Reporting Brokered Loans on the HMDA-LAR

QUESTION

Our investor reviews the loan before closing. Please let us know whether we are supposed to report the loan as a brokered or correspondent loan on the HMDA-LAR?

ANSWER

Under Regulation C, the implementing regulation of the Home Mortgage Disclosure Act, a special broker rule applies to the reporting of loans on the Loan Application Register (“HMDA-LAR”) made by a broker and sold to an investor, where the investor reviews the loan before closing. Before determining who has the responsibility to report, it is necessary to define the terms “broker” and “investor” as they are used in Regulation C.

For purposes of the special broker rule, a “broker” is an institution that takes and processes a loan application and arranges for another institution to acquire the loan at or after closing; and an “investor” is an institution that acquires a loan from a broker at or after closing. [12 CFR, Part 203, Supplement I § 203.1(c)-2]

A broker that makes a credit decision in connection with a loan application reports that decision, and a broker that does not make a credit decision in connection with a loan application does not report the application. [12 CFR, Part 203, Supplement I § 203.1(c)-2]

Where an investor reviews a loan application and makes a credit decision regarding the application before closing, the investor reports that decision.

Thus, if the investor reviews an application before closing and acquires the loan following closing from the broker, the investor reports the loan as an originated loan and not as a purchased loan, regardless of whether the loan closes in the broker’s name or the investor’s name. In such instances, the broker would not report that it originated the loan.

In the subject scenario, the investor, and not the broker, is deemed to have made the credit decision, even if the broker also reviewed the loan application. The origination of a loan is reported by only one institution. [12 CFR, Part 203, Supplement I §§ 203.1(c)-2, 203.4(a)-1(iii), (iv)]

However, if the investor does not review a loan application from a broker before closing, the investor reports only the closed loans that it purchases from the broker as purchased loans. In this situation, the investor does not report closed loans that it elects not to purchase from the broker. [12 CFR, Part 203, Supplement I § 203.1(c)-2]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Preemption and Exemption

QUESTION

As a federally regulated bank, we always consider preemption of state laws and exemption from state laws. Where we usually get confused is the difference between the two. What is preemption and is it different from exemption? Also, what kinds of laws are preempted?

ANSWER

Preemption refers to a doctrine enshrined in the Supremacy Clause of the U.S. Constitution. This clause provides that certain matters are subject to national laws, rather than controlled by state or local laws. The former takes precedence over the latter. This is what is meant by the term “preemption.” Federal law provides some measure of preemption of certain state laws for federally chartered banks (national banks), federal savings and loan institutions, and federal credit unions. [12 USC § 85, 12 USC § 371, 12 CFR § 34.4, 12 CFR §§ 7.4008 & 7.4009; 12 USC § 1463, 12 USC 1464.12, 12 CFR part 560; 12 USC § 1757(5), 12 CFR § 701.21]

Unlike preemption, which is based on federal law, an exemption is based on state law that provides an express exception from a particular state provision.

Federal law preempts state law when state law is in conflict with federal law (or when Congress has indicated an intention to “occupy the field”).

Generally, if there is a conflict between state law and federal law, state law is preempted or displaced.

The National Bank Act, which is the governing framework for the banking system, sets forth a number of preemptions of state laws relating to mortgage lending. [12 USC §§ 85, 371; 12 CFR §§ 7.4008, 7.4009, 34.4]

State laws that are preempted include:

1. Licensing, registration (except for purposes of service of process), filings, or reports by creditors.
2. The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigation, in furtherance of safe and sound banking practices.
3. Loan-to-Value ratios.
4. Terms of credit (i.e., schedules for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan).
5. Aggregate amount of funds that may be loaned upon the security of real estate.
6. Escrow or impound accounts and similar accounts.
7. Security property, including leaseholds.
8. Access to, and use of, credit reports.
9. Disclosures and advertising (i.e., laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents).
10. Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.
11. Disbursements and repayments.
12. Interest Rates (viz., the limitations on charges that comprise rates of interest on loans by national banks are determined under federal law).
13. Due-on-Sale clauses (with some exceptions).
14. Covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan.
15. Debt collection, contracts, torts, criminal law, Homestead laws, acquisition and transfer of real property, taxation, zoning (viz., state laws on these subjects are not inconsistent with the real estate lending powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al).
16.  Any other law that the OCC determines to be incidental to real estate lending transactions of a national bank (viz., Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), or that is made applicable by federal law). [12 CFR § 34.4 (a) & (b)]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Fair Housing and Disparate Impact

