Mortgage lending

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See also mortgage modification.

Contents

Dodd-Frank changes for mortgage origination

INTRODUCTION

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which President Obama signed into law on July 21, 2010, will bring about many regulatory changes - some of which are set forth in the Act itself and others that are to be promulgated by federal regulators within the next 30 months. Of particular import, Title XIV of the Act, The Mortgage Reform and Anti-Predatory Lending Act, imposes new obligations, standards, and regulations on mortgage originators.

What Title XIV of The Dodd-Frank Act Provides

Title XIV of the Act was drafted for the purpose of assuring "that consumers are offered and receive residential mortgage loans on terms that reasonably reflect their ability to repay the loans and that are understandable and not unfair, deceptive or abusive." Some of the most noteworthy changes for mortgage originators are set forth below.

New Minimum Standards for Ensuring Borrowers' Ability to Pay

The Act imposes a "good faith" duty on lenders - requiring that they make a "reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance...and assessments." This "good faith determination" requires mortgage originators to consider a variety of documents that evidence a loan applicant's ability to repay, including "credit history, current income, expected income the consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or the residential income the consumer will have after paying non-mortgage debt and mortgage-related obligations, employment status, and other financial resources other than the consumer's equity in the dwelling or real property that secures repayment of the loan."

Title XIV also imposes on lenders a duty to verify amounts of income or assets that the lender relies upon to determine the consumer's ability to repay the loan. In order to "safeguard against fraudulent reporting," lenders are now required to use Internal Revenue transcripts of tax returns or another method that "quickly and effectively verifies income" by a third party who is also subject to the rules promulgated as a result of this legislation.

Integral to the above analysis is the concept of a "qualified mortgage." Aspects of this concept are as follows:

  • The mortgage provides that regular periodic payments do not result in an increase of the principal balance of the loan or allow the consumer to defer repayment of principal.
  • The mortgage does not result in a balloon payment (a scheduled payment that is more than twice as large as the average of earlier scheduled payments).
  • The income and financial resources relied upon by the lender have been verified and documented.
  • The underwriting process for a fixed loan is based on a payment schedule that fully amortizes the loan over the loan term, taking into account all applicable costs.
  • The underwriting process for an adjustable rate loan is based on the maximum rate permitted under the loan for the first five years and a payment schedule that fully amortizes the loan over the loan term, taking into account all applicable costs.
  • The mortgage complies with guidelines and regulations related to ratios of total monthly debt to total monthly income or alternative measures of a borrower's ability to pay.
  • The mortgage has total points and fees amounting to no more than 3 percent of the total loan amount.
  • The term of the loan does not exceed 30 years.

The Act provides a safe harbor provision for those mortgages that meet the definition of "qualified mortgage" - establishing a presumption in favor of the mortgage originator that the mortgagor is able to pay the loan.

New Loan Origination Standards

Title XIV of the Act requires that mortgage originators "establish and maintain procedures reasonably designed to assure and monitor the compliance" of institutions subject to the Act. Specifically, this provision requires that lenders be qualified and registered as mortgage originators under the applicable federal and state laws. The significance of this registration procedure is that all loan documents will require the inclusion of the mortgage originator's unique identifier, which is to be provided by the National Mortgage Licensing System and Registry.

Prohibits "Steering Incentives"

The Dodd-Frank Act calls for the promulgation of regulations that will prohibit lenders from "steering" borrowers into more costly loans. More specifically, such regulations will prohibit mortgage originators from (a) steering consumers to residential mortgage loans that consumers lack a reasonable ability to pay or that have "predatory characteristics or effects"; (b) steering the consumer away from a "qualified mortgage" toward a non-qualified mortgage when the consumer qualifies for a "qualified mortgage"; or (c) employing abusive and unfair lending practices that promote disparities among consumers of equal creditworthiness but of different race, ethnicity, gender, or age.

Additionally, the Act specifically prohibits mortgage originators from mischaracterizing the credit history of a consumer or the residential loans available to the consumer for purposes of making the loan. Mortgage originators are also prohibited from discouraging consumers from seeking a residential mortgage loan from another lender when the former is unable to suggest, offer, or recommend a loan that is not more expensive.

