Part 2: Residential mortgage lending
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Act"). The Act will make a variety of changes aimed at reducing the regulatory burden on small and mid-sized banks, including changes to regulatory requirements imposed under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd Frank").
This post covers provisions in the Act that could impact community banks with regard to residential mortgage lending activity. Check the Bank Check blog for additional posts with analysis of other aspects of the Act that could impact community banks.
Under the Truth in Lending Act ("TILA") as amended by Dodd Frank, a creditor cannot make a residential mortgage loan unless the creditor makes a reasonable and good faith determination that the consumer has a reasonable ability to repay the loan. However, if a loan constitutes a "qualified mortgage" under TILA, the loan is deemed to comply with such ability-to-repay requirements.
Previously, to be considered a "qualified mortgage" under TILA, the residential mortgage had to meet nine separate criteria, including requiring the lender to document the verification of customer income in accordance with Appendix Q to Regulation Z. Through the new Act, Congress provided a safe harbor provision that is less onerous for community banks to follow.
Specifically, the Act creates a safe harbor provision within TILA under which loans meeting the following requirements are considered "qualified mortgages," and therefore, are deemed to be in compliance with the ability-to-repay requirements:
- The mortgage is originated and retained in portfolio by a "covered institution" (meaning an insured depository institution or an insured credit union which, together with its affiliates, has less than $10 billion in total consolidated assets);
- The mortgage complies with TILA's prepayment penalty provisions;
- Total points and fees payable on the loan are no more than 3% of the total loan amount;
- The mortgage does not have negative amortization or interest-only features; and
- The covered institution considers and documents the debt, income, and financial resources of the consumer according to relaxed documentation guidelines. These relaxed guidelines also specifically set out that the documentation of the customer's ability to repay does not require compliance with Regulation Z, Appendix Q.
However, a residential loan generally loses its safe harbor protection if the loan is transferred, unless the loan is transferred:
- As a result of the bankruptcy or failure of a covered institution;
- To another covered institution, so long as the loan is retained in portfolio by the covered institution to which it is transferred;
- As a result of a merger or an acquisition of a covered institution, so long as the loan is retained in portfolio by the person to whom the loan is transferred; or
- To a wholly owned subsidiary of a covered institution, so long as after the transfer, the loan is considered to be an asset of the covered institution for regulatory accounting purposes.
The Act contains multiple provisions relating to real estate appraisals.
Tax-deductible charitable contributions. TILA requires that lenders compensate appraisers in a "customary and reasonable" amount. The Act provides that appraisal services donated by an appraiser to an organization which is eligible to receive tax-deductible charitable contributions (e.g., Habitat for Humanity) are considered to meet TILA's "customary and reasonable" requirements. This section of the Act provides clarity for community banks that they will not be in violation of TILA in instances where an appraiser chooses to donate its services to an entity which can receive tax-deductible charitable contributions.
Exemption from appraisal requirement in rural areas. The Act provides an exemption from federal mortgage loan appraisal requirements, which should help facilitate smaller real estate transactions in rural areas where an appraiser may not be readily available. Under the Act, for a loan secured by real property that is a "federally related transaction" (including a real estate-related financial transaction conducted by a federally regulated institution that would normally require the services of an appraiser), an appraisal is not required if:
- The real property is located in a "rural area";
- The mortgage originator, not later than three days after the Closing Disclosure Form is given to the consumer, as required under Regulation X and Regulation Z, has contacted at least three state certified or licensed appraisers on the originator's approved appraiser list and then documents that no such appraiser was available within five business days beyond reasonable timeliness standards;
- The transaction value is less than $400,000; and
- The mortgage originator is subject to oversight by a federal financial institutions regulator.
For purposes of this exemption, a "rural area" refers to:
- A county that is neither in a metropolitan statistical area nor a micropolitan statistical area that is adjacent to a metropolitan statistical area; or
- A census block that is not in an "urban area," as defined by the U.S. Census Bureau.
After making such a loan, the originator may not transfer legal title to the loan unless:
- The loan is transferred due to the bankruptcy or failure of the mortgage originator;
- The loan is transferred to another person regulated by a federal regulator and the transferee retains the loan in portfolio;
- The loan is transferred due to a merger or acquisition of the mortgage originator; or
- The loan is transferred to a wholly-owned subsidiary of the mortgage originator, provided that the loan is still considered to be an asset of the mortgage originator for regulatory accounting purposes.
