Compliance News
In First American's Compliance News Archive you will find easy access to our library of GSE announcements, court findings, legislative changes, specific changes to state requirements, governmental guidance on issues that directly affect the mortgage document industry and more.June 2007
Colorado
Senate Bill 85 (effective June 1, 2007) (36 KB)
A Mortgage Broker cannot compensate, coerce, or intimidate an appraiser for the purpose of influencing the independent judgment of the appraiser, with respect to the value of a dwelling offered as security for repayment of a mortgage loan.Senate Bill 144 (effective August 8, 2007) (24 KB)
For small consumer loans where the amount financed is not more than one thousand dollars, a supervised lender may charge, in lieu of the loan finance charges permitted by Section 5-2-201 of the Uniform Consumer Credit Code, an acquisition charge for making any refinanced loan, not to exceed seven and one-half percent of the amount financed. In addition, a lender may not refinance a loan more than three times in one year.Senate Bill 158 (effective May 14, 2007) (41 KB)
The homestead exemption increased from $45,000 to $60,000. The exemption increased to $90,000 if the property’s occupant is an elderly or disabled owner, an elderly or disabled spouse of an owner, or an elderly or disabled dependent of an owner.Georgia
Senate Bill 70 (effective July 1, 2007) (108 KB)
Mortgage lenders or mortgage brokers must submit background check forms and are subject to new advertising restrictions.Florida
Senate Bill 2038 (effective June 6, 2007) (83 KB)
The Uniform Real Property Electronic Recording Act allows individuals to use electronic documents for real estate transactions. Documents that require notarization, acknowledgement, verification and other legal formalities can also be in used in an electronic format despite the needed legal formalities. Electronic documents will be accepted as originals. However, the same fees will still apply to electronic documents as they to do their paper counterparts, for example documentary stamp taxes.Hawaii
Senate Bill 1400 (effective May 24, 2007) (206 KB)
Financial institutions have a duty to promptly report suspected incidents of financial abuse to local law enforcement agencies or the department of human services. The agencies then will determine whether further investigation or other action is warranted.Indiana
House Bill 1557/Senate Bill 559 (Section 10 effective 5/10/07; all other sections effective July 1, 2007) (7,557 KB)
The allowable fee for a returned check under the Uniform Consumer Credit Code is increased from $20 to $25. In addition, the Department of Financial Institutions is authorized to participate in an automated central licensing system. Licensing and educational requirements are amended.House Bill 1717 (effective July 1, 2007) (2,499 KB)
An individual desiring to be employed by a Loan Broker Act licensee and who will engage in origination activities or an individual desiring to be employed by a Loan Broker Act licensee as a principal manager shall apply to the Securities Commissioner for registration.Iowa
SF 557 (effective July 1, 2007) (139 KB)
A state credit union may include in the loan documents an amount equal to one-twelfth of the estimated annual real estate taxes, special assessments, hazard insurance premium, mortgage insurance premium, or any other payment agreed to by the borrower and the state credit union in order to better secure the loan.Louisiana
House Bill 284 (effective June 18, 2007) (8 KB)
The origination fee limitation for a consumer loan or revolving loan account is increased from $25 to $50.House Bill 317 (effective June 18, 2007) (8 KB)
No person licensed pursuant to the Residential Mortgage Lending Act may engage in or be financially compensated for any loan transaction in which such person, for a fee, commission, or other valuable consideration, is acting as a licensee under the Louisiana Real Estate License Law, in connection with the same residential loan transaction.Senate Bill 253 (effective June 18, 2007) (18 KB)
No mortgage lender shall finance or include in the original principal balance loan amount of a residential mortgage loan of more than fifty thousand dollars the premium amount for any single premium credit life, dismemberment, health and accident, mortgage life and disability, involuntary unemployment, collateral protection, or debt cancellation insurance sold in connection with a residential mortgage loan transaction unless that portion of original principal balance attributable to such insurance premium is scheduled to be fully amortized no later than the coverage expiration date of such insurance product. The financing of private mortgage insurance paid on a single premium basis in connection with a residential mortgage loan transaction is allowed.Senate Bill 254 (effective June 18, 2007) (18 KB)
Parties to a consumer loan which is secured by a mortgage encumbering one to four family residential immovable property, whether or not such a loan includes any additional security interest in movable property, may agree by contract that such a loan shall be governed by the Louisiana Consumer Credit Law.Minnesota
Senate File 241 (effective August 1, 2007) (191 KB)
- A consumer reporting agency or any other business entity may not sell to, or exchange with, a third party, unless the third party holds an existing mortgage loan on the property, the existence of a credit inquiry arising from a consumer mortgage loan application when the sale or exchange is triggered by an inquiry made in response to an application for credit.
