The January 2014 CFPB Regulations

Come January, 2014 most of the final regulations proposed by the CFPB this year will take effect. We have been taking a pro-active approach in implementing these regulations, by identifying the areas of our business which will need to be modified to ensure compliance with them, making plans for such modifications, and getting them “in place” for January.

This article provides a summary of the changes we are planning to make. A table summarizing these changes can also be found at the end of this article.

Revisions to Our “Section 32 Mortgage Loan Disclosure” (Cx2790) and HCL APR Test

Amended regulations under 12 CFR § 1026.32 concerning “high-cost mortgages” (HCLs) were finalized in 78 FR 6856 (2013). Among other changes, the final rules amend Subsection (c), which requires certain disclosures to be given in connection with HCLs (which disclosures we combine in Cx2790).

The requirements concerning the contents of these disclosures will be effectively expanded, due in large part to the fact that open-end credit can be considered a HCL once these regulations take effect. The CFPB has also taken the liberty, through new Official Staff Commentary, to effectively require additional disclosures. Creditors will be expected to disclose (inter alia):

1. Whether certain finance charges, such as bona fide third-party charges, are included in the amount of the loan;
2. The maximum periodic payment possible for each “payment level” of the loan; and
3. Recommended text for when the loan has a discounted or premium variable interest rate.

Due to the combination of these new disclosure requirements and the inclusion of open-end credit in the HCL tests, we have determined that our Cx2790 will be inadequate for handling these changes, so we will be effectively modifying and expanding it into a new document.

There will be two different versions of this new document. One will print for closed-end loans, while the other will print for open-end loans, due to calculation differences. Enhanced text will be included in both versions, in order to cover all the required and “expected” disclosures. The most major change will be the inclusion of payment tables, in order to disclose both the actual periodic payments and the maximum periodic payment for each “payment level” of the loan.

While the closed-end version of the document will begin printing on January 10, 2014 (the effective date of these regulations), the open-end version will continue to be developed during 2014, due to software enhancements which will need to be made in order to support high-cost, open-end loans. In the interim, a hard-stop warning will appear if such a loan is passed through our system.

Cx2790 will continue to print in some states (such as Massachusetts), which have their own variants of Regulation Z and which require disclosures similar to the current regulations, rather than the new ones.

Another final change is to the APR test used to determine whether a loan is a HCL or not. The new regulations have created three new APR calculations for this test in 12 CFR § 1026.32(a)(3), which are based on whether the loan has a fixed interest rate, an adjustable interest rate based on an index, or an adjustable interest rate based on a factor other than an index.

While HCL checks are largely handled by InterthinX, one of our third party vendors, the APR for these checks are passed through our system to theirs, so it has become necessary for us to basically create new APR calculations for this test. Progress has been quick on this part, due to previous calculations that have been made in the past which fit the requirements for these new calculations, so we will be more than ready for this change by January.

New List of Housing Counselor Agencies

Also included in the new regulations set forth in 78 FR 6856 (2013) were amendments to Regulation X, requiring lenders to provide borrowers, in connection with federally-related mortgage loans, with a list of homeownership counseling agencies which are located within “the loan applicant’s location,” starting January 10, 2014 (see new 12 CFR § 1024.20[a][1]). The CFPB is planning on creating a website in which certain information concerning the loan applicant can be inputted (e.g. the applicant’s zip code) and an appropriate list of counselors can be generated and given to the applicant.

It is anticipated that the CFPB, in conjunction with HUD, will also be providing certain items of data which can be collected from this website by document vendors and used to automatically generate such lists, rather than making loan officers visit the website and print the lists manually for each loan.

This is a very important document and we are closely monitoring progress on the website’s creation, particularly in order to know whether we will be able to pull data from this website and generate the lists ourselves or not. However, the website is still under development by the CFPB and HUD and, from feedback we have received from the CFPB, we do not expect it to be available for testing until October (at the earliest). Until the website is created, we will not be able to make any progress on these lists. We are, however, reserving resources for creating these lists as quickly as we can (if we can), once the website is created and accessible.

