RC11Jaworski.Workshop2

8/3/2019 RC11Jaworski.Workshop2

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Robert M. Jaworski, Partner

Reed Smith, LLP

MBA Regulatory Compliance ConferenceRenaissance Washington DC Downtown

HotelWashington, D.C.

September 25, 2011

WORKSHOP 2:QUICK GUIDE TO TILA


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TILA/Regulation Z


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Outline

Purpose: To ensure meaningful disclosure of creditterms so consumers can better shop for credit and use itwisely

Key Definitions Disclosure Requirements Right of Rescission Advertising Restrictions HOEPA Loans (Section 32 Mortgages) Higher-Priced Mortgage Loans Servicing Requirements Loan Originator Compensation Rules Notification of Sale or Transfer of Mortgage Loan Valuation Independence Rules

Public and private remedies


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Key Definitions

Consumer Credit Transaction

Finance Charge

APR

Amount Financed


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Disclosure RequirementsGeneral

Closed-end

Early TIL

Final TIL

ARM Program Disclosure + CHARM Booklet

Open-end

HELOC Plan disclosure + What You Should Know

About Home Equity Lines of Credit Disclosure before first advance

Periodic Statement

Model Forms and Clauses


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Disclosure RequirementsRate and Payment Summary

Required by Mortgage Disclosure Improvement Act of2008 (MDIA)

Mandatory compliance January 30th 2011

Scope: Closed end; secured by property or a dwelling

Timeshare plans not covered

Replaces payment schedule


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FORMAT:

Minimum 10 point font No unrelated information

Not more than 5 vertical columns

Model forms in Appendix to Regulation Z

Must be in the form of a table, with headings

substantially similar to model clauses Rearrangement of the model forms, except for limitedpermitted changes, may cost creditors protection fromcivil liability


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FIXED RATE MODEL CLAUSE

H-4(E)Rate & Monthly Payment

Interest Rate _____%

Principal + Interest Payment $_____

Est. Taxes + Insurance (Escrow)* [Includes [Private] MortgageInsurance]

$_____

Total Est. Monthly Payment $_____


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ESCROW TAXES AND INSURANCE: MORTGAGEINSURANCE

Mortgage insurance premiums are included in escrowdisclosure

Credit insurance excluded

Mortgage insurance premiums included until the datecreditor must automatically terminate mortgage

insurance Escrow disclosure includes mortgage insurance even

if there is no escrow account established for thetransaction


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MORTGAGE WITH NEGATIVE AMORTIZATION MODELCLAUSE - H-4(G)

[This loan offers you several monthly payment options. The table below shows

you what your payments would be under two of these options if the interest ratereached its maximum of ___% in the (period) of this loan.][All payments shown in the table include $___ for estimated taxes and insurance[(escrow)].

(Date)

[((period)

[intro])]

[(Date) (1st

adjustment)][(Date) (2nd

adjustment)](Date) +every

(period)after

Maximum Interest Rate _____%[(intro rate)]

[_____%] [_____%] _____%(max. ever)

Full Payment Option

Monthly payments coverall principal and interest

$_____ [$_____] [$_____] $_____

Minimum Payment

OptionInitial monthly paymentscover no principal andonly some interest andincrease your loanamount.

$_____ [$_____] [$_____] $_____

You will borrow an additional $_____ by (date) if you make only minimumpayments on this loan.


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FIXED RATE: INTEREST-ONLY

MODEL CLAUSE H-4(H)INTRODUCTORY

Rate & Monthly Payment

(for first ____ years)

MAXIMUM EVER

(as early as ___)

Interest Rate _____% _____%

Principal Payment $_____ $_____

Interest Payment $_____ $_____

Est. Taxes + Insurance (Escrow) $_____ $_____

Total Est. Monthly Payment $_____ $_____


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TEASER RATE MODEL CLAUSE H-4(I) - place below the table:

Period in sequence means in the second year or similar phrase

Introductory Rate NoticeYou have a discounted introductory rate of

__________% that ends after (period). In the (period insequence), even if market rates do not change, this rate

will increase to _____%.


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BALLOON MODEL CLAUSE H-4(J) place below table:

Balloon payment = more than twice the regular periodic payment

Disclosure: Outside and below the table, unless coincides withinterest rate adjustment or a scheduled payment increase

Final Balloon Payment due (date):$______________.


