Compliance has never been more complex or confusing. “Higher-Cost Loans” versus “Higher- Priced Loans; …. Finance Charge” versus “APR;” “APR” versus “TCR;” “Qualified Mortgage” versus “Qualified Residential Mortgage;” what is a Compliance Officer to do?
Unfortunately, the only choice is to buckle down and find a way to make sense out of the changes, while staying ahead of the latest regulatory developments.
Elsewhere in this edition of the Quarterly Report, we have discussed the CFPB’s proposed revision and consolidation of the early disclosure and loan closing disclosure forms required by RESPA and TILA. We have also outlined six other rulemaking efforts that will be released over the next six months which will impact a bank’s residential mortgage lending products and procedures. The challenge will be to approach all of this regulator’:’ change in a holistic way that allows us to gain a complete, and hopefully clear, picture of the new regulatory landscape.
At this point, there does not appear to be one single place to start. Each of the proposed rules discussed elsewhere is connected to all of the others. Some are fairly simple, and some are complex. Together, they have huge implications for a bank’s operations and profits. It is hard to determine exactly where to begin. So, for lack of a clear starting point, we suggest looking at the recently proposed High-Cost Mortgage Amendments to the Truth In Lending Act (TILA). But first, some brief history.
The Home Ownership Equity Protection Act was enacted in 1994 and the so-called HOEPA regulations under TILA were adopted in 1995. The HOEPA regulations required lenders to provide special pre-closing disclosures, restricted prepayment penalties and certain other loan terms, and prohibited certain other lender practices like originating a loan without determining a borrower’s ability to pay.
In 2001, the Federal Reserve Board issued further regulations that lowered the APR “’trigger” rate for first-lien mortgage loans, expanded the definition of “points and fees” to include the cost of optional credit life insurance and debt cancellation premiums, and enhanced restrictions on.
In 2008, the Board introduced the concept of “Higher-Priced Mortgage Loans.” With APRs that are lower than those prescribed for HOEPA loans, but that nevertheless exceed the “Average Prime Offer Rate” (APOR) by prescribed amounts.
In 2009, the Board issued its Mortgage Proposal related to closed-end credit transactions and for the first time introduced the concept of the “Transaction Coverage Rate” (TCR) as a new measurement for determining HOEPA coverage.
Also in 2009, the Board proposed further amendments to TILA that related to disclosures, terms and conditions for open-end HELOCs.
In 2010, the Board proposed further amendments to Regulation Z regarding rescission rights, disclosure requirements for mortgage loan modifications, and escrow requirements for higher-priced mortgage loans. This 2010 Mortgage Proposal also floated the concept of a “simpler,” more inclusive definition of the term “finance charge.” It was in connection with this expanded definition of finance charge that the Board introduced the concept of TCR, which the Board proposed to calculate based on the existing method for calculating APR, but excluding prepaid finance charge not paid to the lender.
In 2011, the Board issued its Escrow Proposal which set forth escrow-related disclosure requirements for higher-priced mortgage loans using the previously announced TCR method for determining whether a loan was a higher-priced mortgage loan. The Board also proposed to use the “Average Prime Offer Rate” as the benchmark rate for higher-priced mortgage loan coverage.
A few months later, the Board issued its 2011 ATR Proposal which included its initial attempt to address the Dodd-Frank Act’s “Ability to Pay Rule” and the concept of the “Qualified Mortgage.”
Congress passed the Dodd-Frank Act in 2010 and in doing so significantly amended HOEPA to expand the types of loans potentially subject to HOEPA coverage, to revise the trigger for HOEPA coverage, and to strengthen and expand still further the restrictions that HOEPA imposes on mortgage loans. Among the changes made was an expansion of HOEPA to include purchase money loans and home equity lines of credit, a significant increase in scope.
Not long thereafter, the Board’s authority to write regulations under TILA was transferred to the CFPB, and that Bureau has now proposed rules for comment that will finalize all of this activity. To that end, the CFPB has announced that its HOEPA proposed regulations will draw upon the Board’s 2009 Closed-End Proposal, 2009 Open- End Proposal, 2010 Mortgage Proposal, 2011 Escrow Proposal, and 2011 ATR Proposal. (Is all that clear? Hang in there!)
Scope of HOEPA. The Dodd-Frank Act expanded the coverage of HOEPA to include residential mortgage transactions, including purchase money loans and open-end lines of credit secured by a consumer’s principle dwelling. (HELOC’s).
Threshold Triggers. HOEPA has always featured trigger rates that determine whether a loan is a HOEPA loan. The Dodd-Frank Act adjusted the two existing triggers and added a third trigger based on the inclusion of prepayment penalties. Now, a loan with be a high-cost (HOEPA) mortgage loan if:
- The APR exceeds the Average Prime Offer Rate (APOR) by (1) more than 6.5% on first mortgage loans secured by the consumer’s principle dwelling or 8.5% if the dwelling is personal property and the loan is less than $50,000; or (2) 8.5% for subordinate lien loans;
- The total points and fees (other than bona fide third-party charges not retained by the lender) exceed (1) for loans of $20,000 or more, 5% of the total transaction amount; or (2) for loans under $20,000, the lesser of 8% of the total transaction amount or $1,000;
- or The loan has a prepayment penalty that (1) may be imposed more that 36 months after consummation or account opening;
The APR, APOR, TCR (for determining HOEPA coverage). We have already mentioned that the Dodd-Frank Act lowered the percentage point trigger and changed the APR benchmark. The question becomes one of implementation. The CFPB has proposed two alternatives. The first alternative would simply compare the APR to the APOR to determine HOEPA coverage for closed- end mortgage loans. The second alternative is substantially identical, except that it substitutes what the CFPB has termed the “Transaction Coverage Rate” (TCR) in place of the APR. The TCR would then be compared to the APOR to determine coverage for closed-end mortgage loans.
Alternative two is being proposed because the CFPB is also proposing to simplify and broaden the definition of “finance charge” under Regulation Z.
Expanding the Definition of Finance Charge. Alternative two discussed above would account for changes in the calculation of “finance charge.” The CFPB is proposing a simpler, more inclusive definition. This simpler calculation would include most third-party charges for closed-end mortgage loans. Taken alone that would widen significantly the disparity between the APR and the APOR, causing many more loans to be HOEPA loans since the APOR generally only includes the contract interest rate and points, but not other origination fees.
The Transaction Coverage Rate. The second alternative for compensating due to the broader definition of finance charge would be to replace the APR as a benchmark for closed-end loans with the “Transaction Coverage Rate.” (TCR). The TCR would be determined in the same manner as the APR for closed-end loans, except that prepaid finance charges used for calculation purposes would only include those charges retained by the lender. For example, third-party charges for title insurance would not be included. The CFPB expects that the margin of difference between the TCR and the current APR would be much smaller than the margin between the current APR and the APR calculated using the expanded definition of finance charge.
Open-End Transactions. The proposal to have a more inclusive definition of finance charge only applies to closed-end loans. Therefore, the CFPB proposes to use the TCR for closed-end loans only. Open-end loans calculate APR using interest only and do not include other fees or charges. Therefore, the annual percentage rate would be used for open-end transactions.
The foregoing regulatory changes are still in the proposal stage; however, the CFPB goes to great length in its proposed rule to say that they have done a thorough job of research and have anticipated many possible comments from advocates on both sides. Given the importance of this regulatory effort and the short timeframe for finalization, it seems likely that the proposed rule will be adopted with few changes.
We plan to have a panel discussion at the August Quarterly Meeting devoted to the issues surrounding implementation of these changes.
