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Company Name Compliance Policies and Procedures

Table of Contents Table of Contents................................................................................................... i 2.1 Federal Regulatory Compliance Overview......................................................1 RESPA - Real Estate Settlement Procedures Act (Regulation X) .......................................... 2 Policy in Practice.......................................................................................................... 2 Home Mortgage Disclosure Act (HMDA)................................................................................. 4 Policy in Practice – Loan Origination/Production Process........................................... 4 ECOA- Equal Credit Opportunity Act - Regulation B .............................................................. 6 Fair Housing Act ...................................................................................................................... 7 Policy in Practice.......................................................................................................... 7 Fair Credit Reporting Act - FCRA............................................................................................ 8 Policy in Practice.......................................................................................................... 8 Regulation Z - Truth-In-Lending Act (TILA) ............................................................................. 9 Policy in Practice – Origination .................................................................................... 9 APR Tolerance............................................................................................................. 9

2.2 RESPA – The Real Estate Settlement Procedures Act.................................11 Purpose of the Law .................................................................................................... 11 Exempt Transactions ................................................................................................. 11 Kickbacks and Referral Fees and Fee Splitting......................................................... 12 Fee Splitting ............................................................................................................... 12 Affiliated and Controlled Business Arrangements ..................................................... 12 2.21.1 Application Disclosures - The Good Faith Estimate of Closing Costs ....................... 13 Practical Applications of the GFE – Total Cash at Closing........................................ 13 Using a Closing Cost Worksheet ............................................................................... 14 2.21.2 Completing The Good Faith Estimate ........................................................................ 14 2.21.2 Completing The Good Faith Estimate ........................................................................ 15 2.21.3 Disclosing Originator Compensation and Closing Costs ................................ 18 2.21.4 The Good Faith Estimate Process.................................................................. 19 2.22 GFE Application Process .............................................................................................. 20 Issuing Initial GFE Forms........................................................................................... 21 2.23.1 Changed Circumstances................................................................................. 22 Changed Circumstances Process.............................................................................. 22 2.24 RESPA Required Disclosures ....................................................................................... 25 At Application - The Special Information Booklet....................................................... 25 At Application - Notice of Transfer of Servicing ......................................................... 25 At Closing - HUD-1 Settlement Statement................................................................. 26 At Closing - Aggregate Escrow Disclosure ................................................................ 26

2.3 The Truth-in-Lending Act (TILA) - Regulation Z ............................................27 Purposes of Truth-in-Lending Act .............................................................................. 27 2.31 - The APR (Annual Percentage Rate) Disclosure.............................................. 28 APR Tolerance........................................................................................................... 28 2.31.2 Determining the Amount Financed - Prepaid Finance Charge....................... 29 2.32 Additional Disclosures ................................................................................................... 30 At Application – ARM Disclosure ............................................................................... 30 Home Equity Lines and Open-Ended Credit.............................................................. 30 2.33 Notice of Right to Cancel (Right to Rescind)................................................................. 31 Waiver of Right to Rescind ........................................................................................ 31 Right to Rescind in Open-end Transactions .............................................................. 31 Three Day Right to Cancel......................................................................................... 31 2.34 - Advertising................................................................................................................... 32 2.35 – High Cost Loans......................................................................................................... 34 Section 32 of Truth-in-Lending Act ............................................................................ 34

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Company Name Compliance Policies and Procedures

Loans Subject to Section 32 ...................................................................................... 34 Points and Fees Trigger............................................................................................. 34 Section 32 Disclosures .............................................................................................. 34 Section 32 Prohibitions .............................................................................................. 34 Penalties for HOEPA Violations................................................................................. 35 “Higher Priced Mortgage Loans” (HPML) - Section 35 .............................................. 36 2.36 Mortgage Disclosure Improvement Act (MDIA)............................................................. 37 Corrective Truth-in-Lending Disclosures.................................................................... 37

2.4 Consumer Credit Protection Laws ................................................................38 The Equal Credit Opportunity Act .......................................................................38 Unlawful Inquiries....................................................................................................... 38 Prohibitions ................................................................................................................ 38 Notification Requirements.......................................................................................... 38 Penalties .................................................................................................................... 39

