Mortgage Reform and Anti-Predatory Lending Act

The Federal Reserve recently issued a final rulemaking regarding Title XIV of the Dodd-Frank Act ("Act") prescribing new residential mortgage loan standards, creating stringent consumer protections, and greatly increasing loan originators’ underwriting burdens.

Beyond creating incentives for lenders to only offer prime quality "vanilla" loan products, the Act and its regulations will reduce credit availability to the non-prime lending sector.

Increased Underwriting Requirements

The Act amends the Truth-in-Lending Act’s ("TILA") "mortgage originator” definition to any person, who for direct or indirect compensation, takes a residential mortgage loan application, assists a consumer in obtaining or applying to obtain a residential mortgage loan or offers or negotiates terms of a residential loan.

Excluded from the definition are persons performing "purely administrative or clerical tasks" or solely real estate brokerage activities if properly licensed, and persons making 3 or fewer fully amortized purchase money loans in any 12 month period where borrower has a reasonable ability to repay loan.

Section XIV’s core is a TILA amendment mandating that consumers be offered loans reasonably reflecting their ability to repay, that are understandable and not unfair, deceptive or abusive, and requiring originators be appropriately licensed and adhere to Secured and Fair Enforcement for Mortgage Licensing Act of 2008 requirements.

“Steering” Prohibition

The Act prohibits mortgage lenders and brokers from giving or receiving compensation that varies with loan terms (other than principal amount) and payment of yield spread premiums for referral of a loan to a lender at a higher than par interest rate but does not bar payment to lenders ultimately passed on third parties for bona fide charges not retained by lender or broker or impact compensation that secondary market purchasers pay for closed loans.

The Act directs the newly created Bureau of Consumer Financial Protection ("Bureau") to prescribe regulations prohibiting mortgage originators from steering consumers to a residential mortgage loan that they lack a reasonable ability to repay, has predatory characteristics or effects (i.e., equity stripping, excessive fees or abusive terms), is a non-qualified mortgage when consumer was eligible for a qualified mortgage, or have abusive or unfair lending impact promoting disparities among consumers of equal credit worthiness of different race, ethnicity, gender or assets.

Further, the Act prohibits mortgage originators from mischaracterizing consumer credit history or residential mortgage loans available to consumer, mischaracterizing appraised value of property securing credit extension, and discouraging consumer from seeking a loan secured by their principal dwelling from another originator if unable to suggest, offer or recommend to consumer a loan that is not more expensive than a loan for which the consumer qualifies.

“Duty of Care” and “Steering” Violations Liability

Mortgage originators violating duty of care and steering provisions are subject to TILA liability up to the greater of actual damages or 3 times the total of compensation earned by mortgage, plus litigation costs including reasonable attorney's fees.

The Act increases TILA violations statutory civil liability from current $100 – $1,000 for individual actions to $200 – $2,000 and class actions from current $500,000 to $1,000,000.

Further, the statute of limitations for bringing steering and ability to pay provisions claims is expanded from 1 to 3 years.

Additionally, borrowers may assert a defense to foreclosures brought by creditor or assignees if creditor violated anti-steering and ability to repay provisions.

Regulation Promulgation

The Act authorizes the Bureau to promulgate regulations prohibiting:
○abusive, unfair, deceptive, predatory acts or practices necessary or proper to ensure that responsible, affordable mortgage credit remains available; and
○creditors from making residential loans unless they make a reasonable and good faith determination based on verified information that, at the time loan is consummated, consumer has a reasonable ability to repay loan, according to its terms, all applicable taxes and insurance (including mortgage guarantee insurance), and assessments.

In determining “ability to repay a residential mortgage loan”, creditor must consider credit history, current income, expected income consumer is reasonably assured of receiving, current obligations, debt-to-income ratio or residual income consumer will have after paying non-mortgage debt and other mortgage-related obligations, employment status, and other financial resources other than consumer's equity in property securing loan’s repayment.

Safe Harbor and Rebuttable Presumption

Creditors and their assignees are subject to a rebuttable presumption of “repayment ability” compliance if originated loan is a “qualified mortgage” defined as any residential mortgage loan with no negative amortization or balloon payments, verified and documented income and financial resources, loan’s underwriting process is based on a payment schedule fully amortizing loan over loan’s term (or, if adjustable rate loan, underwriting process based on maximum rate permitted for first 5 years) taking into account taxes and insurance, complies with all Federal Reserve debt-to-income ratios pronouncements, total points and fees do not exceed 3 percent of total loan amount and term not exceeding 30 years.

HOEPA Expansion

The Act expands the primary federal anti-predatory lending law Home Ownership and Equity Protection Act’s ("HOEPA") scope currently applying to loan refinances with points and fees exceeding 8% of the "total loan amount" or $592.

The Act increases HOEPA coverage to purchase money loans and home equity lines of credits and creates a new APR test based on an undefined "average prime offer rate" instead of currently used yield on a Treasury Security of comparable maturity to the loan term. Under this new test, first lien loans either not secured by personal property or in amounts of $50,000 or greater will be subject to HOEPA if APR at consummation exceeds average prime offer rate by 6.5 percentage points and for subordinate lien loans if APR at consummation exceeds average prime offer rate by 8.5 percentage points.

The Act creates a new HOEPA threshold triggered if total points and fees, other than bona fide third party charges exceed in a transaction of $20,000 or more, 5 percent of "total transaction amount" or, if less than $20,000, lesser of 8% of the "total transaction amount" or $1,000.

The Act provides that a creditor or assignee, when acting in good faith, may correct a HOEPA violation if:
○within 30 days of loan’s closing and prior to institution of any action, it notifies consumer, makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute; or
○within 60 days of creditor's discovery or receipt of notification of an unintentional violation or bona fide error, it notifies consumer and makes "restitution" and adjustments either rendering loan compliant with HOEPA or no longer subject to statute.