NAFCU Compliance Blog

Updated Threshold Levels for 2012; Musings from the CU Suite

Written by Steve Van Beek

A new year usually brings with it updated thresholds for various regulations.  Below are a couple of updated thresholds and, unfortunately, one unknown.  

Reg Z - Section 32 Threshold

Each year, the "points and fees" dollar amount threshold for Section 32 (high-cost mortgage loans) is adjusted.  The underlying requirement comes from 12 CFR 1026.32(a)(1)(ii):

"(ii) The total points and fees payable by the consumer at or before loan closing will exceed the greater of 8 percent of the total loan amount, or $400; the $400 figure shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index that was reported on the preceding June 1."

Here are the last few years - including 2012 - from Comment 2 in the Official Staff Commentary to Section 1026.32(a)(1)(ii):

"xiv. For 2009, $583, reflecting a 3.94 percent increase in the CPI–U from June 2007 to June 2008, rounded to the nearest whole dollar.

xv. For 2010, $579, reflecting a 0.74 percent decrease in the CPI–U from June 2008 to June 2009, rounded to the nearest whole dollar.

xvi. For 2011, $592, reflecting a 2.2 percent increase in the CPI–U from June 2009 to June 2010, rounded to the nearest whole dollar.

xvii. For 2012, $611, reflecting a 3.2 percent increase in the CPI–U from June 2010 to June 2011, rounded to the nearest whole dollar."

The 2012 threshold was published in the Federal Register by the Federal Reserve on June 20, 2011 (the Fed had authority over Reg Z until July 21, 2011).

Thresholds for Regulation Z and Regulation M

Dodd-Frank increased the exemptions in Regulation Z and Regulation M from $25,000 to $50,000 on July 21, 2011.  These exemptions were also tied to inflation and increased to $51,800 on January 1, 2012.

• Regulation Z Federal Register from June 20, 2011.
• Regulation M Federal Register from June 20, 2011.

Comment 1 to the Official Staff Commentary to Regulation Z includes background on these exemption levels:

"i. Prior to July 21, 2011, the threshold amount is $25,000.

ii. From July 21, 2011 through December 31, 2011, the threshold amount is $50,000.

iii. From January 1, 2012 through December 31, 2012, the threshold amount is $51,800."

HMDA Reporting Asset Threshold

I wish I knew what to tell you.  This seems to be the perfect example of growing pains with a new regulator.

In the past, the Federal Reserve published the HMDA asset threshold each December informing institutions who would need to collect HMDA data during the following year.  Below are the announcements from the Federal Reserve for past years:

• For the 2011 reporting year, a $40 million asset threshold.
• For the 2010 reporting year, a $39 million asset threshold.
• For the 2009 reporting year, a $39 million asset threshold.  

So, what is the threshold for 2012?  Unfortunately, no one seems to know - the CFPB hasn't provided any information on the 2012 threshold.  When the CFPB republished the consumer regulations, including Regulation C (HMDA), it did not update the asset threshold.  

Here is how the Official Staff Commentary currently reads for Regulation C:

"2. Adjustment of exemption threshold for depository institutions. For data collection in 2011, the asset-size exemption threshold is $40 million. Depository institutions with assets at or below $40 million as of December 31, 2010 are exempt from collecting data for 2011."  (emphasis added).

We'll be sure to update everyone as soon as we hear from the CFPB on the asset level for 2012 reporting.  In the meantime, chalk this one up as an example of unnecessary regulatory burdens.  

***

New NAFCU Blog.  The new year also brings exciting news on the blog front.  Everyone knew blogging runs through his veins and it was only a matter of time before Anthony Demangone was blogging again.  Well, he's back - this time sharing his experiences as an executive.  

What is the new blog about?  The blog's subtitle says it all: Great Links. Big Ideas. A splash of Random Commentary.

Take a peek at NAFCU's new blog - Musings from the CU Suite.  Stop by, say hi, leave a comment and consider signing up for the email feed.   

Mortgages; Happy Birthday Kate and Briggs!

Posted by Anthony Demangone

A few of us were chatting around the office the other day, and the subject of mortgages came up.  We quickly began shaking our heads.  On one hand, many people are chewing out financial institutions for not making enough loans.  And the government has spent the last few years doing what it can to prop up the U.S. housing market.  All the while, credit unions and other mortgage lenders are getting pounded from every conceivable direction.  Just think about the following.

