CONTINUED ¾ Changes to official commentary effective April 1, 2003 with compliance date of October 1, 2003 Mortgage guaranty insurance payments must be set forth in the payment schedule for closed-end loans Clarifying language relating to the applicable treasury security rate for determining whether a loan is a high cost loan subject to the provisions of HOEPA 24 Servicemembers Civil Relief Act of 2003 ¾ Servicemembers Civil Relief Act of 2003 (“SCRA”) Public Law 108 – 189 (50 USC App. 501596) Revises Soldiers’ and Sailors’ Civil Relief Act of 1940 (“SSCRA”) Took effect December 19, 2003 Generally broadens protections of SSCRA 25 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ Persons Protected by SCRA Servicemembers called to active duty Members of U.S. armed forces (Army, Navy, Air Force, Marines, Coast Guard, Public Health Service) Members of National Guard called to active service • For more than 30 consecutive days • To respond to certain national emergencies • Certain protections granted to “dependents” (i.e, spouses • and children) of servicemembers Some protections available to persons secondarily liable on servicemember obligations 26 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ Period of Protection Generally during and shortly after the period of military service ¾ Waiver of Protection Servicemember can waive any rights under SCRA • The waiver must be in writing and refer to the legal instrument to which it applies Persons secondarily liable for a servicemember’s obligations can waive Must be in writing and be separate from the obligations to which the waiver applies 27 Servicemembers Civil Relief Act of 2003 ¾ CONTINUED Protections Maximum interest rate (50 USC App. 527) Capped at 6% per year on obligations incurred before period of military service Extends though period of military service Applied only to obligations incurred solely by servicemember or jointly with spouse Interest in excess of 6% must be forgiven and payments reduced by amount of forgiven interest 28 Servicemembers Civil Relief Act of 2003 ¾ CONTINUED Protections Servicemember must provide lender with written notice and copy of orders to military service within 180 days after release from military service to get benefit of statute Creditor can petition court to allow it to accrue interest at a rate in excess of 6% per year if the servicemember’s ability to pay interest in excess of 6% is not materially affected by his/her military service 29 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ No Penalty for Exercising SCRA Rights Lender cannot punish a servicemember for exercising his/her SCRA rights as a basis • To deny credit to him in the future • To issue adverse credit report in the future • To note he/she is a member of the National Guard or reserves in his/her credit record 30 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ Default Judgments Default judgments for nonpayment of debts in civil actions against servicemembers who do not make an appearance are more difficult to obtain Affidavits as to military status required Court must appoint attorney for a defendant who “appears” to be a servicemember Non-appearing defendant also has right to stay an action or to reopen any adverse judgment 31 Servicemembers Civil Relief Act of 2003 ¾ Stay of Pending Actions CONTINUED A servicemember with notice of a civil proceeding can have it stayed until after his/her period of military service is over ¾ Fines and Penalties under Contracts Late charges, default interest and other penalties for non-performance under contracts are prohibited during any period of time an action against a servicemember has been stayed 32 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ Stay an Enforcement of Judgment Court can stay the execution of a judgment or an attachment against a servicemember if his/her ability to comply with the judgment is materially affected by his/her military service ¾ Evictions Court order is required to evict a servicemember or his/her dependents during the period of military service if the premises are a primary residence with a rent of less than $2,400 per month 33 Servicemembers Civil Relief Act of 2003 ¾ CONTINUED Installment Contracts Terminating a contract for the sale or lease of personal property during a servicemember’s period of military service is generally prohibited Repossession of auto loan collateral is prohibited Benefit of protection extends to dependents if their ability to comply with an obligation is materially affected by servicemember's military service Court can allow three disinterested parties to appraise the value of any collateral and order the creditors to pay any equity to servicemember or his/her dependents 34 Servicemembers Civil Relief Act of 2003 ¾ CONTINUED Mortgages Creditor cannot foreclose a mortgage of a servicemember