In football, the higher your score, the better. In golf, the lower your score, the better. In baseball, if your batting average is .500, you are doing very well. And in boxing, the less you get hit, well, the less it hurts. If you were to extend this sports analogy to the business of reverse mortgages, you could say that the industry scored three out of seven—that is, of the seven new mortgage rules recently released by the CFPB, the reverse sector dodged just under half. It’s no slam-dunk or home run, but in my view, three out of seven ain’t bad.
Most of the rules are set to take effect sometime next January, so the mortgage industry does have some time to adjust operations to ensure compliance with these new guidelines. Still, it would be wise to begin decoding and translating these complex new rules now. This way, companies have plenty of time to convert the mandates into workable policies and test their implementation well in advance in order to ensure a smooth transition.
A Breakdown of the Rules In January, the CFPB issued seven final rules that are designed to further regulate lending practices in the mortgage world. Of these seven rules, only three will directly impact the reverse mortgage sector:
-The Loan Originator Compensation and Qualifications Rule
-The Mortgage Servicing Rules
-An ECOA Appraisal Rule
Thanks in part to the dedicated efforts of NRMLA’s team, the other rules do not directly impact the reverse mortgage business. Still, it is worthwhile to examine these new guidelines as they may indicate the direction of future changes to the HECM program.
- The Ability to Repay and Qualified Mortgage Rules
-A new HOEPA Rule
-An Escrow Rule
-A Higher-Priced Appraisal Rule
The Loan Originator Compensation and Qualifications Rule—No Longer S.A.F.E. Before Dodd-Frank gave rise to the CFPB, the Federal Reserve Board was tasked with regulating consumer credit practices, including certain aspects of mortgage lending. The board first proposed placing restrictions on loan originator compensation in 2010, and then, just after the Dodd-Frank Act took effect the following July, it finalized those rules. As modified by Dodd-Frank, violation of the new Loan Originator Compensation and Qualifications Rule will have severe consequences that some might call draconian.
The Dodd-Frank Act upheld the board’s rule against steering and compensation based on the terms of a transaction, and it also reaffirmed the limit on dual compensation, which states that a loan originator (LO) may be paid by the consumer or by the lender, but not both. The CFPB’s new mortgage rules effectively put many of Dodd-Frank’s guidelines regarding LO compensation into action. It revised the definition of a “loan originator” and defined key concepts such as the “term of a transaction” and a “proxy for a term of a transaction.”
Definitions according to the new rule:
Loan originator: With respect to a particular transaction, a person who for compensation or other monetary gain, or in expectation of compensation or other monetary gain, arranges, negotiates or otherwise obtains an extension of consumer credit for another person.
This would include a person who, in expectation of direct or indirect compensation, performs any of the following activities:
no.1 Takes an application
no.2 Offers, arranges or assists a consumer in obtaining or applying to obtain a loan
no.3 Negotiates or otherwise obtains or makes an extension of consumer credit for another person
no.4 Through advertising or other means of communication represents to the public that such person can or will perform any of these activities
Under this definition, a loan originator could include an employee, agent or contractor of the creditor or mortgage brokerage company. Except for certain loan originator qualification standards discussed below, it does not include a lender unless the lender brokers a loan.
The bureau’s rule asserts that anyone who purports to be someone who can help in the loan process is in effect a loan originator. This would include any oral or written action directed to a consumer that can affirmatively influence the consumer to select a particular loan originator or creditor to obtain an extension of credit.
A term of a transaction: Any right or obligation of the parties to a credit transaction.
Importantly, the phrase “in connection with a particular transaction,” which is present in the current rule, has been removed from the bureau’s final rule. This means persons engaged in loan originator activities will be covered regardless of whether any specific consumer credit transaction is consummated.
A proxy for a term of transaction:
no.1 A factor that consistently varies with a transaction term over a significant number of transactions
no.2 A factor that the loan originator has the ability to add, drop or change in originating the transaction
How This Impacts Compensation Under the bureau’s new rule, a loan originator is defined more broadly than before, meaning that once these mandates take effect, it will be easier for persons to “trip” the definition of loan originator and be forced to abide by the new compensation rules.
When it comes to compensation, the new rule states that a loan originator can only be paid based on a fixed percentage of the amount of credit extended, and such compensation may be subject to a minimum or maximum dollar amount. For reverse mortgages, the bureau’s rule dictates that the loan amount can be either:
no.1 The maximum proceeds available to the consumer under the loan 8
no.2 The maximum claim amount as defined in HUD’s HECM regulations if the mortgage is an FHA-insured HECM
no.3 Based on the appraised value of the property, as determined by the appraisal used in underwriting the loan, if the mortgage is not an FHA-insured HECM
Like the original compensation rules set forth by the Federal Reserve Board, the CFPB’s rule applies only to closed-end credit as defined under Regulation Z. Thus, reverse mortgages structured as closed-end credit, most typically fixed-rate loans, will continue to be subject to the rule. Open-end credit plans, most typically variable-rate reverse mortgages, are still exempt.
