Residential Mortgage Loan

Transcription

MAINE’S NEW
PREDATORY
LENDING LAW
1
L.D. 1869 – “An Act to Protect Maine
Homeowners from Predatory Lending”:
Impact on Maine’s Truth-in-Lending
Act
Lori A. Desjardins, Esq.
October 11, 2007
2
Who Is Covered by Maine TILA
(Title 9-A, Article 8)?
State SFO at Home in Maine:
YES
Federal SFO at Home in Maine:
NO
State SFO from Away:
YES
Federal SFO from Away:
NO
SL – NSFO from Anywhere:
YES
3
New Key Definitions
Residential Mortgage Loan [§8-103(1-A)(W)] – means an
extension of credit, including open-end, in which:
(1) The loan does not exceed the maximum original principal
obligation as set forth in and from time to time adjusted
according to the provisions of 12 United States Code,
Section 1454(a)(2) – i.e., is less than the Freddie Mac
maximum conventional loan amount (currently $417,000);
(2) The loan is considered a federally related mortgage loan
as set forth in 24 Code of Federal Regulations, Section
3500.2 – i.e., is a RESPA-covered loan;
(3) The loan is not a reverse mortgage transaction or a loan
made primarily for business, agricultural or commercial
purposes; and
(4) The loan is not a construction loan.
4
New Key Definitions (cont.)
Subprime Mortgage Loan [§8-103(1-A)(BB)] – means either:
(1) a nontraditional mortgage, as defined here, or
(2) a rate spread home loan, as defined here.
5
Nontraditional Mortgage Loan [§8-103(1-A)(T)] – has the same
meaning as those mortgages described in the "Interagency
Guidance on Nontraditional Mortgage Product Risks" issued
September 29, 2006 and published in 71 Federal Register, 58609
on October 4, 2006 and as updated from time to time -
– i.e., option ARMs and interest-only mortgages.
6
Rate Spread Home Loan [§8-103(1-A)(V)] – means:
(1) any loan for which the rate spread must be reported
under the Home Mortgage Disclosure Act of 1975,
Regulation C, 12 Code of Federal Regulations, Section
203.4(a)(12) – i.e., loans reportable as exceeding the “high”
rate trigger under HMDA; and
(2) any loan that meets the criteria of a high-rate, high-fee
mortgage.
7
High-Rate, High-Fee Mortgage [§§8-103(1-A)(Q)&(FF)] – means
a residential mortgage loan in which the terms of the loan meet or
exceed one or more of the following thresholds:
(1) A rate threshold where the APR equals or exceeds the
TILA Section 32 triggers (T-bill + 8% for first lien, 10% 2d),
including purchase money and open-end transactions; or
(2) A points and fees threshold as follows:
(a) For loans in which the total loan amount is $40,000
or more, the point at which the total points and fees
payable in connection with the residential mortgage
loan less any excluded points and fees exceed 5%
of the total loan amount; and
(b) For loans in which the total loan amount is less than
$40,000, the point at which the total points and fees
payable in connection with the residential mortgage
loan less any excluded points and fees exceed 6%
of the total loan amount.
8
Points and Fees [§8-103(1-A)(U)] – means:
(1) All items included as “finance charges” under the TILA,
other than periodic interest;
(2) All amounts that count as “points” under Section 32 of
TILA;
(3) All compensation paid directly or indirectly to a mortgage
broker from any source, even if a table-funded transaction;
(4) All financed credit insurance or debt cancellation, except
for premiums calculated and paid on a monthly basis or
through regularly scheduled periodic payments;
(5) Maximum possible prepayment fees and penalties; and
(6) Actual prepayment penalties incurred refinancing an
existing loan with same creditor or affiliate.
9
Points and Fees – means (cont.):
- Exclude Regulation Z, Section 226.4(d)(2) charges paid to
persons other than the creditor, such as taxes, filing fees,
recording fees and charges to public officials, fees for flood
certifications and determination, appraisal fees, fees for credit
reports, fees for surveys, title insurance premiums, etc.
- For open-end loans, add the total points and fees known at
or before closing, including the maximum prepayment
penalties that may be charged or collected, and the minimum
fees the borrower would be required to pay to draw down an
amount equal to the total credit line – i.e., maximum cashadvance fees.
10
Total Loan Amount [§8-103(1-A)(GG)] – means:
the principal of a loan minus those points and fees that are
included in the principal amount of the loan. For open-end
loans, the total loan amount must be calculated using the total
line of credit allowed under the residential mortgage loan at
closing.
11
New Maine TILA Restrictions
Residential Mortgage Loans [§8-206-D(1)] :
- Creditor may not recommend default.
- No “flipping” - defined as refinancing without “net tangible
benefit” to the borrower (to be defined by rulemaking of
OCCR/BofFI).
- Late charges must be capped at 5% & assessable after 10 days.
- No pyramiding.
12
(cont.)
Residential Mortgage Loans (cont.):
- No accelerating debt except in good faith due to borrower’s
failure to abide by material loan terms.
- No single-premium credit life/disability insurance or debt
cancellation (monthly expressly allowed).
- No extra fee for discharges beyond actual public discharge fee.
13
(cont.)
Residential Mortgage Loans (cont.):
- Free annual payoff balances.
- New borrower right to cure all defaults after initiation of
foreclosure –
- creditor can recover reasonable costs incurred before
cure
- reinstates borrower to same position as if no default
- is exercisable once every 12 months.
14
(cont.)
