E-Sign Act Disclosures

QUESTION

We originate loans almost exclusively through E-Sign procedures. Recently, we were cited for not providing proper disclosure to consumers regarding our E-Sign policies. What are the proper disclosures that we must provide consumers in order to ensure compliance with E-Sign?

ANSWER

The Electronic Signatures in Global and National Commerce Act (E-Sign Act) provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.

Prior Consent is required from the consumers in order to implement the E-Sign Act procedures. Prior to obtaining their consent, financial institutions must provide consumers, a clear and conspicuous statement informing the consumer:

• of any right or option to have the record provided or made available on paper or in a non-electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal;
• whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship;
• that describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and
• that informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Mortgage Servicing Rights - Valuation

QUESTION

We are considering whether to sell our mortgage servicing rights. This has been a long, drawn out process of complicated decision-making. At this point, we are still struggling with how to determine the valuations. Perhaps there is a given set of valuation criteria that we could use. Essentially, we just want to be sure we are including the basics in our valuation. Is there a set of valuation data sets that we should be considering in our valuation approach?

ANSWER

Servicers Compliance Group, our affiliate, handles due diligence for virtually all aspects of mortgage servicing, so this is a subject with which we have considerable familiarity. First, it is important to define “mortgage servicing rights,” often referred to by the acronym “MSR”. At the most rudimentary level, MSRs are the capitalized value of the right to receive future cash flows from the servicing of mortgage loans. The concept of capitalized value asserts that the current value of an asset can be determined based on the total income expected to be realized over its economic life span. Those cash flow periods are the anticipated earnings, as discounted (viz., given a lower value), so they take into account the time value of money.

MSRs are considered a source of value derived from originating or acquiring mortgage loans. Because residential mortgage loans typically contain certain features, such as a prepayment option, borrowers often elect to prepay their mortgage loans by refinancing at lower rates during declining interest rate environments. But, when the refinance occurs, the cash flows generated from servicing the original mortgage loan are terminated. Thus, the market value of MSRs is extremely sensitive to changes in interest rates. For instance, the MSR market value tends to decline as market interest rates decline and increase as interest rates rise.

It is usual to capitalize MSRs on the fair market value of the servicing rights associated with the underlying mortgage loans at the time the loans are sold or securitized. Generally Accepted Accounting Principles (GAAP) requires that the value of MSRs be determined based upon market transactions for comparable servicing assets or, in the absence of representative market trade information, based upon other available market evidence and even modeled market expectations of the present value (PV) of future estimated net cash flows – such as internally developed discounted cash flow models to estimate the fair market value – that market participants would expect from servicing.

Obviously, valuation requires considerable expertise. I offer here a few of the many possible ways to process assumptions in a valuation of MSRs. This outline is by no means comprehensive. It assumes that MSRs are carried at estimated fair market value.

• Prepayment This is the most significant driver of MSR value based on the actual and anticipated portfolio prepayment behavior. Prepayment speeds, sometimes referred to as “velocity,” represent the rate at which borrowers repay their mortgage loans prior to scheduled maturity. As interest rates rise, prepayment velocity generally slows down, and as interest rates decline, prepayment velocity generally accelerates. When mortgage loans are paid off or expected to be paid earlier than originally estimated, the expected future cash flows associated with servicing such loans are reduced.
• Discount Rate The cash flows of MSRs discounted at prevailing market rates, which often include an appropriate risk-adjusted spread.
• Base Mortgage Rate (BMR) This is the current market interest rate for newly originated mortgage loans. It is considered a key component in estimating prepayment speeds of a portfolio because the difference between the current BMR and the interest rates on existing loans in the portfolio is an indication of a borrower’s likelihood to refinance.
• Cost to Service Servicing costs are based on actual expenses directly related to servicing. These servicing costs are compared to market servicing costs when market information is available. It is advisable to include expenses associated with activities related to loans in default.
• Volatility This is an assumption that represents the expected rate of change of interest rates. The rate of change is often notated with this sign Δ and is referred to as “Delta”. Without getting too technical, the Delta is used in valuation methodologies to place a theoretical boundary around the potential interest rate movements from one period to the next.