Regulation Z.  MDIA disclosures were put in place.  Then there was the mortgage loan sale or transfer notice regulation..  In case that wasn't enough, along came a rule on mortgage loan originator compensation.  Those MDIA disclosures?  They were amended. Requirements regarding higher-priced mortgage loans were put in place.  And then new HPML loan requirements for jumbo mortgages were announced.  In that same announcement, the Fed issued a proposal that would amend the first set of HPML requirements. And don't tell me that they tweaked that MDIA disclosure again?  Oh, and the entire system of disclosures for closed end mortgages and HELOCs are in the process of being amended.  The CFPB will pick that process up sometime in the future. 

SAFE Act.  Need I say more? 

RESPA.  The GFE and HUD-1 were completely overhauled.  And the CFPB announced that they want to rework the disclosures as soon as they gain their official powers.

Appraisals.  First, a state Attorney General from New York manages to ink a deal with Fannie and Freddie that practically changed appraisal requirements for the entire country.  Then regulators, including NCUA, issued their interagency appraisal and evaluation guidelines, which completely overhauled just about every aspect of the appraisal process.  And the Fed has issued its appraisal regulation.  All of these requirements have mortgage lenders jumping through hoops - many of which appear to complicate the process without ensuring any benefit to the housing system. 

GSEs.  The future of GSEs are on the line. Congress and the Obama administration are trying to craft solutions to deal with these entities, all the while, leaving a great deal of uncertainty for credit unions that need access to some sort of secondary market for liquidity and interest rate risk management. 

Servicers.  Add to all of this a recent development.  State Attorney Generals crafted an agreement/settlement offer sheet for the largest mortgage lenders in America.  While this on the surface doesn't directly affect credit unions, many of the agreement's requirements may find their way into regulations and guidance documents or become industry servicing standards.  Some of those provisions are quite onerous, such as one that raises the issue of cram downs. 

Dodd-Frank. Provisions in Dodd-Frank will likely increase downpayment requirements for many mortgage loans. 

CFPB.  As noted above, Elizabeth Warren has indicated that one of the CFPB's first priorities will be to overhaul mortgage disclosures.  Combining TILA and RESPA disclosures is not necessarily a bad thing, but given everything we've gone through already, a break might be nice. 

Market Forces.  Oh, lest we forget.  Mortgage values are down, there is talk about a partial elimination of the mortgage interest deduction, and mortgage rates will likely increase in the not too distant future.

So, if you work with mortgages and someone wants to know how "work is going," feel free to send them this post. The pace and amount of change in this area has been practically unmanageable.  There is so much risk and uncertainty, I wonder if some lenders will simply decide to exit the mortgage market altogether.  All of this uncertainty and change also creates another problem - it tends to favor large organizations who can throw oodles of compliance and legal resources at the problem. Smaller shops may eventually leave the market or merge themselves out of existence.  Wasn't there a cry about ending "too big too fail?" 

Oh, and feel free to share this with your Congressman if he or she wants an example of regulatory burdens faced by credit unions. 

***

Speaking of the rapid pace of change, Kate and Briggs turned two today. Looking back on these two years, well, the words just escape me. It is hard to describe the effect they've had on my life. 

 

 

Fed Guidance on HPMLs, "Balloons" and Ability to Repay

Posted by Anthony Demangone

Earlier this week, the Fed issued a nice guidance document to clear some confusion on higher priced mortgage loans that centered on balloon loans and verifying the borrower's ability to repay. Access the guidance here.  Before the guidance, many concluded that HPMLs with short-term balloons (less than 7 years) were a no-no.  The Fed clarifies that this isn't the case.

I'd keep an eye out for this type of guidance moving forward.  With virtually every aspect of Reg Z being amended, the Fed will have to clarify issues that pop up.  And many will.  I'd bet on it.

Here's the Q and A portion of the guidance:

Frequently Asked Questions and Answers

1. Question: Does the rule prohibit short-term balloon loans that are higher-priced mortgage loans?

Answer: No. However, the creditor must use prudent underwriting standards and, after considering consumers’ income, employment, obligations and assets other than the collateral, the creditor should determine that the value of the collateral (the home) is not the basis for repaying the obligation (including the balloon payment).