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NO REFINANCE GUARANTEE Model Clause H-4(K) Clause

inserted on TILA forms

There is no guarantee that you will be able to refinance to

lower your rate and payments.


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Right of Rescission

Loans subject to rescission

Notice of Right to Cancel

Delayed Disbursement

Expiration

Effect of rescission

Waiver


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Advertising Restrictions

Closed-end

Simple interest rate/APR

Trigger terms Requirement to disclose additional info about

rate/payment with equal prominence and in closeproximity to advertised rate/payment

Prohibited practices

HELOCs

Warning that balloon payment can result from payingminimum payment

Additional disclosures for promotional rates/payments

No misleading claims of tax deductibility

No references to HELOCs as free money


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HOEPA Loans (Section 32 Mortgages)

Loans secured by principal dwelling; not purchasemoney, reverse or open-end

Must meet APR Test or Points and Fees test

3-day cooling off disclosure

Notice to assignees

Numerous restrictions and limitations


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Higher-Priced Mortgage Loans

Loan secured by principal dwelling; not bridge loan,reverse mortgage or HELOC

APR in excess of average prime offer rate (APOR) +1.5/3.5 (first/subordinate liens)

Restrictions and limitations

Verified ability to repay

Mandatory escrows for taxes and insurance for atleast 12 months

Limited ability to charge prepayment penalties

(PPPs)


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Servicing Requirements

Applies to loans secured by a borrowers principaldwelling

No pyramiding of late fees

Requirement to credit payments on date of receipt

Requirement to provide payoff quotes within reasonabletime


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LO Comp RuleScope

Does not implement similar provision in Dodd-Frank(CFPB will revise as necessary to implement Dodd-Frank

provision)

Does not apply to HELOCs or timeshare loans

Defines loan originator as including mortgage brokerage

companies and their loan officer employees + loan officeremployees of lenders who fund their own loans, but not thelenders themselves

Mandatory Compliance DateApril 6, 2011


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LO Comp RuleThree Main Prohibitions

No comp may be paid to a LO based on loan term or condition (or

other factor that serve as a proxy for loan term or condition), exceptamount of loan

No comp may be paid to a LO by both the consumer and a partyother than the consumer for same loan

No improper steering by an LO (obtaining loan that providesgreater comp to LO unless loan is in the consumers interest) safe harbor if LO presents consumer with loan options fromsignificant number of creditors with which LO regularly doesbusiness (preferably 3), including

Loan with lowest interest rate Loan with lowest interest rate but which does not allow for neg.

am., prepayment fee, interest-only payments, balloon payment

within first 7 years, demand feature or shared equity/sharedappreciation feature Loan with lowest origination fees/discount points


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LO Comp RuleUnacceptable/Acceptable Comp Under Prohibition #1

Unacceptable

Comp based on the loan interest rate, APR, LTV ratio or theexistence of a prepayment penalty

Comp based on a factor that is a proxy for a loan term orcondition; e.g., consumers credit score or DTI ratio

Acceptable

LOs overall loan volume Long-term performance of LOs loans; Hourly Rate or Salary or flat fee per loan (fixed in advance) LO pull-through rate Loans to existing v. new customers Quality of LOs files (accuracy and completeness) LOs fixed overhead costs

Comp based on amount of loan Percentage of loan amount with fixed maximum and/or

minimum amount per loan


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LO Comp RuleIssues

Comp based on profitability/revenue?

Different comp for different loan programs FHA/VA or

CRA or jumbo v. conventional; portfolio v. non-portfolio; in-house v. brokered, purchase v. refinance?

Borrower-pay mortgage broker comp/payment to LO?

LO agreement to credit portion of LO comp to consumer toseal the deal/Point Banks?

Loans made through different channels (bank supplies leadsv. LOs get their own leads)?

Loans made by different subsidiaries/affiliates?

Comp to managers who do/do not originate?