- The homestead exemption is increased from $200,000 to $300,000. If the homestead is used primarily for agricultural purposes the exemption is increased from $500,000 to $750,000.
- In addition, this Act amends the enforcement of judgments involving the sale of homestead property; provides limitations on actions for damages based on services or construction to improve real property; and regulates the redemption of mortgaged lands by creditors.
Nevada
Assembly Bill 329 (effective May 21, 2007) (22 KB)
The Commissioner of Financial Institutions, with the cooperation of the Commissioner of Mortgage Lending, must adopt regulations concerning nontraditional mortgage loans and lending practices. The regulations adopted must be substantially similar to the provisions set forth in the “Guidance on Nontraditional Mortgage Product Risks” published by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators on November 11, 2006.Ohio
Regulations 1301:8-3-03 (effective June 1, 2007) (13 KB)
Prepayment penalties under the Second Mortgage Loan Act are limited to the first five years of a loan.Oklahoma
House Bill 2871 (effective July 1, 2007) (53 KB)
The Consumer Finance Act is amended to create new provisions of the usury law regarding fees and expenses. The changes relate to title and payday loans.Oregon
Regulations 1301:8-3-03 (effective June 1, 2007) (68 KB)
Prepayment penalties under the Second Mortgage Loan Act are limited to the first five years of a loan.Rhode Island
House Bill 5485/Senate Bill 371 (effective June 20, 2007) (16 KB)
A borrower’s recovery against a purchaser of assignee of a high cost home loan is limited to the amount necessary to extinguish the borrower’s liability under the loan plus costs, including reasonable attorneys’ fees. Credit unions are exempt from the provisions.South Dakota
Regulation 20:07:19:01 – 20:07:19:11 (effective July 1, 2007) (26 KB)
Mortgage broker and mortgage banker licensing, fees, record retention, proof of experience and continuing education requirements are amended and supplemented.Tennessee
Senate Bill 317 (effective July 1, 2007) (effective July 1, 2007) (26 KB)
The county register may register a copy of an electronic document if the writing is otherwise eligible for registration and the electronic document is certified as a true and correct copy of the original. The certification of an electronic document must be made by either a licensed attorney or the custodian of the electronic version of the document and the signature of such person must be acknowledged by a notary public. The certification must be transmitted with the electronic document and recorded by the county register as a part of the document being registered.If the law requires, as a condition for recording, that a document be signed, the requirement is satisfied by an electronic signature or a digitized image of a wet signature.
Fannie Mae
Announcement 07-04 dated May 18, 2007 (317 KB)
The Selling and Servicing Guides are updated to expand the availability of Expanded Approval (EA), add a new 40-year amortization option to EA, and expand Financed Single-Premium Mortgage Insurance to 100% LTV.Announcement 07-05 dated May 22, 2007 (100 KB)
The Selling Guide is modified to amend the pricing requirements and eligibility criteria for Fannie Mae’s flagship community lending product, MyCommunity Mortgage (MCM®).Morgan Stanley
Bulletin 07-029 (effective June 25, 2007)
In addition to the information provided in our May 29th memorandum, the following DTI changes are effective on loans covered under Bulletin 07-024 for loan amounts less than or equal to $1 million:- Options/Alt-A, Full/Alt Doc: DTI change from 50% to 55%
- Preferred Hybrid ARM: DTI change from 45% to 50%.
Guidance on Nontraditional Mortgage Products
Delaware: (effective July 11, 2007)
New York: (effective May 25, 2007)
Rhode Island: (effective May 7, 2007)
Wisconsin: (effective April 13, 2007)
Wisconsin: (effective April 13, 2007)
New York, Rhode Island and Wisconsin recently adopted guidelines for nontraditional mortgage products, based on the federal interagency guidance issued in September of 2006.
As previously addressed in our December 29, 2006 Legislative Update, the federal Interagency Guidance on Nontraditional Mortgage Products clarifies how institutions can offer nontraditional mortgage products in a safe and sound manner that clearly discloses the risks a borrower may assume, by addressing three primary areas: loans terms and underwriting standards; portfolio and risk management practices and consumer protection issues.
To date, thirty-five states and the District of Columbia have adopted a variation of the federal guidance: AZ, CT, DE, GA, HI, ID, IN, IA, KY, LA, MA, MI, MN, MS, MO, MT, NE, NH, NJ, NY, NC, ND, OH, OR, PA, RI, SD, TN, TX, UT, VT, VA, WA, WI, WY.