2. Question: Does that mean the creditor must verify that the consumer has assets and/or income at the time of consummation that would be sufficient to pay the balloon payment when it comes due?

Answer: No, such a requirement would effectively ban short-term balloon loans. If the Board had intended to ban these products it would have done so explicitly.

3. Question: What must the creditor do, then, to verify the borrower’s ability to repay a short-term balloon loan?

Answer: In addition to verifying the consumer’s ability to make regular monthly payments, a creditor should verify that the consumer would likely be able to satisfy the balloon payment obligation by refinancing the loan or through income or assets other than the collateral.

4. Question: How does the creditor verify, when it originates a short-term balloon loan, whether the consumer could qualify for a refinancing before the balloon payment is due?

Answer: The creditor has an affirmative duty to engage in prudent underwriting. Thus, the creditor should consider factors such as the loan-to-value ratio and the borrower’s debt-to-income ratio or residual income—all as of the time of consummation. A borrower with a high debt-to-income ratio, and/or with little or no equity in the property, will be less likely to be able to refinance the loan before the balloon payment comes due than a borrower with lower debt-to-income and loan-to-value ratios. The creditor is not required to predict the consumer’s future financial circumstances, interest rate environment, and home value.

Grab Bag

Posted by Anthony Demangone

While the proposed changes to Regulation Z have grabbed our attention, other compliance issues continue to come up.  With that in mind, here are a few things that have happened recently that I wanted to mention.  We'll get back to Reg Z tomorrow.

• Everyone continues to ask HUD to delay implementation of its RESPA rule, due to take affect January 1, 2010.  RESPA keeps saying, thanks, but no thanks.

• The CFPA debate continues to rage on the Hill.  The latest development?  An amendment that would exempt credit unions under $1.5 billion in assets.  Stay tuned.

• The Fed continues its check processing restructuring.  Yesterday, the Fed issued a final rule to implement recent changes.  In this notice, I saw something of note.  The Fed gave us a heads up that they'll need to tinker with Reg CC's rules.  I'm not sure what those changes will look like, but here's why they'll need the changes.  Due to the consolidation of check processing centers, next year at some point...all checks will be considered local. 

• OTS issued a CEO memorandum that does a great job of summarizing how the recently enacted HOEPA rules affect HMDA reporting.  In short, OTS has amended their HMDA examination procedures, and this CEO memo addresses those changes.  It is a concise, clear overview.

• The revised model privacy form is coming. Soon.

• FinCEN has released the latest issue of its SAR Activity Review, Trends, Tips and Issues.   This document is a BSA goldmine.  In this issue, there's an article on SAR completion tips from law enforcement and another on how to avoid errors in SAR filings.

• Also, we hear that FinCEN is planning to release its rule to put stored value cards under its BSA requirements in February.

There. That's more than enough for a Monday.

Escrow for Flood Insurance; Dividends on Escrow Accounts?

Posted by Steve Van Beek

The new higher-priced mortgage requirements under HOEPA require the escrowing of taxes and mortgage insurance for loans secured by a first lien on a principal dwelling.  This blog post discusses this requirement.  Reminder: the deadline is April 1, 2010 (or October 1, 2010 for manufactured homes).  

So what does this have to do with flood insurance?  NCUA's regulations require credit unions that escrow for taxes and mortgage insurance to also escrow for flood insurance:

"§ 760.5 Escrow requirement.
If a credit union requires the escrow of taxes, insurance premiums, fees, or any other charges for a loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after November 1, 1996, the credit union shall also require the escrow of all premiums and fees for any flood insurance required under § 760.3. The credit union, or a servicer acting on behalf of the credit union, shall deposit the flood insurance premiums on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA), which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Director of FEMA or other provider of flood insurance that premiums are due, the credit union, or a servicer acting on behalf of the credit union, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due."

Note that the section says "if a credit union requires the escrow."  Could you argue that it is not the credit union requiring escrow but, rather, HOEPA which requires the credit union to escrow?  I'm not so sure.  In practice, the credit union would require escrowing of taxes and mortgage insurance to comply with HOEPA and, therefore, would need to escrow for flood insurance as well.

Thanks to Katey from Chevron FCU for bringing this to our attention.  

***

The new HOEPA requirements will result in some credit unions escrowing for the first time which will bring some new challenges.  One of them is state law that attempts to require escrow accounts to pay interest (or dividends).  

