Senator Chris Dodd (D-Connecticut) and Congressman Barney Frank (D-Massachusetts) introduced the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). It is made up of 16 titles, 2,319 pages, and almost 390,000 words. The Mortgage Reform and Anti-Predatory Lending Act under Title XIV of the Dodd-Frank Act begins on page 773 and ends on page 850. Within those 73 pages Title XIV places several curbs on loan officers for the purpose of protecting consumers and ensuring financial stability. There are eight subtitles with affirmations of existing law, amendments to existing legislation that result in significant lender curbs, enhancements to consumer protections, exemptions, and Congressional blame shifting.
Subtitle A - Residential Mortgage Loan Origination Standards Subtitle A affirms the Housing and Economic Recovery Act of 2008, which implemented the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). Loan officer compliance is monitored by the Nationwide Mortgage Licensing System and Registry (NMLS). The underlying purpose is to ensure that loan officers working within federally regulated depository institutions and their subsidiaries are registered, licensed, and qualified through ongoing training.
Subtitle A amends the Truth in Lending Act (TILA) by barring loan officers from discouraging borrowers to competitively shop and compare mortgage products, interest rates, and loan fees by contacting and also applying with other lenders. Loan officers, who violate the steering for profit ban, can face up to three times the ill-gotten compensation. This is significant, because when a borrower applies with three lenders, there is a one in third chance of originating a loan. The net impact of this will be that loan officers will be forced to become more competitive in their service and knowledge that they provide customers.
Subtitle A amends TILA by barring lenders from steering borrowers into mortgages that net loan officers higher fees. Originators, who violate this prohibition, will face repayment penalties of up to three times the total compensation. Loan officer fees are now capped at 3 percent, down from 4.5 percent that was permitted under the Home Ownership and Equity Preservation Act (HOEPA).
Subtitle B - Minimum Standards For Mortgages Subtitle B amends TILA. Under this subtitle, mortgage lenders are now barred from requiring their borrowers to sign an arbitration agreement as a condition of applying for and obtaining a mortgage to finance a home purchase or refinance an existing mortgage. This means that customers will be entitled to judicial redress and due process. Complaints will be heard in the discovery process in a conference room, and if not settled out of court, the complaints will be heard in a public courtroom.
Subtitle B also requires that lenders ensure that their borrowers have a reasonable ability to repay their debt. This means that loan officers will need to verify their borrowers' incomes and assets and ensure that they can support the new monthly debt obligations. In other words, the loan officer's role will not be to get the borrower qualified, but rather to make sure the borrower can repay the obligation. Regarding seasonal income, creditors "may" consider this income. The law does not say "shall". The net impact of this will be that the low prima facia standard established under the HOEPA will be bumped up to a higher level that approaches due diligence though this provision does not amend HOEPA. Lenders must produce a net tangible benefit for their borrowers.
While the new law is silent on what specifically constitutes a net tangible benefit to the borrower, the Federal Reserve will implement regulations over time that provide more clarification. Loan officers must qualify borrowers applying for "non standard" loan like an interest only mortgage or an Option ARM based on a fully amortizing schedule. Moreover, loan officers must calculate and take into account when making a lending decision the increased loan balance due to negative amortization for their Option ARM borrowers. Moreover, loan officers must qualify adjustable rate mortgage (ARM) borrowers based on the fully indexed rate, which is the index plus the margin at the time of origination.
Subtitle B amends TILA further by enabling borrowers to defend themselves against foreclosure actions. This amendment requires lenders to disclose to borrowers that they have a right to sue a lender attempting to foreclose. There is a no-time-limit provision, which permits borrowers, who have lost a home due to foreclosure, to offset their loss by not being liable for a deficit judgement. Moreover, another TILA amendment validates the anti-deficiency judgment statues across the different states designed to protect consumers. There is a new required disclosure to borrowers that they could lose these protections through a refinance.
Also under Subtitle B, loan officers are prohibited from offering a borrower a mortgage that has a prepayment penalty if an alternative mortgage without a prepayment penalty is also available. Lenders, in other words, are required to place both mortgages before the customer for the customer to decide what is better for them.
