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REGULATION Z – MORTGAGE LENDING CHANGES

This conference call covers the changes in mortgage lending regulations, including early disclosure requirements, rules affecting higher priced mortgage loans, prohibitions on appraiser coercion, and best practices for mortgage servicing.

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REGULATION Z – MORTGAGE LENDING CHANGES

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  1. REGULATION Z – MORTGAGE LENDING CHANGES FDIC Chicago Regional Conference Call November 30, 2009

  2. Today’s Presenters • Curtis W. Theyse – Senior Compliance Examiner, Springfield, IL Field Office • James R. Bryans, Compliance Supervisory Examiner, Springfield, IL Field Office 2

  3. Topics of Discussion • Early Disclosure Requirements • Rules Affecting Higher-Priced Mortgage Loans • Prohibitions on Appraiser Coercion • Rules on Mortgage Servicing • Best Practices 3

  4. Purpose of Amendments • To protect consumers against unfair, abusive, or deceptive mortgage lending and servicing practices while preserving responsible lending and sustainable homeownership • To provide consumers transaction-specific disclosures early enough to use while shopping for a mortgage 4

  5. Mortgage Disclosure Improvement Act (MDIA)Expands the Types of Loans Requiring Early Disclosures Under §226.19 • Expands Coverage • Mortgage transactions subject to RESPA (other than open-end) and secured by the “dwelling of a consumer” • Includes: • Home Purchase Loans • Home Refinance Loans (New) • Home Equity loans – Closed-End (New) • Dwellings other than the consumer’s principal dwelling (i.e.; vacation and/or second homes) (New) • Effective date • Applications received on or after July 30, 2009 5

  6. Early DisclosuresTiming Rules and Waiting Periods • Early TILA disclosures must be delivered or mailed within 3 business days of application, and prior to collecting any fees other than a bona fide and reasonable credit report fee • Must wait 7 business days after providing early disclosures before closing loan • Must provide new disclosures and wait an additional 3 business days before closing loan, if the APR provided in early disclosures changes and is not considered accurate under §226.22 §226.19(a)(2) 6

  7. Early DisclosuresOther MDIA Rules • Consumer waiver of waiting periods – 226.19(a)(3) • Consumer can waive both the 3 & 7 day waiting periods • Bona fide personal financial emergency • Disclosure notice rule – 226.19(a)(4) • The following statement must be included in the early and corrected disclosures: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” • Must be grouped with required disclosures under 226.18 7

  8. “3-7-3” Timing Rules 8

  9. Higher-Priced Mortgage Loans §226.35 • A New Category of Mortgage Loan • Definition: Closed-end consumer credit transaction secured by the consumer’s principal dwelling • APR Triggers • First-lien: On the “rate-lock” date, the APR on the loan exceeds the APOR by 1.5 or more percentage points • Subordinate-lien: On the “rate-lock” date, the APR on the loan exceeds the APOR by 3.5 or more percentage points • Effective Date: Requirements apply to applications received on or after October 1, 2009 9

  10. Covered Transactions§226.35 • Covered Loans: • Home Purchase • Home Refinance • Closed-End Home Equity Loans • Excluded Loans: • HELOCs • Reverse Mortgages • Construction-Only • Bridge Loans • Loans for real estate investment purposes 10

  11. Index for Determining Higher-Priced Mortgage Loans§226.35 • Average Prime Offer Rate (APOR): The APOR is an APR that is derived from average interest rates, points, and other loan pricing terms offered to consumers by a sample of creditors for mortgage transactions that have low-risk pricing characteristics • Calculated (or derived) and published by the Board at least weekly and can be found on the FFIEC website at www.ffiec.gov • Based on data obtained from the Freddie Mac Primary Mortgage Market Survey® 11

  12. New FFIEC Rate Spread CalculatorGenerates Spread Between the APR and the APORhttp://ffiec.gov/ratespread/newcalc.aspx 12

  13. Rules for Higher Priced Mortgage Loans • Must Evaluate a Borrower’s Repayment Ability • Limits Prepayment Penalties • Requires Escrow Accounts • Prohibits Evasion Tactics/Strategies to Avoid Regulation 13

  14. Ability to Repay§226.34(a)4 and §226.35(b)1 • Creditors must take into account consumer’s repayment ability • Ability to repay is determined by: • Current and reasonably expected income • Employment • Assets other than the collateral • Current obligations • Mortgage related obligations • Expected property taxes • Insurance premiums required by the creditor, such as property insurance or PMI 14

  15. Verification of Repayment Ability §226.34(a)4 and §226.35(b)1 • Creditor must verify repayment ability • Verification of income and assets require third party documentation, oral information does not satisfy this requirement: • IRS Form W-2 • Tax returns • Payroll receipts • Financial institution records • Check-cashing or remittance receipts • Written statement from the consumer’s employer • Other third party documents 15