Prohibits Loans With "Predatory Characteristics"

Mortgage originators are prohibited from steering consumers to residential mortgage loans that have "predatory characteristics or effects." Although the Act does not define the term "predatory characteristics," it gives examples, which include equity stripping, excessive fees, or abusive terms. The Act calls for the establishment of additional regulations prohibiting acts or practices that are abusive, unfair, deceptive, or predatory.

The Dodd-Frank Act also imposes new compensation limitations by prohibiting yield-spread premium bonuses, a practice that increases the total cost of the loan to the borrower. The Act calls for additional new regulations that will prohibit "permitting any yield spread premium or other similar compensation that would, for any residential mortgage loan, permit the total amount of direct and indirect compensation from all sources permitted to a mortgage originator to vary based on the terms of the loan (other than the amount of the principal)."

Additional Liability for Mortgage Originators

The Act imposes liability on mortgage originators who fail to comply with these new minimum standards. It also provides a remedy to consumers for "the greater of actual damages or 3 times the total amount of direct or indirect compensation or gain accruing to the mortgage originator in connection with the residential loan involved in the violation," plus the costs of suit and reasonable attorneys' fees.

WHAT THIS MEANS TO MORTGAGE ORIGINATORS

Title XIV changes the regulatory landscape for mortgage originators, setting tougher new standards and creating new redress for consumers. The full effect of this new legislation has yet to be determined and will become clearer when federal regulatory agencies create the regulations that will implement much of this new legislation. However, it is evident that one of the aims of the Act is to prevent borrowers from being placed in residential mortgage loans that they are unable to repay. Mortgage originators must be prepared to comply with the Act's new minimum standards or face exposure to liability created by enhanced consumer recourse.

Fed rulemaking the Home Mortgage Disclosure Act

The Home Mortgage Disclosure Act (HMDA), enacted in 1975, requires depository institutions and certain for-profit, nondepository institutions to collect, report to federal agencies, and disclose to the public data about:

  • originations and purchases of home mortgage loans for home purchase and refinancing;
  • originations and purchases of home improvement loans; and
  • loan applications that do not result in originations (for example, applications that are denied or withdrawn).

The data collected under HMDA are used to:

  • help determine whether institutions are serving the housing needs of their communities;
  • help public officials target public investment to attract private investment where it is needed; and
  • assist in identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes.

The Board’s Regulation C implements HMDA. The information reported under Regulation C includes, among other items:

  • application date;
  • loan type, purpose, and amount;
  • property location and type;
  • race, ethnicity, sex, and annual income of the loan applicant;
  • action taken on the loan application (approved, denied, withdrawn, etc.) and date of that action;
  • whether the loan is covered by the Home Ownership and Equity Protection Act (HOEPA);
  • lien status (first lien, subordinate lien, or unsecured); and
  • certain loan price information.

Institutions report HMDA data to their supervisory agencies, which make the data available to the public with certain fields removed to preserve applicants' privacy. On behalf of the supervisory agencies, the Federal Financial Institutions Examination Council (FFIEC) compiles the reported data and prepares an individual disclosure statement for each institution, aggregate reports for all covered institutions in each metropolitan area, and other reports, all of which are available to the public on the FFIEC website.

New Fed rule for mortgage transaction disclosure

BACKGROUND

On August 16, 2010, the Federal Reserve Board ("Board") issued two proposed rules and three final rules governing federal Truth-in-Lending Act ("TILA") requirements for residential mortgage loans. This Client Alert summarizes the Board's interim rule that requires the disclosure of an interest rate and payment summary for mortgage loans.

Later Client Alerts will address the Board's remaining proposals and final rules.

CURRENT RULE

The payment schedule disclosure for closed-end loans is generally governed by Section 226.18(g) of Regulation Z, which requires a disclosure of the number, amounts, and timing of payments scheduled to repay the obligation. For mortgage loans with introductory interest rates, rate caps, payment caps, interest-only features, negative amortization, mortgage insurance, step rate, step payment, or other unique features, the payment schedule will have multiple phases—often, five or more—each set forth on a separate line.