Subtitle B states that mortgage lenders are also barred from requiring borrowers to directly or indirectly through a third party finance various insurance plans through single premiums at closing. This provision protects consumers from higher closing costs. The prohibition covers life insurance, disability insurance, unemployment insurance, loss of income insurance, accident insurance, health insurance, and mortgage pay off insurance in the event of death.
Subtitle B also requires lenders to provide existing ARM borrowers six months advance notice of an interest rate adjustment, information about the index and formula, an explanation of the how the new interest rate and monthly payments were calculated, and a list of alternatives that include refinancing, renegotiation, forbearance, and a pre-foreclosure sale. Because of the widespread trouble many ARM borrowers experienced and the impact on financial stability, the advance notices must also include the the complete contact information for HUD-approved counseling agencies and the borrower's state housing agency. Lawmakers exempted reverse mortgages under Subtitle B. This is significant, because the reverse mortgage is a non-standardized product. Most of the reverse mortgages offered to consumers are not government loans.
Subtitle C - High Cost Mortgages This subsection amends TILA not HOEPA, which was the one law that established curbs on costs and rates. Loan officers are now limited in the interest rate reductions that they can offer borrowers. Interest rates can only be bought down based on the use of 2 percent in fees to secure a true discounted rate. This rate reduction limit tied to cost constrains a lender's ability to offer the lowest available interest rate on a product in the market at a given time. The intention of this provision is consumer protection by limiting costs. Also under Subtitle C is another TILA amendment, loan officers are no longer permitted to tell their borrowers to not make a scheduled mortgage payment if they are refinancing them into a high-cost mortgage. To ensure that subprime borrowers are not taken advantage of, loan officers are barred from originating a high-cost mortgage unless those borrowers have secured HUD-approved counseling.
Subtitle D - Expand and Preserve Home Ownership Through Counseling Act Subtitle D establishes the Office of Housing Counseling within the U.S. Department of Housing and Urban Development (HUD). HUD-approved counseling will be made available to borrowers in order to educate consumers about procedures, financial planning and budgeting, mortgage products, and high-cost mortgages. HUD will authorize software for consumer use in mortgage finance decision making. HUD will also provide default and foreclosure data to the public. Public access to non proprietary default and foreclosure data will have the net benefit of aiding in the clearance of real estate owned and foreclosed properties from the real estate market.
Subtitle E - Mortgage Servicing Subtitle E amends TILA and requires servicers to establish escrow accounts for real estate taxes, private mortgage insurance, and homeowners insurance in connection with first mortgages. Servicers are required to pay customers the interest accrued on these escrow accounts. Servicers shall maintain the escrow account for at least 5 years. Borrowers can waive the escrow requirement if they have sufficient equity in the property or do not have to pay private mortgage insurance. Servicers are required to provide borrowers with a prominent disclosure of the consequences for failure to pay their real estate taxes and homeowners insurance premiums.
Subtitle E amends the Real Estate Settlement Procedures Act (RESPA) by establishing tighter limits on loan servicers in connection forced placed in insurance. These are homeowners insurance policies that lenders require when borrowers permit an existing policy to lapse. The penalties against loan servicers violating this amendment have doubled. Subtitle E amends TILA by requiring servicers to post payments upon receipt unless a delay would not adversely impact the borrower. Moreover, loan servicers must provide a loan payoff within seven business days when requested. Subtitle E amends RESPA to require servicers of federally related mortgages to provide their customers with the complete contact information of the owner of the mortgage within 10 business days of a written request.