2.41 Fair Housing and Fair Lending Acts............................................................40 Covered Transactions ................................................................................................ 43 Unlawful Lending Practices........................................................................................ 43 Violations and Enforcement ....................................................................................... 44 Advertising ................................................................................................................. 45 Limitations Extended to 3rd Parties ............................................................................ 45 Allegations of Discrimination...................................................................................... 46 Filing Complaints........................................................................................................ 47 2.42 Fair Credit Reporting Act (“FCRA”) .............................................................................. 48 Policy for Distributing Credit Information.................................................................... 48

2.43 Home Mortgage Disclosure Act (“HMDA”) ..................................................49 Depository Institutions Subject to the Act .................................................................. 49 2.43.1 Community Reinvestment Act (CRA) ......................................................................... 50

2.44 The Fair and Accurate Credit Transactions Act (“FACTA”) .........................51 FACTA Red Flags ...................................................................................................... 51 2.45 - Home Owner’s Protection Act ..................................................................................... 52 PMI Cancellation ........................................................................................................ 52

2.46 Consumer Privacy Protection Laws ............................................................53 2.46.1 Gramm-Leach-Bliley Act – Privacy Act........................................................... 53 USA Patriot Act .......................................................................................................... 53

2.7 SAFE Act Requirements ...............................................................................54 Licensing and Professional Education Requirements (SAFE Act)........................................ 54 Loan Originator License Verification .......................................................................... 55 Reporting of Licensee Termination ............................................................................ 55 Branch Licensing Process – NMLS Call Reporting ................................................... 55 Secure and Fair Enforcement for Mortgage Licensing (SAFE Act) ...................................... 56

2.71 Origination Personnel Policies Dodd-Frank Act ..........................................57 Compensation ............................................................................................................ 57 Creditor vs. Originator ................................................................................................ 57 Base Commission Schedule ...................................................................................... 57 Dual Compensation.................................................................................................... 57 Avoiding “Steering”..................................................................................................... 58 2.71.1 Compensation Policy and Procedure......................................................................... 59 Compensation Policy – Consumer Paid Fees....................................................................... 60 Process - Consumer Paid or Lender Paid ................................................................. 60 Consumer May NOT Pay Employee Directly............................................................. 60 Compensation Plans ............................................................................................................. 61 Consumer/Creditor Paid Compensation Plan – Brokers or Creditors ....................... 61 Investor/Wholesaler (Creditor) Paid Compensation – for Brokers............................. 62 Table of Creditors....................................................................................................... 62

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Company Name Compliance Policies and Procedures

Exception to Compensation Grid (Safe Harbor) ........................................................ 62 Safe Harbor – Consumer Chooses Product which results in Higher Compensation............ 63 Customer’s Best Interest Worksheet (Anti-Steering Safe Harbor) ............................ 64 Commission Schedules and Permissible Payments.................................................. 65 Performance Reviews ................................................................................................ 66 Individual and Spousal Loans .................................................................................... 66 Time Keeping Policy .................................................................................................. 67 Employment Status Policy..................................................................................................... 68

2.72 Employment, Screening and Compensation Practices ...............................70 Announcing Position Openings.................................................................................. 70 Treatment of Candidates ........................................................................................... 71 Checking References................................................................................................. 73 Checking Background – Credit, Background and Housing Agencies ................................... 74 Additional Background Checks/Screening................................................................. 75 Affirmative Action/Equal Employment Opportunity .................................................... 76 New Hire Reference and Background Check ............................................................ 77 Completing the Interview ........................................................................................... 78 New Hire Letter/Offer of Employment ........................................................................ 79 New Hire Procedures ................................................................................................. 80