Do federal credit unions have to pay dividends on escrow accounts?  NCUA says that these state laws are preempted as they attempt to regulate the setting of dividends (an explicit power granted to the FCU Board under the Federal Credit Union Act).  Here is another NCUA opinion from 1991 on a Wisconsin state law.

HOEPA - Section 226.36: No-nos related to principal dwellings; NCUA Chairwoman Speaks on CARD Act Compliance

Posted by Anthony Demangone

I HOEPA you enjoyed this overview.  Today, we've come to the last "new" provision in the HOEPA rulemaking: 226.36.  This section has a title that just rolls off the tongue: Prohibited acts or practices in connection with credit secured by a consumer’s principal dwelling.  While the title will not win marketing awards, it is fairly accurate. And note: the requirements below do not apply to HELOCs.

Broker defined.  226.36(a) defines the term "mortgage broker."  The definition excludes an employee of the creditor. 

Coercion of appraisers.  226.36(b) addresses practices that will constitute impermissible coercion of appraisers for consumer credit transactions secured by a consumer's principal dwelling.  This sort of closes the loop on appraisals.  The HVCC only applied to Fannie/Freddie transactions, and some of the anti-coercion guidance on appraisals was just that - guidance.  Now, such practices are a violation of Regulation Z.  This section lists a number of examples of impermissible coercion, such as implying to an appraiser that current or future work depends on the value of an appraisal.  But it also gives a number of examples that are not impermissible coercion, such as asking an appraiser to consider additional information about the basis for a valuation.

In addition, this section states that a creditor may not extend credit secured by a consumer's principal dwelling if it is aware of impermissible coercion in relation to the appraisal.  There is an exception to this; if the creditor acts with reasonable diligence to determine that the appraisal does not misrepresent the value of the dwelling, then all is hunky-dory.

Servicing requirements.  Section 226.36(c) places new requirements on loan servicers, which often are the creditors themselves. You may see a trend here: these requirements apply to loans that are secured by a consumers principal dwelling.  Servicers must credit payments when they are received.  If you provide specific instructions for payments that are not followed, and you accept the payment, you can credit it no more than 5 days after it is received.  Servicers cannot pyramid late fees, and they cannot refuse to provide an accurate payoff statement within a reasonable time of receiving such a request.  What is a reasonable amount of time?  The Fed doesn't say for sure, but it states that 5 days would be reasonable.  Or in other words, a safe harbor.

As always, there are additional details lurking within the Official Staff Interpretation section of the regulation.

 

***

On Friday, new NCUA Chairwoman Deborah Matz issued a statement regarding CARD ACT Compliance for credit unions.

 

..We understand some credit unions may experience difficulties complying with the requirement of the Credit CARD Act and the Federal Reserve Board’s interim rule regarding the mailing of periodic statements. The amount of time necessary to come into full compliance will likely vary, depending on the type of credit arrangements a credit union offers its members and, in many cases, the cooperation of third party vendors in revising billing procedures and statements. All credit unions are expected to come into full compliance as early as reasonably possible, and to demonstrate their efforts to do so. In the interim, credit unions should follow the alternative allowed by the Federal Reserve. Like any regulatory compliance matter, examiners will review credit union efforts to achieve compliance. In no event can credit unions impose a late fee or change terms except as permitted by the Credit CARD Act and the Federal Reserve’s regulation.  (Emphasis added.)

***

 

OK, it is a Monday, and we're still slogging through Regulation Z.  With that in mind, enjoy the following photo that I took of my son recently.  It never fails to crack me up.  How he finds this pose comfortable is beyond my understanding.  Let's have a great week, everyone!

HOEPA - Section 226.35 - Higher-Priced Mortgage Loans - Cont'd

Posted by Steve Van Beek

Yesterday's blog posting discussed the creation of the new "higher-priced mortgage loans" category, and today we will take a look at some of the restrictions and requirements that come with that special category of loans.

Higher-priced mortgages will be under the following restrictions:

Repayment Ability.  Higher-priced mortgage loans will be subject to the same repayment ability requirement that "Section 32" loans - which Sarah discussed earlier this week.  The key is to realize that Section 226.35(b)(1) simply indicates that credit unions must verify repayment ability as provided in 12 C.F.R. 226.34(a)(4).  So, refer to that section when looking for how to determine repayment ability (including the very, very useful official staff commentary).

