Thursday, July 31, 2014

Texas Home Equity Loans

We are going to be offering home equity loans in Texas soon. What are the requirements and restrictions for making a home equity loan in Texas?

The law establishing limitations on home equity lending in Texas is governed by Article XVI, Section 50 of the Texas Constitution. A home equity loan is one of the enumerated permissible purposes for establishing a lien on a homestead. [Tex. Const. art. XVI, § 50 (a)(6)] 

The following are some of the key requirements and restrictions for Texas home equity loans.
  • In Texas, the total mortgage debt, including the amount of any existing mortgages plus the projected home equity lien (whether cash out re-fi or HELOC), cannot exceed 80% of the home's current fair market value at closing. [Tex. Const. art. XVI, § 50 (a)(6)(B)]
  • The outstanding balance on a HELOC may not exceed 50% of the home’s original fair market value. [Tex. Const. art. XVI, § 50 (t)(6)]
  • Lenders may not charge fees for draws on HELOCs. [Tex. Const. art. XVI, § 50 (t)(4)]
  • No home equity loan may close prior to the expiration of 12 calendar days from the date the owner received a written consumer rights disclosure following his/her submission of an application. [Tex. Const. art. XVI, § 50 (a)(6)(M)(i) and (g)] 
  • Owners must be provided with a copy of the executed application and a copy of a HUD-1 Settlement Statement at least one full day prior to closing. [Tex. Const. art. XVI, § 50 (a)(6)(M)(ii)]
  • No blanks may be left in the final loan documents to be filled in with “substantive terms of the agreement.” [Tex. Const. art. XVI, § 50 (a)(6)(Q)(iii)]
  • Owner and lender must sign a written acknowledgment as to the fair market value of the property on the closing date. [Tex. Const. art. XVI, § 50 (a)(6)(Q)(ix)]
  • No recourse in the absence of fraud. [Tex. Const. art. XVI, § 50 (a)(6)(C)]
  • Fees and charges to make the loan (not interest) cannot exceed 3% of the loan amount. [Tex. Const. art. XVI, § 50 (a)(6)(E)] Interest is calculated as “the amount determined by multiplying the loan principal by the interest rate.”  [Finance Comm. of Texas vs. Norwood, No. 10-0121, p.2 (Tex., Jan. 24, 2014) (Supplemental Opinion on Motion for Rehearing)]
  • No cross-default provisions permitted (may not accelerate for default in any loan other than prior lien on the homestead). [Tex. Const. art. XVI, § 50 (a)(6)(J)]
  • Must allow for repayment in substantially equal successive periodic installments, not more often than every 14 days and not less often than monthly, beginning no later than two months from the date the loan is closed. [Tex. Const. art. XVI, § 50 (a)(6)(L)(i)]
  • There can be no prepayment penalties. [Tex. Const. art. XVI, § 50 (a)(6)(G)]
  • Owners are limited to one closed-end home equity loan or HELOC at a time. [Tex. Const. art. XVI, § 50 (a)(6)(K)]
  • Owners with a home equity loan must wait one year from closing to refinance. [Tex. Const. art. XVI, § 50 (a)(6)(M)(iii)]
  • The loan may only be closed in the office of the lender, an attorney, or a title company. [Tex. Const. art. XVI, § 50 (a)(6)(N)]
  • The loan may not require an owner to apply the proceeds to another debt except a debt that is secured by the homestead or owed to another lender. [Tex. Const. art. XVI, § 50 (a)(6)(Q)(i)]
  • The lender forfeits all outstanding principal and interest if:
o   Under §50(a)(6)(Q)(x), a lender fails within 60 days of the consumer’s demand to cure a breach of its obligations by:
a.      returning any overcharge to the owner;
b.      sending to the owner a written acknowledgement that the lien is valid only in the amount that the extension of credit (a) does not exceed 80% of the fair market value of the homestead, or (b) is not secured by certain designated agricultural use property or property other than the homestead;
c.      sending the owner written notice modifying any non-compliant portion of the mortgage documents to make compliant with the home equity requirements;
d.      delivering documents required to be delivered at or prior to closing;
e.      abating all owner’s obligations if another home equity loan was outstanding on the homestead at the time of the loan; and
f.       if the failure to comply cannot otherwise by cured, by refunding or crediting the owner $1,000 and offering the owner the right to refinance the extension of credit with the lender or holder for the remaining term of the loan at no cost to the owner on the same terms, including interest, as the original extension of credit modified to comply with the home equity loan laws; or
o   Under §50(a)(6)(Q)(xi):
- the extension of credit is made by a person not authorized to make home equity loans under §50(a)(6)(P); or
- each owner and each owner’s spouse failed to consent in writing to the loan (unless they subsequently consent).

Brennan Holland
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, July 24, 2014

Fair Lending and Maternity Leave Discrimination

Can a lender refuse to close a loan on the basis that an applicant is pregnant or on maternity leave? 

Bottom Line Up Front: No, not if the applicant qualifies for the loan and demonstrates the ability to repay.  Lenders who refuse to consider income or employment just because a woman is pregnant or on maternity leave may be in violation of the Fair Housing Act’s prohibitions against discrimination on the basis of gender and familial status, and the Equal Credit Opportunity Act (ECOA) prohibitions against discrimination on the basis of gender.

