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New ECOA and Higher-Risk Mortgage Appraisal Rules Issued

As part of its recent wave of rulemaking, the CFPB issued its final rule implementing a Dodd-Frank amendment to the Equal Credit Opportunity Act (ECOA) on January 18, 2013. Under the new rule, lenders must automatically provide copies of any written appraisal reports and valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. The current version of this rule only requires this disclosure upon an applicant’s request, although it applies to junior lien credit applications, as well. The new rule takes effect January 18, 2014. As it does now, and as the ECOA does generally, the rule will be equally applicable to business and consumer credit applications.

On the same day, the CFPB and five other financial regulatory agencies jointly issued a separate appraisal rule for “higher-risk mortgages”. The interagency rule, which implements an amendment to the Truth in Lending Act also contained in Dodd-Frank, applies to mortgages with an APR exceeding the APOR by certain statutory thresholds – what the relevant Dodd-Frank provision calls higher-risk mortgages but the rule calls “higher-priced mortgage loans” to avoid the introduction of a seemingly new class of Regulation Z mortgages. For these loans, lenders must obtain a written appraisal performed by a licensed or certified appraiser who conducts an interior site visit of the subject property and then share this appraisal with the applicant. Taking aim at fraudulent flipping, the interagency rule also requires a second, more detailed appraisal on homes that were sold in the last 6 months for less than the current purchase price. This new rule is also effective on January 18, 2014.

Qualified mortgages under the CFPB’s final Ability to Repay rule; transactions secured by new manufactured homes, mobile homes, boats or trailers; loans on construction of new homes; and bridge loans will be exempt from the interagency rule. The agencies also announced their intent to publish a supplemental proposed rule to also exempt “streamlined” refinance programs and small dollar loans.

In addition, the agencies noted that they may consider tying the definition of “higher-priced mortgage loans” to the “transaction coverage rate” or TCR, a term which would exclude all prepaid finance charges not retained by the lender, instead of the APR. This change will likely depend on the CFPB’s final TILA-RESPA disclosure integration rule.

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The CFPB’s New Mortgage Rules: Themes and Responses

One can’t fault the CFPB’s production level in the past two weeks.  Since January 10, the Bureau has issued seven distinct final rules – the lion’s share of what it considers “a single, comprehensive undertaking” to implement Dodd-Frank mortgage reforms.  By our count, this work includes over 3,100 pages of rulemaking text not to mention the press releases and the various summary materials and social media campaigns.  Final rules were issued on the following:

As a reminder, we’ll provide an overview of these rules and a focused analysis of the Ability to Repay and Qualified Mortgage Rules during a free webinar on Tuesday, January 22, at 3 pm Eastern, and future webinars will unpack the rest of these new requirements.  Still to come in 2013 are the Bureau’s final rules on TILA-RESPA disclosure integration. 

A couple of themes dominate this wave of rules.  First, it’s an understatement to say that Dodd-Frank and these Bureau regulations institutionalize the GSEs and tight prevailing credit standards.  Is anyone surprised that these rules effectively kill no-doc and NINJA loans?  The rules effectively draw a box around the only mortgage loans most creditors are willing to make now anyway.  This convergence may limit the Fair Lending and CRA implications of the rules themselves, as there is less room than ever for discretion and exception.  Other themes include the Bureau’s efforts to accommodate the realities of rural markets and smaller creditors and servicers as well as its sensible preference for loans held in portfolio (i.e., skin in the game). 

On the other hand, the new Servicing standards are going to demand a high level of customer service and multi-party coordination.  We attended both the Baltimore and Atlanta release parties (a.k.a. Field Hearings) for the biggest of these new rules (including Servicing).  One take-home could not be missed:  in the wake of the financial crisis, the Bureau continues to emerge as a sounding board for the distressed mortgage borrower and an advocate for consumer rights both real and imagined.  Its public relations efforts this year on the mortgage front are undoubtedly going to lead to more complaints and more lawsuits against lenders. 

The good news is that the Bureau can’t compete with your own relationship with your customer base.  And the easiest complaints to resolve are those that are never filed.  So to avoid paying for the sins of crisis-era lenders and practices that are now long gone, take a lesson from the CFPB and stay ahead this year on customer service and your institution’s brand.  Reinforce the distinction between your organization and the abuses that gave rise to the Bureau, and you may actually benefit from its rules.

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Bryan Cave Attorneys To Present January 22 Webinar on New CFPB Mortgage Rules through BAI Learning & Development

The CFPB continues to finalize a high volume of new mortgage rules required by Dodd-Frank.  Join compliance training leader BAI Learning & Development and Bryan Cave attorneys John ReVeal and Barry Hester as they provide an overview of final Qualified Mortgage and Ability-to-Repay rules and other new and proposed requirements.  This informative webinar will be offered on Tuesday, January 22, from 3-4 pm Eastern.

Here’s also a recent bulletin John and Barry developed on some of these new rules.