2.73 Appraiser Independence .............................................................................81 Implementing Appraiser Independence Rules ...................................................................... 81 Background ................................................................................................................ 81 2.73.1 Appraisal Management Service ...................................................................... 82 2.73.12 Highlights of Company Compliance Procedures .......................................... 82 2.73.2 Pre-Qualification and Property Valuation ................................................................... 83 Valuation and Pre-Qualification ................................................................................. 84 Prohibited Practices for Production Staff ................................................................... 85 2.73.3 Underwriting Submission............................................................................................ 86 Appraisal Copy to Borrower Certification ................................................................... 86 Borrower Appraisal Copy Notice Form ...................................................................... 87 2.73.31 Basic Underwriting Submission Process.................................................................. 88 2.73.4 Appraisal Ordering – Random Appraiser Selection ................................................... 90 Appraisal Checklist..................................................................................................... 90 Approved Appraiser Vendor List ................................................................................ 91 Random Appraisal Order Process ............................................................................. 92 Random Order Rotation Log...................................................................................... 93 Appraisal Order Form................................................................................................. 94 2.73.5 Underwriting Property and Appraiser Approval.......................................................... 95 2.73.51 Appraiser Approval Process ......................................................................... 95 2.73.52 Approved Appraiser Vendor List ................................................................... 97 2.73.53Prohibited Practices ....................................................................................... 97 2.73.54 Evaluating Appraisers ................................................................................... 98 2.73.55 Unacceptable appraisal practices................................................................. 98 2.73.6 Removal from Approved Appraiser List ..................................................................... 99 What appraisers need from the underwriter .............................................................. 99 What the underwriter need from appraisers .............................................................. 99 2.73.61 Appraisers .............................................................................................................. 100 Appraiser Approval Process .................................................................................... 100 Approved Appraiser Vendor List .............................................................................. 102 Appraisal Audit Function .......................................................................................... 103 Desk Review of Appraisal ........................................................................................ 104

2.8 Complaint Resolution..................................................................................106 State Laws ............................................................................................................... 106 Complaint Policy ...................................................................................................... 106

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Company Name Compliance Policies and Procedures

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Company Name Compliance Policies and Procedures

2.1 Federal Regulatory Compliance Overview Company Name is subject to and complies with all State and Federal Laws and Regulations. We provide detailed instruction to our employees. We are providing this brief summary of our policies in action.

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Company Name Compliance Policies and Procedures

RESPA - Real Estate Settlement Procedures Act (Regulation X) 12 USC Section 2601 et seq. - This law requires the lender to provide the borrower with information regarding closing costs and expenses and other disclosures related to the real estate settlement process. Policy in Practice Good Faith Estimate A written estimate of charges the borrower is to incur at settlement must be provided at application or mailed to applicant within 3 business days of receipt of application. We may not collect any fee, other than a credit report, prior to providing this estimate. An application is where there is a property address, property value or sales price, loan amount, borrower income HUD Special Information Booklet “Understanding Closing Costs� This applies to purchase transactions only. The booklet contains information on settlement procedures and costs. This must be mailed to applicant within 3 business days of receipt of application. Required Settlement Service Provider This disclosure is required if we use a specific settlement service provider such as specific tax service, credit reporting agency, appraisers and flood certificate providers. This must be provided at application or mailed to applicant within 3 business days of receipt of application. Affiliated/Controlled Business Arrangement Disclosure We must disclose an identity of interest or compensation for referring a borrower to any provider of a required service. Title Companies, Insurance, Real Estate Firms, and Pest Inspections are examples of these types of providers. Servicing Transfer We must identify the applicant’s rights under the Servicing Transfer Practices Act, and provide an estimate of the percentage of we service and transfer. This notice must be provided at application or mailed within 3 business days of application. HUD-1 Settlement Statement

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Company Name Compliance Policies and Procedures

Borrowers have a right to receive the HUD-1 Settlement Statement a minimum of 24 hours prior to closing. We insure satisfaction of this by requiring a copy of the HUD-1 in advance of arranging for wire transfer of funds (see pre-closing/funding procedure).

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Company Name Compliance Policies and Procedures

Home Mortgage Disclosure Act (HMDA) The purpose of HMDA is to assist the government in identifying possible discriminatory lending patterns and enforcing the anti-discrimination statutes. It also is to determine whether depository institutions are filling their obligation to serve the housing needs of the communities and neighborhoods in which they are located. Only those loan applications for which Company Name makes a credit decision must be considered when interpreting the HMDA reporting requirements. If Company Name denies the loan application prior to submitting the application to our sponsor/lender or investor; or the borrower withdraws their application prior to the submission of the loan application to our sponsor/lender or investor; it is Company Name’s responsibility to report these activities under HMDA. In addition, if Company Name does not make a credit decision as stated above, it is required to file a Negative HMDA Report. Policy in Practice – Loan Origination/Production Process Our production personnel attend either state approved, privately sponsored or association sponsored continuing education courses that describe HMDA related laws. Data Requirements Lender must property complete government-monitoring section of 1003 and capture additional information • • • • • • • •

property location income-all borrowers loan type loan amount occupancy purpose race sex

In addition, for the purposes of monitoring under ECOA we must collect • • •

national origin marital status age

If a loan application is a “face-to-face” application, the government monitoring section must be completed by "visual observation” if borrower chooses not to provide the data.

