RESPA also requires a new closing document that must make clear how the final closing costs correspond to the GFE, which will display the total estimated closing costs on the first page so the consumer can easily compare loan offers. HUD will also outline which closing costs can and cannot change prior to closing. Even though these regulations will go into effect in January, lenders are preparing now to revamp their disclosure and closing procedures to comply with the rules. However, confusing the matter is the passage in the House of Representatives of HR 1728, the Mortgage Reform and Anti-Predatory Lending Act. HR 1728, if passed by the Senate, would force HUD to cancel the upcoming changes to RESPA until a combined, single GFE that matches the Federal Reserve Board’s Truth-inLending Act can be secured.
AUGUST 2009 O
TEXAS MORTGAGE PROFESSIONAL MAGAZINE
O www.NationalMortgageProfessional.com
HMDA seeks to discourage higher cost loans
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On Oct. 20, 2008, the Federal Reserve Board published final rules to amend HMDA’s reporting rules to include information on higher-priced loans. The HMDA rules will now conform to the definition of ‘’higher-priced mortgage loans’’ adopted by the Board under Regulation Z (Truth-in-Lending) in July of 2008. The final rule is effective Oct. 1, 2009, and lenders must ensure compliance on all loan applications taken after that date or any loans closing after Jan. 1, 2010. Under the final rule, a lender will have to report rate spreads on any loan with a difference equal to or greater than 1.5 percentage points for a first-lien loan (or 3.5 percentage points for a subordinate-lien loan) from a survey-based estimate of annual percentage rates (APRs) currently offered on prime mortgage loans of a comparable type. One of the most prominent concerns with this change is that the 2009 HMDA data submission will contain loan data that spans two standards. Lenders will need a system in place that can document application dates and closing dates to ensure that all loans are properly reported. The agencies have made it very clear that lenders that have higher percentages of these loans are going to be under greater fair lending scrutiny.
The rules are designed to protect consumers’ sensitive personal data, such as Social Security Numbers or financial account numbers, and financial institutions are required to implement a program to detect and prevent identity theft by processes that verify identity and flag suspicious behavior. These rules apply to any “creditor,” which the regulation defines as any person or company that regularly extends, renews or continues credit. It explicitly lists mortgage brokers as being subject to this law. Beginning Nov. 1, lenders and brokers must develop a written plan that ensures that they are confirming an applicant’s identity. In addition, they will be required to report suspicious activity, such as unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents. The good news is that most lenders already verify this information on every loan, and compliance can be as easy as documenting the process.
would have authority over consumer- by HMDA and RESPA, can be automated oriented financial products, including by software that is integrated into loan mortgages. origination systems (LOS). These appliThe new agency would have the cations contain features that flag power to write rules and levy fines incomplete applications and keep loans based on a wide range of existing state from closing if all the steps have not and federal statutes. It would also be been followed. tasked with educating consumers about For regulations with more subjective financial rights and responsibilities. requirements, lenders must combine One of the most debated aspects of their best good faith efforts with docuthe proposed agency is giving it the mentation and reports from their authority to define standards for simple automation tools. Lenders who use “plain vanilla” products, such as mort- available software to analyze loan gages, which would have to be offered applications and document how and “prominently” by companies. why decisions are made will be in a In late July, the House Financial stronger position to defend their offerServices Committee delayed considera- ings on the market. tion of the new agency until September. As regulations become more complex While it remains to be seen whether this and require lenders to provide more anaagency will actually be created given lytical support to loans prior to underother legislative priorities such as writing, software has been developed healthcare reform, or if the proposed that assists lenders in making accurate responsibilities will fall to existing agen- decisions. Lenders can use pre-funding cies, lenders can expect the federal gov- compliance automation to review the ernment to remain very involved in the underwriting process and ensure the lending process for a long time. quality of a loan prior to funding. The good news is that no matter Lenders have the responsibility of what rules or regulations are passed, ensuring that all loans that are compliMaking appraisals there are steps lenders and brokers can ant. It is much easier to discover probnon-biased with HVCC take to make compliance easier and less lems before closing, so use automated The Home Value Code of Conduct (HVCC) time-consuming. reports and flags to discover and correct is a controversial regulation lenders are compliance issues prior to the closing dealing with now. Implemented in May, Automation table. An ounce of prevention now can HVCC outlines new processes that How can lenders comply with these save your company a pound of fines or lenders and appraisers must comply myriad of regulations, both federal and refused loan purchases later. with to order appraisals for loans being state, without losing their minds? A purchased by Fannie Mae and Freddie combination of automation and good Leonard Ryan is president of Laguna Mac. faith efforts provides the easiest path to Hills, Calif.-based QuestSoft, a provider In short, anyone originating a mort- staying compliant and reducing the risk of automated compliance solutions gage may not choose the appraiser to of fines or buyback requests from and geocoding services to the mortgage be used for loans they originate. Even investors. industry. He can be reached at (800) more limiting, the originator may not Hard data, such as preliminary dis- 575-4632, ext. 211 or e-mail engage in any communication with closures and fee calculations required leonard.ryan@questsoft.com. appraisers. Choosing appraisers and all communication with appraisers is delegated to lenders, which will typically partner with an appraisal management company (AMC) to handle the logistics In a survey of 355 lenders, the level of concern cited for compliance of the appraisal orders. issues in 2009. The regulation has received criticism from many corners of the indusHigh Medium Low try that it is raising costs for borrowers Compliance issue concern concern concern and unnecessarily delaying closings RESPA changes (New rules on fee accuracy) 74% 18% 4% due to the enforced lack of communication between the appraiser and the HMDA changes 54% 32% 12% originator. Legislation is pending, howRed Flags compliance 49% 35% 12% ever, that would suspend the regulation for 18 months to enable regulators Fed, state & local consumer laws 45% 38% 13% to rework the details to better fit the Fraud (Borrower identity) 39% 37% 18% original intention of reducing appraisHigh and higher cost loan thresholds 29% 39% 25% al fraud. Fraud (4506-T verifications) 29% 37% 27%
Compliance concerns for the mortgage industry
Preventing identity theft with Red Flags Rules
New agency on the horizon?
Another new regulation lenders and originators must account for this year are the Red Flags rules, which were established by the Federal Trade Commission (FTC) to fight identity theft.
In June, President Barack Obama unveiled a blueprint for financial regulatory reform that included a proposed Consumer Financial Protection Agency (CFPA). This new agency, if created,
Fraud (Loan flipping, collateral)
28%
37%
27%
Pending FEMA flood map changes
22%
41%
32%
CRA
26%
32%
20%
Source: QuestSoft