S


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Requirement of Notification of Sale or Transfer ofMortgage Loan

Helping Families Save Their Homes Act of 2009

Applies only to loans secured by borrowers principaldwelling

New owner must send Notice of Transfer within 30 days(unless it transfers loan before then)

Notice must specify

Contact info for new owner Date of transfer How to reach agent for new owner Where transfer of ownership recorded Other relevant information


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Valuation Independence RulesUse of Coercion

Prohibits:

Directly or indirectly causing or attempting to cause avaluation to be based on anything other than theindependent judgment of the person performing thevaluation

Use of coercion, extortion, bribery, intimidation,compensation, or collusion to influence the person

performing the valuation

Material misrepresentations as to the value of theproperty by the person performing the valuation

Falsifying or materially altering the valuation report

Note: It does not matter that the action was not intendedto influence the valuation, or that the person refusedthe attempt the mere conduct is a violation.

V l i I d d R l


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Examples of prohibited conduct:

Withholding or threatening to withhold paymentbecause the valuation does not come in at a certainamount

Implying that the willingness of the lender to retain the

person for future engagements depends on theamount of the current valuation Come in at $X, oryoull be dropped from our preferred vendor list.

Conditioning payment for the valuation on the loanactually closing

V l i I d d R l


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Examples of permissible activities: Asking the preparer to consider additional and

appropriate property information, including othercomparable properties

Asking the preparer to provide further detail,substantiation, or explanation for the valuation

Asking the preparer to correct errors in the valuation

Obtaining multiple valuations on the same property to

obtain the most reliable valuation a SecondOpinion

Withholding payment for breach of contract orsubstandard performance.

Note: The key is that the request must be consistent

with prudent banking practices and not an attempt toget the preparer to change the outcome of thevaluation improperly.

Valuation Independence Rules


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Valuation Independence RulesConflicts of Interests

Person who prepares valuations, or performs valuationmanagement functions may not have a direct or indirectinterest, financial or otherwise, in the property or thetransaction.

Valuation management functions =

recruiting, selecting or retaining person to prepare valuation

contracting with or employing person to prepare valuation managing or overseeing process of preparing valuations

(e.g., receiving orders for and receiving valuations;submitting completed valuations to, and collecting fees from,creditors and underwriters; and compensating persons whoprepare valuations

reviewing or verifying the work of person who prepares

valuation

V l ti I d d R l


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Valuation Independence RulesConflicts of Interests

Presumption of compliance if compensation of preparer nottied to valuation coming in at specific amount AND

For institutions > $250 million (past 2 years):

Person performing the valuation or valuation managementfunction not part of the loan production function.

No person in loan production function directly or indirectlyinvolved in selecting, retaining, recommending, orinfluencing the selection of the person preparing thevaluation or involved in the valuation management function

OR

For institutions $250 million (past 2 years):

Creditor requires that any of its employees, officers ordirectors who orders, performs, or reviews valuation notparticipate in decision to approve, decline or set terms ofloan

V l ti I d d R l


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Valuation Independence RulesProhibition on Extension of Credit

Where creditor knows that a violation of the coercion orconflicts provisions has occurred, credit may not beextended unless creditor documents that it has actedwith reasonable diligence to determine what thevaluation does not materially misstate or misrepresentthe value of the property.

A material misstatement is a misstatement that wouldaffect credit decision.



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Valuation Independence RulesPayment at Customary and Reasonable Rate

Creditor and its agents must compensate fee appraiser atcustomary and reasonable rate in the relevant geographic

market

Compliance presumed if:

Rate is reasonably related to recent rates paid forcomparable services in relevant geographic market, takinginto account type of property, scope of work, time required,appraisers qualifications, experience and professionalrecord, and quality of work, and creditor does not engage inanticompetitive conduct

Rate is based on (i) objective third-party information, e.g.,fee schedules, studies and surveys prepared byindependent 3rd parties (govt, academia, research firms)which exclude fees paid to appraisals ordered by AMCs, or

(ii) recent rates paid to a representative sample of providersin relevant geographic area.