Name and NMLS Number of Loan Originators Appearing on Certain Documents

Regulations primarily dealing with loan originator compensation were finalized in 78 FR 11280 (2013), though these also deal with some subjects beyond the scope of an originator’s compensation. One of these rules, which will be codified as 12 CFR § 1026.36(g), will require the name and NMLSR ID number of the loan originator organization and individual loan originator to appear on the loan application, promissory note, and security instrument (and, it is expected, also on the forthcoming Loan Estimate and Closing Disclosure).

Due to this stipulation, both the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) have issued their own variants of this requirement for their uniform legal documents. Both entities allow for the disclosure of this information now, but mandate that such information should be disclosed starting January 10, 2014. FNMA requires the information to appear “below the borrower signature lines and any notary section,” unless state or local law requires otherwise (see FNMA Ann. SEL-2013-03).

FHLMC, however, requires the information to appear “immediately below the signature lines and any notary section” and in a prescribed format (see “Authorized Changes to Notes” and “Authorized Changes to Security Instruments” on FHLMC’s website at http://www.freddiemac.com/uniform/unifchanges.html).

In order to accommodate these various requirements, we will be creating a series of fields which will disclose the names and NMLS numbers of the loan originator companies (assuming there is both a lender and a broker in a transaction) and of the individual originators of such companies, for a total of four names and NMLS numbers. The fields will also provide a caption preceding such information, to identify which entity the information applies to.

Due to the various requirements and preferences of our clients, the content of these fields may be modified on a client-by-client basis. The default, however, will be based on FHLMC’s standards, since these are the most restrictive for these disclosures. This means that by default the information will print immediately after either the borrower signature lines or the notary acknowledgment area (unless state law necessitates otherwise) and the captions for the information will generally follow the caption specified by FHLMC in their authorized changes.

As for the loan application, since the FNMA 1003/FHLMC 65 form only allow for the disclosure of the information of two entities, we are planning to create an addendum to this form (our Cx4193) which will disclose the other two entities’ information (if applicable) – unless this form is updated accordingly between now and January, in which case we will just update Cx4193.

Prohibition Against Financing of Single-Premium Credit Insurance

Also included in the final regulations set forth in 78 FR 11280 (2013) are ones to create a new prohibition against the financing, directly or indirectly, of any premiums for credit insurance, except reasonable premiums for credit unemployment insurance (from which the creditor receives no compensation) and premiums which are “calculated and paid in full on a monthly basis.” This new prohibition will be codified as 12 CFR § 1026.36(i).

These regulations were originally scheduled to take effect on June 1st of this year, but due to requests for clarification concerning the CFPB’s analysis, and the application, of these regulations, the CFPB has temporarily delayed the effective date of these regulations until January 10, 2014 and has been proposing modifications to them (see 78 FR 27308 & 32547; see also CFPB Docket No. CFPB -2013-0018).

While revised final regulations are still being developed, DocuTech has been closely reviewing its state-specific disclosures to ensure that they do not contain provisions which would conflict with these regulations. We have identified four which may, depending on the final rules, be in conflict:

1. MA High Cost Loan Insurance Disclosure (Cx3745), required under Mass. Regs. Code tit. 209, § 32.34(2)(b).
2. OK Insurance Notice to Obligor (Cx3324), required under Okla. Stat. Ann. tit. 14A, § 4-113.
3. PA Optional Insurance Notice (Cx1027), required under 63 Pa. Stat. Ann. § 456.512(f)(2).
4. TX Insurance Notice to Applicant (Cx3715), required under Tex. Fin. Code Ann. § 343.104.

Once the regulations are again finalized, we will begin looking at ways to ensure that these documents are still in compliance.

Ability to Repay/Qualified Mortgage Rule

The final version of these regulations were published in 78 FR 6408 (2013), with amendments to them published in CFPB Docket No. CFPB-2013-0002.

After reviewing these regulations carefully, DocuTech has come to the conclusion that no new generic documents need to be created and that the new tests for determining whether a loan is a “qualified mortgage” (QM) or not will need to be provided through our third party vendor, InterthinX.

We have been apprised of the fact that certain investors will be requiring worksheet-type documents for determining the borrower’s ability to repay their loan and we are prepared to begin making these worksheets, once more details are provided by such investors. We are also considering creating our own generic worksheet which can be used for multiple investor requirements, for cases where investors do not specify the exact content of such worksheets.