during the period of military service or within 90 days thereafter without a court order or waiver agreement Criminal penalties for any creditor who knowingly violates this prohibition ¾ Co-defendants Allows creditors to pursue co-borrowers who are not servicemembers Should only be done with the approval of court 35 Servicemembers Civil Relief Act of 2003 CONTINUED ¾ Statute of Limitations Statutes of Limitations against servicemembers are tolled during period of military service ¾ Further Relief “Catch all” provision allows servicemember to apply to a court anytime during the period of military service or within 180 days thereafter for relief from any obligation or liability incurred before the period of military service 36 Do Not Call Registry ¾ New FTC regulations may not apply to banks, but identical FCC regulations do apply to banks ¾ Regulations being challenged in court by telemarketing industry ¾ Significant exception for persons with whom the bank has an existing business relationship 37 Federal Flood Insurance ¾ Temporary reauthorization to March 31, 2004 Effects of sunset uncertain ¾ Increase limit of liability under Coverage D to $30,000 Coverage for mitigation costs above normal cost of repair Amended 44 CFR Part 61 Effective May 1, 2003 38 Federal Flood Insurance ¾ Change in premiums for Pre-FIRM buildings CONTINUED Increase in rates Elimination of “Expense Constant” Amended 44 CFR Chapter 1 and Part 61. Effective May 1, 2003 39 RESPA and Regulations ¾ No changes in the last year to the Real Estate Settlement Procedures Act ¾ One change to the RESPA Regulation increase civil penalties for failure to provide an initial or annual escrow account statement from $55 to $65 for each violation maximum amount against any one servicer in any twelve-month period increased from $110,000 to $120,000 40 RESPA and Regulations ¾ RESPA Reform 2002 HUD proposed changes to the RESPA regulation HUD indicated that it will continue to press forward on proposed changes which are • Disclosures with respect to mortgage brokers • • fees and yield spread premiums Certain types of guaranteed mortgage packages would be allowed and exempt from the antikickback rules of RESPA Changes to good faith estimates to provide clearer disclosures and limitations on changes 41 RESPA Litigation ¾ Upcharges of Fees Issue is whether a lender can charge more for a service than the provider of the service charges Cases decided in 2003 in the 7th and 11th Circuits hold that the lender can upcharge if • lender provides services and • the charge is reasonable based on the services provided If the lender provides no service, the fee would violate RESPA 42 RESPA Litigation CONTINUED ¾ Yield Spread Premiums Issue is whether the payment of yield spread premiums violates the anti-kickback rules of RESPA Issue has not been resolved • 11th Circuit ruled last April that yield spread • premiums did not violate RESPA Other cases are yet to be decided and the issue not yet resolved 43 Community Reinvestment Act ¾ On February 6, 2004, the federal bank regulatory agencies proposed revisions to their CRA regulations Proposal 1 — Regulatory Burden Relief • Amend the definition of “small institution” • Increase Eligibility for Streamlined CRA Exam from banks with $250 million in assets to banks with $500 million in assets • If adopted, 1,100 additional banks would qualify for the streamlined “small bank” CRA examination 44 Community Reinvestment Act CONTINUED ¾ On February 6, 2004, the federal bank regulatory agencies proposed revisions to their CRA regulations Proposal 2 — Predatory Lending • Require examiners to consider whether a bank is engaged in “predatory lending” when determining its CRA grade (discriminatory, illegal or abusive credit practices or making of loans that the borrower cannot be expected to pay) 45 Appraiser Independence Guidelines ¾ In general October 27, 2003 — Bank supervisory agencies issued an “interagency guidance” on the independence of appraisal functions (FDIC FIL –84-2003) This “guidance” supplements the Interagency Appraisal and Evaluation Guidelines issued on October 27, 1994 (FDIC FIL-74-94) Guidance is intended to clarify what is required for an appraisal program to have the requisite independence 46 Appraiser Independence Guidelines CONTINUED ¾ Appraiser Selection A bank cannot allow a borrower to select an appraiser (even from a bank approved appraiser list) A bank cannot use readdressed appraisals (i.e., appraisal done for the borrower or other party and “readdressed” to the bank) 47 Appraiser Independence Guidelines CONTINUED ¾ Appraisal Independence within the Bank Loan officer may not • select or retain the appraiser – appraiser must be • hired by someone independent of the loan approval function perform in-house evaluations Completed appraisals must be reviewed by someone