Mortgage Reform and Anti-Predatory Lending Act of 2009
April 24, 2009
This memorandum summarizes noteworthy provisions of HR 1728, the
"Mortgage Reform and Anti-Predatory Lending Act", which was
introduced by Representatives Brad Miller, Mel Watt, and Barney
Frank on March 26, 2009. HR 1728 is a revival of a previous
bill, HR 3915, that was introduced and passed in the House of
Representatives in the last Congress by a large margin, but which
was never taken up by the Senate. HR 1728 continues to
include many provisions that have been sought by consumer
activists, including repayment ability and borrower benefit
standards and restrictions on prepayment penalties and yield spread
premiums. HR 1728 also imposes responsibilities on secondary
market participants that were included in HR 3915. Unlike HR
3915 however, HR 1728 imposes on loan originators a requirement
that a portion of any mortgage be retained by each originator as a
means of sharing credit risk with any subsequent
purchaser/securitizer.1
Like HR 3915, HR 1728 addresses concerns over the mortgage
origination process by: (i) establishing a federal "duty of care"
for mortgage originators; (ii) prohibiting originators from
"steering" borrowers to products that are not in the borrower's
"interest"; and (iii) requiring licensing and registration of
mortgage originators pursuant to a qualifying state law or
equivalent federal banking regulatory regime. This minimum
standard includes, among other things, standards regarding the
determination of a borrower's repayment ability and, in the case of
refinances, the determination of a net tangible benefit.
Further, this section of the legislation sets forth safe harbors
from these standards for so-called "qualified mortgages" that meet
certain stringent requirements. This "qualified safe harbor"
is notably narrower than its counterpart provision. HR 1728
also amends the federal Home Ownership and Equity Protection Act
("HOEPA")2
by significantly amending the definition of a "high-cost mortgage"
under that Act and by expanding consumer protections for such
loans.
Importantly, the great majority of the new requirements imposed
by the legislation are not self-executing
and must be implemented by the promulgation of regulations by
various federal agencies, including the United State Department of
Housing and Urban Development ("HUD"), the Office of the
Comptroller of the Currency ("OCC"), the Office of Thrift
Supervision ("OTS"), the Federal Deposit Insurance Corporation
("FDIC") and the Federal Trade Commission ("FTC").
In addition, HR 1728 includes provisions to create new
safeguards for borrowers with respect to escrow accounts and
force-placed insurance and amends the federal Real Estate
Settlement Procedures Act ("RESPA") to mandate faster responses to
consumer inquiries, increasing penalties and requiring the prompt
crediting of payments. Finally, HR 1728 strengthens appraiser
requirements by establishing stronger federal appraiser
independence standards that are backed by tough enforcement
provisions as well as by establishing more stringent appraiser
licensing and education standards and providing a federal grant
program to assist states in their regulation of appraisers.
Critics have expressed concern that if HR 1728 were enacted in
its current form or an even vaguely similar draft, it would quell
the credit markets at a time when liquidity is desperately needed.
It is unclear, at best, whether originators would make and
whether the key current secondary market players such as Fannie Mae
and Freddie Mac will buy non "qualified safe harbor mortgages," and
even if they did, whether depository institutions and private
mortgage companies alike will be able to retain the requisite
recourse when selling or securitizing the loans.
I. New Mortgage Originator
Requirements
A. "Duty of Care"
HR 1728 creates a federal "duty of care" that requires each
mortgage originator to:
1. Be qualified and, when required, registered and licensed as a
mortgage originator in accordance with applicable state or federal
law;
2. With respect to each consumer seeking or inquiring about a
residential mortgage loan, diligently work to present the consumer
with a range of residential mortgage loan products for which the
consumer is qualified and which are appropriate to the consumer's
existing circumstances, based on information known by, or obtained
in good faith by, the originator;
3. Make full, complete, and timely disclosure to each consumer
of (i) the comparative costs and benefits of each residential
mortgage loan product offered, discussed, or referred to by the
originator; (ii) the nature of the originator's relationship to the
consumer (including the costs of the services to be provided by the
originator and a statement that the mortgage originator is or is
not acting as an agent for the consumer, depending on the
circumstances); and (iii) any conflicts of interest;
4. Certify to the creditor, with respect to any transaction
involving a residential mortgage loan, that the mortgage originator
has fulfilled all the above requirements applicable to the
originator with respect to the transaction; and
5. Include the unique identifier of the originator provided by a
qualified nationwide registration regime on all loan documents.