Subprime Mortgage Loans [§8-206-D(1)(G)] :
(are a subset of Residential Mortgage Loans)
- Cannot extend unless reasonable creditor believes that
borrower can, at time of closing, make the scheduled payments.
- Determination of ability to repay must include review of:
- Income, both stated and any contradictory facts
- Credit history
- DTI (including PITI)
- Employment
- Other resources except home equity
15
(cont.)
Subprime Mortgage Loans (cont.):
- Determination of ability to repay must utilize:
- Fully amortizing payment at fully indexed rate
- VOIs
- Full negative amortization in payment calculation
16
(cont.)
High-Rate, High-Fee Mortgages [§8-206-C(1)]:
(also are a subset of residential mortgage loans)
- Cannot finance any points or fees
- No prepayment penalties
- No scheduled payment that is more than twice the average of
earlier scheduled payments (unless due to seasonal/irregular
income of borrower)
- No negative amortization
17
(cont.)
High-Rate, High-Fee Mortgages (cont.):
- No default interest rates
- No consolidation of more than 2 payments paid in advance from
loan proceeds
- Payments to home improvement contractors must be made
jointly with borrower or, at borrower’s election, by an escrow
agent under a written agreement
- Must obtain certification of borrower counseling
- Special borrower notice
18
Consequences of Violations
Violations of §§8-206(C) and (D) expose the violating party to
liability to the borrower for:
- actual damages, including consequential and incidental
damages (without proof of reliance);
- statutory damages – twice the finance charge plus loss of
future interest (an amount likely to dwarf loan principal)
- punitive damages when the violation was malicious or
reckless; AND
- costs, including reasonable attorney’s fees.
Injunctive, declaratory and other equitable relief is also available.
Furthermore, any person who knowingly violates, in pertinent
part, §8-206-C is guilty of a Class E crime.
19
Questions?
Lori A. Desjardins
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Tel: (207) 791-1276
Fax: (207) 791-1350
Email: ldesjardins@pierceatwood.com
20
The Legal Stuff
Because of its generality, the information provided in
this summary may not be applicable to all situations
and should not be acted upon without specific advice
from legal counsel. If you have any questions
concerning this summary or how it applies to any
particular entity or circumstance, please contact Lori
A. Desjardins by phone at (207) 791-1276, or by email
at ldesjardins@pierceatwood.com.
© 2007 Pierce Atwood LLP
21
The Rest
of
L.D.
1869:
Other
Mortgage
The Rest of L.D. 1869: Other
Lending Restrictions
Mortgage Lending
Restrictions
Richard
P. Hackett,
Richard
P. Hackett,
Esq. Esq.
October
11, 2007
October
11, 2007
22
Correcting Early TILA Disclosure Regarding Prepayment
Penalties
New 8-206(3): If the early TILA (3 days) reads “no prepayment
penalty” and becomes inaccurate, creditor must notify consumer
“as soon as practicable” of the change
• Applies to: all state chartered banks and all mortgage
companies
23
RESPA Compliance Under State Law, New Sections 9-311
and 10-307
Certain creditors must comply with RESPA as state law and can
be subjected to state regulatory enforcement for violations
• Applies to: mortgage companies and loan brokers
24
Prohibition on Encouraging False Applications
New Sections 9-312 and 10-308 prohibit a lender or loan officer
from encouraging or assisting a consumer in making false
statements in an application
• Applies to: mortgage companies and mortgage brokers
25
Protection of Rate Locks
New Sections 9-313 and 10-309 require that, if a creditor charges
for a rate lock, it must take the steps necessary to guaranty the
rate, set a lock period during which the loan reasonably can be
expected to close, and use good faith efforts to close in that
period.
• Applies to: mortgage companies and mortgage brokers
26
No Prepayment Penalty of Riders
New Section 9-314 prohibits the use of the rider to add a
prepayment penalty if the underlying note or mortgage states
there is no prepayment penalty.
• Applies to: mortgage companies
27
Good Faith and Fair Dealing by Loan Brokers
New Section 10-303-A requires loan brokers to use good faith
and fair dealing, and to make suitability decisions about all
products that they offer to their consumers.
• Applies to: loan brokers
28
Trigger Leads
Under New Section 1330 of the Maine Fair Credit Reporting Act,
if you purchase a trigger lead, it is an unfair and deceptive
practice under Maine law to:
• fail to state up front that you are not the person who received
the consumer’s loan application when you contact the consumer
• fail to follow firm offer rules under federal FCRA
• ignore prescreen opt outs
• offer teaser rates
• Applies to: everybody
29
Questions?
Richard P. Hackett
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Tel: (207) 791-1280
Fax: (207) 791-1350
Email: rhackett@pierceatwood.com
30
The Legal Stuff
Because of its generality, the information provided in
this summary may not be applicable to all situations
and should not be acted upon without specific advice
from legal counsel. If you have any questions
concerning this summary or how it applies to any
particular entity or circumstance, please contact
Richard P. Hackett by phone at (207) 791-1280, or by
email at rhackett@pierceatwood.com.
31
FEDERAL
MORTGAGE
LAW
DEVELOPMENTS
32
Interagency Guidance
on Nontraditional Mortgage
Product Risks
(NTM Guidance)
Ryan S. Stinneford, Esq.
Matthew McIntyre, Esq.