New Servicing Rules

These regulations, which primarily affect the servicing aspect of the mortgage loan industry, amend both Regulations X and Z and were finalized in 78 FR 10902 (2013), with amendments published in CFPB Docket No. CFPB-2013-0010.

One of these regulations amends 12 CFR § 1024.21 and, subsequently, 12 CFR Pt. 1024, App. MS-2, which contains the “Notice of Assignment, Sale, or Transfer of Servicing Rights” form, a modified copy of which we provide as Cx21.

The changes to this form are largely textual in nature and make the document more streamlined. We are planning on updating Cx21 to duplicate the new model form (which will be entitled “Notice of Servicing Transfer”), with additional edits for certain states, such as Illinois and Missouri, which require additional items of information to be included in this type of form, such as a disclosure of the first three periodic payment amounts (see 205 Ill. Comp. Stat. Ann. 653/3-7, Ill. Admin. Code tit. 38, § 1050.820, and Mo. Ann. Stat. § 443.861 for details).

In addition to this, 12 CFR § 1026.20(d) will be revised to require a creditor to provide a disclosure, in connection with an adjustable-rate mortgage, to borrowers when the first initial rate adjustment will occur within 210 days after consummation. The disclosure contains general terms and information about the loan and about the consequences of the rate adjustment.

Fortunately, the CFPB has published a model form for compliance with this requirement (see new 12 CFR Pt. 1026, App. H; Form H-4[D][3]), which we will be duplicating and begin providing in the appropriate Closing packages on January 10, 2014.

Appraisal Rules

Two new appraisal rules were finalized this year, one affecting loans governed by the Equal Credit Opportunity Act (ECOA) and Regulation B, the other affecting higher-risk mortgages (HRMs, which are basically higher-priced mortgage loans, as determined by 12 CFR § 1026.35, with certain exceptions) governed by various regulations under Title 12 of the Code of Federal Regulations.

The new requirements under Regulation B were finalized in 78 FR 7216 (2013). Among other provisions, it amends 12 CFR § 1002.14(a) to require creditors to automatically provide loan applicants, in connection with loans secured by a first lien on a dwelling, with copies of the appraisals and other written valuations conducted on the property (as opposed to the current rules, which allow for either the creditor to provide a copy as a matter of routine, or to inform the borrower that they must request a copy in order to obtain one).

It also requires a disclosure to be given to the applicant informing him of his rights to a copy of the appraisal. Model language for this disclosure will be provided in 12 CFR Pt. 1002, App. C as Form C-9, which will be as follows:

“We may order an appraisal to determine the property’s value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close.

You can pay for an additional appraisal for your own use at your own cost.”

The new requirements concerning appraisals for HRMs were finalized in 78 FR 10368 (2013) as a joint rule of the CFPB, the Department of the Treasury, the Federal Reserve System, National Credit Union Administration, and Federal Housing Agency. These rules impose additional appraisal requirements on HRMs, including mandating that an appraisal be conducted, setting forth the qualifications of the appraiser, and even requiring two appraisals to be conducted if the seller of the subject property is “flipping” the home.

Among these rules is a requirement, to be codified as 12 CFR § 1026.35(c)(5) (among other parts of Title 12), to provide a disclosure to the borrower which contains a statement near verbatim to the one in Regulation B, with the addition of one word (“promptly”). However, despite this minor difference, Regulation Z stipulates that providing the disclosure under Regulation B is also deemed to be compliance with this HRM appraisal disclosure requirement, so two different disclosures do not need to be provided.

Currently, we are providing Cx6 (“Copy of Appraisal Report Notice”) for the current provisions of Regulation B. Once these new disclosure requirements become effective on January 18, 2014, the text in Cx6 will be replaced with the regulatory-prescribed text.

Conclusion

We have been working hard to ensure that our clients will be in compliance with these new regulations this coming January. Most of the requirements have been finalized and we are in the process of creating or revising documents for them. Some of them, such as the list of housing counselors and the credit insurance premium rules we are still waiting on the CFPB for, but we will proceed to make revisions as quickly as possible. We are “on track” for having all of these changes in effect by January (if not sooner, for testing purposes).