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CFPB Publishes Additional Mortgage Rule Compliance Guides
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.
CFPB Amends Credit Card Ability-to-Pay Rule
On April 29, the CFPB amended Regulation Z to make it easier for spouses or partners who do not work outside of the home to qualify for credit cards. Regulation Z generally requires that credit card issuers consider an applicant’s independent ability to pay regardless of age. A Federal Reserve Board rule adopted to implement the Credit CARD Act, which took effect on October 1, 2011, required card issuers to consider only an individual card applicant’s independent income or assets. The rule received criticism from members of Congress and other stakeholders who argued the rule limited access to credit for stay-at-home spouses and partners. The CFPB’s revised rule allows credit card issuers to consider third-party income for a consumer who is 21 or older, if the applicant has a reasonable expectation of access to such income. The CFPB rule does not change the independent ability to pay requirement for individuals under 21 years old. The rule is effective as of May 3, 2013 and compliance with the rule is required by November 4, 2013. Card issuers may, at their option, comply with the rule prior to that date.
Federal Court Approves Lender Settlement of TILA, UDAP Claims Based on HELOC Reductions
On March 15, the U.S. District Court for the Northern District of California approved a lender’s settlement with a class of borrowers who claimed that the bank suspended or reduced borrower home equity lines of credit (HELOCs) in violation of the Truth in Lending Act and California’s Unfair Competition Law. In Re Citibank HELOC Reduction Litig., No. 09-350 (N.D. Cal. Aug. 31, 2012). The borrowers claimed that the bank improperly utilized computerized automated valuation models (AVMs) as the basis for suspending or decreasing customer HELOCs because of the decline in the value of the underlying property. The complaint also charged that customers were injured because (i) the annual fee to maintain the HELOC was not adjusted to account for the decreased limit, and (ii) the borrowers’ credit ratings were damaged as a result of the reduced credit limit. The named plaintiff also alleged injury because he was forced to obtain a replacement home equity line, which resulted in payment of an early termination fee on the old HELOC and additional costs related to the new HELOC. Under the agreement, class members will have a right to request reinstatement of their HELOC accounts, the bank will expand the information contained in credit-line reduction notices based on collateral deterioration, and customers who incurred an early closure release fee when closing the account subsequent to the suspension or reduction may make a claim for the cash payment of $120. The court reduced the incentive payments owed to the six named plaintiffs by $1,000 each, but approved the proposed $1.2 million in attorneys’ fees.
Federal Court Holds Borrowers Must Allege Sufficient Basis To Exercise TILA Three-Year Right of Rescission
On February 28, 2013, the U.S. Court of Appeals for the Fourth Circuit held that a borrower failed to state sufficient facts to avail herself of TILA’s extended three-year right to rescind her mortgage. Wolf v. Federal Nat’l Mortg. Assoc., No. 11-2419, 2013 WL 749652 (4th Cir. Feb. 28, 2013). Nearly three years after refinancing her loan, and just a few days before the scheduled foreclosure sale, the borrower attempted to rescind her mortgage loan pursuant to TILA, based on arguments that the original lender under-disclosed certain material finance charges. The district court held that the borrower’s TILA claims were untimely because she failed to file a lawsuit within the three-year deadline. Since the district court’s decision was issued, the Fourth Circuit held in another case, Gilbert v. Residential Funding LLC, 678 F.3d 271 (4th Cir. 2012), that a borrower need not file a lawsuit seeking rescission within the three-year deadline but instead must only notify the lender that she is exercising her rescission right. The Fourth Circuit reasoned that, in light of Gilbert, the borrower’s claim had not necessarily expired and the relevant question centered on whether she had adequately alleged facts that the three-year deadline applied. The Fourth Circuit found that the borrower’s allegations amounted to bare assertions and presented no facts as to why the charges were unreasonable. The court also rejected the borrower’s argument that the lender had inadequately disclosed the right to rescind. Accordingly, the Fourth Circuit affirmed the district court’s ruling – on different grounds – and dismissed the TILA claims. The Fourth Circuit also held that the borrower had failed to state claims for fraud, defamation, breach of the implied covenant of good faith and fair dealing, and a claim that the assignment was invalid, thus invalidating the foreclosure sale.