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Company Name Compliance Policies and Procedures

If the application is a telephone or mail in transaction – the borrower has the option to furnish or not furnish the government monitoring information. We must indicate if “by mail” or “by telephone” application. Guide to Reporting In our annual audit we will evaluate our Credit Decision results and, if we exceed the thresholds set forth by the Federal Reserve at http://www.ffiec.gov/Hmda/guide.htm, we will complete the Loan Application Register with data from the preceding calendar year. Calendar year reporting is due by March 31 of the following year.

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Company Name Compliance Policies and Procedures

ECOA- Equal Credit Opportunity Act - Regulation B 15 USC, Section 1691, et seq. defines credit decision requirements and prohibits discrimination on any aspect of a credit transaction • • • • • • • • •

National Origin Marital Status Religion Age Sex Receipt of public assistance Race Exercise of rights under the Consumer Protection laws Color

Policy in Practice - Loan Origination We require applicants to sign ECOA disclosures, provide Notice of Incomplete Application, Adverse Action, and Withdrawal. Our production personnel attend either state approved, privately sponsored or association sponsored continuing education courses that describe ECOA and other credit related laws. Requirements Our policy is that ECOA is triggered by an application. There is a difference between an inquiry and an application. An inquiry is a discussion of general credit procedures including rates, programs. A property address is not recorded. Application Application is defined as an oral or written request for an extension of credit that is made in accordance with the procedures established by the creditor for the type of credit requested. We define an application as – When the borrower permits us to review the credit report - When we receive the borrower’s written application When a lender disqualifies a potential borrower, even on a legitimate underwriting basis, the lender, according to Regulation B, is treating an inquiry as an application and is obligated to follow certain notification and record keeping requirements. Specifically the borrower must receive a Notice of Adverse Action.

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Company Name Compliance Policies and Procedures

Fair Housing Act Prohibits discrimination in housing sales, rentals, brokerage services and financing on any prohibited basis • • • • • • •

National Origin Religion Sex Race Color Familial Status Handicapped status

Policy in Practice We post Fair Housing posters in our office, and provide Fair Housing training through either state-approved continuing education providers, association sponsored courses or internal training programs. Refer to Company Name’s Origination Module for our policy on prohibited advertising practices. Prohibited Practices • • • • •

Redlining – declining financing due to geographic locations Reverse redlining – Only financing in certain geographic locations Excessively low appraisals in minority neighborhoods Burdensome qualification standards for some applicant groups More onerous terms or conditions for some applicant groups

Required Practices We post Equal Housing Opportunity Logo at all locations, on stationary and in all advertising. In addition, we post a Fair Housing poster in all office locations. Possible violations or incidences of discrimination must be reported within 30 days to Office of Fair Housing and Equal Opportunity Department of Housing and Urban Development Room 5204 451 Seventh St. SW Washington, DC 20410-2000

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Company Name Compliance Policies and Procedures

Fair Credit Reporting Act - FCRA This law requires creditors to reveal to the consumer that they have obtained credit information from credit reporting agencies or other institutions or references. Policy in Practice If the information received from a credit reporting agency was the basis for declining the loan, we provide the borrower with specific agency or source information.