October 11, 2007
33
At a Glance:
•
Issued by: OCC, FRB, FDIC, OTS and NCUA
•
Scope:
-
Residential Mortgage Loan Products that allow borrowers
to defer principal and/or interest
•
Effective Date: October 4, 2006
34
Topics Covered by NTM Guidance
•
Scope:
•
Loan Terms and Underwriting (“U/W”) Standards
-
Qualifying Applicants
Collateral-Dependent Loans
Risk-Layering
Reduced Documentation
Simultaneous Second-Liens
Introductory Interest Rates
Lending to Subprime Borrowers
Non-Owner Occupied Investor Loans
35
(cont.)
•
Portfolio and Risk Management Practices
-
Policies
Concentrations
Controls
Third-Party Originations
Secondary Market Activity
Management Information and Reporting
Stress Testing
Capital and Allowance for Loan and Loan Losses
36
(cont.)
•
Consumer Protection Issues
-
•
Concerns
Recommended Practices
Consumer Communications
-
Promotional Materials and Product Descriptions
•
•
•
•
-
Payment Shock
Negative Amortization
Prepayment Penalties
Pricing Premiums
Monthly Statements on Payment Option ARMs
Practices to Avoid
Control Systems
37
Scope
•
Applies to insured financial institutions and their affiliates.
•
Conference of State Bank Supervisors and American
Association of Residential Mortgage Regulators have
promulgated a modified version of NTM Guidance which
applies to state licensed residential mortgage brokers and
lenders. Currently, state regulators in approximately 38 states
have adopted the CSBS/AARMR Guidance.
38
Scope (cont.)
NTM guidance applies to all residential mortgage loan products that
allow borrowers to defer repayment of principal or interest.
Includes:
•
IO Products
•
Negative Amortization Mortgages (not HELOCs)
NB: HELOCs are already covered by May 2005 Interagency Credit
Risk Management Guidance for H.E. Lending. However, the May
2005 Guidance has been amended to include the consumer
disclosure recommendations made in the NTM Guidance.
39
Scope (cont.)
Guidance does not apply to:
•
Fully amortizing residential loan products
•
Reverse mortgages
•
HELOCs (other than simultaneous second-lien loans)
40
Key Definitions
IO Loan = Interest Only Mortgage Loan
•
A nontraditional mortgage on which, for a specified number of
years, the borrower is required to pay only the interest due
during which time the interest rate may fluctuate or be fixed.
After the interest-only period, the rate may be fixed or fluctuate
based on the prescribed index and payments include both
principal and interest.
41
Definitions (cont.)
Payment Option ARM
•
A nontraditional mortgage that allows the borrower to choose
from a number of different payment options.
Reduced Documentation
•
A loan feature that is commonly referred to as “low doc/no
doc,” or “no income/no asset,” “stated income,” or “stated
assets” (i.e., normal documentation to substantiate income
(e.g., W-2, payroll stub) is not required).
42
Definitions (cont.)
Simultaneous Second-Lien Loan
•
A lending arrangement where either a closed-end second-lien
or HELOC is originated simultaneously with the first lien
mortgage loan, typically in lieu of a higher downpayment.
43
The Regulator’s Concerns:
•
Less stringent underwriting standards
•
Broader marketing of NTM loans
•
Equals increased exposure for financial institutions
In addition, Regulators see growth of NTM loans being fueled by the
combination of less stringent U/W and other risky features such as
low-documentation and simultaneous record-lien loans.
44
Management Obligations to Mitigate Increased Risk
I.
Loan Terms and U/W Standards: Should be consistent with
prudent lending practices;
II.
Risk Management Practices: Recognize NTMs are untested in
a stressed environment; and
III. Consumer Protection: Consumers should have sufficient
information to clearly understand loan terms and risks prior to
making a product choice.
45
I.
Loan Terms and Underwriting
“Central to prudent lending is the internal discipline to maintain
sound loan terms and U/W standards despite competitive
pressures.”
•
Qualify borrowers
•
Avoid collateral-dependent loans
•
Mitigate risk-layering, low-documentation loans and
simultaneous seconds
•
Minimize payment shock at ending of teaser rate period
•
Subprime borrowers should be handled with care
•
Properly Qualify Non-Owner-Occupied Investor Applicants
46
(cont.)
Qualifying Borrowers:
Repayment Capacity Analysis
(i)
Determine applicant’s ability to repay the debt
•
•
•
(ii)
by the final maturity date;
at the fully-indexed rate;
assuming a fully-amortizing repayment schedule;
and
Loan amount should include the amount of negative
amortization, if any, that may accrue
•
But should not consider other future events (like
future income).
47
(cont.)
Qualifying Borrowers
•
Avoid over-reliance on credit scores as a substitute for
income verification.
Collateral-Dependent Loans
•
Avoid use of loan terms that may heighten the need for a
borrower to rely on the sale or refinancing of the property
once amortization begins.
•
Considered unsafe and unsound if repayment contingent on
sale of property only.
48
(cont.)
Risk-Layered NTMs
•
Combining NTM features (e.g., IO loans) with a reduced
documentation or simultaneous second lien loan.
If Risk-Layering is used, applicant should have one of the following
(preferably more):
-
Higher credit score
-
Lots of cash
-
Lower LTV ratio
-
Mortgage insurance
-
Lower DTI ratio
-
Other credit enhancement
NB: A higher interest rate is not a substitute for sound U/W.
49
(cont.)
Reduced Documentation Loans
•
Use with caution because assumptions are substituted for
analysis.
•
Clear policy to govern the use of reduced documentation.
(Higher credit risks should require more thorough
valuation/verification).