Prepayment Penalties.  As you are aware, FCUs are already prohibited from charging prepayment penalties.  However, if you are a state-chartered credit union - be sure to analyze these restrictions:

"(2) Prepayment penalties. A loan may not include a penalty described by §226.32(d)(6) unless:
(i) The penalty is otherwise permitted by law, including §226.32(d)(7) if the loan is a mortgage transaction described in §226.32(a); and
(ii) Under the terms of the loan—
(A) The penalty will not apply after the two-year period following consummation;
(B) The penalty will not apply if the source of the prepayment funds is a refinancing by the creditor or an affiliate of the creditor; and
(C) The amount of the periodic payment of principal or interest or both may not change during the four-year period following consummation."

A key here is to realize that these restrictions - which had already applied to "Section 32" mortgages - have been strengthened.  Be sure you review any prepayment penalties your credit union may offer to make sure it will still be allowed when the stronger requirements go into place after October 1, 2009.

Escrow Requirement.  This requirement applies to loans secured by a first lien on a principal dwelling.  In short, credit unions will not be able to extend a higher-priced mortgage loan unless they escrow for for property taxes and mortgage-related insurance.  Mortgage-related insurance includes "insurance against loss of or damage to property, or against liability arising out of the ownership or use of the property, or insurance protecting the creditor against the consumer's default or other credit loss."  This blog post contains a link to a great resource from the Philadelphia Federal Reserve Bank on escrow requirements.

Compliance Dates.  The escrow requirement has an effective date of April 1, 2010.  Loans secured by manufactured houses have an extended deadline of October 1, 2010.

Cancellation.  The credit union can allow the member to cancel the escrow account only if one year has passed from consummation of the mortgage and the member submits a dated, written request to cancel the escrow account.  Keep in mind that the request to cancel must come from the member and can not be signed at consummation to apply in the future.  Rather, the written request must be signed, dated and submitted by the member after the one year period has expired.

Again, this escrow requirement applies to higher-priced mortgage loans secured by a first lien on a principal dwelling.  Footnote 99 to the Final Rule (page 42 of the PDF) reiterates the definition of dwelling for Regulation Z:

"99 Regulation Z currently defines a dwelling to include manufactured housing. See § 226.2(a)(19).  Official staff commentary § 226.2(a)(19) states that mobile homes, boats and trailers are dwellings if they are in fact used as residences; § 226.2(b) clarifies that the definition of ‘‘dwelling’’ includes any residential structure, whether or not it is real property under state law; §§ 226.15(a)(1)–5 and 226.23(a)(1)–3 make clear that a dwelling may include structures that are considered personal property under state laws (e.g., mobile home, trailer or houseboat) and draws no distinction between personal property loans and real property loans. "

The official staff commentary includes similar language:

"35(b)(3) Escrows. 
Paragraph 35(b)(3)(i). 
1. Section 226.35(b)(3) applies to principal dwellings, including structures that are classified as personal property under state law. For example, an escrow account must be established on a higher-priced mortgage loan secured by a first-lien on a mobile home, boat or a trailer used as the consumer’s principal dwelling. See the commentary under §§ 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 226.35(b)(3) also applies to higher-priced mortgage loans secured by a first lien on a condominium or a cooperative unit if it is in fact used as principal residence."

Limited Exemptions for Cooperatives and certain Condominium units.  Escrow accounts do not need to be established for loans secured by shares in a cooperative.  

For loans secured by condominium units, the exemption is smaller - it only excludes the requirement to escrow for mortgage-related insurance premiums if the condominium association has an obligation to maintain a master policy insuring condominium units.  However, even if this exception applies there is still a requirement to establish an escrow account for property taxes.

Have a great weekend!

HOEPA - Section 226.35 - Higher-Priced Mortgage Loans; Early-Bird Pricing

Posted by Steve Van Beek

Section 226.35 creates a new category of mortage loans - "Higher-Priced Mortgage Loans" - which come with their own requirements and restrictions.  Keep in mind that although this category was created by the HOEPA amendments to Reg Z, it is distinct and separate from the traditional HOEPA loans (a.k.a. "Section 32 mortgages" or "high-rate/high-fee loans").