  16. Why so Much Focus on Repayment Ability? • This Rule is intended to ensure that creditors do not assess repayment ability using overstated incomes or understated obligations when evaluating higher-priced or HOEPA loans (creates unaffordable or irresponsible lending practices) • Therefore, the Rule explicitly requires creditors to verify consumer income and assets using reliable 3rd party docs when making a higher-priced or HOEPA loan • A creditor can no longer rely on an income statement from the borrower as sufficient evidence of repayment ability for a higher-priced or HOEPA loan 16

  17. Ability to Repay Presumption of Compliance§226.34(a)4 and §226.35(b)1 • A creditor is presumed to be in compliance if all three of the following requirements are satisfied: • Verification of repayment ability through use of 3rd party docs • Determines repayment ability using the largest principal and interest payment scheduled in the first 7 years following consummation and taking into account current obligations and mortgage-related obligations (i.e. property tax, insurance) • Takes into account at leastone of the following: • A ratio of total debt obligations to income, or • Consumer’s available income after paying debt (residual income) 17

  18. Presumption of Compliance(Continued) • There is no presumption of compliance for a balloon payment loan with a term shorter than 7 years • If the term is at least 7 years, the creditor that underwrites the loan based upon regular payments (not the balloon payment) retains presumption of compliance • If the term is less than 7 years, compliance is determined on the basis of all the facts and circumstances, including consideration of how the balloon payment is going to be made 18

  19. Prepayment Penalty§226.35(b)(2) Prepayment penalty is allowed on higher-priced mortgage loans provided: • Principal and Interest payment may not change during first four years of loan • Penalty can only apply for a maximum of two years following consummation • Penalty cannot apply if source of funds of prepayment is refinancing by same creditor or an affiliate 19

  20. Escrow for Taxes and Insurance §226.35(b)(3) • Escrow required for payment of property taxes and homeowners insurance for higher cost mortgage loans secured by a first lien on a principal dwelling • Creditors may allow a consumer to cancel escrow accounts but no sooner than 12 monthsafter consummation • Effective Dates • Non-manufactured housing: Applications received on or after April 1, 2010 • Manufactured housing: Applications received on or after October 1, 2010 20

  21. Prohibited Acts or Practices§226.36(b) Appraisal • Prohibits any creditor or mortgage broker from directly or indirectly coercing, influencing, or otherwise encouraging an appraiser to misrepresent or misstate the value of a consumer’s principal dwelling • Regulation lists examples of acts or practices that would and would not violate the regulation. ILLUSTRATIVE ONLY • Prohibits a creditor from extending credit if knows before or at consummation of a violation of this section 21

  22. Prohibited Acts or Practices§226.36(c) Servicing • Prohibits mortgage servicing abuses • Failing to credit a payment to an account as of the date received • Pyramiding of late fees • Failing to provide within a reasonable time of a request, a payoff statement 22

  23. CMS Best Practices • Review and provide training regarding early TIL disclosure procedures for coverage, timeliness, and delivery • Develop procedures to identify Higher-Priced Mortgage Loans early in the application process • For Higher-Priced Mortgage Loans, ensure loan underwriting procedures include an evaluation of the borrower’s ability to repay 23

  24. CMS Best Practices • Review timing of fees charged on residential mortgage loans • Review mortgage servicing practices • For Higher-Priced Mortgage Loans, review mortgage loan documents and contracts for any prepayment penalties, including minimum interest charges 24

  25. CMS Best Practices • Expand audit coverage • Be aware of escrow accounting rules 25

  26. CMS Recommendation • If your institution is considering new products or different contract language as a result of these amendments, be sure to conduct proper due diligence, such as discussions with legal counsel, software providers, servicing company, and other third party providers before implementing any changes 26

  27. Additional Changes • Be aware of recent and forthcoming changes to Regulation Z • Closed- and open-end credit advertising rules effective October 1, 2009 • Credit CARD Act amendments, some effective August 20, 2009 • Proposed changes, dated August 26, 2009, currently out for public comment 27

  28. Resources • FIL-134-2008 (12/2/08) – Reg Z and Reg C: Amendments to the Regulations • FIL-26-2009 (6/1/09) – Reg Z Early Disclosure Requirements • FIL-44-2009 (8/6/09) – Reg Z Open-end Consumer Credit Changes Notice of Immediate and 90-Day Changes 28

  29. Resources • FDIC’s Summer 2009 Supervisory Insights Journal • http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/si_sum09.pdf • For proposed Reg Z changes see the following Federal Register citations • http://edocket.access.gpo.gov/2009/pdf/E9-18119.pdf • http://edocket.access.gpo.gov/2009/pdf/E9-18121.pdf 29

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