•
Verify income with W-2 Statement, pay stubs or tax returns.
50
(cont.)
Simultaneous Second-Lien Loans
•
Minimal or no equity can mean that the borrower has little or no
incentive to bring loan current/avoid foreclosure.
•
Avoid a payment structure that allows for negative amortization
unless significant risk mitigation factors exist.
51
(cont.)
Introductory Teaser Rates/Payment Shock
•
Wider spread between teaser and fully indexed rates equates
to payment shock, negative amortization and earlier than
scheduled recasting of payments.
•
Financial institution should minimize the likelihood of these
concerns.
•
Establish controls at both bank and borrower levels.
52
(cont.)
Lending to Subprime Borrower
•
Targeted marketing effort - See Interagency Guidance of
Subprime Lending, March 1, 1999 and Expanded Guidance for
Subprime Lending Program, January 31, 2001. Credit Unions
should refer to 04-CU-12 - Specialized Lending Activities.
•
Risk-layering in subprime arena may significantly increase
risks to lender and borrower.
53
(cont.)
Non-Owner Occupied Investor Loans
•
Borrowers should qualify based on ability to repay over the life
of the loan.
•
Have sufficient cash reserves to cover periods of vacancy and
variability of debt service.
54
II. Portfolio and Risk
Management Practices Re: NTM
Products
•
Develop written policies (i.e., policy exceptions, limits on risklayering, appropriate mitigation factors, volume limits by loan
type).
•
Design early warning or concentration reports, measures and
controls (i.e., track concentrations by loan types, third-party
originations, geographic areas, property occupancy, “high”
LTV, negative amortization, lower credit scores, incentive
programs).
•
Establish appropriate ALLL levels considering limited
performance history with NTMs.
•
Maintain appropriate capital levels to reflect stressed economic
conditions on collectibility.
55
Portfolio and Risk Management
Practices (cont.)
Policies:
•
In writing
•
Should set acceptable risk levels (e.g., risk-layering
mitigation tools)
•
Should set growth & volume limits by loan type
56
Practices (cont.)
Monitoring:
•
Track concentrations by portfolio segments
-
Loan type
-
Third-Party Originations
-
Geography
-
Property Occupancy
57
Practices (cont.)
•
Track concentrations by portfolio characteristics:
•
High LTV, DTI ratios
•
Potential for negative amortization
•
Credit score below established threshold
•
Risk-layered loans
•
Track incentive programs that could produce higher
concentrations
58
Practices (cont.)
Controls: QC, Compliance, Audit Procedures
Examples:
•
Monitor U/W exceptions
•
Confirm origination channels follow policy
•
Timely correct deficiencies
•
Training
59
Practices (cont.)
Oversight of Third-Parties
•
Perform appropriate due diligence prior to entering thirdparty relationship.
•
Correct issues via more thorough application reviews;
terminate the relationship as necessary.
60
Practices (cont.)
Secondary Markets
•
If heavily involved, formal strategies for managing risks are
likely necessary
•
Prepare for reduced demand/heavy inventory
•
Financial institution may need to repurchase defaulted
mortgages to protect its reputation and access to markets
NB: Under risk-based capital rules, financial institutions must
maintain risk-based capital against the entire pool or securitization if
it decides to buy-back loans independently.
61
Practices (cont.)
Goal: Find deterioration as soon as possible
Information should be available:
•
By loan type
•
By risk-layering feature (e.g., payment option ARM with
low-documentation feature)
•
By U/W characteristic (e.g., LTV, DTI, credit score)
•
By borrower performance (e.g., interest accruals, negative
amortization, delinquencies)
62
Practices (cont.)
•
Track Volume/Performance Against Expectations:
-
Analyze differences and adjust as necessary to
maintain appropriate risk level
Stress Testing: Perform sensitivity analysis on key performance
drivers on portfolio:
-
Interest rates
-
Employment levels
-
Economic growth
-
Other factors beyond institution’s immediate
control
63
III.
Consumer Protection Issues
Regulator’s Concerns:
-
Significant risk of payment shock
-
Negative amortization
-
Not fully understood
-
Marketing emphasizes only potential benefits
(unbalanced)
64
Consumer Protection Issues (cont.)
Recommended Practices
•
Communications with Consumers:
-
Promotional materials and other product descriptions
(e.g., ads and oral statements)
-
Monthly Statements
•
Practices to Avoid
•
Control Systems
65
Recommended Practices (cont.)
Communications with Consumers
•
Clear and balanced information about benefits and risks
•
Timing: At inquiry; When shopping for loans and/or
deciding which monthly payment amount to make; With
marketing materials - Not just at application or
consummation
•
Promotional Materials: Inform consumers about costs,
terms, features and risks of NTMs and discuss the
following:
66
Communications with Consumers (cont.)
•
Payment shock
•
Negative amortization
•
Prepayment penalties
•
Low-doc fees
67
Monthly Statements
•
Disclosures should enable borrower to make informed
decisions about amount of payments, including the impact of a
particular choice on loan balances.
68
Practices to Avoid:
•
Obscuring risks
•
Promoting payment patterns that are structurally unlikely
to occur
•
Providing unwarranted assurances about interest rate
changes
•
Making statements regarding cash-savings, buying
power
•
Misleading claims
•
Compensation systems that improperly encourage
lending personnel to direct consumers to particular
products when other products are suitable
69
Control System for Compliance and Consumer Information
Concerns
•
Train lending personnel so they can convey information in a
timely, accurate and balanced manner
•
Monitor lending personnel actions for conformity with policies
•
Review complaints for trends and other risks
•
Seek appropriate legal review
70
Control Systems (cont.)