INTERIM RULE

The Board's interim rule was issued under the Mortgage Disclosure Improvement Act of 2008 and amends Regulation Z. The interim rule applies to closed-end credit transactions secured by real property or a dwelling, but excludes loans secured by consumers' interests in certain timeshare plans. Compliance with the new rule is optional until January 30, 2011. Compliance is mandatory for applications received on or after that date. Comments on the interim rule may be provided to the Board for 60 days following publication in the Federal Register. Other amendments affecting payment disclosures are likely at a later time.

Under the interim rule, the payment schedule disclosure requirements contained in Section 226.18(g) of Regulation Z remain in place, but will apply only to loans that are not secured by real property or a dwelling. For loans that are secured by real property or a dwelling, a new Section 226.18(s) will govern. Section 226.18(s) requires an interest rate and payment summary for these mortgage transactions, rather than an exact payment schedule reflecting every payment due for every phase of the loan. Moreover, Section 226.18(s) requires disclosure of the interest rates that are applicable at various times during the loan term, something that Section 226.18(g) neither requires nor tolerates. In addition, a new Section 226.18(t) will require a disclosure that there is no guarantee that the consumer can refinance the loan to lower the interest rate or periodic payments.

Highlights of the new interim rule include the following:

  • The information must be provided in the form of a table, with headings and formats substantially similar to Model Clauses H-4(E) [for fixed rate mortgages], H-4(F) [for adjustable rate mortgages ("ARMs") or step rate mortgages], H-4(G) [for mortgages with negative amortization features, including Option ARMs], and H-4(H) [for fixed rate mortgages with an interest-only feature]. All loan products must be disclosed using the applicable Model Form.
  • Only information required by the interim rule may be included in the table. The table must be placed in a prominent location in the Regulation Z disclosure, and it must contain a minimum 10-point font. While each of the Model Forms contains a shaded section, it is not necessary to include the shading in the form used by the creditor. Nevertheless, it would be desirable to include the shading, and most creditors presumably will do so.

The interim rule is sufficiently flexible to accommodate a wide range of loan features, and the number of columns and the contents of the table will depend on the specific characteristics of the loan product. In any event, no more than five columns are permitted. Each column contains the interest rate that will apply at a designated time during the loan term, and the various rows will reflect the payments that are due.

Section 226.18(s) of Regulation Z and the corresponding provisions of the Federal Reserve Commentary ("Commentary") provide directions for disclosing the interest rates at various points of time for both amortizing loans (fixed rate, adjustable rate, step rate, and step payment) and negative amortization loans. There also are directions for disclosing the payments for amortizing loans (principal and interest payments, as well as interest-only payments) and negative amortization loans. For example, in the case of a simple fixed rate, fully amortizing payment loan, the table will be very straight-forward—a single column showing the interest rate and then (in successive rows) the principal and interest payment, estimated taxes and insurance (including mortgage insurance) if there is an escrow account, and the total estimated payment.

In contrast, in the case of a "plain vanilla" ARM with a capped rate during the first five years, there will be a disclosure of those same payment rows for each of three columns—the initial rate and payment, the maximum rate and payment during the first five years, and the maximum possible interest rate and payment. The Board has solicited specific comment as to whether five years is the appropriate period.

If the loan has an interest-only period, the creditor must also disclose the first payment that will be applied to both principal and interest. For example, if the ARM has an introductory rate for five years and an interest-only period of three years, there would be four columns—the initial rate and payment (itemized to show that the payment is an interest-only payment), the interest rate and payment when the interest-only period ends, the maximum rate and payment during the first five years, and the maximum possible rate and payment.

More complicated rules apply to loans with negative amortization. For a typical Option ARM product with a 7.5% payment cap except every five years, a maximum balance of 115% of the original balance, and no rate caps, there will (depending upon the other loan terms) be a need to show four columns. The first column will show the initial rate and minimum payment, the second column will show the maximum rate and minimum payment at the beginning of the second year (taking the 7.5% payment cap into consideration), the third column will show the maximum rate and minimum payment at the beginning of the third year (taking the 7.5% payment cap into consideration), and the fourth column will show the maximum rate and fully amortizing payment. The minimum payment option must be accompanied by a disclosure that it pays only some interest, does not repay principal, and that it will cause the loan amount to increase. A second row must reflect the fully amortizing payment option for each interest rate, if the loan product allows that option. Even if the loan product provides other payment options (as these products typically do), these may not be disclosed. Payments must include the estimated taxes and insurance (including mortgage insurance) if there is an escrow account. Various other disclosures are required for negative amortization loans.