As you proceed with your valuation approach, it is important to reconcile actual monthly cash flows to projections, which means reconciling actual monthly cash flows to those projected in the MSR valuation. After each such reconciliation, an assessment should be undertaken to determine the need to modify the individual assumptions used in the valuation.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

Federal Preemption and Mortgage Call Center Recordings

QUESTION

We are a federally chartered savings association and are contemplating opening a mortgage call center.  We are in the process of establishing a call center and, for quality control purposes, would like to record our employees’ calls with our potential customers. We are aware that some states require “two party consent” and others “one party consent”. However, as a federally chartered savings bank, can federal preemption be used to preempt state laws requiring two party consent for the recordation of telephone calls?  

ANSWER

The short answer is that federal preemption cannot be used to preempt state laws requiring two party consent for the recordation of telephone conversations.

Federal law allows the recording of telephone calls with the consent of at least one party. [18 U.S.C. § 2511(2)] The majority of states also follow this “one party consent” rule. However, a minority of states, such as California, Connecticut, Florida, Massachusetts, and Pennsylvania, require the consent of all parties to the communication prior to recordation of the conversation (the “two party consent” rule). If all parties to the conversation are located in the same state, then that state’s laws apply. However, it is often difficult to know where the parties are located while the conversation is taking place, and, for that reason, it is more prudent to follow the two party consent rule.

As to whether the two party consent rule is averted through the doctrine of federal preemption, one must look to the Home Owners Loan Act (“HOLA”). The HOLA expressly provides that Federal regulations occupy the entire field of lending and credit activities and that Federal regulations are to be the governing laws for certain activities. State laws regarding recordation of telephone conversations are not lending laws, but rather wiretapping and privacy laws. As such, the HOLA preemption does not apply to these laws and a federal savings association must comply with the state laws, including those requiring two party consent.

One may assert that the call is a form of advertisement and disclosures related thereto enjoy preemption. However, it’s not the act of soliciting the loan, but the act of recording the conversation which is at issue.  As such, preemption does not apply.

The relevant portion of the HOLA is set forth below.

12 C.F.R. § 560.2: Applicability of law [emphases added]

(a) Occupation of field. Pursuant to sections 4(a) and 5(a) of the HOLA, 12 U.S.C. 1463(a), 1464(a), OTS is authorized to promulgate regulations that preempt state laws affecting the operations of federal savings associations when deemed appropriate to facilitate the safe and sound operation of federal savings associations, to enable federal savings associations to conduct their operations in accordance with the best practices of thrift institutions in the United States, or to further other purposes of the HOLA. To enhance safety and soundness and to enable federal savings associations to conduct their operations in accordance with best practices (by efficiently delivering low-cost credit to the public free from undue regulatory duplication and burden), OTS hereby occupies the entire field of lending regulation for federal savings associations. OTS intends to give federal savings associations maximum flexibility to exercise their lending powers in accordance with a uniform federal scheme of regulation. Accordingly, federal savings associations may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities, except to the extent provided in paragraph (c) of this section or §560.110 of this part. For purposes of this section, "state law" includes any state statute, regulation, ruling, order or judicial decision.

(b) Illustrative examples. Except as provided in §560.110 of this part, the types of state laws preempted by paragraph (a) of this section include, without limitation, state laws purporting to impose requirements regarding:

(1) Licensing, registration, 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;

(3) Loan-to-value ratios;

(4) The terms of credit, including amortization of loans and the deferral and capitalization of interest and adjustments to the interest rate, balance, payments due, 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) Loan-related fees, including without limitation, initial charges, late charges, prepayment penalties, servicing fees, and overlimit fees;

(6) Escrow accounts, impound accounts, and similar accounts;

(7) Security property, including leaseholds;

(8) Access to and use of credit reports;

(9) Disclosure and advertising, including 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 and laws requiring creditors to supply copies of credit reports to borrowers or applicants;

(10) Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages;

(11) Disbursements and repayments;

(12) Usury and interest rate ceilings to the extent provided in 12 U.S.C. 1735f-7a and part 590 of this chapter and 12 U.S.C. 1463(g) and §560.110 of this part; and

(13) Due-on-sale clauses to the extent provided in 12 U.S.C. 1701j-3 and part 591 of this chapter.