HR 1728 directs the federal agencies to prescribe regulations to
further define this federal duty of care.
B. Anti-Steering Provision
HR 1728 amends TILA so that no mortgage originator may receive
from any person, and no person may pay to any mortgage originator,
directly or indirectly, any incentive compensation (including a
yield spread premium) that is based on, or varies with, the terms
of any residential mortgage loan. The enactment of this
provision would dramatically alter the way that subprime lenders
compensate mortgage brokers. The federal agencies are
directed to prescribe regulations which prohibit steering of
borrowers into loans that are not in the consumer's interest (such
as loans with predatory characteristics). However, HR 1728
notes that the foregoing will not be construed to limit or affect
the ability of a mortgage originator to sell loans to subsequent
purchasers or to restrict a consumer's ability to finance
origination fees as long as they were disclosed and do not vary
based on the consumer's decision about whether to finance such
fees.
C. Liability
HR 1728 states that Sections 130(a) and (b) of TILA (TILA civil
liability and correction of errors provisions)will apply to a
violation of these "duty of care" standards by a mortgage
originator. The maximum amount of any liability of a mortgage
originator to a consumer for any violation of the foregoing
provisions is capped at an amount equal to (i) the greater of
actual damages or (ii) three times the total amount of direct and
indirect compensation or gain accruing to the mortgage originator
in connection with the residential mortgage loan involved in the
violation, plus the costs to the consumer of the action, including
a reasonable attorney's fee.
D. Regulations
HR 1728 also provides the federal banking agencies with
rule-making authority to issue regulations to prohibit or condition
terms, acts or practices relating to residential mortgage loans
that the agencies find to be abusive, unfair, deceptive, predatory,
inconsistent with reasonable underwriting standards, necessary or
proper to effectuate the purposes of the duty of care and
anti-steering provisions, to prevent circumvention or evasion of
those provisions, or to facilitate compliance or which are not in
the interest of the borrower.
II. Minimum Standards for Mortgages
HR 1728 establishes a number of minimum federal standards which
are applicable to all residential
mortgage loans, and which are not limited to the principal
residence of the borrower.
A. Ability to Repay
HR 1728 provides that no creditor may make a residential
mortgage loan unless the creditor makes a reasonable and good faith
determination based on verified and documented information that, at
the time the loan is consummated, the consumer has a reasonable
ability to repay the loan, according to its terms, including all
applicable taxes, insurance, and assessments.
The determination of a consumer's ability to repay a residential
mortgage loan must be based on consideration of: (a) the
consumer's credit history; (b) the consumer's current income; (c)
the expected income the consumer is reasonably assured of
receiving; current obligations; (d) the consumer's debt-to-income
ratio; (e) the consumer's employment status; and (f) other
financial resources besides the consumer's equity in the real
property that secures repayment of the loan. HR 1728
also lists specific repayment calculation rules for non-standard
loan products (e.g., products with interest-only or negative
amortization features) and provides that the fully indexed rate
must be utilized for the repayment analyses on all
products.
Please note that this is not a self-executing provision and the
OCC, OTS, and FDIC, in consultation with the FTC must jointly
prescribe regulations to implement this provision.
Note that this provision essentially prohibits
underwriting loans to less than the full income and asset
verification standard.
B. "Net Tangible Benefit" Analysis
No creditor may extend credit in connection with any residential
mortgage loan that involves a refinancing of a prior existing
residential mortgage loan unless the creditor reasonably and in
good faith determines, at the time the loan is consummated and on
the basis of information known by or obtained in good faith by the
creditor, that the refinance loan will provide a net tangible
benefit to the consumer. A loan will not be considered to
provide a "net tangible benefit" if the costs of the refinanced
loan exceed the amount of any newly advance principal.
HR 1728 directs the OCC, OTS and FDIC to prescribe
implementing regulations defining the term "net tangible
benefit."
C. Safe Harbor
Any creditor and any assignee of a residential mortgage loan,
may presume that the loan meets the repayment ability and net
tangible benefit requirements set forth above if the loan is a
"qualified mortgage ." However, unlike HR 3915
where this presumption was only rebuttable against the original
creditor of the loan, HR 1728 extends this rebuttable presumption
to any assignee or securitizer.
