We knew it would come and now it is here—or at least it has begun. Congress passed the Dodd-Frank Act more than two years ago, enacting the Consumer Financial Protection Act that gave rise to the CFPB, and making significant changes to the federal Truth-in-Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) as part of its mission to reform the mortgage industry.
Since the bureau came into existence on July 21, 2011, it has been busy staffing up, issuing examination guidelines, examining financial institutions (including nonbank mortgage lenders), engaging in enforcement actions (mostly against credit card companies thus far) and writing regulations. This summer, the bureau issued six significant regulatory proposals. This article outlines two of those proposed rules, assessing their potential impact on the reverse mortgage industry and describing the industry’s response.
Integrated Disclosure Proposal
Section 1032 of the Dodd-Frank Act required the bureau to craft, in one year’s time, a proposal to combine RESPA and TILA disclosures into one set of unified disclosures. This is the so-called “Know Before You Owe” (KBYO) effort that the bureau has been experimenting with since the summer of 2011 through an informal outreach to industry and consumer advocates. This past July, the bureau published the Integrated Disclosure Rule, which suggests RESPA and TILA mortgage origination disclosures be combined and require an “all in” finance charge.
Importantly, the bureau said it would exempt reverse mortgages from the Integrated Disclosure proposal, stating that it will instead implement a specific rule for reverse mortgages at a later date. The bureau said that in the meantime, reverse mortgage lenders should continue to use the current TILA and RESPA disclosures. What this means is, if an integrated disclosure rule is finalized, those lenders that make both forward and reverse mortgages will have to maintain two sets of loan origination systems and loan documentation sets, and perhaps two servicing boarding systems.
Under the Integrated Disclosure proposal, a “Loan Estimate” will take the place of the GFE, and a “Closing Disclosure” will take the place of the HUD-1 Settlement Statement. Other changes made by the Dodd-Frank Act require additional disclosures (the Affected Title XIV Disclosures).
The bureau has requested industry feedback on effective dates for the implementation of these disclosures. Other disclosures will become effective without delay on January 21, 2013 (including the disclosure regarding the reset of hybrid ARM loans, the loan originator identifier requirement, the disclosure regarding waiver of escrow after consummation, the consumer notification regarding appraisals for high-risk mortgages and the consumer notification regarding the right to receive a copy of an appraisal).
The loan originator identifier requirement on loan documents, and the consumer notification regarding the right to receive a copy of an appraisal, will affect reverse mortgages. We expect final rules to be put into place for these items by January 21, 2013, and lenders and systems providers should start preparations now to comply with these two items.
The “all in” finance charge and other concepts in the Integrated Disclosure proposal that deal with the APR, points and fees will impact qualified mortgages, higher-priced mortgages and high-cost home loans. The bureau also proposed a new definition of a “transaction coverage rate,” which would be used in lieu of an APR to determine high-cost home loan triggers, and perhaps be used for other loan classifications with APR and/or points and fees triggers (higher risk and qualified mortgages). However, these items would be forward-mortgage specific.
The Affected Title XIV Disclosures provisions are set to take effect on January 21, 2013, unless the bureau finalizes regulations and establishes a delayed date, which can be no later than January 21, 2014. The KBYO effort is mandated under Title X of the Dodd-Frank Act, not Title XIV. The bureau has asked for comments on effective dates for implementing the Affected Title XIV Disclosures in light of the fact that the KBYO proposal will not be finalized before January 21, 2013. The bureau states that it plans to issue final 8
rules on the KBYO Integrated Disclosure later in 2013.
Some of the Affected Title XIV Disclosures will affect reverse mortgages. NRMLA requested that the bureau delay the mandatory compliance date of the Affected Title XIV Disclosures, as they might impact reverse mortgages, until the bureau can both finalize the KBYO Integrated Disclosure and finalize a reverse mortgage rule. Indeed, the bureau solicited comments on whether the final Integrated Disclosures rule should put into effect the Affected Title XIV Disclosures for reverse mortgages, as applicable, by requiring creditors to comply with the proposed provisions that involve those disclosure requirements.