Additional disclosures are required if there is an introductory rate (i.e., a rate that is less than the fully-indexed rate) or a balloon payment (i.e., a payment that is more than twice as large as a regular payment). Further, in all cases—even for a simple fixed rate, fully amortizing loan—there must be a disclosure of the fact that there is no guarantee that the borrower will be able to refinance to lower his/her rate and payments. These disclosures, set forth in Appendices H-4(I), H-4(J) and H-4(K), must be provided below the table.

There are various nuances. For example, a balloon payment that is due at the same time as another payment must be disclosed in the table, not below the table. Rate caps must be taken into consideration when disclosing the maximum rate during the first five years and during the life of the loan. For both an ARM and a step rate loan, the highest rate that can apply must be disclosed. A loan with an interest-only feature but which permits negative amortization will be disclosed using the negative amortization table. For an amortizing loan (both fixed rate and adjustable rate) where the payment can increase without regard to an interest rate adjustment, there is a need to disclose the payment that corresponds to the first such increase and the earliest date it could occur, subject to the overall rule that no more than five columns can be disclosed.

When providing the introductory rate disclosure for an ARM, it is necessary to know the "fully-indexed rate." The fully-indexed rate is the index plus the margin at consummation. For this purpose, "at consummation" refers to the disclosures delivered at the consummation of the loan (or three business days before consummation, if there is a redisclosure under Section 229.19(a)(2)(ii) of Regulation Z). For the early Regulation Z disclosure, the fully-indexed rate may be based on the index in effect when the disclosure is provided. If the loan product provides a "look back period" in the determination of rate adjustments, that same look back period can be used to identify the index value for purposes of determining the fully-indexed rate. For example, if the loan provides for a 45-day look back period, the creditor can use any index value in effect during the 45 days before consummation (or any earlier date of disclosure) in calculating the fully-indexed rate. This approach is consistent with Paragraph 226.17(c)(1)-10.

The estimated amount for taxes and insurance must be disclosed in the table, as described above, if there will be an escrow account. The escrow amount must include mortgage insurance premiums even if they are not escrowed and even if no escrow account is actually established.

In determining the amount of mortgage insurance premiums that will be reflected in the table, the creditor must assume that mortgage insurance premiums will continue to be charged (in the amounts required) until the date that the creditor must automatically terminate coverage under applicable law. This is the case even if the borrower has the legal right to cancel mortgage insurance coverage at some earlier time. For example, if the loan is subject to the federal Homeowners Protection Act, this means that the creditor must assume that mortgage insurance premiums will continue to be charged until the "termination date," rather than the earlier "cancellation date" on which the borrower may request cancellation under certain conditions. This approach is consistent with existing Paragraph 226.18(g)-5 of the Commentary.

The table for negative amortization loans requires a separate disclosure of the amount of estimated taxes and insurance. This is contained in a sentence that appears above the various columns. This sentence should reflect the mortgage insurance amount that will be collected at the outset of the loan term. In contrast, the mortgage insurance amounts included in the payments in the table should be calculated based on the rules summarized in the preceding paragraph.

ANALYSIS

The interim rule involves an extraordinary departure from the Board's historical approach to disclosure of the borrower's payments. Instead of requiring an exact payment schedule reflecting every payment due for every phase of the loan, the interim rule provides a summary of the interest rates and payments that will apply at critical times during the scheduled term of the loan. This approach reflects the results of extensive consumer research that was conducted for the Board by an outside company. An underlying philosophy of the new tables is that borrowers should not suffer from information overload, and that sometimes less information is better than more. In short, the interim rule provides borrowers with what they say they want and need, rather than providing them with a detailed description of all of the payment information relevant to their loans.