Mitigate Third-Party Origination/Servicing Risks
•
Appropriate Due Diligence
•
Avoid compensation schemes that create steering issue
•
Set requirements for agreements with third-parties
•
Monitor agreements for compliance
•
Implement appropriate corrective action for deficiencies
71
Questions?
Ryan Stinneford
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Matthew McIntyre
Pierce Atwood, LLP
225 Franklin Street, Ste. 1740
Boston, MA 02110
Tel: (207) 791-1154
Fax: (207) 791-1350
rstinneford@pierceatwood.com
Tel: (857) 277-6904
Fax: (617) 426-2321
mmcintyre@pierceatwood.com
72
The Legal Stuff
Because of its generality, the information provided in this
summary may not be applicable to all situations and should
not be acted upon without specific advice from legal counsel.
If you have any questions concerning this summary or how it
applies to any particular entity or circumstance, please contact
Ryan Stinneford by phone at (207) 791-1154, or by email at
rstinneford@pierceatwood.com or Matt McIntyre by phone at
(857) 277-6904, or by email at mmcintyre@pierceatwood.com.
73
Illustrations of Consumer Information
for Nontraditional Mortgage Products
Effective: June 8, 2007
October 11, 2007
74
Illustrations are intended to assist institutions in
implementing the consumer protection portion of the
Interagency Guidance on Nontraditional Mortgage
Product Risks (Interagency NTM Guidance).
or
We’re from the Government and we’re here to help!
75
Not model forms
-
Financial institutions do not need to use them.
-
Just a suggestion . . . but the forms are available from the
agencies from their respective websites.
-
However, not necessarily easy to find.
76
Regulatory Goals of the Disclosure
•
Clear and balanced information
•
Provided prior to making a mortgage product choice
Timing/Examples
•
With promotional materials on NTMs
•
During face-to-face meetings with consumers when they
are shopping for a mortgage
•
With monthly statements on payment options ARMs
77
Three illustrations
(1) A narrative explanation of NTM products;
(2) A chart comparing IO loans and payment option ARMs to
fixed rate and traditional adjustable rate loans; and
(3) A table that could be used with any monthly statement for a
payment option ARM.
78
79
80
81
Questions?
Ryan Stinneford
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Matthew McIntyre
Pierce Atwood, LLP
Boston, MA 02110
Tel: (207) 791-1154
Fax: (207) 791-1350
Tel: (857) 277-6904
Fax: (617) 426-2321
82
The Legal Stuff
summary may not be applicable to all situations and should not
be acted upon without specific advice from legal counsel. If you
have any questions concerning this summary or how it applies
to any particular entity or circumstance, please contact Ryan
Stinneford by phone at (207) 791-1154, or by email at
83
Statement on Subprime Mortgage Lending
Statement on Subprime
Effective: July 10, 2007
Mortgage Lending
Effective: July 10, 2007
Ryan
Stinneford,
Matthew
R.S.
McIntyre,
Esq.Esq.
Matthew
R. McIntyre,
Esq.
October 11,
2007
October 11, 2007
At a Glance . . . Subprime Mortgage
Lending Statement
•
Issued by: OCC, FRB, FDIC, OTS and NCUA
•
Applicable to: All banks and their subsidiaries, BHCs and their
non-bank subsidiaries, savings associations and their
subsidiaries, savings and loan holding companies and their
subsidiaries, and credit unions
•
Scope: Risk management practices and consumer protection
principles relative to subprime ARM applicants/borrowers
•
Effective Date: July 10, 2007
85
In 2001 Subprime was Good
•
“Expanded Credit Access”
•
Offered “attractive returns” for financial institutions
In 2007, Subprime “presents heightened risks to lenders and
borrowers.”
86
Why Promulgate the Subprime
Statement Now?
Answer:
Agencies are concerned:
-
Subprime borrower(s) cannot repay debts
-
Subprime borrower(s) do not understand risks and
consequences of the ARM loans
-
Default and loss of home will result
87
Topics Covered by the Statement
•
Risk Management Practices
•
Predatory Lending Consideration
•
Qualification of Applicants
•
Workout Arrangements
•
Consumer Protection Principles
•
Control Systems
•
Supervisory Review
88
Scope of the Statement
•
Certain types of ARMs offered to “subprime” applicants/
borrowers.
ARMs that have one or more of the following characteristics:
•
Low initial payments based on fixed introductory rate
•
Very high or no limit on payment or interest rate increase
•
Low or no documentation of applicant’s income
•
Product features likely to result in frequent refinancing
•
Substantial prepayment penalties or prepayment
penalties beyond the initial rate period
Note: While focus is on certain types of ARM products offered to
certain types of applicants (i.e., “subprime” applicants), the
guidelines are relevant to ARMs offered to non-subprime
applicants.
89
Scope of the Statement (cont.)
•
“Subprime” Applicants/Borrowers
Is the term “Subprime” applicants/borrowers defined? Not
exactly.
Instead:
Refer to the “Subprime Borrower Characteristics from
2001 Expanded Guidance for Subprime Lending
Programs” or “LCU 04-CU-13-Specialized Lending
Activities.”
90
Scope of the Statement (cont.)