A mortgage loan is considered a "higher-priced mortgage loan" if the loan's APR exceeds the average prime offer rate for a comparable transaction:

• By 1.5 or more precentage points for loans secured by a first lien on a dwelling, or 
• By 3.5 or more precentage points for loans secured by a subordinate lien on a dwelling. 

The "average prime offer rate" will be determined by the Federal Reserve Board and posted at least weekly on the FFIEC website.  Because this rate will change on a weekly basis, credit unions will need to track their APR rates against this continuously moving "average prime offer rate" benchmark.

When do you measure the rate against the "average prime offer rate"?  The official staff commentary has the answer:

"3. Rate set. A transaction’s annual percentage rate is compared to the average prime offer rate as of the date the transaction’s interest rate is set (or ‘‘locked’’) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation."  Comment 3 - Official Staff Commentary to 12 C.F.R. 226.35(a).

To see the latest "average prime offer rates" tables to gauge how your mortgage loan rates stack up, go to the FFIEC's rate spread calculator and review the tables for the maturity terms your credit union offers.  For this week, the average prime offer rate for a 30-year fixed mortgage was 5.18%.  Thus, if the new amendments were effective today, a first lien mortgage loan with a rate of 6.68% or higher would be a "higher-priced mortgage loan."

Remember, this benchmark will be a moving target that the credit union will need to monitor their loans against to ensure they are in compliance. 

Exceptions. Temporary or "bridge" loans with a term of twelve (12) months or less, reverse-mortgage loans, and HELOCs are not included in the definition of "higher-priced mortgage loans" regardless of their APR. 

Tomorrow we will cover the additional requirements and restrictions on "higher-priced mortgage loans" - including the escrow requirement for higher-priced mortgage loans secured by a first lien.

***

Two early-bird pricing offers expire tomorrow, Friday, August 28th.  The two offers are for NAFCU's Online Training Program and NAFCU's Regulatory Compliance Seminar.

Online Training.  By signing up for NAFCU's Online Training program by Friday, August 28th you will be able to lock-in the 30% introductory savings on the annual subscription price.  After Friday, the introductory pricing expires but you can still sign-up and receive access to the online training program for one-year from the date of subscription.  You can demo the online training program before purchasing and this powerpoint presentation Anthony created gives some additional information (including the pricing before and after Friday's early-bird deadline). 

Compliance Seminar.  The early-bird pricing for Compliance Seminar also ends Friday, August 28th.  Signing-up by August 28 allows you to save $200 off the full compliance program registration price.  The dates are October 19-22 in lovely Charleston, South Carolina.   

Special Offer for Blog Readers.  Given the short notice on the end of the early-bird pricing for Compliance Seminar - I've received the "go-ahead" to extend the early-bird for one week for blog readers.  Between August 31 and September 4, when you sign-up for Compliance Seminar - use promo code "THEBLOG" and receive the early-bird pricing through September 4.  Note: The promo code will not work prior to August 31 but the regular early-bird will still available through COB on Friday, August 28.  

Remember, anyone can sign-up and attend Compliance Seminar.  NAFCU members, non-members, and other credit union industry professionals are all welcome (and add significant value to the compliance discussions).

Compliance Hodgepodge at Seminar.  At Compliance Seminar, Anthony and I will have time set aside to discuss a number of important compliance issues that have not been given their own slot in the program.  In this fast-paced compliance environment, we decided to set aside these "Hodgepodge Sessions" on Wednesday and Thursday afternoons to discuss multiple issues.  

Here are the topics we plan to touch on: RESPA, S.A.F.E. Act, E-SIGN Act & E-statements, HVCC, Regulation D changes, Share Insurance, Fair Lending Exams, Regulation CC consolidation, Gift Cards, as well as Regulation Z issues (Private Student Lending Rules, HOEPA & MDIA Issues, and Proposed HELOC and Closed-End Amendments). 

We will also touch on these issues: Legislative Update, BSA Update, Corporate Stabilization Update, Pandemic Update, and a NCUA Guidance Update. 

If you have other ideas or topics you would like us to discuss, please leave a comment on the blog or shoot us an e-mail and we will do our best to incorporate them into the Hodgepodge Sessions.  

