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HERA Regulatory Amendments. October 24, 2008 FRB Atlanta Miami Branch The information contained in this presentation represent my own views and not those of the Federal Reserve System, nor do they represent final regulatory consideration for any specific financial institutions activity.

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HERA Regulatory Amendments

October 24, 2008

FRB Atlanta Miami Branch

The information contained in this presentation represent my own views and not those of the Federal Reserve System, nor do they represent final regulatory consideration for any specific financial institutions activity.

Federal Reserve Bank of Atlanta


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Regulation Z

R-1305

New Rules for Higher-priced Mortgages (HPMs)

Federal Reserve Bank of Atlanta


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Background

  • Final Rule

    • Amends closed & open-end sections of Regulation Z

  • Final Rule Dates

    • July 14, 2008 - Press Release (R-1305)

    • July 30, 2008 - Federal Register Release

  • Effective Dates

    • October 1, 2009

      • Effective Date for applications received on or after this date

    • April 1, 2010

      • Effective Date Escrow Rules

        • Section 226.35(b)(3) – Escrow accounts required

    • October 1, 2010

      • Escrow Rule on Manufactured Housing

Federal Reserve Bank of Atlanta


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Glossary

  • HPM – Higher-Priced Mortgage Loans

  • CPD – Consumer’s Principal Dwelling

  • HOEPA – Homeownership and Equity Protection Act

    • How do you say it?

      • HOPE-a

      • Ho-e-pa

Federal Reserve Bank of Atlanta


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Background

  • Three Mortgage Rule Categories

    • Rules for HOEPA (minor changes)

    • Rules for HPMs (new)

    • Rules for all mortgages secured by CPD (new)

      • HOEPA Rules

      • 226.31, 32, & 34

    • HPMs rules

      • 226.35 Prohibited Acts or Practices

    • All mortgages rules

      • 226.36 Prohibited Acts or Practices

      • 226.16 & 24 Advertising Rules

Federal Reserve Bank of Atlanta


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HOEPA Rule Changes

Sections 226.32 & 34

Federal Reserve Bank of Atlanta


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HOEPA Rule Changes

  • HOEPA- Term Limitations

  • Prepayment Penalty - 226.32(d)(7)

    • Allows for a penalty only if:

      • Section (i)

        • The prepayment penalty will not apply after the two-year period following consummation.

          • Old rule penalty only exercised in the first 5 years

          • New rule penalty only exercised in the first 2 years

      • Sections (ii) & (iii)

        • contain minor edits

      • Section (iv)

        • New rule for ARM Loans

          • the amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation.

          • No old rule for this section

    • The new HPM rules have similar provisions in Section 226.35(b)(2)

Federal Reserve Bank of Atlanta


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HOEPA Rule Changes

  • HOEPA – Prohibited Acts or Practices

  • Repayment Ability - 226.34(a)(4)

    • New Provisions

      • Paragraph (a)(4) has been completely revised from the current regulation

    • This section prohibits HOEPA loans from being extended based on collateral without regard to the consumer’s repayment ability at consummation based on the consumer’s:

      • Current and reasonably expected Income

      • Employment

      • Assets other than the collateral

      • Current obligations

      • Mortgage-related obligations

      • See next slide for details

Federal Reserve Bank of Atlanta


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HOEPA Rule Changes

  • Repayment Ability - 226.34(a)(4)

  • 4 Provisions to Consider

    • Mortgage-related Obligations (i)

      • Expected to escrow property taxes & insurance as outlined in Section 226.35(b)(4)(i)

    • Verification of repayment ability (ii)

      • Verify income or assets relied upon to determine repayment

        • W-2, payroll receipts, bank records

        • Exception if not verified

    • Presumption of Compliance

      • Verifies repayment ability of the largest payment of P&I in the first 7 years

      • Verifies repayment ability by looking at total D/I ratio

    • Exclusion from presumption of Compliance

      • If the regular payment for the first 7 years would cause the principal balance to increase

      • If the loan is less than 7 years and the payment will not amortize the loan (Balloon payment)

    • Exemption

      • Temporary or Bridge Loans terms 12 months or less

Federal Reserve Bank of Atlanta


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Rules for HPMs

New Section 226.35

Federal Reserve Bank of Atlanta


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Definitions for HPMs

  • Section 226.35(a)(1)