•
“Subprime” defined in the Expanded Guidance
•
2 + 30-day delinquencies in last 12 months
•
1 + 60-day delinquencies in last 24 months
•
Judgment, foreclosure, repossession or charged off in last 24
months
•
Relatively high default probability (i.e., based on FICO)
•
DTI > 50%
91
Protections for Financial Institutions
First, a subprime lender ≠ a predatory lender.
Predatory lending involves at least one (1) of the following
elements:
•
Making a loan based primarily on foreclosure value of the
applicant’s collateral as opposed to ability to repay;
•
Loan flipping (i.e., repeatedly refinancing a loan to charge
high points and fees each time); or
•
Deceiving the applicant to conceal true nature of the
mortgage loan.
92
(cont.)
Second, management should implement strategies to reduce risk of
nonpayment
Risk Management Practices
•
Solid applicant qualification standards
•
Avoid reduced documentation/stated income loans
•
Prudently use workout arrangements
93
(cont.)
Risk Management Practices (cont.)
Qualification Standards include:
•
“A credible analysis of a borrower’s capacity to repay the
loan according to its terms”
Can the applicant repay the debt by maturity date?
•
Fully-indexed rate;
•
Fully amortizing repayment schedule; and
•
Use Debt-to-Income using PITI.
94
(cont.)
Qualification Standards (cont.)
•
DTI Ratio
•
“Particularly Important” if “Risk Layering”
•
Risk Layering: a feature of a subprime loan that may
significantly increase the risks to financial institution and
applicant (e.g., reduced documentation loans and
simultaneous second lien mortgages)
95
(cont.)
Qualification Standards (cont.)
•
If risk-layering is present, need documented mitigation
factors that “clearly minimize” the need to directly verify
repayment capacity (e.g., good payer, wants to refinance,
credit not deteriorated, or lots of cash, etc.)
•
Should verify and document applicant’s income (both
source and amount), assets and liabilities
96
(cont.)
Workout Arrangements:
•
Applies to: Borrowers in default and to those whose
default is reasonably foreseeable
•
Terms depend on borrower’s ability to repay. Example:
Convert loan to fixed rate loan
•
No regulatory criticism for pursuing a reasonable workout
97
Protection for Consumers
(Applicants)
Consumer Protection Principles:
•
Loan approvals based on applicant’s ability to repay
•
Timely disclosure material terms, costs and risks
•
Timely, clear and balanced communications about benefits
and risks of the products
•
Timely = at a time that will help the consumer select a
product
98
Protection for Consumers (cont.)
Consumer Protection Principles (cont.)
•
Information is NOT timely if it is provided just upon
submission of an application or at consummation of the
loan.
•
Information is NOT clear and balanced if it “steers”
consumers to these products to the exclusion of all other
products for which the consumer may qualify.
99
Consumer Protection Principles (cont.)
Communications should address:
•
Risk of payment shock
•
Prepayment penalties
•
Balloon payments
•
Cost of reduced documentation loans
•
Responsibilities for taxes and insurance
NB: Federal Credit Unions are prohibited from charging prepayment
penalties. 12 CFR § 701.21
100
Disclosure Content
-
Payment Shock: Potential payment increases, method of
calculating new payment, when it may be imposed
-
Prepayment Penalties: Its existence, how it is calculated,
when it may be imposed
-
Balloon Payment: Its existence
-
Cost of Reduced Document Loans: Fees for such a
program or a “stated-income program”
-
Taxes & Insurance: State amounts are due in addition to
loan payments and if not escrowed, these amounts can
be substantial
101
Control Systems
-
Evaluate whether you “practice what you preach”
Important controls include:
•
Establishing criteria for hiring and training loan personnel
•
Establishing criteria regarding third-party relationships
•
Due Diligence
•
Incentive program should be consistent with solid U/W
102
Important controls include (cont.)
•
Monitor compliance with applicable law, third-party agreements
and internal policies
•
Corrective action plans
•
Review customer complaints for weaknesses and trends
103
Agency Supervisory Review
•
Will review risk management and consumer compliance
processes
•
Take action against institution engaging in predatory lending,
violating consumer protection or fair lending laws engaging in
unfair or deceptive acts/practices
•
Otherwise engaging in unsafe/unsound liability practices
104
Questions?
Ryan Stinneford
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Matthew McIntyre
Pierce Atwood, LLP
Boston, MA 02110
Tel: (207) 791-1154
Fax: (207) 791-1350
Tel: (857) 277-6904
Fax: (617) 426-2321
105
The Legal Stuff
summary may not be applicable to all situations and should not
be acted upon without specific advice from legal counsel. If
you have any questions concerning this summary or how it
106
Proposed Illustrations of Consumer
Information for Subprime Mortgage
Lending
Comments are due on or before
October 15, 2007
October 11, 2007
107
Scope
Covers the consumer protection portion of the Subprime Statement
•
Illustrations are not model forms. Financial institutions are not
required to use them.
•
Rather they are illustrations of the type of information
contemplated by the Subprime Statement.
•
Use of the illustrations is entirely voluntary.
108
To Use or Not to Use
Regardless, communications to consumers (e.g., ads, oral
statements, promotional materials) should provide “clear and
balanced” information about the relative benefits and risks of
certain ARM products.
Include: Information regarding costs, terms, features and risks of
the product to the consumers
109
Contents: (Narrative or Chart)
-
Risk of payment shock
-
Consequence of prepayment penalties, balloon payments,
pricing premiums for reduced documentation loans and the
borrower’s responsibility for real estate taxes and insurance if
not escrowed
110
111
112
Final illustrations will be available on the
respective agency website.
113
Questions?