A loan originator’s compensation may not be based in whole or in part on a term of a transaction, or a proxy for a term of a transaction. This encompasses compensation that is based on the terms of a single transaction completed by a single loan originator, multiple transactions of a single loan originator, or multiple transactions of multiple loan originators. Compensation policies will need to be re-examined.
In April 2012, the bureau issued a bulletin stating that lenders can make payments to their loan originators under a deferred tax advantaged compensation plan, such as a 401(k). The bureau’s recent Loan Originator Compensation Rule extends that guidance to allow payments to loan originators under non-tax-advantaged, deferred compensation plans as long as it does not exceed 10 percent of the LO’s total compensation. However, there is a de minimis exception to this limit for branch managers who do not originate more than 10 loans a year. Under the new rule, LOs can also offer pricing concessions, but these are limited only to situations in which there are unforeseen increases in closing costs from non-affiliated third parties.
Qualification Standards Persons who meet the definition of loan originator will also be forced to adhere to strict qualification standards, and their employers will be required to ensure that their employees are meeting the necessary requirements. This would mean that unique identification numbers for both the individual and the company must appear on several of the documents associated with any loan they handle in order to track those responsible for the transaction. This requirement applies to creditors as well.
While the qualification standards under the new Loan Originator Rule do not impose licensing requirements, every loan originator organization must ensure that each LO in its employ is licensed and registered in compliance with laws related to the S.A.F.E. Act, if applicable. Thus, entities engaged in lead generation and marketing activities, as well as the companies that do business with such entities, will need to pay particular attention to their activities to ensure that they do not inadvertently engage in loan originator activity. If they do, they’ll need to make sure that they meet these new loan originator qualification standards. Failure to meet these standards will give rise to severe civil liability that could impair the collectability of the loan.
New Mortgage Servicing Rules The bureau’s new mortgage servicing rules, issued under both TILA and RESPA, impose nine new requirements for mortgage servicers, but only three and a half of these new rules apply directly to reverse mortgage servicers. New early notice requirements for ARM adjustments apply only to closed-end, variable rate loans, and this would include HECMs if they were structured in such a manner. But nowadays almost all closed-end HECMs are structured with fixed interest rates, and so this requirement will rarely apply. Therefore, we’ll count that rule as half. Below is a summary of the servicing rules that will have a greater impact on the reverse sector.
Disclosure Requirements Disclosure requirements for reverse servicers will be impacted by new guidelines. Under the current RESPA rule, persons making federally related mortgage loans must disclose to loan applicants whether the servicing of their loans may be sold or transferred to another person at any time while the loan is outstanding. The Servicing Disclosure Statement, which must be distributed during origination, has been modified under the bureau’s Mortgage Servicing Rule.
Forced-Placed Insurance The new Mortgage Servicing Rule also requires reverse mortgage servicers to have a reasonable basis to believe the borrower has failed to maintain hazard insurance covering the collateral securing a loan. The servicer will be required to provide several notices and follow detailed timing requirements for informing the consumer of the need for force-placed insurance coverage and for removing this insurance if deemed unwarranted. If a borrower provides proof of hazard insurance to the servicer, the servicer must cancel the force-placed insurance policy and refund any premiums assessed to the borrower for overlapping periods during which coverage was placed. Finally, charges for force-placed insurance must be for services actually performed and must bear a reasonable relationship to the expense incurred by the servicer.
Handling Assertions of Error Under the new Mortgage Servicing Rule, reverse mortgage servicers will be required to follow detailed procedural requirements for responding to borrower assertions of error with regard to the servicing of a loan, and to provide written responses to requests for information from borrowers. In part, they must acknowledge a request for information or a notice of error within five days, and they must correct the error or conduct an investigation within 45 days.
ECOA Appraisal Rule Dodd-Frank amended the Equal Credit Opportunity Act (ECOA) to require creditors to automatically provide mortgage loan applicants with a copy of appraisals and other written valuations prepared in connection with the dwelling’s lien. This amendment also requires creditors to provide applicants with a disclosure at the beginning of the application process. The new ECOA Appraisal Rule recently issued by the bureau implements these requirements.
Under the new rule, creditors must notify mortgage loan applicants within three business days of receiving an application of their right to receive a copy of appraisals developed in connection with the making of the loan. Creditors also must provide an applicant with a copy of each appraisal and other written valuation promptly upon its completion, or three business days prior to the loan closing (for closed-end credit) or the opening of the account (for open-end credit), whichever is earlier. The rule does permit the consumer to waive the timing requirement, but if this is done the creditor must still provide the applicant with a copy of all appraisals and other written valuations at closing or when the account is opened.