    • A higher-price mortgage loan is a consumer credit transaction that is:

      • Secured by Consumer’s Principal Dwelling (CPD)

      • Has an APR that exceeds the “average prime offer rate” for a comparable transaction on the date the interest is set (or locked) before consummation by

        • 1.5% or more for first lien loans

        • 3.5% or more for subordinate lien loans

    • This is different from the proposal of 3 & 5 % above T-bills

Federal Reserve Bank of Atlanta


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Definitions for HPMs

  • Section 226.35(a)(2)

    • “Average Prime Offer Rate”

      • The APR derived for average interest rates, points, and other loan pricing terms currently offered to consumers by a representative sample of creditors for mortgage transactions that have low-risk pricing characteristics.

        • Two types of variable & two fixed rate transactions as found in the “Freddie Mac Primary Mortgage Market Survey”

      • The Board will publish in a table updated at least weekly

Federal Reserve Bank of Atlanta


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HPM - Exception

  • Section 226.35(a)(3)

    • HMP excludes the following transactions to finance:

      • Initial Construction

      • Temporary or “bridge”

        • Terms 12 months or less

      • HELOC

      • Reverse Mortgage

Federal Reserve Bank of Atlanta


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HPM - Restrictions

Federal Reserve Bank of Atlanta


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HPM - Restrictions

  • Section 226.35(b)

    • (1) - Repayment Ability

      • Refers to HOEPA rules in Section 226.34(a)(4)

      • Proposed rule included a section on “Verification of Income & Assets relied on” that is now a part of the repayment ability section.

    • (2) - Prepayment Penalties

      • Refers to HOEPA Rules in Section 226.32(d)(6) &

      • Covers similar rules as in 226.32(d)(7)(i), (ii), & (iv)

    • (3) - Escrows for property taxes & insurance required on 1st lien loan

      • Some exemptions (co-ops & Condo)

      • Customer can cancel after 1 year

    • (4) - Evasion: open-end credit

      • Can not structure a loan as an open-end plan to evade the requirements of this section

Federal Reserve Bank of Atlanta


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Rules Affecting CPD Secured Mortgages

Section 226.19 &

New Section 226.36

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

CPD Secured Mortgages

Federal Reserve Bank of Atlanta


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Early Disclosures

  • Section 226.19(a)

    • New rules now require early TIL disclosures (within three days of application) for all mortgage transaction subject to RESPA and secured by the consumer’s principal dwelling (CPD)

    • Now covers:

      • First & Subordinate Mortgages

      • Refinancing

      • Home Equity Loans

      • Reverse Mortgages (may need clarification)

    • Old Rules only covers purchase or construction loans

    • Exempts

      • HELOCS

Federal Reserve Bank of Atlanta


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Early Disclosures

  • No Fees Section 226.19(a)(ii) & (iii)

    • New rules also prohibits the imposition of fee by a creditor or any other person in connection with the consumer’s application before the consumer has received the early disclosures

  • Exception:

    • The creditor or any other person may impose a fee for obtaining the consumer’s credit report before the disclosure is provided if it is bona fide and reasonable in amount.

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

  • New Section 226.36

    • (a) – “Mortgage Broker” Defined

      • Discussion on payments to a mortgage broker and the limitations have been deleted in final rule

      • This is a significant change

    • (b) – Misrepresentation of value of consumer’s dwelling (Coercion of Appraiser)

    • (c) - Servicing Practices Prohibitions

    • (d) – HELOC exemption

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

  • 226.36(b) – Coercion of Appraiser

    • No creditor or broker (or their affiliates) shall directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or misrepresent the value of the dwelling (CPD)

    • Section 226.36(b) also includes:

      • Examples of actions that violate this section

        • (A) through (E) and examples

      • Examples of actions that do not violate this section

        • (A) through (F)

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

  • 226.36(b) – Coercion of Appraiser

    • (b)(2)Exception

      • If a creditor knows of a violation in connection with an appraisal at or before consummation, it shall not extend the credit based on the appraisal unless it documents it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling

    • (b)(3) Definition

      • The term “appraiser” is defined in this section.