Subtitle F - Appraisal Activities Subtitle F amends TILA by obligating borrowers to only pay for the first ordered appraisal. Lenders requiring additional appraisals must pay for those additional appraisals. In other words, the risk of lending and the required due diligence falls on the lender, not a marketplace participant the purchaser. Moreover, lenders must provide a copy of every appraisal done in connection with a high-cost mortgage three days before closing. Appraisers will be protected by law to ensure appraisal independence. Loan officers are expressly forbidden to "coerce, extort, collude, instruct, induce, bribe, or intimidate" an appraiser in connection with a property value or payment for the appraiser's services. Lenders, however, will be permitted and expected to ask appraisers to: Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal; Provide further detail, substantiation, or explanation for the appraiser's value conclusion; and Correct errors in the appraisal report. The appraisal independence stipulation under Subtitle F is a major issue, and much attention is devoted to studying, monitoring, and enforcing the law. The title addresses the need to study the impact of the Home Valuation Code of Conduct (HVCC) in the selection of appraisers, the impact on cost and quality, the impact on mortgage brokers, and the impact on consumers. Of interest to lenders is that Subtitle F establishes an appraisal complaint hotline to ensure appraisal independence. Lenders will be required to deliver at no cost a copy of each appraisal in connection with a higher-risk mortgage within three days of closing pursuant to an amendment of the TILA and a copy of the appraisal on all mortgages pursuant to an amendment of the Equal Credit Opportunity Act (ECOA). An ECOA amendment requires lenders to provide their borrowers with a copy of each appraisal three days before closing. Lenders that willfully refuse to comply with this amendment may be subject to a $2,000 fine.
Subtitle G - Mortgage Resolution and Modification Subtitle G addresses Mortgage Resolution and Modification and affirms the Home Affordable Modification Program (HAMP) of the Making Home Affordable initiative of the U.S. Department of the Treasury (Treasury) established through the Emergency Economic Stabilization Act of 2008 intended to help between 7 and 9 million homeowners. Subtitle G reiterates that the Treasury is to post both guidelines and a net present value calculator on the Internet for consumer use. The modification guidelines and net present value (NPV) calculation are used as the basis for determining the eligibility of an applicant's loan modification inquiry. The mortgage loan limits for owner occupied properties are: 1 Unit@$729,750 2 Units@$934,200 3 Units@$1,129,250 4 Units@$1,403,400 The Treasury's standing offer on this voluntary program with loan servicers acting on behalf of investors is a dollar-for-dollar match when the front end debt to income ratio is reduced from 38 percent to 31 percent per mortgage. In exchange for that, the Treasury will pay $1,500 to lenders and investors and $500 to servicers for negotiating the trial loan modification while the borrower was less than 30 days late. The U.S. Treasury pays servicers $1,000 per modification and $1,000 per year for up to three years provided that borrowers stay in the trial loan modification. The U.S. Treasury will also apply up to $1,000 per year for up to five years towards the borrower's principal balance if they are current on their monthly trial loan modification. The Treasury's trial loan modification program is authorized through December 31, 2012. The trial HAMP loans may result in a permanent HAMP loan modification or a lender's in-house modification.
Subtitle H - Miscellaneous Provisions Subtitle H is an opportunity for Congress to lay the blame for the failure of Fannie Mae and Freddie Mac on HUD. Subtitle H notes that in 1995, HUD authorized Fannie Mae and Freddie Mac to purchase subprime loans made to low income borrowers. In 1996, HUD then mandated that 42 percent of Fannie Mae and Freddie Mac's mortgages be made available to borrowers with incomes below the median income levels for the nation's metropolitan statistical areas.
Affordability products made this possible. In 2006, HUD increased the target imposed on the agencies to 56 percent. As a result of these policies, Fannie Mae and Freddie Mac's subprime loan securities increased from 9 percent in 2001 to 40 percent by 2006. The risk in these agencies further grew between 2005 and 2007 as they purchased approximately $1 trillion in subprime and Alt-A mortgages. The conservatorship of Fannie Mae and Freddie Mac exposes taxpayers to $5.3 trillion of risk. As of June 2010, Fannie Mae and Freddie Mac owned 13.3 percent of the nation's outstanding mortgages.
In addition, these agencies issued 31 percent of the nation's recent mortgage securities, which were either held or purchased by the Federal Reserve. Structural reforms imposed on Fannie Mae and Freddie Mac will be forthcoming. Concluding Thoughts There is no such thing as a perfect law. Opposing interests intersect, compromises are made, and the end result almost always never pleases everybody. Lenders violating any provision of the Dodd-Frank Act will not be criminally liable. Violating any of the new provisions are just civil offenses. The Dodd-Frank Act is nothing like the New Deal that protected depositors, borrowers, and investors between 1933 and 2000. Even with the short comings, the mortgage reform provisions within Title XIV of the Dodd-Frank Act are good first steps towards ensuring higher standards within the lending industry, promoting financial stability, and aiding in consumer protection.