Mortgage Rules That Won’t Impact Reverse—for Now The remaining rules issued by the CFPB won’t directly impact the reverse sector. Some of this is because of the nature of reverse mortgages, and some of this is a result of NRMLA’s valiant work. The association has been dogged in its efforts to assure the bureau recognizes the differences that exist between forward and reverse mortgage loans, claiming that because of these differences the reverse sector should not be subject to rules that won’t work for this niche mortgage product. This argument helped stave off some of the rules, but it doesn’t mean the reverse industry won’t face further regulation in the future. More mandates are in store for reverse mortgages, and a quick assessment of new rules for the forward market may help us prepare for what’s to come.
Ability to Repay and Qualified Mortgage Rule The Dodd-Frank Act amended TILA to require a lender to determine a borrower’s ability to repay a loan before approving a residential mortgage. The CFPB’s new rule puts this principle into effect, mandating that a lender must review at least eight criteria to assure the borrower has the ability to repay a loan.
This criteria includes the borrower’s:
no.1 Current or reasonably expected income or assets
no.2 Current employment status
no.3 Monthly payment on the covered transaction
no.4 Monthly payment on any simultaneous loan
no.5 Monthly payment for mortgage-related obligations
no.6 Current debt obligations, alimony or child support
no.7 Monthly debt-to-income ratio or residual income
no.8 Credit history
A lender that fails to meet this requirement will be subject to civil liability under TILA and administrative enforcement action. The collectability of the loan could be impaired for the life of the loan in the face of foreclosure (because TILA, as revised by the Dodd-Frank Act, gives a borrower of an improperly underwritten loan a defense against foreclosure by way of recoupment or set-off in the face of foreclosure, with no statute of limitations).
As an alternative to underwriting a loan pursuant to the above criteria, a lender could make a “qualified mortgage,” and if certain conditions are met, be afforded a conclusive presumption of compliance with the Ability to Repay Rule (i.e., a “safe harbor” from TILA liability).
There are several types of qualified mortgages created and defined under the final Qualified Mortgage Rule (all of which carry a limit on points and fees of 3 percent of the loan amount, among other things). However, because a borrower is not required to make monthly payments under a reverse mortgage, the Ability to Repay requirements do not apply, so there is no definition of a qualified reverse mortgage under the final Ability to Repay and Qualified Mortgage Rule. Thus, the 3 percent limit on points and fees does not apply to reverse mortgages.
HOEPA and Counseling Reverse mortgages have been and continue to be exempt from the high-cost mortgage rules under the Home Ownership and Equity Protection Act (HOEPA). The Dodd-Frank Act did not change that. The bureau did, however, propose the implementation of new counseling disclosure rules that would apply to reverse mortgages, but thanks to objections from NRMLA, reverse mortgage lenders will be exempt from the requirement to provide a list of counselors within three days of a consumer’s application. Of course, reverse mortgage lenders must continue to provide counseling disclosure in the manner required by the FHA HECM program rules.
Higher-Priced Appraisal Rule The Higher-Priced Appraisal Rule requires additional procedures for home-secured loans that meet the definition of a higher-priced mortgage loan (for first lien loans, a loan with an APR that is 1.5 percentage points in excess of the average prime offer rate, or APOR). However, after meeting with staff members from several federal agencies and submitting comments on the industry’s behalf, and because the higher-priced calculation does not fit well with reverse mortgages, and detailed appraisal requirements and protections exist under the FHA HECM program, NRMLA was able to convince the agencies to exempt reverse mortgages from this rule.
Escrow Rule Dodd-Frank also amended TILA to require creditors to establish and maintain escrow accounts for higher-priced mortgage loans for at least five years. The Escrow Rule amends existing regulations to implement this statutory change. Reverse mortgages are also exempt from this rule.
Conclusion While not all of the CFPB’s seven new rules governing residential mortgage lending and servicing apply to reverse mortgages, the bureau did state that it will issue proposed regulations specific to reverse mortgages in either 2013 or 2014. For an inkling of what those rules might look like, interested parties should look back to rules proposed by the Federal Reserve Board in the fall of 2010 (which were never finalized) and the bureau’s report on reverse mortgages issued in the summer of 2012. Other than speculate, there is little else we can do but trust that our friends at NRMLA will continue to work with the CFPB to ensure that the bureau’s future mandates will help and not hinder the continued offering of HECMs and the return of proprietary reverse mortgages.
For the time being, reverse mortgage companies should count their blessings and be thankful that NRMLA’s comments to these rules led to the industry’s exemption in some cases. Thanks to our dedicated association, more than half of these rules do not apply to the reverse mortgage industry.
Despite this win, there are still new rules that we must implement, including important rules regarding LO compensation and appraisal disclosures, and lenders would be wise to assess their practices now in order to make room for new procedures.
This article represents the views of Jim Milano, and not those of the law firm of Weiner Brodsky Kider PC, or its clients. This article is meant to give a concise overview of new regulations finalized by the CFPB. It is not intended as legal advice.