HR 1728 defines a "qualified mortgage" as a residential mortgage
loan that constitutes a first lien or subordinate lien on the real
property securing the loan and:
- Has an annual percentage rate ("APR")3
that does not exceed the average prime offer
rate4
for a comparable transaction by 1.5% or more for first liens or by
more than 3.5% or more for subordinate liens;
- For which income and financial resources of the consumer are
verified and documented;
- For which the underwriting process is based on the
fully-indexed rate, and which takes into account taxes and
insurance;
- For which the back-end debt-to-income ratio does not exceed
some maximum percentage of the consumer's monthly gross income as
is prescribed by regulation; and
- For which the term of the loan is fixed for a period of not
less than or more than 30 years.
Significantly, this is a narrower definition of
"qualified mortgage" than that set forth in HR
3915. Notably, only 30-year fixed mortgage
loans underwritten on a full documentation basis would qualify
under the safe harbor. By contrast, option ARM products which
were very popular until recently or even 15-year fixed rate loans
would never qualify as a "qualified mortgage" because of the APR
and loan term caps. Significantly, note that HR 1728 permits
the Federal Banking agencies to prescribe regulations that can
revise or modify the criteria to be considered a "qualified
mortgage" as necessary or appropriate. Some industry
participants have noted that fixing the term of a qualified
mortgage to 30 years would run in contrast to loans modified under
the U.S. government's Home Owner's Affordability and Stability Plan
which calls for modifications of certain loans to 40 year repayment
periods.5
D. Credit Retention Risk
Significantly, in arguably the most contentious provision in the
legislation, HR 1728 requires that creditors, with respect to loans
other than qualified mortgages, would be
required to retain an economic interest in a material portion (at
least 5 percent) of the credit risk of each such loan that the
creditor transfers, sells, or conveys to a third party. Under
regulations to be promulgated by the appropriate federal banking
agencies, a creditor would also not be able to directly or
indirectly hedge or otherwise transfer the credit risk it
retains. The consequent of this provision is that
non-qualified mortgages will not likely be made, and even if they
are originated, it will be exceedingly difficult for originators to
sell them in the secondary market.
E. Liability Provisions
1. Limited Assignee
Liability
Significantly, HR 1728 provides that in additional to any other
remedies a consumer may have against the creditor under TILA, a
civil action which may be maintained against a creditor with
respect to any residential mortgage loan for a violation of the
repayment ability and net tangible benefit requirements for:
(a) rescission of the loan; and (b) any additional costs incurred
as a result of the violation, unless the creditor provides a cure
within 90 days after the receipt of notification of the violation
from the consumer. Further, HR 1728 provides that
no civil action may be brought against any assignee or securitizer
who has acted in good faith, except for rescission and costs.
Assignees and securitizers will not be liable if they provide a
cure6
within 90 days after the receipt of notification from the consumer,
so that the loan satisfies the requirements on repayment ability or
net tangible benefit.
HR 1728 deletes the "due diligence" defense that was
contained in HR 3915 which had permitted an assignee, including a
securitizer, to demonstrate that the assignee had a policy against
buying residential mortgage loans other than qualified mortgages
and exercised reasonable due diligence to adhere to that policy
through adequate, thorough, and consistently applied sampling
procedures established in accordance with regulations to be jointly
prescribed by the federal banking agencies. The elimination
of this defense significantly undermines an assignee's ability to
defend against an unknowing purchase of a non-qualified mortgage
which would have a chilling effect on future
securitizations.
HR 1728 also permits a consumer to maintain a civil action
against an assignee or securitizer if the original creditor that
violated these regulations and ceases to exist or becomes
bankrupt.
2. Class Actions Prohibited
As in HR 3915, HR 1728 states that only individual actions may
be brought against an assignee, including a securitizer, of a
residential mortgage loan for a violation of the repayment ability
or net tangible benefit provisions. Thus, an
assignee will not face class action lawsuits for purchasing loans
that violate the repayment ability and net tangible benefit
provisions.
3. Statute of Limitations
On a fixed rate mortgage loan, HR 1728 creates a 3-year statute
of limitations period with respect to a claim against an assignee
or securitizer alleging violations of the repayment ability or net
tangible benefit provisions. For an adjustable rate loan,
there is a floating statute of limitations period determined at the
earlier of: (i) the period ending 1-year after the date of the
first reset or adjustment on the mortgage loan or (ii) 6 years
after the mortgage loan was originally consummated.