QUESTION

I have been reading about a recent important United States Supreme Court decision which affects fair housing laws.  Can you elaborate on the details of the case for me?

ANSWER

On June 25, 2015, the United States Supreme Court (the “Court”) in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (the “Case”) upheld that “disparate impact” is a viable theory of liability under the United States Fair Housing Act. “Disparate impact” occurs when certain housing or lending policies, which are neutral or seemingly non-discriminatory on their face, have a disproportionally adverse effect or impact on a member of a protected class and there is no legitimate, non-discriminatory business need for the policy or practice causing such disparate impact.

In the Case, the Court ruled that a consumer may bring an action claiming fair housing discrimination based on disparate impact even if no intent to discriminate exists. The Court further upheld that liability may be found where a legitimate business interest for the policy or practice exists but there was a less discriminatory option available.

The decision in the Case is significant in that real estate and mortgage professionals may be found guilty of fair housing violations even if they do not intend for their policies and/or practices to discriminate against, or disproportionately affect, protected classes. Under the Fair Housing Act, protected classes include race or color, religion, national origin, sex, familial status (defined as children under the age of 18 living with a parent or legal custodian, pregnant women, and people securing custody of children under 18), and disability or handicap.

An example of disparate impact could be a situation where a landlord adopts a policy which only permits tenants who have with full-time jobs. While this policy may not violate fair housing laws, it could bar disabled individuals (a protected class) who may not be able to work full-time even though they may meet the financial qualifications for the rental.

Neil Garfinkel

Executive Director/Realty & Title Services Compliance Group 

Director/Legal & Regulatory Compliance

Waiving the Seven Day Waiting Period

QUESTION

We know about the seven day waiting period requirement between providing the initial disclosures and consummation. We need to know the criteria to use in order to determine if the consumer may waive the waiting period based on a personal emergency? And if a consumer can waive the waiting period, how is this done?

ANSWER

For a closed-end credit transaction that is secured by the consumer’s dwelling and subject to RESPA (excluding timeshares), the creditor must deliver or place in the mail the initial TILA disclosure no later than the seventh business day before consummation of the loan transaction. [12 CFR § 226.19(a)(2)(i)] The waiting period commences when the creditor delivers or places the disclosures in the mail, and not when the consumer receives or is deemed to receive the disclosures.

If the extension of credit is necessary to meet a “bona fide personal financial emergency,” the consumer may modify or waive the waiting period after receiving the initial TILA disclosures. [12 CFR § 226.19(a)(3)]

What constitutes a bona fide personal financial emergency is a matter of some consternation, because it is not statutorily defined for purposes of waiving the waiting period, even though the emergency must be one that needs to be met before the end of the waiting period. [12 CFR Supp. I to 226, Official Staff Commentary § 226.19(a)(3)-1] Whether an emergency rises to the level of a bona fide personal financial emergency – obviously a higher, yet undefined standard – is determined on a case-by-case basis. There are illustrations of such events, but circumstances can vary. It would be prudent to take a narrow view of what may qualify as a bona fide personal financial emergency.

Nevertheless, if a decision has been reached that the consumer is faced with a bona fide personal financial emergency and, therefore, may waive the seven business day waiting period, each consumer who is primarily liable on the legal obligation must give the creditor a dated, written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signatures of all the consumers who are primarily liable on the legal obligation. Printed forms may not be used for a consumer to waive the waiting period. [12 CFR § 226.19(a)(3); 12 CFR Supp. I TO 226, Official Staff Commentary § 226.19(a)(3)-1]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

Real Estate Professionals: Top Ten List about TRID

QUESTION

We realize the TILA/RESPA rules are complex. An affiliate of ours is a real estate company. So, we are wondering how the new rules will affect real estate agents. Do you have a list of items that we consider important for real estate agents to know about the TRID requirements?

