Mortgage Compliance in Today’s Turbulent
Regulatory Environment
Amy Avitable
Director of Regulatory Compliance, TCS BaNCS
Copyright © 2012 Tata Consultancy Services Limited
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Amy Avitable, JD, CPA
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-InChief 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.
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Pace of Regulatory Change
Major New Regulatory Requirements
250
200
200
150
100
50
4
10
2008
2009
20
26
2010
2011
12
0
2012
2013-2014
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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
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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
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New Rules: January 2013 Mortgage Reform
1. Homeownership Counseling Disclosure
2. Homeownership Counseling for Negative Am
Loans
3. Ability to Repay and Qualified Mortgage
Standards
4. Disclosure and Delivery Requirements for Copies
of Appraisals and Valuations
5. Appraisals for Higher-Priced Mortgage Loans
6. Escrow Requirements
7. High-Cost Mortgage Requirements
8. Mortgage Servicing
9. Loan Originator Compensation
Application
Loan
Processing
Closing
Post-Closing
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Ability to Repay and
Qualified Mortgage Standards
Effective January 10, 2014
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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
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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 consummation
that the consumer will have a
reasonable ability to repay the loan
according to its terms
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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
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Overview of Rule
Does the Ability to Repay Rule Apply?
If an exception is met, No.
If an exception is not met, Yes.
Continue to next step.
Is the Loan a Qualified Mortgage?
If no, apply the Ability to Repay rule
without a presumption of compliance.
If yes, continue to next step.
Is the Loan a Higher Priced Covered Transaction?
If no, you are deemed compliant and
such safe harbor cannot be rebutted.
If yes, you receive a presumption of
compliance but it can be rebutted.
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Ability to Repay
 Must consider eight factors in determining if consumer has
“reasonable ability to repay”
1. Current or reasonably expected income or assets
2. If income relied on, current employment status
3. Monthly payment on the covered transaction
4. Monthly payment on simultaneous loan that the lender knows or
has reason to know will be made
5. Monthly payment for mortgage-related obligations
6. Current debt obligations, alimony and child support
7. Monthly debt to income ratio or residual income
8. Credit history
 Must also verify using reasonably reliable third party records
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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
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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
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What is a Qualified Mortgage?
Three possible scenarios:
1. Regular Qualified Mortgage
2. Qualified Mortgage during transition period
3. 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
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Regular Qualified Mortgage
 Six Required Components
1. Regular periodic payments that are substantially equal
2. Term no longer than 30 years
3. Total points and fees don’t exceed specified limit
4. Specially calculated monthly payments for mortgage-related
obligations are taken into account in underwriting
5. Income, assets, current debt obligations, alimony, and child
support are verified under Appendix Q of Regulation Z
6. At closing, total monthly debt / total month income does not
exceed 43%
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Qualified Mortgage In Transition Period

Four Required Components
1. Regular periodic payments that are
substantially equal
2. Term no longer than 30 years
3. Total points and fees don’t exceed
specified limit
4. Must be eligible for one of the following:
•
•
•
First 3
requirements
from QM
definition
PLUS one
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
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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
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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 firstlien 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
All Must
Be Met
• $2B in 2013
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Requirements for Balloon Loan
Regular, periodic, substantially equal payments
Loan term of 5-30 years
Fixed rate
Points and fees don’t exceed QM limit
DTI, residual income, and income asset and debt verification must
meet certain requirements
6. 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:
–
–
–
All must be met
1.
2.
3.
4.
5.
Consumer can make all scheduled payments + monthly mortgagerelated obligations
Ignoring balloon payment
Can be covered by consumer’s current or reasonably expected income
or assets (other than dwelling and underlying land)
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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
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High-Cost Mortgage Requirements
Effective January 10, 2014
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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!
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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
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Points and Fees Test
Will be a high cost mortgage if total points and fees exceed:
Loan amount
= $20,000 or
More
Loan amount
< $20,000
• 5% of total loan amount
• Lesser of:
• 8% of total loan amount or
• $1,000
*$20,000 and $1,000 will be adjusted annually
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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
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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
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Mortgage Servicing Under RESPA
Effective January 10, 2014
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Overview of RESPA Revisions
 New requirements for all mortgage servicers:
1. Refunding escrows after payoff
2. Escrowing for hazard insurance
3. Force placement of hazard insurance
4. Error resolution
5. Handling information requests
 New requirements for certain mortgage
servicers
1. General servicing policies and
procedures
2. Early intervention for delinquent
borrowers
3. Continuity of contact
4. Loss mitigation procedures
Not Applicable to
“Small Servicer”
• 5,000 or fewer
mortgage loans and
• Servicer or affiliate
was creditor
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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
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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.
2.
3.
Cancel force placed insurance purchased by servicer
Refund to borrower all force placed insurance premium charges
and related fees paid by borrower for any period of overlapping
insurance coverage
Remove from borrower’s account all force placed insurance
charges and related fees assessed for overlapping period
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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
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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!
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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!
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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!
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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!
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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
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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 number
2. Identity and contact info for insurance company or agent
2. Cancel force placed policy within 30 days
3. 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!
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Identify Your Areas of Risk






Regulation Z
RESPA
HMDA
Flood
Fair Lending
UDAAP
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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
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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)
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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
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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
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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”
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UDAAP in Lending
 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
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Make Policy Decisions
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Policy Considerations
 Product Offerings
– Are you going to make loans that are not Qualified Mortgages?
– Are you going to make Qualified Mortgages that are HigherPriced 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?
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Policy Considerations
 Pricing and Features
– Will you allow mortgages to be made that trigger the higherpriced 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?
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Implement New Requirements
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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
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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
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Questions?
Amy Avitable
amy.avitable@tcs.com
Copyright © 2012 Tata Consultancy Services Limited
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