Because every loan product has its own unique characteristics, the interim rule and related Commentary provide generalized rules and some examples, rather than attempting to provide specific guidance for every conceivable type of loan. As confusing as the rules may seem, the Model Forms provided by the interim rule are remarkably clear and understandable—the best adjective might be "elegant." For most loan products, it will be less difficult to populate the tables than might appear at first glance.

Historically, creditors had the choice of whether to include escrows in the monthly payment schedule required by Section 226.18(g) of Regulation Z. See Paragraph 226.18(g)-1 of the Commentary. In practice, very few creditors chose to include the escrows in their disclosed payment schedules. Under new Section 226.18(s), creditors no longer have a choice. They will be required to disclose the estimated monthly escrow payment for taxes and insurance (including mortgage insurance) in all of the tables. In all of the tables other than the table for negative amortization loans, the creditor is required to separately disclose the monthly principal/interest payments, the monthly escrow payments, and the monthly total payments. In the table for negative amortization loans, the creditor is required to disclose payments for the fully amortizing payment option (if applicable) and the minimum payment option, with both sets of payments including the escrow payments.

The Wall Street Reform and Consumer Financial Protection Act of 2010 ("Dodd-Frank Act") amends the TILA's disclosure requirements for closed-end mortgage loans in several respects. Section 1419 of the Dodd-Frank Act amends Section 128(a) of TILA to require, in the case of a residential mortgage loan with a variable rate, a disclosure of the initial monthly payment for the payment of principal and interest, as well as the amount of that payment together with the monthly escrows for the payment of all applicable taxes, insurance, and other assessments.

Similarly, there is a need to disclose the fully-indexed monthly payment of principal and interest, as well as the amount of that payment together with the monthly escrows for the payment of all applicable taxes, insurance, and other assessments. In contrast, Section 1465 of the Dodd-Frank Act amends Section 128(b)(4) of TILA to require, in the case of a consumer credit transaction secured by a first lien on a principal dwelling (excluding open-end credit plans and reverse mortgages) for which an escrow account is required, a payment schedule that takes into account the amount of the periodic escrow payments. There are differences in the requirements of the interim rule, the amended Section 128(a) of TILA, and the amended Section 128(b)(4) of TILA, and the Board will need to sort these out in its implementing regulations.

The Commentary states that it is not permissible to include premiums for credit insurance or debt suspension or cancellation agreements as part of the disclosed escrow payment in the tables. If the purchase of any such insurance or agreements is mandatory, the associated premiums become part of the finance charge. See Section 226.4(b)(7),(10) and (d)(1),(3) of Regulation Z, and the corresponding Commentary provisions. Under Section 226.18(g) of Regulation Z, those premiums must be disclosed as part of the payment schedule. See Paragraph 226.18(g)-1 of the Commentary. In contrast, new Section 226.18(s) contains no requirement for the disclosure of such mandatory premiums as part of the payment schedule summary. However, the mandatory premiums would be part of the disclosed finance charge.

The Regulation and Commentary do not address whether it is permissible to include other escrowed items, such as ground rents, as part of the disclosed escrow payment. Presumably, the explicit reference in the Regulation and Commentary to the inclusion of taxes and insurance in the disclosed escrow payment means just that.

For high-cost mortgages, creditors must provide an additional disclosure at least three business days before the consummation of the loan transaction. See Section 226.31(c)(1) of Regulation Z. Among other items, this disclosure must include an exact payment schedule reflecting every payment due for every phase of the loan. See Section 226.32(c)(3) of Regulation Z and Paragraph 226.32(c)(3)-1 of the Commentary. Creditors that make high-cost mortgages will be required to provide both the interest rate and payment summary required by new Section 226.18(s) and the exact payment schedule required by Section 226.32(c)(3), notwithstanding the fact that these may look very different.

Loans secured by consumers' interests in certain timeshare plans are not subject to new Section 226.18(s) and (t) of Regulation Z. For those loans, Section 226.18(g) continues to apply, and the exact payment schedule must be disclosed in accordance with the requirements of that section and corresponding provisions of the Commentary. Reverse mortgages are subject to Section 226.18(s) and (t) of Regulation Z. However, reverse mortgages are excluded from the definition of a "negative amortization mortgage" for purposes of the interim rule. The vast majority of closed-end reverse mortgages carry a fixed rate, which means that those mortgages would be disclosed using the fixed rate table.