ANSWER

TRID is a new federal consumer disclosure law that goes into effect October 3, 2015. TRID will significantly change the way a mortgage lender discloses to consumers the terms, conditions and closing costs associated with most residential mortgage loans. 

To assist real estate professionals in understanding what TRID is and how it will affect the residential closing and mortgage loan process, we have created a “Top Ten List” of things to know about TRID:

1) TRID stands for TILA-RESPA Integrated Disclosure. TILA stands for Truth-in-Lending Act and RESPA stands for the Real Estate Settlement Procedures Act.

2) TRID is a federal law which requires mortgage lenders to provide consumers with certain disclosures during the loan application and closing process. These disclosures summarize the terms of the loan, such as the interest rate, and the costs associated with obtaining the loan.

3) There are two new consumer disclosure forms required by TRID, (i) the Loan Estimate and (ii) the Closing Disclosure.

4) The Loan Estimate, or “LE,” replaces the current disclosure forms known as the Good Faith Estimate and initial Truth-in-Lending disclosure (the “TIL”). The purpose of the LE is to give consumers a better, more clear understanding of the terms of their loan and the costs associated with such loan. With more complete knowledge the consumer can then, in theory, shop for and make an informed decision about the mortgage product that best fits their needs.

5) The regulatory body responsible for implementing and overseeing TRID, the Consumer Finance Protection Bureau (the “CFPB”) refers to the LE as a “Know before you Owe” disclosure.

6) The Closing Disclosure, or “CD,” replaces the current disclosure forms known as the HUD-1 Settlement Statement and the final TIL. The purpose of the CD is to finalize information that appears on the LE, including the mortgage terms and the projected payment amount, as well as to summarize the closing costs incurred by the purchaser and seller.

7) TRID imposes certain dates by which the LE and CD must be delivered to a borrower. The Loan Estimate must be provided to the consumer by the third business day after receipt of a completed loan application and at least seven business days prior to the closing of the loan. The Closing Disclosure must be delivered to and received by the borrower at least three business days prior to “consummation” of the transaction (usually the closing of the transaction). The three business day period can be referred to as the “Waiting Period” and a closing cannot occur until the conclusion of the Waiting Period.

8) There are three events that require a re-disclosure of the CD and a new Waiting Period prior to closing. They are:

I. An increase in the annual percentage rate (APR) by more than 1/8 of a percentage point for a fixed rate loan or 1/4 of a percentage point for an irregular transaction, such as a variable rate transaction; 

II. The addition of a prepayment penalty; and,

III. Changes in the loan product, such as from a fixed rate to an adjustable rate loan. Although the Waiting Period will not be required to commence again for changes other than these three events, the lender is still responsible for giving the borrower a new CD if there are any changes to the CD after it is presented to the borrower.

9) The CFPB recently announced that it will be issuing a proposed amendment to delay TRID’s effective date from August 1, 2015 to October 3, 2015. TRID will apply to all applicable mortgage applications taken on and after October 3, 2015.

10) Real estate agents are an integral part of the closing process and will play an important role in facilitating the implementation of TRID and its various delivery requirements.  More specifically, real estate professionals should be prepared to do the following things:

                           I.  Educate consumers and professionals with respect to TRID and its various elements,

                         II.  Set reasonable expectations for all relevant parties regarding potential closing delays,

                        III.  Assist the various professionals associated with the closing process in creating a collaborative work environment so that all closing costs can be provided to the lender in order to prepare the CD, and

                       IV.  Understand the situations which require a new Waiting Period as well as situations, such as adjustments necessitated by a pre-closing walk-through that do not require a new Waiting Period.

Neil Garfinkel

Executive Director

Realty and Title Services Compliance Group 

Director/Legal & Regulatory Compliance