4. Exclusion for Pools and Investors in
Pools
HR 1728 makes it clear that liability will not be extended to
bondholders or other investors in mortgage-backed
securities.
F. Defense to Foreclosure
HR 1728 includes the section previously contained in HR 3915
that allows rescission as a defense to foreclosure with regard to
the violation of the repayment ability or net tangible benefit
provisions. If the rescission period has expired, the
consumer may seek actual damages incurred in connection with the
violation including reasonable attorney's fees.
G. Additional Restrictions on Mortgage Loan
Products
1. Prohibition on Certain Prepayment
Penalties
A residential mortgage loan that is
not a qualified mortgage may
not contain a prepayment penalty. A
residential mortgage loan that is a qualified mortgage may not
contain terms under which a consumer must pay a prepayment penalty
for paying all or part of the principal in excess of the
following:
(a) a prepayment penalty not to exceed 3% of the outstanding
balance of the loan during the first year immediately following the
consummation of the loan;
(b) a prepayment penalty not to exceed 2% of the outstanding
balance of the loan during the second year immediately following
the consummation of the loan; and
(c) a prepayment penalty not to exceed 1% of the outstanding
balance of the loan during the third year immediately following the
consummation of the loan;
The mortgage originator is also required to offer the consumer a
qualified mortgage loan that contains no prepayment penalty.
Further, a residential mortgage loan with an introductory fixed
interest rate that adjusts or resets to a variable interest rate
after the period may not contain terms
under which a consumer must pay a prepayment penalty for paying all
or part of the principal after the beginning of the 3-month period
ending on the date of the adjustment or reset.
2. Prohibition against Financing Credit Insurance
Premiums
Similar to many state anti-predatory mortgage laws, HR 1728
prohibits any creditor from financing (except in connection with a
reverse mortgage), any credit life, credit disability, credit
unemployment or credit property insurance premiums
except where such premiums are calculated
and paid in full on a monthly basis and
are reasonable, at no "additional" cost to the consumer and neither
the creditor nor any of its affiliates receives any compensation,
directly or indirectly, in connection with such premiums.
3. No Mandatory Arbitration Provision/No Waiver of
Statutory Causes of Action
HR 1728 prohibits the inclusion of a mandatory arbitration
clause for any residential mortgage (except for reverse mortgages)
in connection with resolving or settling any claims arising out of
the transaction. This restriction, however, does not appear
to apply to any creditor, assignee or securitizer that agrees to
arbitrate after the dispute or claims under the transaction
arises.
HR 1728 also prohibits the inclusion of any waiver of the
consumer's right to bring a cause of action into federal court for
damages or relief for any violation of Title II of HR 1728.
4. Duty of Securitizer to Retain Access to
Loans
Any securitizer must reserve the right and preserve an ability,
in any document or contract establishing any pool of assets that
includes any residential mortgage loan to identify and obtain
access to any loan in the pool and to provide for and obtain a
remedy for any obligor alleging a violation of the repayment
ability or net tangible benefit provisions.
5. Mortgages with Negative
Amortization
HR 1728 discourages loan products with negative amortization by
requiring additional disclosures and counseling when these products
are made to first time home buyers.
6. Annual Contact Information
HR 1728 provides that at least once annually and whenever there
is a change in ownership of a residential mortgage loan, the
servicer must provide a written notice to the consumer identifying
the name of the creditor or any assignee or securitizer who should
be contacted concerning the loan.
7. Tenant Protection
HR 1728 augments substantially the tenant protections that were
set forth in HR 3915 for tenants that rent homes that go into
foreclosure. For foreclosures that occur after the date of
enactment of HR 1728, HR 1728 provides:
(a) Tenants may remain in the premises until the end of the
lease period;
(b) Tenants without a lease or with a lease terminable at will
must receive a 90 day notice to vacate;
(c) If the purchaser will occupy the unit as a primary
residence, the purchase may terminate the lease but must give a 90
day notice to vacate.
With respect to foreclosures for Section 8 housing
tenancies:
(a) Immediate successors are subject to pre-existing lease and
housing assistance payments for Section 8 tenants;
(b) Foreclosure will not constitute good cause for termination
during the initial term of the tenant's lease. However, in
subsequent lease terms, if the property is unmarketable while
occupied or if the owner will occupy the unit as a primary
residence, it may constitute good cause;
(c) Public housing agencies may pay utilities that are the
responsibility of the owner as well as reasonable moving costs for
Section 8 tenants, if the agency is unable to making housing
assistance payments to the immediate successors after a
foreclosure.