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Valuation Independence RulesMandatory Reporting of Violations

Applies to all covered persons (creditors and other settlementservice providers)

Applies when covered person reasonably believes appraiser hascommitted a material violation (one likely to significantly affectthe property valuation) of Uniform Standards of ProfessionalAppraisal Practice or ethical or professional requirements imposedby federal or state law

Requires covered person to notify appropriate state appraisercertifying/licensing agency of suspected violation withinreasonable period of time after determining reasonable basisexists to believe violation has occurred


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Public and private remedies

Administrative enforcement by CFPB or principal federal bank regulator (for banks

under $10 billion in assets)

by means of an Order to Make an Adjustment

Private right of action Actual damages Statutory damages

Individual actions: $200-$2,000 (open-end); $400-$4,000 (closed-end)

Class actions: $500,000 or 1% creditors net worth,whichever is less

Enhanced damages for material violations of section 129(HOEPA and HPML loans) = sum of all finance charges

Court costs + attorneys fees General assignee liability only for violations apparent on

the face of the disclosure statement

1 year limitation period to commence suit

Criminal enforcement up to $5,000 and/or 1 year imprisonment


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Dodd-Frank Amendments to TILA

Outline


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Outline

New definitions

Anti-steering provisions

Ability to repay requirements

New defenses to foreclosure

Limitations on PPPs

Other limitations

Increased penalties/time to sue

New disclosures

HOEPA Changes

FRB Ability to Repay Proposal

New definitions


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New definitions

Residential mortgage loan = Closed-end, dwelling-securedconsumer credit transaction

Qualified mortgage (QM) = residential mortgage loan

no negative amortization/balloon payment

verified income and assets

underwritten using fully-amortizing payment schedule,including applicable taxes, insurance and assessments

points and fees 3% total loan amount complies with DTI ratios established by FRB

Mortgage originator somewhat broader than SAFE Act butexcludes servicers

Servicer same as in RESPA

Anti steering provisions (New section 129B)


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Anti-steering provisions (New section 129B)

Prohibited steering =

Mortgage originator comp. based on loan terms (otherthan loan amount), e.g., YSPs

Payment of mortgage originator comp. by bothborrower and another person

Steering consumers to loans For which they lack reasonable ability to repay

That have predatory characteristics

That are not QMs when they qualify for a QM

Engaging in abusive or unfair lending practices thatpromote disparities [based on] race, ethnicity, gender,or age.

Ability to repay requirements (New section


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Ability to repay requirements (New section129C)

Creditors must make reasonable and good faith

determination, based on verified and documentedinformation, that, at time of closing, consumer hasreasonable ability to repay loan according to its terms(using fully-amortizing payment schedule and taking intoaccount all applicable taxes, insurance and assessments)

Rebuttable presumption/safe harbor - ability to repay aQM



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For violations of section 129B or 129C

As a defense by recoupment or set off

Any time during life of loan

Limitations on PPPs


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Limitations on PPPs

PPPs permitted only if:

Loan is a QM

Loan APR APOR + 1.5 (1st lien conforming)/2.5 (1st

lien jumbo)/3.5 (2nd lien) percentage points

Penalty 3%, 2% or 1% of outstanding balance whenrepaid, respectively, during first, second or third yearsof loan term

No penalty after 3 years

Creditor offers loan without PPP

Other limitations


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Other limitations

Residential mortgage loans and HELOCS

No financing of single premium credit insurance

No mandatory arbitration clauses

No payment schedules that permit negative amortization

No refinancing that result in borrower losing anti-deficiencyprotections, without notice before closing

No loans that are not QMs to 1st time homebuyers withoutcounseling



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Class action damages limit raised from $500,000 to $1million

Enhanced section 129 damages for violations of anti-steering and ability to repay provisions

Private right of action for violation of anti-steering

provision by loan originators/capped at actual damages or3 times originators total comp., whichever is higher

Time to sue for violations of sections 129, 129B and 129Cincreased from 1 year to 3 years

New disclosures


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New disclosures

6-month prior notice of interest rate adjustments onfixed/adjustable rate hybrid ARMs secured by borrowersprincipal residence

Additional closed-end disclosures

Monthly statements for all residential mortgage loans(other than fixed-rate loans where equivalent info is oncoupon books)

HOEPA Changes


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HOEPA Changes

Changes name to high cost loans (HCLs)

Expands definition

includes open-end and purchase money loans changes index (from yield on Treasury securities to

APOR) and lowers APR threshold (from 8/10 to6.5/8.5 percentage points over the applicable index)

lowers points and fees threshold from 8% to 5% of

total loan amount expands list of points and fees

adds new category = loans with PPPs payable after 6months or more than 2% of amount prepaid

Prohibits, among other things, balloon payments and latefees > 4%

Creates cure provisions

FRB Ability-to-Repay Proposal


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FRB Ability to Repay Proposal

Before making a covered transaction (dwelling-secured

consumer-purpose loan - not a HELOC, timeshare loan,reverse mortgage or bridge loan), creditor must makereasonable and good faith determination that consumerhas reasonable ability, at time of consummation, to repayloan according to its terms, including any mortgage-related obligations.