Third Circuit Holds Notice Sufficient to Preserve Borrower's Three-Year TILA Rescission Right
On February 5, the U.S. Court of Appeals for the Third Circuit held that a borrower need only provide written notice of intent to rescind a loan within the statutory three-year rescission period to preserve that right; a borrower need not also file a complaint within the three-year period. Sherzer v. Homestar Mortg. Servs., No. 11-4254, 2013 WL 425835 (3rd Cir. Feb. 5, 2013). TILA allows borrowers three years to rescind a loan if the lender fails to provide certain required disclosures. In this case, counsel to the borrowers—who had obtained two mortgage loans from two different lenders—sent a letter to the lenders within three years of the closing date asserting that the lenders materially violated TILA by failing to provide certain disclosures. The letter also notified the lenders that the borrowers were exercising their right to rescind the loans. When the lenders refused to rescind one of the loans, the borrowers filed suit more than three years after closing. On appeal, the court reversed the district court, which had dismissed the borrowers’ rescission claims as untimely. The Third Circuit instead held that (i) nothing in the language of the statute (or its implementing regulation) requires the filing of a court action to invoke the right to rescind, and (ii) valid written notice of rescission within the three-year period is sufficient. The court acknowledged concerns about the practical impacts of such a holding on lenders, but stated it was constrained by the statute’s text. In so holding, the Third Circuit agreed with the position advocated by the CFPB and already adopted by the Fourth Circuit, but split from the Ninth and Tenth Circuits, which have held that a borrower must file a complaint within the three-year period to properly exercise the rescission right. The same issue remains pending in the Eighth Circuit.
Special Alert: Detailed Analysis of CFPB's Mortgage Servicing Rules
On January 17, the CFPB issued final rules amending Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The rule amending Regulation Z includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoff statements. The rule amending Regulation X addresses (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. This Alert includes a detailed analysis of these nine topics and also provides links to each of the model forms amended or added by the rule. For ease of reference, this Alert contains a detailed, hyper-linked table of contents. Click here to download our detailed analysis of CFPB's Mortgage Servicing Rules.
Special Alert: Analysis of Final ECOA and HPML Appraisal Rules
On January 18, the federal banking agencies issued a final rule amending Regulation Z to implement certain requirements from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs), and to notify consumers who apply for these loans of their right to a copy of appraisal. On the same day, the Consumer Financial Protection Bureau issued a final rule under the Equal Credit Opportunity Act (ECOA), as amended by the Dodd-Frank Act, to require creditors to provide residential mortgage loan applicants with a copy of any and all appraisals and other written valuations developed in connection with an application for closed or open-end credit that is to be secured by a first lien on a dwelling. Both rules take effect on January 18, 2014. BuckleySandler has prepared a Special Alert that provides additional details regarding the HPML appraisal rule, as well as a Special Alert regarding the ECOA appraisal rule.
Special Alert: Detailed Analysis of CFPB's Final Ability-to-Repay/Qualified Mortgage Rule
As promised in our earlier flash Alert on the Consumer Financial Protection Bureau's highly anticipated final "Ability-to-Repay" rule governing residential mortgage lending under Regulation Z, we are providing in this Special Alert a detailed summary and analysis of the Rule, which becomes effective on January 10, 2014. We also assess the Bureau's concurrently issued proposal, which seeks comments by February 25, 2013 on potential amendments to the Rule. For ease of reference, the Alert contains a detailed, hyper-linked Table of Contents.