8. Notices Before Reset of Hybrid Adjustable Rate
Mortgages
HR 1728 provides that in the case of a "hybrid adjustable rate
mortgage," the creditor or servicer must provide a written notice,
separate and distinct from all other correspondence which includes
certain disclosures such as the index and how the new interest rate
and payment are determined. A "hybrid adjustable rate
mortgage" is defined as a consumer credit transaction secured by a
consumer's principal residence with a fixed interest rate for an
introductory rate that adjusts or resets to a variable interest
rate after such period.
9. Additional Disclosures
HR 1728 also provides for a number of additional disclosures,
such as disclosures for variable rate residential mortgage loans
which state the amount of the initial monthly payment as well as
the fully indexed payment, the aggregate amount of settlement
charges in connection with the loan, the aggregate amount paid to
the originator, including any additional amounts
received by the originator from the creditor based on the interest
rate of the loan, as well as certain disclosures in
monthly statements.
H. Various Amendments to Liability
Provisions
1. Right of Rescission
HR 1728 amends Section 130(e) of TILA by stating that in an
action to collect the debt, or as a defense to judicial or
non-judicial foreclosure, a consumer can assert a right of
rescission even after the expiration of the time periods for
affirmative actions set forth in Section 130(e) and Section
125.
2. Civil Liability Provisions
HR 1728 amends Section 130(a) of TILA to double the existing
available amount of civil monetary penalties. HR 1728 also
amends Section 130(e) to allow any violation of Section 129 to be
brought in any United States district court, or in any other court
of competent jurisdiction, before the end of the three year period
beginning on the date of the occurrence of the violation.
Currently, TILA only permits such actions for a period of one year
in an affirmative claim.
3. Creditor/Assignee Defense for Borrower's
Fraud
No creditor or assignee (including a securitizer) will be liable
for any violation of the consumer's ability to repay or the net
tangible benefit standard for refinancing where the borrower
knowingly, willfully, and with actual knowledge furnished false
information to the creditor or mortgage originator in order to
obtain the mortgage loan. Please note that this is a very
narrow defense and that it would not be available in stances when
the broker or originator persuaded the borrower to falsify
information on an application.
III. High Cost Home
Mortgages
HR 1728 also significantly amends the definition of a "high cost
mortgage" under HOEPA and models the amendments after the North
Carolina high-cost law that originally went into effect in
2000.
A. High Cost Threshold
1. Definition of High Cost Mortgage
HR 1728 alters the existing high cost thresholds under HOEPA by
defining a "high cost mortgage" as a consumer credit transaction
that is secured by the consumer's principal dwelling, other than a
reverse mortgage transaction, that meets one of the following
thresholds:
a. With respect to first lien and subordinate lien loans, the
APR at consummation of the transaction will exceed by more than 8%
and 10% respectively, the yield on Treasury securities having
comparable periods of maturity on the 15th day of the month
immediately preceding the month in which the application for the
extension of credit is received by the creditor. This
provision codifies the APR thresholds currently set forth in
Regulation Z, which promulgates TILA; or
b. With respect to a loan of $20,000 or more, the total points
and fees payable in connection with the loan exceed 5% of the total
loan amount. Note that this is a reduction from the current
8% points and fees threshold. With respect to a loan of less
than $20,000, the total points and fees payable in connection with
the loan exceed the lesser of 8% of the total loan amount or
$1,000; or
c. With respect to a loan in which the loan documents permit the
creditor to charge or collect prepayment fees or penalties more
than 36 months after the loan closing or the fees or penalties
exceed, in the aggregate, more than 2% of the amount prepaid.
Note that this is a new, additional "high-cost"
threshold.
2. Treatment of Introductory Rates
For purposes of calculating whether a mortgage exceeds the
thresholds set forth above, the APR must be determined based on the
following interest rates:
a. In the case of a fixed-rate loan in which the APR will not
vary during the term of the loan, the interest rate in effect on
the date of consummation;
b. In the case of a loan in which the rate of interest varies
solely in accordance with an index, the interest rate determined by
adding the index rate in effect on the date of consummation to the
maximum margin permitted at any time during the loan agreement;
or
c. In the case of any other loan in which the rate may vary at
any time during the term of the loan for any reason, the interest
charged on the loan at the maximum rate that may be charged during
the term of the loan.