Four ways to meet ability-to-repay requirement:

1. General ability-to-repay standard

2. Originate a qualified mortgage

3. Originate a balloon payment qualified mortgage

4. Refinance a non-standard mortgage with a standardmortgage



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y p y pGeneral ability-to-repay standard

Must consider and verify

Income or assets relied upon Current employment status

Monthly payment on the covered transaction

Using greater of fully-indexed rate or introductoryrate, and monthly, fully-amortizing, substantiallyequal payments

Special rules for balloon, interest-only andneg.am loans

Monthly payment on any simultaneous mortgage

Monthly payment for mortgage-related obligations

Current debt obligations

Monthly DTI ratio or residual income Credit history



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y p y pQualified Mortgage (one option)

Safe harbor

No negative amortization No interest-only payments No balloon payment No loan term in excess of 30 years Total points and fees 3% total loan amount Income or assets relied upon are considered and

verified Underwriting must be

based on maximum interest rate that may applyduring 1st 5 years

using fully amortizing payment schedule over loanterm

taking into account any mortgage-relatedobligations



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y p y pQualified Mortgage (second option)

Rebuttable presumption of compliance

Must meet same criteria as for safe harbor

Must consider and verify

consumers employment status

monthly payment for any simultaneous mortgage

consumers current debt obligations

monthly DTI ratio or residual income

consumers credit history



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Balloon-Payment Qualified Mortgage

Only for creditors who operate predominantly in rural orunderserved areas

Loan term must be 5 years

Must comply with requirements for a qualified mortgage

Must underwrite based on the scheduled payment (exceptfor the balloon payment)

FRB Ability-to-Repay ProposalR fi i f N St d d M t ith St d d M t


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Refinancing of Non-Standard Mortgage with Standard Mortgage

Non-Standard Mortgage = covered transaction that is

an ARM with an introductory rate that is fixed forat least 1 year

a loan that permits one or more interest-onlypayments

a loan (other than a reverse mortgage) thatprovides for a minimum periodic payment thatcovers only a portion of the accrued interest,resulting in negative amortization



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y p y pRefinancing of Non-Standard Mortgage with Standard Mortgage

Standard Mortgage = covered transaction

that provides for regular periodic payments that donot cause principal to increase or allow consumer todefer payment of principal or result in a balloonpayment

for which total points and fees 3% of total loanamount

for which term 40 years

for which interest fixed for at least 5 years for which proceeds used solely to pay off outstandingbalance on the non-standard loan plus closing costsrequired to be disclosed under RESPA



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Refinancing of Non-Standard Mortgage with Standard Mortgage

Creditor of standard mortgage must be holder or servicerof non-standard mortgage

Monthly payment for standard mortgage must be

materially lower than monthly payment for non-standardmortgage

Creditor receives consumers written application forstandard mortgage before non-standard mortgagerecasts, i.e.

end-date of introductory fixed rate on ARM loan

end-date of period when interest-only paymentspermitted end-date of period when negative-amortizing

payments permitted

No more than one 30-day late payment on non-standardmortgage during preceding 24 months

No 30-day late payments on non-standard mortgageduring preceding 6 months



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Prepayment Penalty Restrictions

Prepayment penalty permitted if:

otherwise permitted by law

loan APR cannot increase after consummation

loan is a qualified mortgage

loan is not a higher-priced mortgage loan

only for prepayment made within first 3 years of loanterm

it does not exceed 3%, 2% or 1% of outstandingbalance when incurred during 1st, 2nd or 3rd year,respectively, of loan term

creditor (or broker, by agreement with creditor) offersconsumer a similar loan that does not have aprepayment penalty and for which the consumer likely

qualifies



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Record-keeping

Must retain records evidencing compliance withability-to-repay requirement and prepayment penaltyrestrictions for at least 3 years followingconsummation of the transaction

Questions?


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Contact Information

Robert M. Jaworski, Partner

Princeton Forrestal Village

136 Main Street, Suite 250

Princeton, NJ 08540

Tel: +1 609 520 6003

Email: [email protected]

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