March’s National Mortgage News Compliance Matters blog post, written by Fred Gooch, general counsel and vice president of Compliance, was a continuation of February’s blog post that took a look at the first three Consumer Financial Protection Bureau (CFPB) announced rules. March’s post focused on the next two CFPB rules that are effective June 1, 2013: Escrow requirements for HPML’s and LO Comp amendments found under § 1026.36(h) and (i).
The CFPB has addressed lenders’ wrongful steering of borrowers into loans they could not afford to pay back through its Ability-to-Repay rule. Prior to the establishment of this rule, originators were making loans without considering the borrower’s ability to repay and selling loans that were not in the consumer’s best interest. The LO Comp Reform rule’s intention is to set standards and require originators to meet certain qualifications in order to practice in the industry and to ensure they are not compensated based on certain loan terms.
The industry has already seen a decrease in the number of loan originators due to the education and licensing requirements that have become more extensive. A simple shift in market forces has also caused a decrease in loan originators. Originators with good skills and strong business ethics have been able to weather the mortgage crisis and the influx of recent CFPB regulations.
Under amendments §1026.36(h) and (i) of the LO Comp Reform rule, mandatory arbitration clauses and the wavering of consumer rights are prohibited as well as financing premiums and fees for credit insurance. In the past, mandatory arbitration has not been common among most lenders, so this new regulation will have minimal impact. However, this amendment will ensure that consumers will not be able to waive their day in court if they choose to proceed with legal action and sue their lender. The CFPB is also declaring it illegal for creditors to force borrowers to waive their rights, but it will still allow credit insurance to be paid on a monthly basis. However, the Bureau will no longer allow lenders to have it financed into the loan.
Higher-priced mortgage loans (HPML) have faced scrutiny in the past due to its higher rates and fees than non-HPML. A typical escrow account – including funds for insurance, property taxes and fees – has always been maintained by the lender. Escrow Requirements under the Truth in Lending Act (Regulation Z), states that creditors are currently required to establish escrow accounts for HPML secured by a first lien on a principal dwelling. Under this new regulation, borrowers are required to have an escrow account on their HPML for at least five years, as opposed to the past regulation of one year.
In order for lenders to maintain compliance, they will need to implement policies and procedures to ensure their HPML with an on or after June 1 application date has an escrow account for at least five years. Lenders should check with their document and compliance vendors well before the deadline to run tests guaranteeing their software is up-to-date with the new rule.