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Texas Supreme Court Holding Requires Lender-Retained Fees To Be Factored into Home Equity Loan Fee Cap
On June 21, the Texas Supreme Court invalidated state regulations that defined “interest” with regard to home equity loans to exclude lender-retained fees and allowed home equity loan closings through an agent. Finance Commission of Texas v. Norwood, No. 10-0121, 2013 WL 3119481 (Tex. Jun. 21, 2013). The state constitution caps home equity loan fees at three percent of principal, but excludes “interest” from the definition of “fees.” The Texas Supreme Court held that a state regulation that defined “interest” for the purpose of home equity lending by referencing a state code definition that excludes lender-retained fees effectively rendered the constitutional fee cap meaningless by giving the state legislature authority to modify the cap. The legislature’s broader definition of interest was designed to prohibit usury, a function inversely related to the constitutional cap for home equity loans, the court explained. The court held that the constitutional definition of interest means the amount determined by multiplying the loan principal by the interest rate, and therefore does not include lender-retained fees. The court also invalidated a regulation that allowed borrowers to mail consent to a lender to have a lien placed on the homestead and to attend the equity loan closing through an agent, reasoning that a constitutional provision designed to prohibit the coercive closing of a home equity loan at the owner’s home requires that execution of consent or a power of attorney must occur at one of the locations specified in the provision – the office of the lender, an attorney, or a title company. Finally, the court upheld a regulation that created a rebuttable presumption that a specific home equity loan consumer disclosure required by the state constitution is received three days after it is mailed.
Special Alert: CFPB Proposes Additional Changes to Mortgage Rules
On June 24, 2013, the Consumer Financial Protection Bureau ("CFPB") issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.
Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.
Comments on the proposed amendments are due July 22, 2013.
Key Proposed Amendments
Mortgage Servicing
Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of "first notice or filing required by applicable law" and prohibit servicers from filing any document that "would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law" during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.
This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the "first notice or filing required by applicable law." Similarly, servicers in California and other states with pending or effective "Homeowners Bill of Rights" statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes' requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB's minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.
Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower's loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.
The proposed amendments would:
- Allow servicers who initially describe an application as complete based on the five-day review to request additional information in some circumstances;
- Allow servicers to select a "reasonable date" by which an incomplete application should be completed; and
- Allow servicers to offer a borrower the option of a short-term forbearance program (i.e., forbearance of payments for up to two months) even if the application is not complete, subject to certain requirements.
Notice of Denial. The proposed amendments would clarify that, when notifying a borrower that he or she has been denied for a loss mitigation option, the servicer need only disclose the actual reasons for the denial and not other potential reasons.
Loan Originator Compensation
Effective Date. The CFPB proposed to modify the effective date for portions of this rule. Specifically, the proposed rule would: (1) move the effective date for most provisions forward from January 10, 2014 to January 1, 2014; and (2) generally apply the revised restrictions on compensation to transactions consummated and for which the employer paid compensation on or after January 1, 2014. These revisions are intended to permit employers of loan originators to make changes to their compensation, registration, licensing, and training practices at the start of the calendar year.
Definition of Loan Originator. The proposed amendments would provide a number of clarifications about who is and is not covered by the rule. In particular, the CFPB would clarify that employees of a creditor or loan originator in certain administrative or clerical roles (such as tellers or greeters) do not become loan originators solely by providing an application form or discussing general credit terms with consumers (e.g., "We offer rates as low as 3% to qualified consumers."). Instead, to be a loan originator, the employee would need to discuss particular credit terms that are or may be available from the creditor to that consumer selected based on the consumer's financial characteristics.
Other Rules
Points and Fees for Qualified Mortgages and High-Cost Mortgages. The proposed amendments would clarify the treatment of: (1) charges paid by parties other than the consumer - in particular, the amendments make clear that seller's points and charges paid by the creditor are excluded from the finance charge component of points and fees; and (2) loan originator compensation to retailers of manufactured homes and their employees.
