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Final Mortgage Rules released by the CFPB 

Starting in June 2013, credit unions will begin to adopt and adapt to the CFPB new requirements for mortgage lending and servicing. These changes will stretch into 2014 and beyond. Mortgage lending has been the primary focus of the many issues the CFPB has taken up to protect consumers in the financial services market. The CFPB began handing their final rules down in mid-January, and have met the final deadline of Jan. 21 as expected for the issuance of all their proposals. While this presents a tremendous amount of new regulatory concerns, there are some indications that the CFPB is recognizing that credit unions and other community lenders are generally not the problem at the root of many of these offerings, and are taking steps to mitigate the effect of some rules through the definition of “qualified mortgage” and small servicer exemptions.

As of Jan. 18, the new rulings issued include:

High-cost Mortgage and Homeownership Counseling Amendments
The final rules for high-cost mortgages amend the Home Ownership and Equity Protection. The rule expands loans currently covered which will now include most types of mortgage loans secured by a members principal dwelling including:

• Purchase-money mortgages
• Refinances
• Close-end Home Equity Loans
• Open-end Credit Plans

The regulation requires credit unions offering mortgage loans that exceed certain APR thresholds to disclose terms, costs and fees associated with high-cost loans early in the process and certify that the members have received homeowner counseling regarding the loan.
In a release the CFPB also said that the high-cost mortgage regulation will:

• Ban risky mortgage features such as balloon payments and prepayment penalties for qualifying mortgages
• Prevent charging loan modification and loan payoff fees
• Set a late-fee cap of 4% of the amount of payment that is past due
• Prohibit lenders from rolling closing costs into the loan amount

The High-cost Mortgage and Homeownership Counseling Amendment will take effect on Jan. 10, 2014, and further information can be found by clicking here.

Escrow Requirements
The escrow changes finalized by the CFPB through Regulation Z, which take effect June 1, will require higher-priced mortgage loans have escrow accounts that must be established and maintained for at least five years. This rule does have an exemption from the escrow requirement for small creditors that operate predominately in rural or underserved areas. To be eligible for the exemption, a credit union must:

• Make more than half of its first-lien mortgages in rural or underserved areas;
• Have an asset size less than $2 billion;
• Together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; and
• Together with its affiliates, not escrow for any mortgage it or its affiliates currently services, except in limited instances.

Under the rule, eligible credit unions need not establish escrow accounts for mortgages intended at consummation to be held in portfolio, but must establish escrow accounts at consummation for mortgages that are subject to a forward commitment to be purchased by an investor that does not itself qualify for the exemption.

Further information on the rule can be found by clicking here.

Mortgage Servicing
On Jan. 17 the CFPB released the new mortgage servicing rules amending regulation Z and X. The rule will be in effect on Jan. 10, 2014, and covers nine major topics:

1. Servicers must provide a periodic statement for each billing cycle containing, among other things, information on payments currently due and previously made, fees imposed, transaction activity, application of past payments, contact information for the servicer and housing counselors, and, where applicable, information regarding delinquencies. These statements must meet the timing, form, and content requirements.
2. Servicers must provide a notice to members whose mortgage has an adjustable rate with a notice between 210 and 240 days before the first payment due after the rate first adjusts. This notice may contain an estimate of the new rate and new payment. Servicers also must provide a notice between 60 and 120 days before payment at a new level is due when a rate adjustment causes the payment to change.
3. Servicers must promptly credit periodic payments from members as of the day of receipt
4. Servicers are prohibited from charging a member for force-placed insurance coverage unless the servicer has a reasonable basis to believe the member has failed to maintain hazard insurance and has provided required notices. An initial notice must be sent to the member at least 45 days before charging the borrower for force-placed insurance coverage, and a second reminder notice must be sent no earlier than 30 days after the first notice and at least 15 days before charging the member for force-placed insurance coverage.
5. Servicers will need to meet new requirements in responding to error resolutions and complaints of errors.
6. As always, the new rule requires a credit union to develop policies, procedures and requirements that meet the new standards of the amended regulation.
7. Servicers must establish or make good faith efforts to establish live contact with members by the 36th day of their delinquency and promptly inform such members, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide the member a written notice with information about loss mitigation options by the 45th day of the member’s delinquency.
8. Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent members with access to personnel to assist them with loss mitigation options where applicable.
9. Finally, servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower’s principal residence. If a member submits an application for a loss mitigation option, the credit union is generally required to acknowledge the receipt of the application in writing within five days and inform the member whether the application is complete and, if not, what information is needed to complete the application. The credit union is required to exercise reasonable diligence in obtaining documents and information to complete the application.