A mortgage veteran with over 35 years in the industry informed me that she was once required to confirm whether women were on birth control as a prerequisite to applying for a mortgage – she called it the “pill disclosure”. Thankfully, those days are over and fair lending laws are increasingly addressing the remaining vestiges.

In its Single Family Selling Guide, published on January 24, 2014, Fannie Mae clarified that maternity leave is defined as “temporary leave” analogous to short-term medical disability, parental leave, or other temporary leave types that are acceptable by law or the borrower's employer. Generally, lenders should be aware that:

·        It is a Fair Lending violation to assume that a woman will not return to work after child-birth.  Under Fannie Mae guidelines, the applicant on maternity leave must provide written notice of her intent to return to work, and the employer, or a third party representative may verify the return date and whether the borrower has the right to return to work after the temporary leave period is over. Confirmation requires no particular formality and does not need to comply with Fannie Mae’s “Age of Allowable Credit Documents” policy – in other words, lenders should not impose expiration date standards applicable to other credit documents.  

·        Temporary Leave means “employed”. Once the lender confirms that the borrower is on “temporary leave” the lender must consider the borrower as “employed”. The lender is prohibited from requiring a qualified applicant who is pregnant or on maternity leave to return to work, and thereafter earn a specified number of paychecks before her loan may be approved or closed. If the borrower will return to work by the date the first mortgage payment is due, the lender can consider the borrower's regular employment income for qualification purposes.

“If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower's temporary leave income (if any) or regular employment income. If the borrower's temporary leave income is less than her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves.” 
[Fannie Mae Seller Guide, B3-3.1-09, 5/27/14]

·        Lenders must establish underwriting policies that similarly consider employment and income for pregnant women and women on maternity leave, as it does other mortgage applicants.  Temporary leave income that falls below the borrower’s regular income may be supplemented by the borrower’s available liquid financial reserves, subject to Fannie Mae’s underwriting guidelines. If the lender is aware that a borrower will be on maternity leave at the time of closing, and if the loan cannot be approved without the income of the borrower who will be on maternity leave, the lender must confirm employment and qualify income under standard eligibility requirements.

Lenders should understand Fair Lending risks and take the necessary steps to ensure compliance.  

Wendy Bernard
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, July 17, 2014

Settlement Service Provider Sponsors Continuing Education Class

We are a mortgage broker which owns a subsidiary that is a licensed real estate education provider, which I will refer to as “Real Estate Academy”. Real Estate Academy will be holding a continuing education class for which it charges $25 per person. A local title company has offered to sponsor the class and pay the $25 fee for each person in attendance. Is this arrangement permissible?

Whether the foregoing arrangement is a violation of the Real Estate Settlement Procedures Act (RESPA) depends on whether the real estate agents or other attendees are receiving continuing education credits for their attendance. If no credits are received, there is no RESPA violation. By contrast, if credits are received, RESPA has been violated.

As a general rule, RESPA and its implementing regulation, Regulation X, prohibit a person from giving or accepting “any fee, kickback or other thing of value” for the referral of any business that is incident to or part of a settlement service involving a federally related mortgage loan. [12 CFR 1024.14(b)] The term “thing of value” is construed quite broadly and includes “payment of another person’s expenses”. [12 CFR 1024.14(d)] Certainly, the payment by the title company of a realtor’s continuing education expenses falls within the definition of “thing of value”, and is in violation of the general rule. 

However, there is an exception to the general rule which would permit the title company to sponsor the class, provided no continuing education credits or other “thing of value” is given to the realtors. RESPA permits “normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto”. [12 CFR 1024.14(g)(vi)]  This exception underscores that an arrangement that results in continuing education credits being given to the realtors is not permissible because the title company is defraying expenses the agents would otherwise incur, for instance, continuing education expenses.

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, July 10, 2014

Identity Theft Prevention Program - Definitions

We are a mortgage lender and have an Identity Theft Prevention Program, but we are still not sure what is considered a “covered account”, or an “account”, or a "Red Flag", or even a “customer”. What are the definitions for these terms?

Required by the Federal Trade Commission and other Federal agencies, the Identity Theft Prevention Program must be implemented by “financial institutions” and “creditors”. The foregoing two categories of subject entities have been defined very broadly, so as to reach to all residential mortgage lenders and originators. Essentially, a financial institution or creditor that offers or maintains one or more covered accounts must develop and implement a written Identity Theft Prevention Program, the purpose of which is to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account.

A “covered account” consists of two classes:

1. An account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, such as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account; and,

2. Any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks. [16 CFR § 681.1(b)(3) (2010)]

An “account” is a continuing relationship established by a person with a financial institution or creditor to obtain a product or service for personal, family, household or business purposes. For instance, an account would include an extension of credit, such as for the purchase of property or services involving a deferred payment. [16 CFR § 681.1(b)(1) (2010)]

A “Red Flag” is a pattern, practice, or specific activity that indicates the possible existence of identity theft. [16 CFR § 681.1(b)(9) (2010)]

A “customer” is a person who has a covered account with a financial institution or creditor. [16 CFR § 681.1(b)(6) (2010)] 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group