Compliance News

The Department of Housing and Urban Development ("HUD") extended the public comment period until June 12th, 2008 for the proposed amendments to Regulation X, the regulation implementing the Real Estate Settlement Procedures Act, which were released March 14, 2008.

Among other things, the proposed amendments:

• Establish a four-page standard Good Faith Estimate ("GFE") and new timing requirements for delivery and redelivery
• Define new terms such as "closing script", "GFE application" and "mortgage application"
• Impose tolerances to limit increases in estimates provided in the GFE at closing
• Revise disclosure requirements of yield spread premiums
• Revise the HUD-1 Settlement Statement to allow for easier comparisons between the HUD-1 and the GFE
• Limit fees for appraisals, inspections and similar charges prior to the provision of the GFE
• Restricts the mark-up of third party fees
• Revise regulations to permit certain average cost pricing and volume discounts
• Clarify settlement statement instructions
• Revise the Servicing Disclosure Statement and timing requirements

First American Loan Production Solutions ("LPS") is in the process of revising the necessary federal disclosures, in preparation for the implementation of the revised rule and will have them available to our clients by the effective date. In the interim, LPS will continue to monitor sources for updates and changes.

The Residential Mortgage License Act of 1987 has been amended to give borrowers a private right of action, set cure provisions for violations by licensees and include the following requirements, among other things:

• Licensees must verify a borrower's reasonable ability to repay a residential mortgage loan before making, providing or arranging any such loan
• Licensees must verify the borrower's income and financial resources through reasonably reliable methods and documentation. A borrower's statement of his or her income and resources is not sufficient to establish the same unless factors exist that clearly minimize the need for direct verification
• Brokers are deemed to create an agency relationship with the borrower in all cases and must:
  • act in the borrowers best interest and in good faith
  • disclose all compensation that inures to the benefit of the broker
  • disclose all material facts known to the broker, which might affect the borrower
  • use reasonable care
  • account to the borrower for all the borrower's money and property received as an agent
• Licensee may not make, provide or arrange a mortgage loan with a prepayment penalty unless the licensee offers the borrower a loan without a prepayment penalty in writing and the borrower initials that he or she has declined the offer
• No prepayment penalty may exceed:
  • 3% of the total loan amount if the prepayment is made within the first 12 months following the closing date
  • 2% of the total loan amount if the prepayment is made within the second 12 months following the closing date
  • 1% of the total loan amount if the prepayment is made within the third 12 months following the closing date, if the fixed rate period extends 3 years
• No prepayment penalty is allowed on a mortgage secured by a "residential mortgage loan". A residential mortgage loan is a loan made for the benefit of any natural person and primarily for personal, family or household use, secured by a mortgage on property improved by a one-to-four family dwelling used or occupied, wholly or partly, as the home or residence of one or more persons
• Within 3 days of knowledge or 24 hours before closing, licensees must provide notice to the borrower of any material change in loan terms or if any fees payable to the licensee increase by more than 10% or $100, whichever is greater
• Licensees may not state or imply that monthly loan payments that include escrowed amounts are comparable to monthly loan payments that do not include these amounts
• Licensees must provide the borrower a copy of the appraisal, including any appraisal generated using an AVM, within 3 business days of receipt by the licensee, but in no event less than 24 hours prior to closing
• Licensees may not make a residential mortgage loan that finances credit life, disability or unemployment insurance
• No licensee may encourage a borrower to default on a residential mortgage loan

The Illinois Interest Act has been amended to allow prepayment penalties that extend no longer than the fixed rate period of a variable rate mortgage provided the penalty is no more than:

• 3% of the total loan amount if the prepayment is made within the first 12 months following the closing date
• 2% of the total loan amount if the prepayment is made within the second 12 months following the closing date
• 1% of the total loan amount if the prepayment is made within the third 12 months following the closing date, if the fixed rate period extends 3 years

The predatory lending database program ("Program") will become operational July 1, 2008, with registration beginning May 28th, 2008. Borrowers applying for Home Equity Conversion Loans are exempt from the counseling requirements set forth in the Program.

LPS is in the process of creating an Illinois Appraisal Notice and revising our prepayment penalty documentation and will have them available to our clients by the effective date.

Kentucky passed House Bill 552, which is a comprehensive bill that affects several areas of mortgage lending law, including the Mortgage Loan Company and Mortgage Loan Broker Act, the new Kentucky Residential Mortgage Fraud Act and the state's high cost home loan laws. Highlights include:

Mortgage Loan Company and Mortgage Loan Broker Act ("MLCMLBA")