As noted above, additional disclosures are required if there is an introductory rate (i.e., a rate that is less than the fully-indexed rate). In many instances, the initial interest rate of an ARM is set by the creditor in accordance with market conditions at the time. If the initial rate is less than the fully-indexed rate, the introductory rate disclosure will be required. This result applies even if the creditor does not intend to offer a "teaser rate" designed to attract borrowers to the loan.

For negative amortization mortgages, only two payment rows are allowed—one for the fully amortizing payment (if applicable) and one for the minimum payment. The Board's Supplementary Information states that information relating to other payment options may be placed "outside the segregated information required under [Section 226.18(s)]." Notwithstanding this language, it may be risky to include information on other payment options in the so-called "Federal Box." Only "directly related" information may be included in the Federal Box, and the Commentary's list of items that constitute "directly related information" does not include such payment options. See Paragraph 226.17(a)(1)-5 of the Commentary. If a creditor wishes to disclose information regarding the additional payment options, it would be prudent to provide that information outside of the Federal Box.

The interim rule applies to all closed-end consumer credit transactions secured by real property or a dwelling. This means that new Section 226.18(s) and (t) of Regulation Z applies to a consumer loan secured by land that contains no dwelling or other structure whatsoever. The Board's reasoning is that unimproved real property is likely to be a significant asset for most consumers.

The Board's Supplementary Information states that both consumer advocates and some industry commenters argued that the tables should reflect estimates of taxes and insurance even if no escrow accounts are established. The Board will conduct additional testing to determine whether this approach is feasible and would be helpful to consumers. Creditors that would be concerned by such a requirement may wish to submit a comment to the Board.

Fed releases new rules for mortgage originators

The Federal Reserve announced rules aimed at preventing mortgage originators from receiving more compensation for selling home loans with higher interest rates.

“A loan originator may not receive compensation that is based on the interest rate or other loan terms,” the Fed said today. “This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs,” the Fed said as part of five final, interim or proposed rules released in Washington to combat unfair or abusive lending.

The proposals are part of the central bank’s ongoing effort to fix weaknesses in mortgage finance, including compensation practices, which undermined lending standards and prompted excessive risk-taking last decade. Lawmakers including Senate Banking Committee Chairman Christopher Dodd have criticized the Fed in recent years for failing to adequately regulate mortgage lenders prior to the financial crisis.

The Fed also proposed rules pertaining to so-called jumbo mortgages, home loans exceeding the loan-size limits for purchase by the government-sponsored enterprise Freddie Mac, and issued a final rule to require that consumers receive notice when their mortgage loan is sold or transferred.

The central bank proposed changes to the “Truth in Lending” rules that would require increased and clearer disclosure on reverse mortgages and boost protections that allow consumers to rescind a mortgage contract.

The move is “the second phase of the Board’s comprehensive review and update” of the broad set of mortgage rules under the Truth in Lending regulations, the Fed said. The first phase began with the publication of proposals in 2009.

More Disclosure

An interim rule released today requires increased disclosure by mortgage lenders, calling on them to provide borrowers with a table showing more detailed terms of mortgages.

The table must show the initial interest rate and monthly payment. For adjustable rate loans, the lender must disclose the maximum payment that can occur in the first five years and the “worst-case” scenario that can occur over the life of the loan. Features like balloon payments must also be disclosed. Lenders must comply with the new disclosure rule by January 30, 2011.

Final rules issued for S.A.F.E. Act for registration of mortgage loan originators

Federal agencies issued final rules today requiring residential mortgage loan originators who are employees of national and state banks, savings associations, Farm Credit System institutions, credit unions, and certain of their subsidiaries (agency-regulated institutions) to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act). The final rules are being issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Farm Credit Administration, and National Credit Union Administration (the agencies).

The S.A.F.E. Act requires residential mortgage loan originators who are employees of agency-regulated institutions to be registered with the Nationwide Mortgage Licensing System and Registry (registry). The registry is a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. As part of this registration process, residential mortgage loan originators must furnish to the registry information and fingerprints for background checks. The S.A.F.E. Act generally prohibits employees of agency-regulated institutions from originating residential mortgage loans unless they register with the registry.