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CFPB’s Final Rule on Escrow Requirements for Higher-Priced Mortgages Reinforces Its View of the Big Lender-Small Lender Divide

We previously covered the CFPB’s issuance of final rules on Ability-to-Repay and Qualified Mortgages together with the expansion of HOEPA coverage under the Dodd-Frank Act (DFA). Here we review the final escrow rules and suggest that they reveal a line the Bureau intends to consistently draw—under its exemption authority—between large and small mortgage lenders (at $2 billion). The Bureau’s final escrow rules take effect on June 1, 2013.

“Higher-priced mortgage loans” are a class of mortgages carrying APRs that are comparatively high but not high enough to trigger the full HOEPA protections implicated by “high-cost mortgages” (a.k.a. “HOEPA loans”). Under 2008 Federal Reserve amendments to Regulation Z, however, creditors must meet a number of requirements in conjunction with the origination of higher-priced mortgage loans, including the establishment and maintenance of escrow accounts for at least one year after origination. These escrow accounts set aside consumer funds on their behalf to pay property taxes, mortgage insurance premiums, and other mortgage-related insurance required by the creditor.

In its 2008 rulemaking, the Federal Reserve concluded that it was “unfair for a creditor to make a higher-priced loan without presenting the consumer a genuine opportunity to escrow.” The agency’s evidence suggested then that few subprime mortgage creditors provided for escrow accounts.

Congress liked these Fed rules enough to codify them, with certain differences, through Dodd-Frank.

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CFPB’s Ability to Repay, Qualified Mortgages, Escrow, and HOEPA Rules Provide Clarity and Certain Opportunities

The CFPB released its much-anticipated ability to repay (ATR) and qualified mortgage (QM) rules on January 10, 2013 after a field hearing attended by Bryan Cave in Baltimore, MD. At the same time, the CFPB issued a final rule amending Regulation Z (Truth in Lending) to implement Dodd-Frank Act (DFA) requirements for creditors to establish escrow accounts for higher-priced mortgage loans secured by a first lien on a principal dwelling, and a third rule to implement the DFA amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA) and modifying requirements with respect to homeownership counseling.

In the coming days, we will provide detailed analyses of these new rules. For now, the following addresses certain of the key provisions of the ATR and QM rules, including certain proposed exemptions and temporary measures intended to soften the impact of these changes on smaller lenders.

The ATR and QM rules are scheduled to take effect on January 10, 2014. However, the CFPB also has proposed possible adjustments to the final rules for certain specialized community-based lenders, housing stabilization programs, Fannie Mae and Freddie Mac refinancing programs, and small portfolio lenders (including many community banks, as explained below). The CFPB states that it would finalize those proposals this Spring so that they would also be effective on January 10, 2014.

One key issue resolved by the final rules is whether QMs will be afforded either a conclusive or, alternatively, a rebuttable presumption of compliance with the ATR requirements. Here, the CFPB drew a line that, according to Director Cordray during the field hearing in Baltimore, “has long been recognized as a rule of thumb to separate prime loans from subprime loans.” Specifically, the rule provides a conclusive presumption of ATR compliance—a so-called “safe harbor”—for loans that meet the definition of a qualified mortgage and that are not “higher-priced” under existing rules. All other qualified mortgages would only be afforded a rebuttable presumption of compliance with the new ATR rules.

This fleshes out a framework in which there are four ways to comply with ATR requirements:

(1) Satisfy the general ATR standards;

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A Big Month for Mortgages and the CFPB

January 2013 promises to be a big month for mortgages and the CFPB, as a variety of provisions of Title XIV of the Dodd-Frank Act take effect by operation of law on January 21, 2013 unless the Bureau issues final rules implementing them by then.  The Bureau has proven to be savvy in meeting its own Dodd-Frank deadlines.  We will soon find out if it is as savvy in establishing compliance deadlines for its new mortgage rules. 

Title XIV—Dodd-Frank’s “Mortgage Reform and Anti-Predatory Lending Act”—says that its provisions take effect 18 months following the designated transfer date of July 21, 2011 unless final implementing rules have been issued by the Bureau prior to that time.  It also provides that such rules must take effect not later than 12 months after they are issued.  So the industry has circled January 21, 2014 as a potential best-case scenario on compliance dates for the following important Title XIV content:

  • Ability to Repay & “Qualified Mortgages”
  • Certain New Mortgage Servicing Requirements
  • High-Cost Mortgage Scope and Restrictions
  • Loan Originator Compensation and Qualification
  • Appraisal Standards and Disclosures

We say “potential best-case” for a few reasons.  First, the Bureau may not publish corresponding final rules in time, so these provisions could take effect by operation of law on January 21, 2013.  No one really believes that will happen, but it is possible.  Proposed rules are pending as to each of these elements.