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Company Name Compliance Policies and Procedures

Regulation Z - Truth-In-Lending Act (TILA) 15 USC Sec 1601 et seq. - This law promotes the informed use of consumer credit by requiring disclosures about terms and costs of credit. There is a detailed policy and description in the Federal Laws Section. Policy in Practice – Origination We require applicants to sign Truth-in-lending disclosures, provide written booklets and disclosures as applicable, and encourage compliance with the spirit of the law. Our production personnel attend either state approved, privately sponsored or association sponsored continuing education courses that describe Truth-in-Lending laws. Initial Truth-in-Lending Disclosure This disclosure is designed to provide meaningful and comparable credit information to consumers and increases the consumers understanding of the cost of their credit. Requirements Truth in Lending Disclosure (APR Statement) Must be provided at face-to-face application (laptop) or mailed within 3 business days of receipt of the written or telephone application. ARM & Balloon Disclosures A loan program disclosure must be provided for each variable rate program in which the borrower expresses an interest. Must be provided at face-to-face application (laptop) or mailed within 3 business days of receipt of the written or telephone application. The Consumer Handbook on Adjustable Rate Mortgages (CHARM Booklet) In addition to the ARM disclosure, the borrower must receive The Consumer Handbook on Adjustable Rate Mortgages (“CHARM” Booklet), “or a suitable substitute”, which explains how ARMs work. Right of Rescission Provided to ALL borrowers, this is the notice of the 3-day right to cancel a refinance of an owner occupied primary residence transaction only. This must be provided at the time the promissory note is signed. APR Tolerance

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Company Name Compliance Policies and Procedures

At the time of application the borrower receives an Annual Percentage Rate disclosure, also referred to as a “T-I-L”, or APR disclosure. During the process of the loan, if the terms of the loan change, the lender must re-disclose the APR. If the terms do not change, the APR must still be re-disclosed at closing. That FINAL Truth-in-Lending statement must be correct as to the actual loan terms. The margin of error for the final disclosure is referred to as “tolerance”. Loan Type Fixed or ARM

Tolerance 0.125% up or down, for a total of .25%

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Company Name Compliance Policies and Procedures

2.2 RESPA – The Real Estate Settlement Procedures Act RESPA – Primary Regulator is HUD The Department of Housing and Urban Development (“HUD”) is the department responsible for issuing implementing regulations (Regulation X) for RESPA and for enforcement of the law. HUD is a large department that also regulates or administers the Government National Mortgage Association (GNMA), Federal Housing Administration (FHA) and many other agencies relating to housing and cities. Purpose of the Law The purpose of the law is to protect consumers from excessive settlement costs and unearned fees. RESPA • • • •

Establishes prohibited practices to protect consumers from unearned fees (Kickbacks and Controlled Business Arrangements) Allows consumers to obtain information on the costs of closing so that they can shop for settlement services. (Good Faith Estimate and Closing Cost Booklet) Gives consumers a complete and accurate accounting of all funds collected and disbursed in conjunction with the transaction. (HUD-1 Settlement Statement) To protect customers from financial loss when their loan or the servicing of their loan is sold. (Servicing Practices Act)

Exempt Transactions • • • • • • •

Loans for 25 acres or more Loans for business, commercial, or agricultural purposes Temporary financing, such as bridge loans Loans secured by vacant land Loan assumptions which are permissible without lender approval Loans sold in the secondary market Loan conversions, when a new note is not required and the provisions are consistent with those of the original mortgage

Transactions which ARE subject to RESPA are loans secured by a first or subordinate lien on residential property which are made with funds insured by the federal government, from a lender regulated by the federal government, intended for sale to Fannie Mae or Freddie Mac, or any creditor regulated under the Truth in Lending Act.

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Company Name Compliance Policies and Procedures

Kickbacks and Referral Fees and Fee Splitting Section 8(a) of RESPA prohibits anyone from giving or receiving a fee, kickback, or “anything of value” pursuant to an “agreement or understanding” for the referral of settlement business. The purpose of the prohibition is to protect consumers from the payment of fees when no additional work is actually performed. Kickbacks tend to increase the cost of the transaction, since the borrower will have to be charged more in order to cover the cost of the referral fee. Penalties for violations of the anti-kickback provision include fines of up to $10,000 and up to one year in prison.