Rural and Underserved Areas. The proposed amendments would revise the exceptions available to small creditors (creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year) operating in predominantly "rural" or "underserved" areas while, as announced in May, the CFPB re-examines the underlying definitions of "rural" or "underserved" over the next two years. Specifically, the CFPB would allow all small creditors, regardless of whether they operate predominantly in "rural" or "underserved" areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for balloon qualified mortgages. In addition, the CFPB would allow more small creditors to take advantage of the exemption from the requirement to establish escrow accounts for higher-priced mortgage loans.
Prohibition on Financing Credit Insurance. For purposes of the prohibition on financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, the proposed amendments would clarify what constitutes financing of premiums by a creditor and, for purposes of the statutory exclusion for certain credit insurance premium calculation and payment arrangements, when credit insurance premiums are considered to be calculated and paid on a monthly basis.
HUD Proposes Expansion of Mortgagee Evaluation System, Clarifies Good Neighbor Sales Program Rules
On June 12, HUD proposed in Mortgagee Letter 2013-21 revisions to the system used by the FHA to measure and inform mortgagees of their loss mitigation performance. The proposed revisions involve more comprehensive metrics to evaluate mortgagees on their overall performance with regard to delinquent loan servicing, as opposed to the limited review of default reporting of forbearance actions and loss mitigation and foreclosure claims paid under the current system. HUD is seeking comments on the proposal, which are due by July 12, 2013. Also on June 12, HUD issued Mortgagee Letter 2013-20 to clarify that under its Good Neighbor Next Door Sales Program, which enables eligible participants to purchase at a discount certain designated properties, (i) the mortgage insurance premium is based on the first mortgage only and (ii) the process for submitting requests for an interruption in the owner-occupancy term.
CFPB Director Affirms Mortgage Rule Effective Dates, Acknowledges Potential Secondary Market Impacts
On Wednesday, CFPB Director Richard Cordray delivered remarks at an Exchequer Club luncheon in Washington, DC. During a brief question and answer segment, Mr. Cordray confirmed that the Bureau does not intend to delay the effective date of the mortgage rules and fully expects institutions to be in compliance when the rules take effect in January 2014. Financial institutions and their trade associations have expressed concern about implementing certain aspects of the myriad rules in the short time allowed by the CFPB and the potential impact on credit markets. Most recently industry representatives highlighted specific challenges at a House Financial Services Committee hearing that focused on the potential effects of the ability-to-repay/qualified mortgage (ATR/QM) rule.
Mr. Cordray generally downplayed the potential market impact and cost of compliance with the CFPB’s mortgage rules, with a particular focus on the ATR/QM rule. Mr. Cordray explained the CFPB expects that the spread between QM and non-QM loans, if passed to the consumer, should be only 10 basis points, and that, as a result, concerns over the significant cost of compliance with the ATR/QM rule’s requirements are overblown. Some market participants believe this estimate may be overly optimistic and not in line with the factors they are considering in making pricing decisions on non-QM loans. These observers believe that the underlying CFPB economic analysis for the estimate includes a series of critical assumptions based on limited data, such as the probability that a borrower will allege a rule violation and estimated repurchase and litigation costs.
Mr. Cordray reiterated the agency’s promise to provide further guidance on the interplay of fair lending compliance and QM lending although, given his expectations that QM and non-QM loans will not vary significantly from a pricing perspective, he expressed the view that the issue is not a major concern. He also downplayed concerns that changes to FHA premium requirements will cause more QM loans to exceed the APR threshold required for QM safe harbor status, an issue recently addressed by FHA Commissioner Galante.
In response to an observation from BuckleySandler Partner Jerry Buckley that the assignee liability provisions of the ATR/QM rule may act as an impediment to private capital re-entering the secondary market -- an issue that could become more critical since the Federal Reserve Board has signaled it may soon begin to taper its quantitative easing activities, which have buoyed secondary market liquidity -- Mr. Cordray acknowledged that the provision could possibly serve as a brake on secondary market liquidity. He also noted the CFPB’s ongoing work with the FHFA to develop a national mortgage database, which is intended to allow the agencies to monitor, among other things, the health of the secondary market.
CFPB Publishes Additional Mortgage Rule Compliance Guides, Launches Mortgage Rule Implementation Web Page
On June 7, the CFPB published a loan originator rule compliance guide and a mortgage servicing rules compliance guide. As with other prior guides it has released, the CFPB cautioned that the guides are not substitutes for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination or servicing of mortgage loans. On June 13, the CFPB announced a new web page that provides, in one location, the various compliance guides and other mortgage rule implementation materials prepared by the CFPB.