independent of the loan approval process Loan officers should review appraisals but there must be an independent review 48 Appraiser Independence Guidelines CONTINUED ¾ Small Bank Rule In small banks, it is often impossible to separate the appraisal and loan approval processes When this happens, anyone involved with the appraisal of a loan should abstain from voting on that loan 49 Appraiser Independence Guidelines CONTINUED ¾ Effective Real Estate Appraisal and Evaluation Program The Board is required to establish an effective real estate appraisal and evaluation program that contains • Appraiser selection and evaluation procedures • Procedures for appraiser independence • Criteria for appraisals • Timely receipt of appraisal • Internal controls 50 New Standards for Notaries in MA ¾ Executive Order 455 signed December 19, 2003 ¾ Effective April 19, 2004 (originally February 19) ¾ Motivation Fear of fraud by “Notario Publico” National security immigration concerns 51 New Standards for Notaries in MA CONTINUED ¾ Major Changes Satisfactory evidence of identity required Notary journal Attorney present at all real estate closings ¾ Criticism Journal error could invalidate mortgages Conflicting regulatory and statutory requirements Inspection of journals may lead to identity theft 52 New Standards for Notaries in MA ¾ Worst-Case Scenario CONTINUED Bank takes mortgage on property Mortgage is notarized and filed Some time later (less than 10 years) debtor goes bankrupt Trustee discovers improper recording of mortgage notarization in notary journal Trustee challenges validity of mortgage filing 53 USA PATRIOT Act ¾ Part 326 Customer Identification Program Regulations Effective October 1, 2003 Require financial institutions to have customer identification program CIP requirements apply to loan customers CIP Regulations require banks to slightly modify their data collection on loans 54 USA PATRIOT Act CONTINUED ¾ Part 326 Customer Identification Program Regulations Must collect date of birth information, not age Must collect a mailing address if different, from the present address PATRIOT Act changes have been picked up in the standard FHLMC / FNMA Form 1003 (Uniform Residential Loan Application) 55 Predatory Lending/High Cost Loans ¾ Fairbanks Capital Holding Corp. settlement with FTC and HUD $40 million dollars New concept of “predatory servicing” • Failing to post payments on time • Charging inappropriate late fees • Inappropriately force-placing property insurance on mortgaged property 56 Predatory Lending/High Cost Loans CONTINUED ¾ HOEPA update Applicability trigger of total points and closing costs raised from $488 to $499 (or 8% of loan, if greater) Regulation C revised to clarify identification of Treasury Security to determine applicable rate for whether a loan is a HOEPA loan 57 Predatory Lending/High Cost Loans CONTINUED ¾ New OCC regulations on debt cancellation/suspension agreements Disclosures required Must give consumer option of paying per month rather than single premium to be added to amount financed Either DCA allows consumer to terminate at will or bank must offer similar product that gives consumer this option 58 The Preemption Debate ¾ Introduction The Supremacy Clause of the U.S. Constitution makes federal law the supreme law of the land (U.S. Const. Art. VI, cl. 2) Federal law preempts or supersedes contrary state and local laws In deciding whether a state law is preempted by a federal law, the Courts generally follow what they believe to be the intent of Congress – this can be quite complicated 59 The Preemption Debate ¾ The Dual Banking System and Preemption CONTINUED Since the 1860’s the U.S. has had a dual banking system with national banks and federal savings and loan association chartered and regulated by the United States and local banks chartered and regulated by the states The financial services marketplace is becoming more nationalized every day 60 The Preemption Debate ¾ The Dual Banking System and Preemption CONTINUED National banks claim that they are regulated exclusively by federal law, not the laws of the various states National banks claim that state laws purporting to regulate their banking activities are preempted and therefore inapplicable to them 61 The Preemption Debate ¾ The Dual Banking System and Preemption CONTINUED State officials want to enforce state laws of all kinds, including laws designed to protect consumers OTS and OCC have been aggressive and are getting more so about preempting state laws which they say interfere with a federally chartered bank’s rights to operate interstate 62 The Preemption Debate ¾ The Dual Banking System and Preemption CONTINUED The states, their attorneys general and consumer groups claim that state laws of general application dealing with predatory lending, consumer protection and unfair