A “Thing of Value” Money Discounts Commissions Salaries Stock Opportunities to participate in a money-making program Special or unusual banking terms Tickets to theater or sporting events Services of all types at special rates Trips and payments of another’s expenses

The “Agreement or Understanding” does not have to be a formal agreement, but can be a verbal agreement or even an agreement established through a practice, pattern, or course of conduct. Fee Splitting Fee splitting is when a service provider inflates charges and splits the excess funds with another service provider in exchange for the referral of business. This is tantamount to a kickback and is a prohibited practice. Service providers may attempt to circumvent this prohibition by establishing joint ventures or entering into business arrangements that allow referrals between organizations and conceal the fee splitting arrangement. Affiliated and Controlled Business Arrangements In some cases, there can be fee splitting or referral fees paid under what is known as an “affiliated business arrangement”. An affiliated business arrangement is where a person who refers settlement services has an “affiliate relationship” or “an ownership interest of more than one percent in a provider of settlement services.” The payment of fees is acceptable as long as the relationship is disclosed to the borrower and the referrer actually performs a service – or somehow adds value. The referral service provider may NOT be a REQUIRED provider of services, such as an appraiser or credit bureau that the lender must select. In addition, an affiliate relationship structured simply to legitimize a kickback or referral fee is referred to as a “sham”. They must be a “Bona Fide Provider of Services” to receive a referral fee legally.

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Company Name Compliance Policies and Procedures

2.21.1 Application Disclosures - The Good Faith Estimate of Closing Costs The Good Faith Estimate (“GFE”) is required to be given at the time of application, or mailed within three business days after completion of loan application. Business days do not include federal holidays, Sundays, or Saturdays. The Good Faith Estimate of closing costs gives the borrower advance notice of the costs of the transaction. A properly explained GFE will help a borrower understand his cash requirements better and will result in a borrower who shops less. The new GFE form is a simplification of costs into categories related to who receives payment for what service. The originator’s estimates of its own costs may not change. Closing costs paid to required providers may not change by more than 10%. Closing costs related to borrower selected providers may change. The reality is that a relatively small portion of the costs reflected on the GFE are paid to the lender whereas the borrower’s perception is that they are ALL paid to the lender. The GFE shows the charges in the categories of payees. The Settlement Costs Booklet, sometimes referred to as the “Special Information Booklet”, will help the borrower understand how to shop for settlement services. Practical Applications of the GFE – Total Cash at Closing The 2010 GFE does not total the borrower’s cash requirement at closing. In order to help the borrower understand his total cash requirement, utilize one of the following tools: • •

Closing Cost Worksheet Residential Loan Application – Details of Transaction

Practical Applications of the GFE – Total Monthly Payments The 2010 GFE does not give a total monthly PITI payment, only Principal and Interest plus and PMI or MIP. It also does not break the payment into its components; they are lumped together. In order to help the borrower understand her total monthly payments, utilize one of the following tools: • •

Closing Cost Worksheet Residential Loan Application – Proposed housing expense

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Company Name Compliance Policies and Procedures

Using a Closing Cost Worksheet

Line through “good faith estimate” and write “Closing Cost Worksheet.”

The 800 Section of costs applies to lender costs that appear in line 3 of the new GFE. The Loan Origination Fee and other fees paid directly to the lender, such as processing fees, are imported to the Origination Charge

The 1100 Section, Title charges, are services that the borrower can shop for. These fees can change unless the borrower chooses the provider we indicate, when the fees can change by no more than 10%.

Recordation and Transfer taxes must be 100% correct. There is no variance tolerance.

Prepaids on the worksheet can include escrows AND amounts to be repaid to seller – providing a better cash requirement estimate.

This is worksheet provides better insight as to monthly payments and cash required. It is not an estimate and must not be signed.

Figure 1 - The Legacy Good Faith Estimate can no longer be used as a disclosure, but may be a good tool for showing a customer how the GFE numbers were derived. In addition, the worksheet provides estimates of cash required and total monthly payment.

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Company Name Compliance Policies and Procedures

2.21.2 Completing The Good Faith Estimate The GFE includes a disclosure of loan terms, lock-in period, and a “shopping cart” showing the trade off between upfront fees and closing costs. For consumers and lenders familiar with previous forms, this document represents more of an overall loan terms disclosure. The form eliminates the detailed itemization of most charges and aggregates them into main categories. HUD felt that over-itemization tended to inflate closing costs. In addition, originator compensation is clearly outlined so that, whether compensation comes from above par pricing (yield spread), borrower paid fees, or a combination of these, borrowers will see the total compensation paid to the originator. Lender charges and charges for services from providers selected by the lender cannot change between application and closing, creating a “firm Good Faith Estimate”. If the borrower cannot shop for a third party service, those fees cannot change by more than 10%.

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Compliance Module - Part II of QC Plan