Note that the exception to the appraisal requirement does not apply when the loan is considered to be a "high-cost mortgage" under TILA, or when an appraisal is required separately by a federal financial institutions regulator.
The exception is clearly directed at residential mortgage loans, as evidenced by its references to "mortgage originators." Based on the text of the Act, it appears that the exception is not intended to apply to commercial loans.
HMDA loan data disclosures
The Act also provides regulatory relief under the Home Mortgage Disclosure Act of 1975 ("HMDA") for certain insured depository institutions and insured credit unions. Prior to Dodd Frank, HMDA required lenders to itemize residential mortgage loan data in a number of ways, including according to census tract, income level, racial characteristics, age, and gender, among others. Dodd Frank added more itemization requirements to HMDA, including itemization of residential mortgage loans based on criteria such as loan fees and rates, collateral value and various types of contract terms. The Act provides an exemption only from these additional loan data itemization requirements that had been implemented by Dodd Frank.
A residential mortgage lender can qualify for this exemption with respect to closed-end mortgage loans, open-end lines of credit, or both. To qualify for this exemption with respect to closed-end mortgage loans, an insured depository institution or credit union must, in each of the two preceding calendar years, have originated fewer than 500 such loans. Similarly, to qualify for the exemption with respect to open-end lines of credit, the institution must have originated fewer than 500 such lines of credit in each of the preceding two calendar years.
Further, the exemption is not available for any insured depository institution that received either:
- A rating of "needs to improve record of meeting community credit needs" during each of its two most recent Community Reinvestment Act of 1977 ("CRA") examinations, or
- A rating of "substantial noncompliance in meeting community credit needs" on its most recent CRA examination.
Escrow account requirements for small lenders
The Act also modifies the TILA requirements governing when a financial institution must set up an escrow account for a borrower's payment of insurance and taxes. Under the Act, the Consumer Financial Protection Bureau is to adopt a regulation providing that insured depository institutions and insured credit unions making first lien loans on a borrower's principal dwelling do not have to set up escrow accounts for the borrower's insurance and taxes if:
- The institution has $10 billion in assets or less;
- The institution and its affiliates originated 1,000 or fewer first lien loans on borrowers' principal residences during the preceding calendar year; and
- The transaction satisfies certain other criteria under Regulation Z regarding exemptions from escrow requirements for higher-priced mortgage loans.
No wait for lower rates
The Act also alters a TILA requirement that previously required certain mortgage-related disclosures, including the loan's APR and monthly payment amount, to be made to a consumer not less than three business days prior to consummation of the transaction. Previously, this three-day requirement applied to all offers of credit—even when the lender was extending a second offer of credit to a customer with a lower rate and had already complied with the initial three-day waiting period for the prior offer with the higher rate. This requirement had the effect of delaying the closing in the instance where a lender made more than one offer of credit to the consumer, even if the later offer was the same as the prior offer except for having a lower rate.
The Act relaxes this requirement by removing the three-day waiting period when a creditor extends a second offer of credit to a consumer and the second offer has a lower APR than the original offer. The disclosures must still be made in such a case, but they do not need to be made three business days before consummating the transaction.
SAFE licensing for loan originators
The Act also impacts licensing requirements under the S.A.F.E. Mortgage Licensing Act of 2008. Specifically, registered loan originators who change their employment from a depository institution to a non-depository institution will have temporary authority to act as loan originators for up to 120 days after submitting a loan originator application in the applicable state, if they satisfy the following requirements:
- The person has not had an application for a loan originator license denied, or a loan originator license which was revoked or suspended;
- The person has not been subject to a cease and desist order;
- The person has not been convicted of a misdemeanor or felony which would preclude licensure under the law of the state in which the new license is sought; and
- The person was registered in the NMLS as a loan originator during the one-year period preceding the application.
Similarly, loan originators who move interstate to a new loan originator job may have temporary authority to act as loan originators for up to 120 days after submitting a new loan originator application in the new state if they submit an application in the new state and satisfy similar requirements as stated above, as well as having been licensed in a state other than the new state during the 30-day period preceding the application date.
More analysis coming soon
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.