This Mortgage Servicing Rule does include an exemption to several parts of the regulation for small servicers that service less than 5,000 mortgage based loans. It is important to understand the definition of mortgage loan when determining if you qualify for the exemption. Mortgage loan is defined in the regulation as any mortgage loan secured by a first or subordinate lien on residential real property excluding lines of credit. 
Further information on these provisions can be found by clicking here.

Disclosure and Delivery Requirements for Copies of Appraisals
This rule amends the appraisal provision of Regulation B and is effective Jan. 18, 2014. The amendment only applies to applications for credit secured by a dwelling under a first lien, and:

• Requires credit unions to notify members of their right to receive a copy of their appraisal within three days of receiving an application.
• Requires credit unions to provide a copy of the appraisal and other written valuations promptly upon completion, or three business days before loan closing.
• Permits the member to waive the timing requirement for providing copies of appraisals; however, applicants who waive the timing requirement must be given the appraisals at or prior to loan closing. If the transaction is not consummated the appraisal must be given to the member no later than 30 days after the creditor determines the transaction will not be closed.
• Prohibits a credit union from charging for a copy of the appraisal, but permits the credit union to charge members for the cost of the appraisal or other written valuation.

Further information on the rule can be found by clicking here.

Appraisals for High-priced Mortgage Loans
The final amendment, issued jointly by the CFPB and several other agencies, allows a credit union to extend a higher-priced mortgage loan only if the credit union obtains a written appraisal from a certified or licensed appraiser, and the appraiser conducts a physical property visit of the interior of the home.
Similar to the CFPB Disclosure and Delivery Requirements for Copies of Appraisals rule, credit unions must provide a notice of the purpose of the appraisal and a copy of the appraisal to the member. The written notice for the CFPB rule and this jointly issued amendment can use a single, unified document to meet both requirements.

There are also requirements for properties that are flipped, or purchased and resold within 180 days which require an additional appraisal from a second appraiser. The rule only applies to closed-end credit transactions, and exempts: reverse mortgages, construction and bridge loans, and new manufactured home loans.

The rule takes effect Jan. 18, 2014. Further information can be found by clicking here.

Ability to Repay and Qualified Mortgage Standards
The CFPB made an additional amendment to Regulation Z through the Ability to Repay and Qualified Mortgage Standards rule. This rule was founded on the experiences of the mortgage crisis, when many mortgages were made without regard to a person’s ability to repay loans. The final rule describes certain minimum requirements to make ability-to-repay determinations, but does not dictate that credit unions follow particular underwriting models. At a minimum, creditors generally must consider eight underwriting factors:

1. Current or reasonably expected income or assets;
2. Current employment status;
3. Monthly payment on the loan;
4. Monthly payments on any other loans;
5. Monthly payments for mortgage-related obligations;
6. Current debt obligations, alimony, and child support;
7. Monthly debt-to-income ratio or residual income; and
8. Credit history.

Credit unions should use reasonably reliable third-party records to verify the information they use to evaluate the factors. The rule does establish certain protections from liability under the requirement for “qualified mortgages” and a concurrent proposal to expand that definition for non-profit, portfolio lenders, has also been issued. Additionally the rule limits prepayment penalties and requires credit unions to retain evidence of compliance for three years after a covered loan is consummated.

This rule will be effective Jan. 10, 2014. Further information on the rule can be found by clicking here.

This is not the end of the changes we can come to expect from the CFPB on mortgage lending and servicing, and further information on the new rule on loan originator compensation, issued Sunday, Jan. 20, will be forthcoming. And, as one can see with the proposals already issued to alter new rules on International Remittance Transfers and the “Ability to Repay” standards, the industry will have to closely monitor the agency’s activity with regard to all of these rules.