Ryan Stinneford
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Matthew McIntyre
Pierce Atwood, LLP
Boston, MA 02110
Tel: (207) 791-1154
Fax: (207) 791-1350
Tel: (857) 277-6904
Fax: (617) 426-2321
114
The Legal Stuff
115
Other Federal Law
Developments
October 11, 2007
116
Interagency Statement on
Working with Mortgage Brokers
On April 17, 2007, federal regulatory agencies (FRB, FDIC, OCC,
OTS and NCUA) issued a statement encouraging financial
institutions to work with mortgage borrowers unable to make loan
payments. Highlights of the statement include:
•
Borrowers who cannot make payments should contact
lenders and servicers at earliest indication of problems to
discuss alternatives.
•
Financial institutions should consider prudent workout
arrangements that are consistent with safe and sound
banking practices, such as modifying loan terms (including
converting ARMs to fixed rate loans).
117
(cont.)
•
Financial institutions may receive favorable CRA
consideration for loan programs that transition LMI borrowers
from high cost loans to lower cost loans, if the programs are
consistent with safe and sound practices.
•
Examination and supervision standards will not change.
•
Financial institutions are not required to foreclose
immediately when payment difficulties occur, and will not be
penalized for pursuing reasonable workout arrangements.
118
(cont.)
•
Financial institutions should identify and report credit risk,
maintain adequate allowance for loan losses, and recognize
credit losses in a timely manner.
•
Financial institutions should inform delinquent borrowers
about the availability of homeownership counseling, and
refer them to HUD-approved counselors.
119
(cont.)
•
Financial institutions are reminded of their obligations under
the Servicemembers Civil Relief Act (including prohibition on
foreclosure during period of active duty + 90 days, and duty to
notify service members of their rights under SCRA). Financial
institutions are encouraged to work with service members who
are unable to make payments, even if the loans are not
subject to SCRA.
120
Pilot Project to Evaluate NonDepository Subprime Lenders
On July 17, 2007, three federal regulatory agencies (FRB, OTS
and FTC), together with two state regulator associations (the
Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators) announced a
pilot project to coordinate compliance reviews of non-bank
subprime lenders and brokers. A primary goal of the project is to
ensure effective and consistent reviews of such entities, and to
share lessons learned.
121
(cont.)
Highlights of the announcement include:
•
The pilot will begin in 4th quarter of 2007, and will target:
– Non-depository subprime lending subs of bank
and thrift holding companies;
– Mortgage brokers doing business with those subs;
– Independent state-licensed subprime lenders; and
– Mortgage brokers associated with such lenders.
122
(cont.)
•
Reviews will include evaluation of:
– underwriting standards; and
– senior management oversight of risk-management and
compliance practices
•
Agencies will share information about reviews and
investigations, and take appropriate corrective or enforcement
action.
•
At the conclusion of the reviews, agencies will analyze results
and determine whether to continue the project (and, if so, the
focus of future reviews).
123
OTS Advance Notice of Proposed
Rulemaking on Unfair or Deceptive
Acts or Practices
On August 6, 2007 (72 Fed. Reg. 43570), the OTS issued an
ANPR to determine whether and to what extent additional
regulations are needed to ensure that customers of OTSregulated entities are treated fairly.
•
Under Section 18(f)(1) of FTCAct, OTS is responsible for
issuing regulations to prevent UDAPs by savings
associations. At a minimum, OTS regulations must be
consistent with FTC rules and guidance, but can be more
protective.
124
Acts or Practices (cont.)
•
HOLA gives OTS authority to issue regulations to prevent
UDAPs by all entities subject to OTS supervision.
•
Proposed rule would apply to:
– Savings associations
– Non-functionally regulated subsidiaries of savings
associations
– Service companies owned by savings associations
– S&L holding companies
– Non-functionally regulated subsidiaries of S&L holding
companies (other than a bank or bank subsidiary)
125
•
Proposed rule would not apply to:
– Functionally regulated entities (e.g., entities governed
by SEC)
– Banks
– Bank subsidiaries
– Unrelated service providers
•
Issues:
– Should OTS consider rulemaking on UDAPs involving
products and services other than consumer credit?
– Should such products and services be limited to
financial products and services?
– How should financial products and services be defined?
– Should the rulemaking address UDAPs only by savings
associations, or should it also address UDAPs by other
related entities?
126
•
Approaches:
– Should OTS follow FTC lead and adopt FTC guidance
as OTS rules? For example:
• Bait advertising
• Use of “Free”
• Deceptive pricing
• Warranties and guarantees
• Endorsements and testimonials
127
– Should OTS convert OTS guidance to OTS UDAP
rule? For example:
• Statement on Working with Mortgage Borrowers
(failure to consider and implement reasonable
workout practices = UDAP?)