The agencies’ final rules establish the registration requirements for residential mortgage loan originators employed by agency-regulated institutions and requirements for these institutions, including the adoption of policies and procedures to ensure compliance with the S.A.F.E. Act and final rules. As required by the S.A.F.E. Act, the final rules also require that each residential mortgage loan originator obtain a unique identifier through the registry that will remain with that residential mortgage loan originator, regardless of changes in employment. This will enable consumers to easily access employment and other background information about registered mortgage loan originators from the registry. Under the final rules, registered mortgage loan originators and agency-regulated institutions must provide these unique identifiers to consumers.

The final rules take effect on October 1, 2010. The agencies anticipate that the registry could begin accepting federal registrations as early as January 28, 2011. Employees of agency-regulated institutions must not register until the agencies instruct them to do so. The agencies will provide an advance announcement of the date when the registry will begin accepting federal registrations, and agency-regulated institutions and their applicable employees will have 180 days from that date to comply with the initial registration requirements.

The final rules appear in today’s Federal Register.

The Federal Register notice and final rules are attached.

U.S. mortgage brokers get criminal check, tests under new rules

California mortgage brokers face closer scrutiny as the state adopts a federal law aimed at curbing the fraud and abuse that helped decimate the housing market.

Brokers in the nation’s most populous state will be required by July 31 to have passed criminal-background and credit checks, as well as licensing exams. California, along with about a third of U.S. states, previously didn’t require mortgage sellers to have individual licenses.

That’s about to change as all states by Jan. 1 must implement the national rules, which Congress developed after record mortgage defaults and foreclosures were triggered by rampant lending to people who couldn’t afford to repay their loans or never intended to. Brokers will be assigned identification numbers to enable regulators and borrowers to track their lending histories.

“When someone buys 100 shares of stock, they must go through a licensed securities broker,” said Senator Dianne Feinstein, a California Democrat and co-sponsor of the law, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. “Until recently, some purchased their home -- a far more valuable asset -- through an independent mortgage broker or lender who may have had a criminal background or no license at all. This lack of accountability enabled unscrupulous brokers to commit fraud at the expense of unsuspecting homebuyers.”

The U.S. financial-overhaul bill passed by Congress last week includes additional mortgage regulations. The legislation seeks to protect consumers from unaffordable loans with low introductory teaser rates by requiring that they be able to repay the maximum cost of adjustable mortgages based on current income. It also caps brokers’ fees at 3 percent for most loans to eliminate incentives to issue costlier and riskier mortgages.

Banks Exempted

The 2008 law, dubbed the SAFE Act, doesn’t require testing for mortgage brokers at federally regulated lenders. That may help companies such as Bank of America Corp. and Wells Fargo & Co. gain market share because they face fewer training requirements and costs, said William Emerson, chief executive officer of Quicken Loans Inc., a closely held nonbank lender in Livonia, Michigan.

“For large, independent, nonbank lenders, this is certainly an operational challenge,” Emerson, whose company originated $25 billion in mortgages in 2009, said in a telephone interview. “It certainly adds costs.”

Bank of America and Wells Fargo together accounted for 46 percent of the residential-lending market in the first quarter, according to data compiled by Inside Mortgage Finance Publications in Bethesda, Maryland. Of $320 billion in new mortgages in the quarter, about $184 billion, or 57 percent, was originated by lenders whose employees are exempt from the licensing exams, according to Inside Mortgage Finance data.