CFPB Issues Mortgage Servicing Standards
On January 17, the CFPB issued final rules amending Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The rule amending Regulation Z includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoff statements. The rule amending Regulation X addresses (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. While many of the rules implement changes required by the Dodd-Frank Act, other proposed requirements incorporate requirements similar to those placed on servicers as part of the national mortgage servicing settlement earlier this year, or corrective actions taken in 2011 by the prudential regulators. The new standards go into effect on January 10, 2014. The rule provides certain exemptions for servicers that service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own. BuckleySandler will provide additional analysis of key issues in the rules once we complete our review of them.
Special Alert: CFPB Issues Final Ability-to-Repay / Qualified Mortgage Rule
On January 10, the CFPB issued its keenly awaited final "Ability-to-Repay" rule under Regulation Z that will require lenders to verify a consumer's ability to repay a mortgage loan as required by Sections 1411 and 1412 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule will become effective on January 10, 2014. Concurrently, the CFPB released a proposal seeking comment on amendments to the final rule. Together, the releases containing the final and concurrent proposed rules total almost 1,000 pages. This alert highlights some key issues that the releases resolve and leave open; we will send a summary of the releases with additional analysis of the key issues once we have had more time to review.
Because of the severe penalties established by Congress for violating the "Ability to Repay" requirements - a borrower in foreclosure can assert a violation against the creditor or assignee seeking up to three years of finance charges paid on the loan - the key definitions and exemptions established by the rule are expected to greatly influence the availability and cost of residential mortgage credit for years to come.
The statute defines a subset of mortgage loans to be "Qualified Mortgages" (or QMs), which would be more difficult for consumers to challenge on ability-to-repay grounds. The rule resolves three of the major policy debates surrounding the QM concept, as discussed below, but leaves open many related matters:
- Whether the QM definition should be objective (and thus easier to determine compliance with up front but more rigid in application to individual borrowers) or subjective (creating more of a compliance challenge but allowing for more individualized determinations)
- The rule takes the more objective path, using as its underwriting criteria (i) a numerical standard of 43% debt to income (DTI) ratio as the QM cut-off or, alternatively, for the time being, (ii) eligibility for purchase, guarantee or insurance by the GSEs or Federal agencies. (This alternative to the 43% cut-off will become unavailable after seven years or, if earlier and as applicable, until the Federal agencies write their own qualified mortgage rules or the GSE conservatorships end.) Note that jumbo loans, by definition, could not qualify under the GSE/Federal agency alternative; thus, they will have to be made at a 43% DTI just to pass the QM underwriting test.
- Whether the QM definition should encompass much of the market or be limited to the very top end of the market
- The definition clearly includes much of the market. The underwriting criteria described above would make well over 90% of the current residential mortgage marketplace QM eligible. How many of those loans would also pass the separate "points and fees" test for QM (discussed below) is an open question, however.
- Whether QM status would provide a "safe harbor" from liability under the requirements or merely a "rebuttable presumption" that the loan meets the ability-to-repay requirements
- The rule provides a safe harbor for loans with APRs below the "higher-priced" threshold of 150 basis points over the Average Prime Offer Rate (APOR), and a "rebuttable presumption" for loans with an APR above that threshold.
The expansive underwriting criteria adopted in the final rule for QMs will place relatively more importance on the separate QM requirement that points and fees be limited to 3% of the loan amount. Indeed, to many observers, the components of that cap present the most significant unresolved issues in the rule. The final rule includes in the 3% cap both (i) direct and indirect loan originator compensation, as well as (ii) closing charges paid to affiliated settlement providers such as a lender-owned title company.
The inclusion of those items in the 3% cap will place a lot of stress on mortgage brokers and wholesale lending business models (and the brokers that send applications to those lenders) and on the use of affiliates. By including these items in the 3% cap, there will be little room for upfront lender charges. At least on the issue of indirect loan originator compensation, however, the Bureau has shown some potential flexibility by raising the matter in the concurrent proposal.
- Whether the QM definition should be objective (and thus easier to determine compliance with up front but more rigid in application to individual borrowers) or subjective (creating more of a compliance challenge but allowing for more individualized determinations)