• Interagency Guidance on Nontraditional Mortgage
Product Risks
• Interagency Statement on Subprime Mortgage
Lending
• OTS Guidance on Overdraft Protection Programs
• OTS Guidance on Gift Card Programs
128
– Should OTS adopt other agency guidance as OTS
UDAP rules? For example:
• OCC Guidelines Establishing Standards for
Residential Mortgage Lending practices
– equity stripping
– fee packing
– loan flipping
– refinancing special mortgages
– encouraging default
– financing single premium credit insurance
– negative amortization
– balloon payments in short-term transactions
– prepayment penalties not limited to early years
of loan
129
• HUD rules re “mortgages with unacceptable terms
and conditions” (i.e., loans with excessive fees
exceeding greater of 5% of loan amount of $1,000,
prepayment penalties except in very limited
circumstances, prepaid single premium credit life
insurance, inadequate consideration of repayment
ability)
– Should OTS adopt state UDAP laws as OTS UDAP
rule? For example:
• Michigan Consumer Protection Act
• North Carolina predatory lending law
130
– Should OTS target specific practices? For example:
• Credit card lending:
– universal default
– OTL fees triggered by other fees
– pyramiding penalty fees
– mandatory arbitration and waiver of trial
– application of payments first to lower-rate
balances, or to fees, penalties and interest)
131
• Residential mortgage lending:
– repetitive refinancing with no financial benefit
– encouraging default
– increases in interest rates or balloon payments
upon default
– discretionary pricing practices
– force placing insurance without notice and
opportunity to cure
– failure to mitigate losses prior to foreclosure
• Gift cards:
– imposing fees exceeding a certain amount or
percentage of original gift amount
– setting an expiration date less than one year
from date of issuance
132
•
Deposit accounts:
– freezing accounts containing federal benefit
payments upon receipt of attachment or
garnishment
– setting off debts owed to the financial
institution from federal benefit payment
deposits
Comment Period closes November 5, 2007
133
Questions?
Ryan S. Stinneford
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Tel: (207) 791-1154
Fax: (207) 791-1350
Email: rstinneford@pierceatwood.com
134
The Legal Stuff
not be acted upon without specific advice from legal
counsel. If you have any questions concerning this
summary or how it applies to any particular entity or
circumstance, please contact Ryan Stinneford by phone at
(207) 791-1154, or by email at
rstinneford@pierceatwood.com.
135
Other Maine Statutes on Mortgage Lending
Brandon M. Dell’Aglio, Esq.
October 11, 2007
136
Funded Settlement Act
33 M.R.S.A. Sections 521 et seq.
Applicability
•
Loans secured by mortgages on 1-4 dwelling residential units
•
For personal, family or household purposes
•
Loan office or branch must be in Maine, or loan must be
closed in Maine
•
Not applicable to open end credit
137
Funded Settlement Act (cont.)
Requirements for Lender
•
Disburse loan funds to settlement agent
– For non-rescindable loans - at or before closing
– For rescindable loans - at or before noon on first
business day after expiration of rescission period
138
Requirements for Settlement Agent
•
"Settlement Agent" includes a lender that closes its own loans
•
Record mortgage, deed or other documents
– For non-rescindable loans - within 2 business
days of settlement
– For rescindable loans, at time agent reasonably
determines that right of rescission has not been
exercised
139
Form of Loan Proceeds
Loan proceeds may be in:
•
Cash;
•
Wired or electronic funds transfer;
•
Certified Check;
•
Checks issued by government entity;
•
Cashier's Check, Teller's Check, or any transfer of funds by
check or otherwise that is finally collected and unconditionally
available to the settlement agent;
140
Form of Loan Proceeds (cont.)
•
Checks or other drafts drawn by a state or federal chartered
financial institution or credit union; or
•
Checks issued by an insurance company licensed and
regulated by the Maine Bureau of Insurance.
141
Violation
Violation of the act may result in consumer recovering greater of:
•
Actual damages
•
Penalties ranging from $250 to $1000
•
Plus court costs and attorneys' fees
•
Recovery limited to actual damages plus court costs and
attorneys' fees if violation is unintentional and result of bona fide
error
142
Mortgage Discharge Statute
33 M.R.S.A. Section 551 et seq.
143
Recording of Mortgage Discharge
•
Mortgagees must record discharge within 60 days of full
performance by mortgagor
– If open-end credit, "full performance" includes request
by mortgagor to terminate the line
•
"Mortgagee" includes both owner of the mortgage at the time it
is satisfied, and the servicer who receives final payment
satisfying the debt
•
Mortgagee may charge the mortgagor for the cost of recording
the mortgage
144
(cont.)
Violation
If discharge is not recorded within the statutory time period, owner
of mortgage and servicer are jointly and severably liable to any
aggrieved party in amount equal to or greater than:
•
Actual damages
•
Penalties of $200 per week after expiration of 60 day period,
up to $5000 maximum
•
Plus court costs and attorneys' fees
145
Borrower's Choice of Accounting
Service Law
P.L. 2007, c. 185
•
Took effect September 20, 2007
•
Same standard as "Bring Your Own Title Attorney" law
146
Service Law
(cont.)
Applicability
•
Appears to apply to consumer and commercial loans
•
Applies to all “supervised lenders,” “creditors” and “financial
institutions and credit unions authorized to do business in
Maine” (“Lenders”)
147
Service Law
(cont.)
Choice of Accountant
•
Creditor may not interfere with purchaser/borrower's free
choice of accounting, tax or attest services provider in
connection with extension of credit
•
Provider must be accredited as a CPA, public accountant, or
enrolled agent
•
Lender may require that provider provide adequate evidence
of liability insurance or other written policy requirements the
Lender deems necessary to protect its interest
148
Questions?
Brandon M. Dell’Aglio
Pierce Atwood, LLP
One Monument Square
Portland, ME 04101
Tel: (207) 791-1161
Fax: (207) 791-1350
Email: bdellaglio@pierceatwood.com
149
The Legal Stuff
applies to any particular entity or circumstance, please
contact Brandon Dell’Aglio by phone at (207) 791-1161, or by
email at bdellaglio@pierceatwood.com.
150

Residential Mortgage Loan

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