Note that the Affected Title XIV Disclosures include:
1 | Warning regarding negative amortization features
2 | Disclosure of state law anti-deficiency protections
3 | Disclosure regarding creditor’s partial payment policy
4 | Disclosure regarding mandatory escrow accounts
5 | Disclosure regarding waiver of escrow at consummation
6 | Disclosure of monthly payment, including escrow, at initial and fully indexed rate for variable-rate transactions
7 | Repayment analysis disclosure to include amount of escrow payments for taxes and insurance
9 | Disclosure of mortgage originator fees
10 | Disclosure of total interest as a percentage of principal
11 | Optional disclosure of appraisal management company fee
Below are NRMLA’s comments on the Affected Title XIV Disclosures:
(i) Dodd-Frank Act specifically exempted reverse mortgages from some of these disclosures.
(ii) Most of the remaining disclosures would not apply to reverse mortgages.
(iii) The bureau should delay implementing a mandatory compliance date with the remainder of the Affected Title XIV Disclosures until it finalizes a KBYO rule for forward mortgages and finalizes a reverse mortgage rule (which we do not expect to happen until sometime in 2013).
NRMLA’s comment letters on the bureau’s proposals can be found in the Members section on NRMLA’s website, http://nrmlaonline.org/.
The Dodd-Frank Act amended the HOEPA provisions under TILA to expand the coverage of high-cost home loans by lowering the APR and the points and fees threshold, as well as removing the exemption from HOEPA for purchase money loans and HELOCs. The HOEPA Proposal continues to exempt reverse mortgages from the TILA high-cost home loan rule. However, the HOEPA Proposal implements Dodd-Frank Act changes, which require pre-loan counseling disclosures of HUD-approved counselors for all loan applicants, and pre-loan counseling sessions by HUD-approved counselors for first-time homebuyers and all consumers receiving high-cost home loans, as well as new pre-loan counseling disclosure for all mortgage applicants.
The HOEPA Proposal states that it would not require a lender to provide a HECM applicant with the list of counselors required under the proposed rule if the lender is otherwise required by HUD to provide such a list. NRMLA requested the bureau fully exempt HECM loans from HOEPA counseling disclosure requirements. As it is currently proposed, a lender that does not meet HECM counseling disclosure requirements would also have a HOEPA violation on its hands. However, NRMLA did request that proprietary reverse mortgage lenders should be deemed to have met the HOEPA Proposal counseling disclosure requirement if it follows HECM counseling disclosure rules.
The HOEPA Proposal also discusses that state housing finance agencies may qualify as counselors for high-cost home loan borrower counseling and first-time homebuyers using loans with negative amortization. The HOEPA Proposal also discusses that HUD may soon begin approving individual counselors (in addition to counseling agencies) and that such broader approvals will help add resources to forward mortgage counseling needs. Also, the proposal states that creditors may pay for counseling for these types of sessions, but acknowledges that this is prohibited by HECM rules for reverse mortgage lending. This conceivably could create a bit of “channel” conflict for lenders that offer both forward and reverse mortgages. NRMLA commented on these issues and asked the bureau to coordinate and cooperate with HUD in order to ensure that “un-funded” mandates of such additional required counseling for the forward mortgage industry did not crowd out available HUD-approved counselors for reverse mortgage counseling, and so that lenders could continue to operate with counselors under the HOEPA rule as proposed without violating HUD HECM rules.
We are in a tsunami and rip current of regulatory change that, over the next few months, will impact and shape the mortgage industry, including the reverse mortgage industry, for years to come. Stay tuned, and stay afloat! x
This article is based on the personal views of Jim Milano and does not represent the views or opinions of the law firm of Weiner Brodsky Sidman Kider PC, or its clients.