Interagency Statement on Subprime Mortgage Lending
(effective July 10, 2007) (107 KB)
On July 2, 2007, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift supervisions and the National Credit Union Administration (collectively, “Agencies”) issued a final interagency Statement on Subprime Mortgage Lending (“Statement”) to clarify how financial institutions can offer certain adjustable rate mortgage products in a safe and sound manner and in a way that clearly discloses the risks a borrower may assume. The Statement reiterates many of principles addresses in existing guidance, including the Interagency Guidance on Nontraditional Mortgage Product Risks originally discussed in our December 28, 2006 legislative update.The Statement uses the term “subprime” as described in the 2001 Expanded Guidance for Subprime Lending Programs. Subprime loans are loans to borrowers displaying one or more of the following characteristics at the time of origination or purchase: reduced repayment capacity as measured by credit scores, debt-to-income ratios or other criteria that may encompass borrowers with incomplete credit histories.
There are four primary areas addressed in the Statement: (1) Risk Management Practices (predatory lending considerations and underwriting standards); (2) Workout Arrangements; (3) Consumer Protection Principles; and (4) Control Systems. Each will be addressed individually below.
Risk Management Practices
The following three elements typically are present in loans deemed predatory and invite elevated scrutiny from the Agencies:
- Making loans based predominantly on the foreclosure or liquidation value of a borrower’s collateral rather than on the borrower’s ability to repay the mortgage according to its terms;
- Inducing a borrower to repeatedly refinance a loan in order to charge high points and fees each time the loan is refinanced (“loan flipping”); or
- Engaging in fraud or deception to conceal the true nature of the mortgage loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.
- Consider a borrower’s ability to repay the debt by maturity at the fully indexed rate, assuming a fully amortizing repayment schedule, including potential negative amortization amounts.
- Establish clear policies for reduced documentation loans and make such loans only if there are mitigating factors that clearly minimize the need for direct verification of repayment capacity. A higher interest rate is not an acceptable mitigating factor.
- Demonstrate that mitigating factors support the underwriting decision and the borrower’s ability to repay, when loan features are layered (i.e. interest-only loan with reduced documentation).
- Verify and document the borrower’s income (both source and amount), assets and liabilities.
Workout Arrangements
Constructive workout arrangements with borrowers in default are encouraged and the Agencies will not criticize those institutions that pursue reasonable such arrangements. Financial institutions should identify and report credit risk, maintain an adequate allowance for loan losses and recognize credit losses in a timely manner. Immediate foreclosure is not required.
Consumer Protection
To assure consumers understand product terms, risks as well as benefits, financial institutions should:
- Approve loans based on borrower’s ability to repay the loan according to its terms
- Provide information that enables consumers to understand material terms, costs, and risks of loan products at a time that will help the consumer select a product
- Assure that all offered products comply with applicable laws and regulations
- Provide clear and balanced information about the relative benefits and risks of the products and not “steer” consumers to particular products to the exclusion of others
- Provide in promotional materials and other product descriptions information about costs, terms, features and risk
- Provide information on prepayment penalties, such as the existence thereof, how it is calculated and when it may be imposed. Prepayment penalties should not exceed the initial reset period and borrowers should be given a reasonable time period to refinance without penalty.
- Provide information on balloon payments and the lack of escrow for taxes and insurance, as necessary
- Provide information on payment shock; potential payment increases, including how the new payment will be calculated when the introductory fixed rate expires
- Provide information on the cost of reduced documentation loans including any pricing premiums attached to them
Control Systems
Financial institutions should develop strong control systems to monitor business practices and insure compliance with policy and procedures. Such controls include:
- Establishing appropriate criteria for hiring and training loan personnel, entering into and maintaining relationships with third parties, and conducting initial and ongoing due diligence on third parties
- Designing compensation programs that avoid providing incentives for originations inconsistent with sound underwriting and consumer protection principles, and that do not result in the steering of consumers to these products to the exclusion of other products for which the consumer may qualify
- Having procedures and systems in place to monitor compliance with applicable laws and regulations, third-party agreements and internal policies. An institution’s controls also should include appropriate corrective actions in the event of failure to comply with applicable laws, regulations, third-party agreements or internal policies. In addition, institutions should initiate procedures to review consumer complaints to identify potential compliance problems or other negative trends.
The Agencies will take action against institutions that exhibit predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices.