Regardless of any potential Consumer Financial Protection Bureau (CFPB) overhaul, financial institutions that offer or provide products or services directly or indirectly to consumers still face challenges complying with consumer laws. Mortgage and consumer finance providers continue to be burdened by onerous and even conflicting compliance and regulatory obligations for mortgage origination and servicing, TILA-RESPA integrated disclosures, loan officer compensation, fair lending and UDAAP – unfair, deceptive and abusive acts or practices. In addition, one particular area of focus this year will be the ongoing implementation of CFPB’s new Home Mortgage Disclosure Act (HMDA) rules.
Ability to Repay and Qualified Mortgages
The Ability to Repay (ATR) rules require creditors to make a reasonable, good-faith determination that a borrower has the ability to repay the loan applied for. To assess a borrower’s ability to repay, creditors generally must consider certain underwriting factors and verify the information the borrower has provided. While creditors have some flexibility to determine a borrower’s ability to repay, the CFPB will be looking for how creditors use that flexibility.
Financial institutions can comply with the ATR rules in a few different ways. First, a creditor can follow the general ATR rules. Second, a creditor can refinance a non-standard mortgage into a standard mortgage under certain conditions. Finally, a creditor can originate one of four types of a QM, or “qualified mortgage.” QMs both prohibit harmful loan features, such as interest-only periods, negative amortization, balloon payments, and loan terms that exceed 30 years, and also limit debt to income ratios and upfront points and fees. Creditors can benefit from originating one of the four QMs: liability protection, including either a safe harbor or a rebuttable presumption depending on whether the QM is deemed higher-priced under the Truth in Lending Act.
There are also disclosures that have been promulgated under the Truth in Lending Act and the Real Estate Settlement Procedures Act, referred to as “TRID.” The rules require creditors to specifically disclose mortgage loan terms and conditions, as well as expected settlement costs. Under these rules, creditors must issue one disclosure to the borrower at the outset of the mortgage loan process, the Loan Estimate (LE); and a second disclosure at the closing of the mortgage loan process, the Closing Disclosure (CD). While many of the core disclosure requirements from the old disclosure regime have been transferred to the new forms, the new rules carry several intricate timing and situation-specific disclosure requirements that require constant training and attention by compliance staff.
The changes also challenge mortgage vendors, such as technology companies that develop software that must evolve as the TRID rules evolve, and investors and loan purchasers of newly issued mortgage loans. They all face a steep learning curve on the new rules to ensure that the loans they buy are compliant.
Loan Officer Compensation
Generally, the loan originator compensation rules prohibit a loan originator from receiving, directly or indirectly, compensation based on a term of a mortgage loan transaction. The rules also prohibit compensation based on a factor that is a proxy for a term of the loan transaction. These “proxies” are factors that consistently vary with the term or terms of a transaction over a significant number of transactions, and that the loan originator has the ability -- directly or indirectly -- to manipulate when originating the transaction. This analysis can be particularly complex and fraught with uncertainty. But loan originators still have ways of being compensated, such as payments based on a fixed percentage of the loan amount; overall dollar or unit volume of transactions; long-term performance of the loan; an hourly rate of pay; whether the borrower is a new or existing customer; and the quality of loan files originated.
Compensation for loan originators is under heightened scrutiny, especially in light of recent enforcement actions and civil money penalties that focus on incentive compensation more broadly. Financial institutions must conduct periodic reviews and conduct ongoing monitoring of their compensation practices, including the potential incentives created.
Compliance staff are consistently concerned by fair lending risk, in large part because of agency enforcement efforts that can result in referrals to the U.S. Department of Justice. Risks exist in all phases of a credit transaction, especially in pricing and underwriting, and lenders should be tracking and documenting any exceptions, monitoring for exceptions, and responding with corrective actions where appropriate. More generally, institutions must ensure that their compliance programs, which include governance, policies and procedures, the control environment, and monitoring and training programs, are robust and flexible. Robust and flexible programs will be critical as new rules are implemented with fair lending implications, such as new rules that expand the collection of information under HMDA.
More data fields mean greater scrutiny for those lenders subject to the HMDA reporting requirements. As many financial institutions already know, there are a number of changes they must implement before the new rules promulgated under HMDA go into effect January 1, 2018. Most significantly, the new rules require institutions to collect and report a substantial amount of new data points that must be collected and reported as well as changes to which applications and loans must be reported. Like the implementation of the TRID rules, the implementation of the HMDA rules will continue to require a substantial effort by financial institutions subject to HMDA, as well as their technology vendors.
Finally, financial institutions should always consider potential unfair, deceptive and abusive aspects of any new or existing products, services or actions. The CFPB has brought numerous enforcement actions alleging UDAAP, which play a major role in enforcement actions brought by the prudential banking regulators. In many cases, UDAAP allegations accompany other alleged violations of law or regulation. Regardless, UDAAP considerations must be at the forefront of any product or service, compensation structure, or action taken by a financial institution.
About Schiff Hardin’s Financial Institutions Team
Schiff Hardin has a dedicated team of financial institution transactional, regulatory, and litigation attorneys with significant experience handling various aspects of bank and non-bank financial institution matters. Our attorneys regularly advise financial institutions on corporate matters, mergers and acquisitions, regulatory compliance, enforcement matters, and litigation throughout the U.S.
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