Welcome to the first installment of the JOHNSTON | THOMAS mortgage banking newsletter! This newsletter will be published at regular intervals to keep you updated on new developments in mortgage banking.
This newsletter is being published in two parts in order to adequately address the kickoff of the CFPB. Part Two will follow later this month.
What To Expect From the CFPB In Its First Few Months
This initial edition will focus on the Consumer Financial Protection Bureau, the federal agency charged with oversight of the mortgage banking industry.
The CFPB regulatory authority under the Dodd-Frank legislation began on July 21, 2011. Although the CFPB has a lengthy “to do” list in the coming weeks and months, we have focused on three key topics that should be on the radar of most mortgage banking entities: examination procedures and supervision; new mortgage loan disclosures; and regulation of alternative mortgage loan transactions.
Examination Procedures and Supervision
On July 21st, the CFPB issued its introductory CEO letter to CEOs of covered entities. The letter provided a broad description of how the CFPB will conduct compliance examinations. With the exception of “larger participants”, the CFPB will coordinate with federal and state regulators (as the case may be) to conduct “periodic point-in-time examinations.” For most state-supervised mortgage lenders, this most likely means that the CFPB will attempt to schedule joint exams with state regulators that are similar to the point-in-time exams historically conducted by state regulators.
The CFPB is now seeking public comment on how to define “larger participant” as it relates to non-depository financial institutions. Under Section 1024 of Dodd-Frank, the CFPB must implement a risk-based supervision program for certain non-depository institutions and their affiliates in order to “(1) assess [non-depository institutions] for compliance with Federal consumer financial law; (2) obtain information about such [institutions] activities and compliance systems or procedures; and (3) detect and assess risks to consumers and consumer financial markets.”
In implementing the supervision programs, the CFPB may, among other things, require reports and conduct onsite examinations. The CFPB already has these powers and responsibilities for “origination, brokerage or servicing of residential mortgage loans secured by real estate and related mortgage loan modification and foreclosure relief services,” but its powers also reach other product markets to the extent offered by “a larger participant of a market for other consumer financial products or services,” to be defined by the CFPB. Thus, the CFPB will be developing rules to define such larger participants and the scope / timing of supervision that should be applied to such businesses.
New Mortgage Loan Disclosures
In May, the CFPB released two prototype disclosures entitled “Know Before You Owe” that are intended to replace the Good Faith Estimate and Truth-In-Lending Disclosure. The initial release generated more than 13,000 comments from industry participants and consumers. The new prototypes were released in June. You can find the two prototypes (nicknamed Redbud Credit Union and Dogwood Credit Union) at the CFPB website blog entry for June 27 (www.consumerfinance.gov).
The new forms focus on different ways of disclosing fee information. Redbud is organized so as to describe fees and costs in part one down the left hand column and separates out fees and costs for services that the borrower can shop for in part two down the right hand column, along with a line totaling estimated closing costs and a line for total cash required at closing. The Dogwood form provides slightly less line item detail on individual fees and organizes them vertically and based upon category headings of (i) Costs, (ii) Prepaid Insurance Property Tax and Related Services, (iii) Taxes and Recording Fees, and (iv) Lender Credits. Which one do you prefer?
Regulation of Alternative Mortgage Loan Transactions
The Alternative Mortgage Transaction Parity Act (AMPTA) was enacted by Congress in 1982 to level the playing field between federally-regulated creditors and state-regulated creditors in an atmosphere of high interest rates. The Act was intended to increase consumer access to mortgage loans. AMPTA generally authorized state-supervised lenders to make and enforce alternative mortgage loans notwithstanding any State constitution law or regulation as long as the creditor complied with applicable federal law. State-supervised lenders subsequently have originated the same type of ARM loans and balloon loans as their federally-chartered counterparts in reliance on AMPTA preemption except in the few states that opted out of preemption under AMPTA.
An alternative mortgage transaction under AMPTA includes a transaction: (1) in which the interest rate or finance charge may be adjusted or renegotiated, (2) involving a fixed rate, but which permits rate adjustments by having the debt mature at the end of an interval shorter than the term of the amortization schedule (i.e., balloon loan) and (3) involving any similar type of rate, method of determining return, term, repayment or other variation not common to traditional fixed term transactions, including without limitation, transactions that involve the sharing of equity or appreciation (e.g., loans with an interest-only feature).
How did Dodd-Frank change AMPTA?
First, Dodd-Frank narrowed the definition of an “alternative mortgage transaction” for preemption purposes. Although it still includes variable rate loans, any reference to balloon loans and other alternative type loans (e.g., interest-only) is now gone.
Second, Dodd-Frank narrowed the type of state laws or regulations that are subject to preemption under AMPTA. Now, only state laws or regulations that outright prohibit alternative mortgage transactions are clearly preempted. Regulation that merely prohibits certain conduct with respect to such transactions would generally not be preempted.
Finally, preemption under AMPTA required a state-supervised creditor to comply with federal banking regulations regarding alternative mortgage transactions (essentially, OCC regulations). Since Dodd-Frank has transferred rulemaking authority from the federal banking agencies to the CFPB, AMPTA preemption now requires lenders to comply with CFPB regulations (that have yet to be promulgated).
Therefore, on July 22, 2011 and in order to preserve “a level playing field and access to mortgages,” the CFPB issued an interim rule effective immediately aimed at keeping the status quo as it relates to alternative mortgage transactions in order to give lenders, consumers, and regulators time to adjust to the changes in the law. The interim rule gives lenders two choices – either they can originate alternative mortgage transactions in a manner consistent with state law or they can comply with basic federal consumer protection laws in originating such loans. The interim rule applies to all applications received on or after July 22 for creditors that wish to rely on federal preemption. Otherwise, the federal consumer protection rules outlined in the interim rule will not be enforced until July 21, 2012.
Does the Interim Rule accomplish the CFPB’s stated goal of preserving a level playing field and access to mortgages?
Only a small percentage of mortgages originated in the current environment include an interest-only or balloon loan feature. The Interim Rule may be preserving access to such loans in isolated markets. More importantly, the Interim Rule gives us a glimpse into how the CFPB views the Dodd-Frank amendments to AMPTA and, in this regard, may shape the way mortgage products evolve in the coming years.
The CFPB appears to have attempted to define “alternative mortgage transaction” as broadly as possible while still complying with the Dodd-Frank changes. Specifically, the CFPB interprets the term to include balloon loans and interest-only loans to the extent such loans also incorporate a variable rate structure. Otherwise, however, balloon loans and interest-only loans with a fixed rate of interest fall outside of the definition and must be originated with applicable state law / regulation in mind.