CFPB Updates TILA, ECOA Examination Procedures
On June 4, the CFPB released new TILA and ECOA examination procedures, which were updated to incorporate certain of the CFPB mortgage rules finalized in January 2013 that address appraisals, escrow accounts, and mortgage loan originator compensation and qualifications. Parts of the Regulation Z (TILA) amendments took effect June 1, 2013, while the majority of the changes to both Regulation Z and Regulation B (ECOA) take effect in January 2014. The CFPB explained that the procedures will help financial institutions and mortgage companies understand how they will be examined under the new requirements that, among other things: (i) set qualification and screening standards for loan originators, (ii) prohibit steering incentives, (iii) prohibit “dual compensation,” (iv) extend the required duration of an escrow account on higher-priced mortgage loans, (v) prohibit mandatory arbitration, (vi) require lenders to provide appraisal reports and valuations, and (vii) prohibit single premium credit insurance.
HUD Issues Mortgagee Letters on Title Approval at Conveyance, Partial Claim Documentation
On May 31, HUD issued two mortgagee letters to update and clarify certain mortgagee requirements. In Mortgagee Letter 2013-18, HUD replaced prior, delayed guidance related to title approval at conveyance, and explained that, effective August 29, 2013 for single-family REO properties, mortgagees must pay in full prior to conveyance to HUD all taxes, homeowners’ association fees, and water, sewer or other assessments. The letter also details documentation requirements for such payments. With Mortgagee Letter 2013-19, HUD reminded mortgagees about procedures for preparing partial claim documents, calculating claim amounts, and submitting partial claims to HUD. The letter explains that, if a mortgagee does not provide HUD with the original promissory note and security instruments related to the partial claim within prescribed deadlines, the mortgagee will be required to reimburse the full claim amount, including the incentive fee. After the letter takes effect on July 30, 2013, HUD will begin issuing demand letters for the full reimbursement of all amounts associated with overdue partial claim documents.
Texas Reorganizes Mortgage Licensing Laws
On May 24, Texas enacted SB 1004, which reorganizes and simplifies the state’s mortgage licensing regime. Under current law, mortgage loan originators who are employed by mortgage bankers are licensed under separate sections of the code, which together contain six individual types of licenses. Each of these licenses require the same set of qualifications, however, an originator licensed under one chapter must get a separate license to be qualified under the other chapter, and vice versa. SB 1004 creates a single license type for mortgage origination, which will enable a qualified individual to originate for a mortgage company or a mortgage banker, so long as the individual meets the statutory licensure requirements. The bill makes numerous other revisions relating to the regulation of residential mortgage loan originators, residential mortgage loan companies, mortgage bankers, and residential mortgage loan servicers and raises the fee cap for license applications and renewals. The changes become effective on September 1, 2013.
CFPB Delays Prohibition on Financing Credit Insurance Fees
On May 29, the CFPB issued a final rule to delay the effective date of a prohibition on creditors financing credit insurance premiums in connection with certain mortgage transactions. That prohibition, which is part of part of the CFPB’s mortgage loan originator compensation rule, was set to take effect on June 1, 2013. The CFPB has temporarily delayed that effective date until January 10, 2014 – the date on which the balance of the mortgage loan originator rule will take effect – to allow the CFPB to clarify the applicability of the prohibition to transactions other than those in which a lump-sum premium is added to the loan amount at closing. The CFPB plans to seek comment on the potential clarification and, at that time, will also solicit comment on an appropriate effective date.
Fannie Mae Updates Selling Guide
On May 28, Fannie Mae issued Selling Guide Announcement SEL-2013-04 to identify numerous updates to the Selling Guide. With regard to income and documentation requirements, the announcement (i) extends the maximum age of credit documents; (ii) requires documentation of continuance for Social Security benefits other than those of the borrower (e.g., a dependent’s benefits); and (iii) clarifies documentation requirements for “other” income types. Fannie Mae also updated the Selling Guide with regard to, among other things, single-entity ownership in a project, calculation of real estate taxes for housing expense, and measurement of waiting periods.