• Exemption Changes
  • Affiliates of a consumer loan, industrial loan or finance company are no longer exempt from the MLCMLBA
  • Persons doing business relating to any broker-dealer, agent or investment adviser are no longer exempt from the MLCMLBA
  • Any person making less than five loans per year are no longer exempt from the MLCMLBA
  • Licensing exemptions for HUD-approved lenders and brokers and non-profit corporations have been revised
• Definition Changes
  • "Mortgage broker" no longer describes an individual, but instead, strictly an entity
  • "Loan officer" and "loan originator" are interchangeable and definition is expanded
• Mortgage processors now are required to be registered and must do so by July 1, 2008. Applications must be submitted via the NMLS Web site
• Borrower counseling requirements
• Prohibitions on undue influence in the preparation of an appraisal report
• Mortgage loan company, mortgage broker and branch licensing, testing, and fee requirements changes
• A prohibition on licensees or exempt persons from originating a mortgage loan if the "total net income" generated exceeds the greater of $2,000 or 4% of the total loan amount, whichever is greater
• Prepayment penalties may not be assessed after the third anniversary of the mortgage or 60 days prior to the date of the first interest rate reset, whichever is less. Prepayment penalties may not exceed 3% of the outstanding balance the first year, 2% the second year, and 1% the third year and in no event may a prepayment penalty be assessed against a borrower refinancing with the same mortgage loan company

Kentucky Residential Mortgage Fraud Act

A person is guilty of mortgage fraud, which is a felony, when he or she does any of the following with the intent to defraud:

• Engages in any act or employs a device, scheme or artifice to defraud
• Fails to disburse funds in accordance with a loan commitment
• Knowingly makes or uses any material misstatement, misrepresentation or omission within the mortgage lending process with the intent that the statement be relied upon
• Receives funds in connection with a residential mortgage closing that resulted from one of the above-mentioned acts

Predatory Lending/High Cost Home Loan Laws/Consumer Protection

• Addition of a new high cost home loan threshold of total points and fees that exceed the greater of $3,000 or 6% of the total loan amount as shown as the amount financed on the final Truth in Lending Statement
• Establishment of criteria by which a borrower is presumed to be able to make scheduled payments to repay the loan
• Lenders must disclose any "material change" to a high cost home loan prior to closing
• No lender may make a high cost home loan with a prepayment penalty unless the lender offers the borrower a loan without a prepayment penalty. Prepayment penalties may not exceed 3% of the outstanding balance the first year, 2% the second year, and 1% the third year and in no event may a prepayment penalty be assessed against a borrower refinancing with the same mortgage loan company
• A prohibition on interest-only loans
• Additional amendments include escrow accounts; late fees; payoff statements; and servicing requirements
• A borrower may rescind a loan resulting from a home solicitation sale for ten days, as opposed to the previous three days, after closing. A home solicitation sale involves a lien being taken on a home to secure the payment of goods or services sold in the home.

LPS is in the process of revising the Kentucky Right of Rescission Notice and will have it available to our clients by the effective date.

A lender is prohibited from requiring a prepayment penalty on a mortgage loan that is prepaid in whole or in part. A mortgage loan does not include a reverse mortgage.

Under the Mortgage Lender Law, mortgage lenders must give due regard to the borrower's ability to repay a loan, including consideration of debt to income ratio and verification of income and assets by review of written documentation. Mortgage loans approved for government guaranty by the Federal Housing Administration ("FHA"), Veterans Administration ("VA") or Community Development Administration are exempt.

Additionally, mortgage brokers may not charge a finder's fee, unless it is pursuant to a written agreement between the mortgage broker and the borrower that is dated, signed and separate and distinct from any other document. Any such agreement must be provided to the borrower within 10 business days after application and before the mortgage broker undertakes to assist the borrower in obtaining a loan. The agreement also must specify the amount of the finder's fee, and contain a representation by the mortgage broker that the mortgage broker is not a lender in the transaction.

The Commissioner of Financial Regulation is authorized to participate in the establishment and implementation of a multistate automated licensing system for mortgage lenders and mortgage originators.

A new applicant must complete a residential mortgage lending course within the two-year period prior to the date of approval as a mortgage loan originator and at least eight hours of residential mortgage lending continuing education courses annually. Mortgage loan originators approved prior to November 30, 2007 are not required to complete a residential mortgage lending course provided they apply for a license by May 27, 2008.

The Mortgage Brokers, Lenders and Servicers Licensing Act is amended to require a loan officer to register after January 1, 2009. Additional requirements for licensing as well as penalties for prohibited acts have been established.

Under the Mississippi Mortgage Consumer Protection Law, mortgage lenders, mortgage brokers and loan originators must utilize the multistate licensing system for application, renewal, amendment, and surrender of a license.

    Mortgage Brokers & Lenders Letter 2008-3 (published April 11, 2008)

The Division of Financial Institutions ("Division") Guidance on Nontraditional Mortgage Product Risks outlines prudent underwriting and consumer protection principles that registrants should consider with regard to subprime mortgage brokering and lending. The statement reiterates principles related to good faith and fair dealing and identifies possible unfair and improper practices.

Washington enacted a new law creating a fiduciary relationship between the mortgage broker and borrower. A mortgage broker must act in good faith and the borrower's best interest. A mortgage broker may not accept, provide, or charge any undisclosed compensation or realize any undisclosed remuneration that inures to the benefit of the mortgage broker on an expenditure made for the borrower. A mortgage broker must carry out all lawful instructions provided by the borrower, disclose to the borrower all material facts, use reasonable care in performing duties, and provide an accounting to the borrower for all money and property received from the borrower.