      • A person who engages in the business of assessing the value of dwellings

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

  • 226.36(c) – Servicing Practices Prohibitions

    • No servicer shall:

      • Fail to credit payments to the consumer’s loan as of the date of receipt (includes exceptions)

      • Impose a late fee or delinquency charge when the delinquency is attributable to late fee or delinquency charges assessed on an earlier payment

      • Fail to provide, within a reasonable time after receiving a request an accurate statement o the total outstanding balance of the consumer’s obligation to satisfy the obligation in full as of a specific date

      • If a servicer specifies in writing, requirements for making payments but accepts payments that do not conform, the servicer shall credit the payments as of 5 days after receipt

Federal Reserve Bank of Atlanta


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Prohibited Acts or Practices

  • 226.36(d) – HELOC Exemption

    • This section exempts HELOCs from the requirement of Section 226.36 for CPD loans

Federal Reserve Bank of Atlanta


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Special Advertising Rules

  • The Regulation Z final rule also includes new advertising requirements for both open-end and closed-end advertisements as outlined in Section 226.16 and 226.24, respectively.

  • Summary (next slide)

Federal Reserve Bank of Atlanta


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Special Advertising Rules

  • The final rules ensure that mortgage loan advertisements for both open-end and closed-end mortgage loans provide:

    • accurate and balanced information,

    • in a clear and conspicuous manner

      • about rates, monthly payments, and other loan features

  • The Board is also adopting rules to prohibit sevendeceptive or misleading practices in advertisements for closed-end mortgage loans

Federal Reserve Bank of Atlanta


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Special Advertising Rules

  • The Board is also adopting rules to prohibit:

    • Sevendeceptive or misleading practices in advertisements for closed-end mortgage loans

      • Misleading advertising of “fixed” rates or payments

      • Misleading comparisons in advertisements

      • Misrepresentations about government endorsements

      • Misleading use of the current lender’s name

      • Misleading claims of debt elimination

      • Misleading claims suggesting fiduciary relationships

      • Misleading foreign-language advertisements

Federal Reserve Bank of Atlanta


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CRA Consideration ofForeclosure Mitigation

  • CA 07-1/SR 07-6 (April 17, 2007)

    Statement on Working with Mortgage Borrowers

  • Encourages financial institutions to work constructively with residential borrowers within safe and sound lending practices

  • Focus on ARM resets triggering problems

  • Immediate foreclosure on collateral not required under existing supervisory guidance or accounting standards


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CA 07-1

  • Financial institution should inform delinquent borrowers of homeownership counseling

  • Under Servicemembers Civil Relief Act, sale, foreclosure, and seizure of service member property prohibited while individual is in service (and 90 days thereafter) – for mortgage obligations originated prior to service


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CA 07-1 – CRA Consideration

  • Potential favorable CRA consideration for

    • Programs that transition LMI borrowers from high cost loans to lower cost loans

    • Credit counseling in conjunction with reputable organizations (NeighborWorks and others) for LMI populations and geographies

    • Outreach and education that help financially stressed borrowers avoid foreclosure scams for LMI populations and geographies


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Documenting CRA Impact

  • Document geographic location of outreach and counseling services

  • Document income of individuals that attend events or seek counseling

  • Track modifications and refi’s to LMI borrowers (use current income data)


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Yet to be determined….

  • “Distressed Community” status for high impact foreclosure markets

  • Treatment for loan “charge off” balance

  • Participation in Community Stabilization initiatives – other than direct LMI impact


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CRA Q&A Amendments

  • Proposed revision/amendments to CRA Q&A published July 11, 2007

  • Final changes expected to be released the year

    • .12(i)-3 Cites provision of credit counseling to assist borrowers in avoiding foreclosure as a community development service

    • .22(a)-1 Cites example of “responsive lending activity” to include loan programs that provide relief to LMI borrowers facing foreclosure

    • .23(a)-2 Investments in funds that will target LMI geographies should be documented with fund prospectus


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Questions?

Ana Cruz-Taura

Regional Community Development Director

FRB Atlanta, Miami Branch

305-597-6850

ana.cruz-taura@atl.frb.org

Federal Reserve Bank of Atlanta