3. Definition of Points and Fees
HR 1728 amends the current definition of points and fees to
include yield spread premiums in the calculation of
points and fees. HR 1728 also includes the
following items:
- Premiums or other charges payable at or before closing for any
credit life, or similar insurance;
- The maximum prepayment fees and penalties which may be charged
or collected under the terms of the loan documents; and
- All prepayment fees or penalties that are incurred by the
consumer if the loan refinances a previous loan made or currently
held by the same creditor or an affiliate of the creditor.
HR 1728 also allows for the exclusion of up to two bona fide
discount points or certain prepayment penalties from the definition
of "points and fees."
Finally, note that originators may not finance any points and
fees, effectively making it impossible to originate a high cost
loan.
B. Prohibited Practices
HR 1728 amends and make additions to the prohibited practices on
high cost mortgages. For example, HR 1728 expands the
prohibition on balloon payments, and reworks the lending without
due regard to repayment ability on high cost mortgages. HR
1728 also adds prohibitions against recommending default, imposing
excessive late payment charges, accelerating the debt, financing
excessive points and fees, evading HR 1728, charging modification
or deferral fees, and charging for payoff statements.
HR 1728 also adds a counseling requirement for all high cost
mortgages. A creditor may not extend credit to a consumer
under a high cost mortgage without first receiving certification
from a counselor that is approved by HUD, or at HUD's discretion, a
state housing finance authority, that the consumer has received
counseling on the advisability of the loan transaction.
IV. Mortgage
Servicing
HR 1728 also enhances consumer protections in connection with
certain mortgage servicing practices
A. Required Establishment of Escrow or Impound
Accounts
HR 1728 provides that with respect to first lien loans secured
by the principal dwelling of a consumer (other than an open end
credit plan or reverse mortgage) a creditor must establish an
escrow or impound account for the payment of taxes and insurance
and any other required payments at consummation of the loan.
However, no such account can be required as a condition of a real
property sale except in the following specified instances:
- Any such account is required by federal or state law;
- The loan is made, guaranteed or insured by a state or federal
government lending or insuring agency;
- The consumer's debt-to-income ratio exceeds 50%;
- The transaction is secured by a first mortgage and the APR
exceeds by more than 3% the yield on comparable Treasuries as of
the 15th day of the month immediately preceding the month in which
the application for credit is received by the creditor;
- The consumer obtains a loan subject to HOEPA;
- The original principal amount of the loan is (a) 90% or more of
the sale price; or (b) 90% or more of the appraised value of the
property;
- The combined principal amount of all loans secured by the
property exceeds 90% of the appraised value;
- The consumer was subject to a bankruptcy proceeding during the
7 year period preceding the date of the transaction; or
- As otherwise required by regulation.
Any account established pursuant to the foregoing must remain in
existence for a minimum of 5 years and until the borrower has
sufficient equity in the dwelling so as to no longer be required to
maintain private mortgage insurance or as otherwise provided by
regulation. In the case of any account subject to the
foregoing, the creditor must give certain written disclosures to
the consumer at least 3 business days prior to consummation.
Disclosures must also be given to consumers who waive escrow
services that inform consumers of their responsibilities and the
implications of not having such an account. The disclosures
must include:
- Information concerning any applicable fees associated with
either the nonestablishment of such account at the time of the
transaction or any subsequent closure of any such account;
- A clear and prominent notice that the consumer is responsible
for personally and directly paying the non-escrowed items, in
addition to paying the mortgage loan payment, in the absence of any
such account and the fact that the costs for taxes, insurance and
related fees can be substantial;
- A clear explanation of the consequences of any failure to pay
non-escrowed items, including the possible forced placement of
insurance by the creditor or servicer and the potentially higher
cost (including any potential commission payments to the servicer)
or reduced coverage for the consumer in the event of any such
creditor-placed insurance.
In addition, HR 1728 requires the inclusion of escrow payments
in any repayment analysis that is provided to consumers in order to
ensure that lenders inform borrowers of all of the costs involved
in owning a home.