and deceptive practices should apply to all banks operating within a state 63 The Preemption Debate ¾ The Debate Erupts CONTINUED As states became more aggressive in efforts to subject federally chartered banks to state predatory lending laws, OTS ruled in 2002 that predatory lending laws in Georgia, New Jersey and New York were preempted On January 7, 2004, OCC issued a new regulation which asserted its preemption powers over sate laws in the broadest possible terms 64 The Preemption Debate ¾ The Debate Erupts CONTINUED The OCC Preemption regulation allows a national bank to presume that certain categories of state laws which OCC has determined “obstruct, impair or condition” a national bank’s powers granted under federal law are preempted without seeking a prior determination to that effect from OCC 65 The Preemption Debate ¾ The Debate Erupts CONTINUED State officials claim that the OCC Preemption regulation is overreaching States claim that OCC’s ability to preempt state laws only applied to state laws which significantly obstruct, impair or condition a national bank’s exercise of this powers granted under federal law 66 The Preemption Debate ¾ The Debate Erupts CONTINUED Citing the U.S. Supreme Court’s 1996 opinion in Barnett Bank v. Nelson, state officials assert that their right to enforce state predatory lending laws against national banks does not significantly interfere with their right to function as national banks States argue there is no compelling reason why national banks should be exempt from having to comply with legitimate state laws – state law does not conflict with federal law 67 The Preemption Debate ¾ The Debate Erupts CONTINUED National banks counter by asserting that lending is a core banking activity for a national bank which only OCC has the right to regulate 68 The Preemption Debate CONTINUED ¾ Where does the Preemption Debate Go? It is likely that the OCC will win the preemption debate with the states because the litigation process favors OCC The only way the states can win is to convince Congress to step in 69 The Preemption Debate CONTINUED ¾ Where does the Preemption Debate Go? Preemption gives federally chartered banks advantages over state chartered banks because the federally chartered banks can ignore many state laws • Important for banks actively doing business in • • multiple states Easier for big players like WAMU to enter new states — only one national set of consumer mortgage lending laws Less of an advantage for banks doing business in a single state 70 The Preemption Debate CONTINUED ¾ Where does the Preemption Debate Go? NY Attorney General Spitzer has brought a test case of OCC preemption powers against a subsidiary of a national bank • Facts are egregious • Lender collected 30 years of payments on a 25 • • year loan but when consumer objected, lender started foreclosure proceedings Why can’t NY enforce its consumer protection laws against the lender? OCC’s primary goal is to protect banks not consumers 71 The Preemption Debate CONTINUED ¾ Where does the Preemption Debate Go? OCC generally has no comparable regulations for or track record of protecting consumers from overreaching by national banks Congressional action possible (but not likely) • House Financial Services Committee has expressed concern 72 The Preemption Debate ¾ CONTINUED Possible Solutions Federal: • Congressional cut back on OCC and OTS preemption by requiring it to approve preemption of state consumer laws State: • States can repeal state laws preempted by OCC • or OTS States can enact “super parity” legislation that provides either automatic or regulatory override of state laws that do not apply to federally chartered institutions 73 Massachusetts Legislation — 2003 ¾ No major developments Nuciforo Banking Recodification Bill (Senate 2045) pending • Rework G.L. c.167E • Loan Policy largely replaces loan powers Quinn Bill not adopted 74 Proposed Quinn Bill (H2732, 2003) ¾ Would limit prepayment fees in the first 24 months of a mortgage loan and prohibit them after that time ¾ Would require disclosures relating to prepayment fees ¾ Would limit points and loan fees to 5% of the principal amount of a mortgage loan 75 Proposed Quinn Bill (H2732, 2003) CONTINUED ¾ Would prohibit loans made without a determination of the borrower’s ability to repay the loan if the borrower’s income is less than or equal to 120% of the median family income in the relevant metropolitan statistical area Borrowers would be presumed to have ability to repay loan if the monthly payments would be less than 50% of the borrower’s monthly gross income 76 Proposed Quinn Bill (H2732, 2003) CONTINUED ¾ Would prohibit financing credit life or credit disability insurance premiums with the proceeds of a mortgage loan ¾ Would prohibit default rates of interest on home mortgage loans 77