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Board Oversight of the Compliance Function: Coaching Fundamentals

Despite all that has been made of Dodd-Frank, the new Consumer Financial Protection Bureau, and the increased focus on consumer compliance throughout the banking industry, we think that the fundamental formula for effective board oversight of the compliance function has not materially changed. We encourage directors to take stock to make sure their bank’s program is adequate. In this season of great contests on the gridiron, we would emphasize that blocking and tackling—and defense generally—remain the keys to success in this area. Be a good coach and make sure that these fundamentals are practiced at your bank.

Bank Regulatory Expectations

We start with the black-letter guidance and then read between the lines based on our experience and judgment. Each of the prudential bank regulators has outlined its expectations for board oversight of the compliance function. Although it’s stated in various ways, the basic recipe for the “compliance management system” is this:

  1. Compliance program documents and reporting
  2. Compliance audit
  3. Board and management oversight

Think of board oversight as “coaching” and the rest as blocking and tackling.

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Fall 2012 Update on Regulatory and Legal Changes Affecting Community Banks

Bank regulators have been as busy as usual in 2012, but some of the more interesting regulatory and legal changes have come from non-bank regulators and the courts. And, the JOBS Act changes described below actually lifts the regulatory burden on banks a bit, a rare respite in an otherwise challenging regulatory environment.

The JOBS Act eases bank capital activities and M&A.  The Jumpstart Our Business Startups Act affects community banks in 4 key ways:

  • “Going public” is easier. Banks that have less than $1 billion in gross revenue can qualify as an “emerging growth” company and take advantage of relaxed rules that allow them to “test the waters” and obtain a confidential prior review of an IPO filing by the SEC, provide reduced executive compensation disclosures and file without a SOX 404 attestation by the bank’s auditors.
  • The “crowdfunding” rule (expected in early 2013) will provide banks significant flexibility in raising $1 million per year from their community without IPO-type expenses and without adding new investors to their shareholder count.
  • Private offerings are easier. Rules affecting private offerings are being relaxed so that a bank will be able to use public solicitation and advertising to attract investors as long as the bank takes reasonable steps to ensure that those investors are accredited.
  • Going or staying private is easier because the shareholder count triggering “going public” was raised from 500 to 2,000. And, shareholders from a bank’s “crowdfunding” offerings and from employee compensation plans are now excluded from the shareholder count. These helpful changes to shareholder count rules mean that some banks can bring in new investors or even acquire another bank without triggering the obligation to “go public,” a significant cost and compliance barrier. Also, banks with a shareholder count under 1,200 can “go private” following a 90-day waiting period.
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CFPB Issues Bulletin on Marketing Credit Card Add-On Products

Concurrent with its enforcement action against Capital One, the CFPB issued a Bulletin on its expectations for the marketing of credit card add-on products, such as those at issue in the Capital One action. The Bulletin also warns institutions that the CFPB will take “all necessary steps to ensure that consumers are protected from deceptive sales and marketing practices, including those resulting from failures to adequately disclose important product terms and conditions, or other violations of Federal consumer financial law.” These include having a comprehensive compliance management program ensures that telemarketing and customer service scripts do not mislead or pressure consumers.

The Bulletin outlines a number of steps that CFPB-supervised institutions should take to ensure that they market and sell credit card add-on products in a way that limits the potential for statutory or regulatory violations and associated consumer harm. The Bulletin also lists a number of compliance management programs that should be employed by institutions offering credit card add-on products.

Although the Bulletin focuses on credit card add-on products, the CFPB notes that institutions should take this guidance into consideration when offering similar products in connection with other forms of credit or deposit services.

The Bulletin is available here.

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CFPB Issues First Enforcement Action

In its first public enforcement action, the Consumer Finance Protection Bureau (CFPB) found that Capital One Bank, (USA) N.A. engaged in deceptive marketing practices, which the CFPB says mislead customers into buying credit card “add-on products.” The large size of the total payment required under this action ($210 million) has raised speculation that the CFPB will be seeking larger penalties than bank regulators in the past, because such previous penalties have not stopped banks from using unfair tactics to seek profits.

The CFPB found through its supervision process that Capital One’s call-center vendors engaged in deceptive tactics to sell its credit card add-on products, which included payment protection plans, debt forgiveness and credit monitoring services. To activate newly issued credit cards, Capital One customers with low credit scores or low credit limits were directed to a third-party call center and subjected to “high-pressure [sales] tactics.” In particular, the CFPB found that Capital One customers were misled about the benefits of the add-on products, deceived about the nature of the products, mislead about eligibility, misinformed about the cost of the products and, in some cases, enrolled without their consent.

The CFPB’s enforcement action requires Capital One to cease all marketing of these products until the Bureau approves a compliance plan to help ensure against future violations; refund to 2 million customers approximately $140 million, which covers the cost of these add-on products as well as a refund of the finance charges associated with fees paid, any over-the-limit fees incurred and interest; pay claims denied based on ineligibility at enrollment; make convenient repayment to consumers; assure compliance with the terms of the consent order through the work of an independent auditor and pay a $25 million civil money penalty into the Bureau’s Civil Penalty Fund.

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