Regulatory Meltdown Starts Monday

WE’RE HEARING that while most financial institutions and government offices will be closed to honor Martin Luther King’s birthday on the third Monday in January, it won’t be a restful day for many mortgage bankers. That’s because it is (by coincidence) the day they start living in a “post meltdown” regulatory world.

The Consumer Financial Protection Bureau was given broad rulemaking capabilities on the heels of Dodd-Frank. And while some industry optimists thought a repeal of that landmark legislation (or at least stronger oversight of the CFPB) would occur if President Obama did not win a second term, that vision of “hope” and “change” got crushed on Nov. 6.

So here we are in 2013 and about to start living in a post “mortgage meltdown” regulatory world. And Jan. 21, 2013 was set as the date for new rules to be in place and implementation to begin. Here is a brief summary of the rules enacted by CFPB to meet the Jan. 21 deadline:

• Qualified Mortgage

Among the biggest issues the CFPB was tasked with is to define rules around the determination of a borrower’s ability to repay a residential mortgage loan. As lawmakers attributed poorly defined and loose underwriting standards to the real estate market collapse, Congress authorized the CFPB to define the criteria to determine a homeowner’s repayment ability.
After much debate and lobby efforts by stakeholders, the CFPB has released its definition of QM and it includes some key points: no interest-only or negative-amortization loans, no “teaser” interest rates, DTI ratio requirements move to 43%, jumbo loans are not exempt from the QM rules. But most important is the “ability to repay” provision which requires lenders to thoroughly document the characteristics of the borrower and the property to ensure that there is a reasonable ability to repay the loan.

There is a year phase in period to give lenders, investors and regulators time to absorb the 800-plus pages and update their documents, systems and secondary marketing practices. Along with this rule, the CFPB issued a proposal seeking comment on amendments and other matters including the inclusion of loan originator compensation in the points and fees.

• High Cost Mortgages

Changes to the HOEPA portion of the Truth in Lending Act were made on Jan. 10. Those changes include addition of purchase money and HELOC loans to high-cost rules, the trigger for points and fees is lowered to 5% of the total mortgage amount for most loan programs, the new rule cleans up the prepayment provision to prevent problems with currently originated FHA loans falling under the high cost umbrella, and we go from a limited prohibition on prepayment fees for HOEPA loans to a complete prohibition on the practice.

Like QM, there is a year for mandatory compliance.

• Escrow Rule Changes

CFPB looked at the entire escrow process and came up with rule changes to the way servicers handle borrower payments of taxes, insurance and other escrowed items including a five-year minimum for escrow accounts on high-priced loans; the inability for servicers to cancel escrow accounts for certain loans; and the ability for the lender to have an exemption on new escrow rules based on loan volume, rural housing designations and a few other factors.
Details are still to come on some other mandatory rule making based on the Jan. 21 deadline. These include an ECOA Appraisal Disclosure Rule, new servicing guidelines and further scrutiny and regulation on loan officer compensation.

Enjoy the day off on Monday if you are lucky to get it. Mortgage lenders, servicers, investors and industry vendors are in for a busy year. Changing computer systems, legal documents and lender policies and procedures has always been a daunting task. But with so many new rules coming out at the same time, compliance will require careful planning, thorough understanding of the regulations, participation in industry events and partnering with industry experts to prevent costly mistakes.

Penny Showalter is a managing director for Cognitive Options Group, a regulatory compliance consulting firm that also provides companies with operational, transactional and outsourcing services.