Qualified Written Requests – RESPA Revisions in 2014

QUESTION: 

What significant amendments are being made to the Qualified Written Request (“QWR”) rules under RESPA effective January 10, 2014? 

ANSWER:  
Section 1463 (c) of the Dodd-Frank Act modifies RESPA by significantly reducing the time period mortgage servicers have to respond to a QWR from a borrower. Section 1463 (c) contains the following modifications: 

(A) The period of time for a servicer to acknowledge receipt of a borrower’s QWR is reduced from 20 days (current requirement) to 5 business days.

(B) The period of time for a servicer to respond to a borrower’s QWR is reduced from 60 days (current requirement) to 30 business days.  A servicer has a right to a 15 day extension to the 30 business day response period by notifying the borrower of the need for the extension and the reason(s) the extension is needed.

In addition, statutory damages available to a borrower have been increased. Statutory damages have been increased from $1,000 to $2,000. Lastly, statutory damages in class action lawsuits have been increased from $500,000 to $1,000,000.

Given these changes and the increased exposure to mortgage servicers resulting therefrom, mortgage servicers need to make sure that their policies and procedures are updated to avoid running afoul of the new time lines concerning responding to a QWR.

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group

What is an “application” under HMDA?

QUESTION 

We are getting ready to complete our HMDA filing report and we have many prequalification requests. Are prequalifications considered “applications” under HMDA, and, therefore, must be included in our HMDA-LAR?

ANSWER 

In general, an “application” is an oral or written request for an extension of credit through a purchase money, refinance, or home improvement in a loan transaction that is originated pursuant to a financial institution’s loan origination procedures. 

A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution's standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify.

The Home Mortgage Disclosure Act (HMDA), and Regulation C, its implementing regulation, use the Official Staff Commentary to Regulation B, the implementing regulation of the Equal Credit Opportunity Act, to define an “application,” except HMDA does not include prequalification requests.

The ECOA does include prequalification requests as applications, such as where these requests may constitute applications under Regulation B for purposes of adverse action notices, under certain circumstances. [12 CFR part 203, Supplement I 203.2(b)-1 and (b)-2]

Therefore, even if prequalifications may constitute an application under Regulation B (ECOA), they are not reported on the HMDA Loan Application Register under Regulation C (HMDA).

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

What is an Affiliate under the Qualified Mortgage rule?

QUESTION 

What is the definition of an “affiliate,” with respect to the QM 3% Points and Fees cap under the Ability-to-Repay and Qualified Mortgage rule?

ANSWER  

The CFPB’s Ability-to-Repay/Qualified Mortgage’s (QM) rule contains a cap or limit on points and fees to qualify as a QM loan. The calculation of points and fees includes certain charges paid to affiliates of creditors. To qualify as a QM, a loan over $100,000 is limited to points and fees up to 3% of the loan amount. The 3% limit is increased on a sliding scale for loans under $100,000. 

In the Small Entity Compliance Guide, the CFPB defines “affiliate” as “any company that controls, is controlled by, or is under common control with, your company” (Ability to Repay and QM Rule, Small Entity Compliance Guide, p. 34). The CFPB also issued “unofficial staff guidance” in a webinar on October 17, 2013, in which it was stated that the definition of an affiliate is any company that controls, is controlled by, or is under common control with, another company  as set forth in the Bank Holding Act of 1956 (the “Act”). 

The Act states that any company has control over a bank or over any company if -  

(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company; 

(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or 

(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. [12 USC Section 1841(a)(2)]

Although (A) and (B) are straightforward, (C) is vague and the “unofficial staff guidance” (hopefully “official guidance” will be available down the line”) is just as vague as terms such as “controlling influence” are not specifically defined and are subjective in nature.

It is noteworthy that the CFPB has not made any indication that the definition of “affiliate” will mirror the definition as set forth in RESPA. The RESPA definition is far broader in nature.

To determine whether there is an affiliate relationship under QM, the management and ownership interests of the creditor and the affiliate need to be analyzed in great detail. Only then can the specific facts be applied to the definition set forth in the Act and an answer to the question above determined. It is suggested that you spend the time required to perform an analysis, document your findings and reasoning for the determination. Most importantly, be aware of investor overlays as they may very well exceed the “unofficial guidance” provided by the CFPB.

Michael Barone
Director / Legal and Regulatory Compliance
Lenders Compliance Group

Payment Shock Notices

QUESTION 

As a servicer, we issue a payment shock notice. I have always thought that this notice was a requirement. But I am being told that issuing a payment shock notice is optional and not a requirement. Are we required to issue a payment shock notice?

ANSWER
The payment shock notice is optional. Issuing the payment shock notice is not a regulatory requirement. As such, it has been viewed by HUD as a “best practices” action. The payment shock notice is usually issued when there is an adjustment in escrow that causes a higher monthly payment, such higher payment usually attributable to an increase in property taxes.

HUD outlined its reasoning for not requiring the Payment Shock Notice back in 1998, when it amended Regulation X’s section on Escrow Account Procedures in a Final Rule. [63 Federal Register, Volume 63:13, 3214, 3233, 3237-3238, 1998, Rules and Regulations]

As HUD stated in the Final Rule:

“With regard to the ‘payment shock’ problem, the Department determined…that extensive additional regulatory changes are not required and could prove detrimental to consumers. Instead, the Department determined that this problem would be better resolved by identifying and sharing best practices of servicers.” (Emphasis added.)

In part, HUD stated there was a problem involving “…disbursements for items such as property taxes [that] will increase substantially in the second year of the escrow account and where ‘payment shock’ -- the consumer's experiencing of a substantial rise in escrow payments -- will result. The Department has chosen to address this matter by recommending (but not mandating) a best practice for servicers: a voluntary agreement to accept overpayments.” (Emphasis added.)

Thus, HUD had identified a problem with respect to applying an escrow account procedure under Regulation X, and sought to remedy it in the Final Rule. 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group