19% of US mortgages have $770B in underwater equity

An excel spreadsheet released from a recent briefing by Mark Zandi and Robert Shiller is making the rounds within the blogosphere. It provides a useful compilation of the underwater equity statistics in the country. In a nutshell here are the observations:

  • 19%, or 14.748 million of the 77.570 million US households, are in negative equity
  • 30.6% of the 48.243 million of homeowners with first mortgages are in negative equity
  • 21.8% of the 67.578 million in owner-occupied single family homes are in negative equity
  • 4.133 million of the 14.748 million of underwater homeowners are underwater by 50%+, meaning the owe more than 50% more than their homes are worth

Of the 50%+ underwater category, the worst states are:

  • California (672K),
  • Florida (423K), and
  • Texas (344K)

Total Negative Equity in the US is currently estimated at $771.1 billion

  • California mortgages have $234 billion in negative equity,
  • Florida mortgages have $79 billion in negative equity,
  • Texas mortgages have $48 billion in negative equity

$2.4 trillion in total mortgage debt is impaired due to negative equity

FSA: Mortgage Market Review

1.1 Our review of the mortgage market began in 2005 when we launched the first of two studies of the effectiveness of the mortgage conduct regime introduced in October 2004.1 Those customer-facing reviews were complemented by a series of firm-facing thematic projects which also began in 2005. Those early reviews looked at responsible lending practices in the areas of sub-prime, interest-only, self-certified mortgages and lending into retirement.2 At that early stage we were finding weaknesses in responsible lending practices and in firms’ assessments of a consumer’s ability to afford a mortgage, and had already started working with the industry to try and raise standards.

1.2 Events in the financial market from late 2007 onwards inevitably affected our work and brought a much wider remit, extending it beyond a narrow conduct focus to the wider prudential and macroeconomic context. As we have said previously, the mortgage market worked well for many consumers. But it was also clear that the existing regulatory framework had been ineffective in constraining particularly risky lending and unaffordable borrowing. Circumstances led lenders to feel insulated from losses arising from poor lending, largely as a result of being able to pass risks onto others (e.g. by securitisation) and also by the widely held expectations of continuing growth in property values. This resulted in relaxed lending criteria and increased risk taking, and increased competition pushed lending further along the risk curve with a rash of new market entrants (often non-deposit taking lenders) adding to this.

1.3 The continued boom in house prices and this ready availability of credit allowed many households to take on even more debt. This increase in mortgage borrowing included extended access to higher-risk groups, such as the credit impaired, who had previously been excluded. So far in this downturn we are seeing problems concentrated among such borrowers and characterised by apparently higher-risk lending practices.

1.4 With the Bank of England (BoE) Bank Rate at a historically low level the majority of borrowers currently enjoy lower mortgage rates. Together with the various government initiatives and improved lender forbearance, this disguises the full impact of unaffordable lending and the true extent of the vulnerability of many consumers to upward interest rate movement, as we discuss in Chapter 2.

1.5 Our approach to retail conduct of business regulation and supervision generally has undergone fundamental change. We will no longer intervene based solely on observable facts and we will no longer wait for our effectiveness and thematic reviews to highlight crystallised risks before acting. We are prepared to take a much more robust and interventionist approach to regulating firms and markets, intervening early where necessary to shape the market to deliver appropriate outcomes and address problems before they cause substantial consumer detriment.

1.6 In line with this new approach, this Consultation Paper (CP) sets out the changes we believe are needed to deliver a more responsible approach to lending in future, to ensure a sustainable market and one that works better for consumers. We believe that a robust and effective assessment of individual affordability has to underpin any sustainable lending model. This will address one potential cause of business failure as well as contributing to the fight against financial crime. By the same token, ensuring that individual borrowing decisions are responsible and affordable will also limit harm.

1.7 This CP also presages a more interventionist and robust approach to challenging unfair charging practices in the market. We indicated in the Mortgage Market Review (MMR) Discussion Paper (DP09/3) that we had work underway to help us develop a better understanding of charging and pricing structures in the market. This should enable us to identify and challenge unfair and excessive practices. The first stage of that work looked at arrears charges and this CP presents the outcomes of that review. It sets out proposed changes to our arrears-charging rules to clarify the approach we expect firms to be taking under our existing requirements.

1.8 There are two areas that we open up for further debate in this CP. One is our approach to regulating non-banks. The other is our approach to interest-only mortgages. We invite further debate and discussion on both topics to help inform our final proposals, which will be consulted on at a later stage.

1.9 The overall aims of the MMR are to have a mortgage market that is sustainable for all participants and to have a flexible market that works better for consumers. We believe that the proposals set out in this CP will go a long way to help deliver these aims.

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