QUESTION
I am the CEO of a Midwest mortgage lender. We are being sued in a class action alleging that we violated the steering prohibitions. They're claiming that we can’t use the safe harbor protection. Our General Counsel and outside counsel are fighting back.
However, I would like your review, and I especially want other companies to know about their potential vulnerability. Since your newsletter is hugely followed, I hope you will provide the safe harbor elements to your readers.
What are the elements of the safe harbor to avoid steering violations?
ANSWER
Although originators know the anti-steering disclosure and anti-steering requirements, many do not realize that there is a legal safe harbor. A transaction does not violate the steering prohibition if the consumer is presented with loan options that meet the conditions regarding the presentation of loan options. This applies to each type of transaction in which the consumer expressed an interest.
Let’s clarify what I mean by “each type of transaction” for purposes of the safe harbor.
These three criteria relate to the meaning of each type of transaction:[i]
1. A loan has an annual percentage rate that cannot increase after consummation;
2. A loan has an annual percentage rate that may increase after consummation; or
3. A loan is a reverse mortgage transaction.
Now, concerning the presentation of loan options, there are three dispositive factors.
I will outline the factors because they can be a bit complex.
The transaction satisfies
the safe harbor only if the loan originator presents loan options for each type
of transaction in which the consumer expressed an interest and all of the following
conditions are met:
1. The loan originator must obtain loan
options from a significant number of creditors with which the originator regularly
does business and, for each type of transaction in which the consumer expressed
an interest, must present the consumer with the loan options that include:
a. The loan with the lowest interest
rate;
b. The loan with the lowest interest rate without
i. negative amortization,
ii. a prepayment penalty,
iii. interest-only payments,
iv. a balloon payment in the first seven years of
the life of the loan,
v. a demand feature,
vi. shared equity, or
vii. shared appreciation; or
viii. in the case of a reverse mortgage transaction,
A. a loan without a prepayment penalty, or
B. shared equity, or
C. shared
appreciation; and
ix. The loan with the lowest total dollar amount for
origination points or fees and discounts points;
2. The loan originator must have a good
faith belief that the options presented to the consumer are loans for which the
consumer likely qualifies; and
3. For each type of transaction, if the
originator presents more than three loans to the consumer, the originator must
highlight the loans that satisfy the criteria specified in item 1 above.[ii]
Note: The loan originator can present
fewer than three loans and satisfy the safe harbor conditions if the loan(s)
presented to the consumer satisfy the criteria of the options set forth above
in item 1 and the conditions in items 1 to 3 are otherwise met.[iii]
Jonathan Foxx, Ph.D., MBA
Lenders Compliance Group
[i] 75
FR 58,509, 58,534, codified in 12 CFR § 226.36(e)(2)
[ii]
75 FR 58,509, 58534, codified in 12 CFR § 226.36(e)(3)
[iii] 75
FR 58,509, 58534, codified in 12 CFR § 226.36(e)(4)