Wisconsin amended the definition of "loan" to mean a loan for personal, family, or household purposes that is secured by a lien or mortgage, or equivalent security interest, on real property located in the state. A loan secured by real property consisting of 1-to-4 dwelling units, including individual condominium units, is a loan for household purposes, but a loan made by a landlord to a tenant is not.

FHA provided guidance to lenders and underwriters for establishing and evaluating nontraditional credit histories and also describes FHA's acceptance of those enterprises that can develop a verifiable credit history, no less than 12 months in duration, for borrowers with limited traditional credit. The guidance is effective immediately but must be considered for borrowers without traditional credit beginning with case numbers assigned 30 or more days after the effective date.

Counseling agencies participating in HUD's Housing Counseling Program may charge a fee for Home Equity Conversion Mortgage counseling services as long as the cost is reasonable and customary, does not create a financial hardship for the client, and meets all other requirements set forth in the applicable regulations.

FHA announced FHASecure in Mortgagee Letter 2007-11, which provided a temporary initiative to permit lenders to refinance delinquent adjustable rate mortgages and/or to offer new subordinate financing where the combined loan-to-value ratio exceeds the applicable FHA loan-to-value ratio and geographical maximum mortgage amount. This mortgagee letter expands FHASecure by replacing the specific guidance issued in Mortgagee Letter 2007-11 and is effective for case numbers assigned on or after July 14, 2008.

Mortgagees are reminded that the eligibility criteria for delinquent borrowers and new subordinate financing under the FHASecure initiative are temporary and require that the loan application be signed no later than December 31, 2008. Mortgagees are reminded that FHA has not changed its underwriting guidelines, but rather its eligibility criteria. Existing policies are still applicable, such as those involving bankruptcy.

VA clarifies its position on allowable attorney fees and costs of outsourcing foreclosure referral and management services. Specifically, the cost for such outsourcing must be considered as an operating expense of the firm contracting for the outsourcing. VA will reimburse for attorney fees for services related to only foreclosure of loans. This circular is rescinded July 1, 2010.

All MERS Pennsylvania documents that require a certificate of residence statement (e.g. recordable documents) must include a street address, alongside the P.O. Box address.

LPS is in the process of revising all Pennsylvania recorded documents and will have them available to our clients by May 30th, 2008.

Freddie Mac had updated the maximum requirements for mortgages with LTV/TLTV/HTLTV equal to or greater than 95%. Lenders are not required to reduce the LTV/TLTV/HTLTV below 95% for properties located in declining markets, as long as the following requirements are met:

• The mortgage is a purchase transaction or a "no cash-out" refinances mortgage.
• The mortgage is secured by a 1-unit Primary Residence that is not a manufactured home.
• The mortgage receives an Accept Risk Class from Loan Prospector®

Please note that the following mortgages are exempted from this requirement:

• FHA and VA
• Native American Mortgages (Section 184)
• Guaranteed Rural Housing Mortgages (Section 502)

Freddie Mac will no longer purchase the following products effective June 1, 2008:

• Mortgages with LTV/TLTV/HTLTV ratios greater than 97%, except for Home Possible Mortgages with Indicator Scores equal to or greater than 700, FHA/VA Mortgage and Section 502 GRH Mortgages.
• Alt 97® Mortgage with Affordable Second®
• Streamlined Purchase for Homeowners Mortgage (streamlined purchase Mortgage)
• Freddie Mac 100 Mortgage

Borrowers cannot have more than four 1-4 unit properties, including subject property that are financed, for Second Home Mortgages transaction with a Freddie Mac settlement date on or after August 1, 2008. Borrowers owning more than one financed Investment Property cannot have more than four 1-4 unit properties (reduced from 10) including subject property that are financed, for Investment Property Mortgages transaction with a Freddie Mac settlement date on or after August 1, 2008.

"No cash-out" refinances mortgages sold to Freddie Mac will be deemed "cash-out" refinances, if the mortgage has been refinanced with cash-out less than 6 months from the current transaction. This will affect mortgages with a Freddie Mac settlement date on or after August 1, 2008.

Effective August 1, 2008 borrowers must have owed the subject property of a cash-out refinance for at least six months prior to the new note date.

U.S. Bank has added the new Jumbo Conforming Fixed Rate Program as part of the Stimulus Act of 2008. This program will be available for borrowers in high-cost areas, with a 1 unit Primary, Second Home or Investment property. The loan limit for these areas has increased to above $417,000 with a maximum limit of $729,750 depending on the county. At this time DU approval is not eligible. For full details view the sellers guide on the SellUs website.

Citimortgage will offer Jumbo Conforming Loans for borrowers in high cost areas only with the maximum loan limit determined by the county for the property. Products currently available for the program are:

• Fixed Rate 15 and 30 Year
• Fixed Rate 30 Year Interest Only
• 5/1 LIBOR ARM Stimulus with a 30 Year Term

For full details on these programs please review the Economic Stimulus-Conventional Loans, section 411 of the Correspondent Manual.

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