B. Amendments to RESPA
Further, HR 1728 amends the federal Real Estate Settlement
Procedures Act to impose additional prohibitions of mortgage
servicers of federally-related mortgage loans. Specifically,
HR 1728 prohibits servicers from:
- Obtaining force-placed hazard insurance unless there is a
reasonable basis to believe the borrower has failed to comply with
the loan contract's requirements to maintain property
insurance;
- Charging fees for responding to valid qualified written
requests;
- Failing to take timely action to respond to a borrower's
requests to correct errors related to allocation of payments, final
balances for purposes of paying off the loan or avoiding
foreclosure or other standard servicer's duties;
- Failing to respond within 10 business days to a request from a
borrower to provide the identity, address and other relevant
contact information about the owner assignee of the loan; or
- Failing to comply with any other obligation required to carry
out the consumer protection purposes of RESPA.
HR 1728 also sets forth a number of requirements that servicers
must fulfill in order to be considered to have had a reasonable
basis for force-placed insurance. In addition, HR 1728
requires the prompt crediting of payments by servicers, as well as
prompt sending of payoff amounts and refunds of escrow accounts
upon payoff. Finally, HR 1728 increases penalty amounts under
RESPA.
V. Appraisal Activities
HR 1728 also includes a number of provisions in order to
strengthen appraiser independence.
A. Property Appraisal Requirements
1. HOEPA Mortgages
HR 1728 requires creditors who extend mortgages subject to HOEPA
to obtain a written appraisal which meets certain requirements,
such as physical property visits, second appraisals under certain
conditions without cost to the consumer and giving a free copy of
the appraisal to the consumer without charge at least 3 days prior
to consummation.
2. Unfair and Deceptive Practices Acts and Appraiser
Independence
HR 1728 states that it will be unlawful, in providing any
services for a mortgage loan secured by the principal dwelling or a
consumer, to engage in any unfair or deceptive acts or practices
that are described by regulations.
Further, HR 1728 provides for a number of specific acts and
practices related to appraiser independence that will be considered
unfair or deceptive pursuant to the foregoing prohibition. HR
1728 provides for significant penalties, starting at $10,000 per
day, for violations.
B. Appraisal Subcommittee of the FFIEC
HR 1728 amends the Financial Institutions Reform, Recovery and
Enforcement Act to provide the Appraisal subcommittee of the
federal Financial Institutions Examination Council ("FFIEC") with a
consumer protection mandate to protect the consumer from improper
appraisal practices and predations of unlicensed appraisers.
HR 1728 also strengthens the oversight and monitoring ability of
the FFIEC over state appraisal certifying and licensing
agencies. Finally, HR 1728 strengthens appraiser licensing
and education standards and establishes a federal grant program to
assist state agencies in their regulatory activities with respect
to appraisers.
C. Equal Credit Opportunity Act Amendment
HR 1728 amends the federal Equal Credit Opportunity Act to
require creditors to furnish applicants with a copy of all
appraisal reports and valuations developed in connection with a
residential mortgage loan and to notify consumers of their right to
receive same.
******
Please contact Stephen
Ornstein if you have any questions regarding this
memorandum.
1 The term
"securitizer" means any person that transfers, conveys, or assigns,
or causes the transfer, conveyance, or assignment of residential
mortgage loans, including through a special purpose vehicle, to any
securitization vehicle, excluding any trustee that holds such loans
solely for the benefit of the securitization vehicle.
2 15 USC § 1641, et
seq. HOEPA amended and became part of the TILA on
October 1, 1995.
3 The determination of the APR
must be based on the fully indexed rate of interest for mortgages
containing introductory rates. Accordingly, the fully indexed
rate will be applied in determining the APR threshold.
4 The term "average prime offer
rate" means an annual percentage rate that is derived from 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. Under HR 1728, such average prime offer
rates must be published at least weekly.
5 See Sonnenschein Nath
& Rosenthal LLP memorandum entitled, "Updated Overview of the
Homeowner Affordability and Stability Plan Including Treasury
Guidelines", March 3, 2009.
6 The term "cure" means the
modification or refinancing, at no cost to the consumer, of the
loan to provide terms that would have satisfied the requirements of
the repayment ability or net tangible benefit provisions if the
loan had contained the terms at the time of origination of the
loan.
These materials should not be considered as, or as a
substitute for, legal advice and they are not intended to nor do
they create an attorney-client relationship. Because the materials
included here are general, they may not apply to your individual
legal or factual circumstances. You should not take (or refrain
from taking) any action based on the information you obtain from
this document without first obtaining professional counsel and you
should not send us confidential information without first speaking
to one of our attorneys and receiving explicit authorization to do
so.