HOEPA - Section 226.34, Prohibited Acts or Practices for Section 32 Loans

Posted by Sarah Loats

This amendment to section 226.34 strengthens the requirement to verify repayment ability for "section 32" mortgage loans (it does not apply to temporary or bridge loans that do not extend beyond 12 months). What are Section 32 loans? These are the traditional HOEPA high-cost loans. They are referred to as section 32 loans because the definition of and requirements for these loans are found in section 226.32 of Reg Z.

The new rule provides that a credit union may not extend a Section 32 loan to a consumer based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than the collateral, current obligations, and mortgage-related obligations.

• Current obligations include other loans, that the credit union has knowledge of, that are entered into at or around the same time as the current transaction and are secured by the same dwelling (i.e., piggy-back loans).
•  Mortgage related obligations include property taxes, premiums for mortgage-related insurance, and similar expenses such as homeowners/condo dues.

Repayment Ability

The credit union must verify the amounts of income/assets that you rely on by IRS W-2 forms, tax returns, payroll receipts, financial institution records, or other documents that provide reasonable reliable evidence. The credit union must also verify the consumer's current obligations, and this can be done by reviewing a credit report.

There is a get-out-of-jail-free card of sorts - if the credit union didn't verify income and assets, it will not be considered in violation of this provision if it can demonstrate that the income and assets it relied upon were not materially greater than the consumer's actual income and assets. Here's an example from the Staff Commentary:

"For example, if a creditor determines a consumer's repayment ability by relying on the consumer's annual income of $40,000 but fails to obtain documentation of that amount before extending the credit, the creditor will not have violated this section if the creditor later obtains evidence that would satisfy Sec. 226.34(a)(4)(ii)(A), such as tax return information, showing that the creditor could have documented, at the time the loan was consummated, that the consumer had an annual income not materially less than $40,000."

Presumption of Compliance

A credit union is presumed to comply with these requirements if it verifies the consumer's repayment ability as mentioned above, determines the consumer's repayment ability using the largest payment of principal and interest scheduled in the first 7 years of the loan, taking into account current obligations and mortage-related obligations, and assesses the consumer's repayment ability taking into account at least one of the following:

1. the ratio of total debt obligations to income; or 
2. the income the consumer will have after paying debt obligations.

Notwithstanding the above, there is no presumption of compliance for loans where the regular periodic payments for the first 7 years would cause the princpal balance to increase, or the term of the loan is less than 7 years and the regular periodic payments do not fully amortize the outstanding principal balance.

I know I go on and on about the Staff Commentary (I really am a fan), but again, the Fed provides great tidbits in there, including examples of how to determine the maximum scheduled payment in the first 7 years of the loan.

Tomorrow is Section 226.35, which incorporates these rules for higher-priced mortgage loans.

HOEPA: Section 226.32 (Prepayment penalties)

Posted by Anthony Demangone

On to section 226.32.  The HOEPA amendments added a new protection for "section 32" mortgages.  But this new protection shouldn't be that big of a deal.  It says that unless you fit within the exception outlined in 226.32(d)(7), you won't be able to charge a prepayment penalty on a mortgage subject to 226.32 (as determined by fees or the loan's interest rate). 

That's old news to us.  FCUs, as an industry, can't charge prepayment penalties.  The prohibition is outlined in the Federal Credit Union Act.

Worth noting: Some federal credit unions waive closing costs on their mortgages. But if the member pays off that mortgage within 2 years, they seek to recoup those fees.  Is that a prepayment penalty?  NCUA says no.

***

Here are a few other things to chew on:

• NCUA recently issued Letter to Credit Unions 09-CU-17.  The letter gives everyone a "heads up" that on September 1, 2009, NCUA is moving toward web-based system to collect Report of Officials and 5300 Call Report information.   NCUA conducted a webinar to explain the changes, which you can access from the guidance noted above.  They plan to offer 3 more webinars on the subject in the next few months
• On September 18, 2009, the NACHA IAT era will begin. The Fed is offering IAT transaction testing until September 11, 2009 for its FedACH customers. If you are one of those customers, you may want to take advantage.
• Each year, the Fed's annual report documents how banks and thrifts are complying with consumer regs.  It lists the most common compliance boo-boos in many areas.  Shari Pogach has written an article highlighting the report, and the article can serve as a simple auditing tool to judge whether you have made similar mistakes in your shop.  NAFCU members can access the article here.