(c) State laws that are not preempted. State laws of the following types are not preempted to the extent that they only incidentally affect the lending operations of Federal savings associations or are otherwise consistent with the purposes of paragraph (a) of this section:

(1) Contract and commercial law;

(2) Real property law;

(3) Homestead laws specified in 12 U.S.C. 1462a(f);

(4) Tort law;

(5) Criminal law; and

(6) Any other law that OTS, upon review, finds:

(i) Furthers a vital state interest; and

(ii) Either has only an incidental effect on lending operations or is not otherwise contrary to the purposes expressed in paragraph (a) of this section.

Joyce Wilkins Pollison, Esq.

Director/Legal and Regulatory Compliance

Lenders Compliance Group

Loan Officer Pipeline Transitions

QUESTION

We parted ways with one of our Loan Officers today. We have a new loan officer who will be taking over his pipeline but are awaiting his license. In the interim, I will be handling his pipeline since I am still licensed. I seem to remember at some point in the past that when a new Loan Officer was taking over an existing application, the borrower had to be notified in writing about the change with the new LO’s phone number and RMLO number. Can you confirm for us what our requirements are here? I appreciate your help!

ANSWER

Yes, you probably need to notify the borrower of the change in loan officers, even if the change is only temporary. The need to provide such notice to the consumer under existing regulations is fairly straightforward. Under 12 CFR 1007.105 (Regulation G), the implementing regulation for the SAFE Act, a registered mortgage loan originator “shall” provide his or her “unique identifier” to a consumer…”before acting as a mortgage loan originator. …”  The regulation states:

§1007.105   Use of unique identifier.

(a) The covered financial institution shall make the unique identifier(s) of its registered mortgage loan originator(s) available to consumers in a manner and method practicable to the institution.

(b) A registered mortgage loan originator shall provide his or her unique identifier to a consumer:

(1) Upon request;

(2) Before acting as a mortgage loan originator; and

(3) Through the originator's initial written communication with a consumer, if any, whether on paper or electronically. (Emphasis added.)

The Appendix to §1007.105 contains detailed examples of mortgage loan origination activities that constitute “acting as a mortgage loan originator.” As a substitute loan officer, you would most likely perform at least one of these activities.

Whether this notice to the consumer needs to be in writing is not clear. In the commentary accompanying the original version of this rule jointly issued by the OCC, Federal Reserve, FDIC, OTS, FCA, and NCUA, it is specified that the notice can be given “in a manner and method practicable to the institution.” That language is carried forward in subpart (a) of §1007.105, which is the portion pertaining to a covered institution’s duty to make the unique identifiers of its registered mortgage loan originators available to consumers, but is not specifically mentioned in subpart (b), which deals with the disclosure obligations of individual MLOs. Prudence would indicate, however, that to make sure there is a record of compliance with the Rule, providing the notice in writing is essential. Individual states may prescribe additional requirements or even specify the form of any such notice.

In addition, under the 2013 amendments of TILA, 12 CFR 1026.36(g) (Regulation Z) the name and unique identifier of the mortgage loan officer must be included in the “loan documents,” including the “note” and “security instrument” when they are signed. Since those documents are not normally signed at the application stage, you would most likely be the person who would need to be identified as the loan officer on the “loan documents” issued at or near closing.

The commentary makes it clear that the lender does not need to go back and re-issue loan documents if the identity of the MLO changes during the application process. But any documents issued after the change has been made should reflect the change. This would need to be in writing. Again, however, there is no prescribed form, except that the GSEs are now requiring the name and NMLS identifier appear on their documents such that, if you use their documents, the disclosure will need to appear in the place provided for on their documents. This is a highly technical area, so if you have any questions, please do not hesitate to contact us.  

Michael R. Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group