By Timothy Raty, DocuTech Corporation – Regulatory Compliance Specialist
Among the more than 2,530 pages of final rules (and their analyses, history, and commentary) promulgated by the Consumer Financial Protection Bureau (CFPB), pursuant to the requirements of the estimated 920 page Dodd-Frank Wall Street Reform and Consumer Protection Act (124 Stat. 1376 ), there are three regulations which take effect on June 1, 2013. The three regulations, applicable to transactions subject to Regulation Z, are:
- Revised requirements for higher-priced mortgage loans, particularly in regards to escrow accounts;
- A prohibition against mandatory arbitration clauses; and
- A prohibition on the financing of certain up front credit insurance premiums.
The Compliance and Legal staff at DocuTech have been working diligently to ensure that, where applicable to the disclosure aspect of a mortgage transaction, clients will be in compliance with these new regulations when they take effect. The following provides a summary of these new regulations and what DocuTech is doing to modify its system and documents to help clients comply with them.
New Higher-Priced Mortgage Loans Rules
The new regulations affecting higher-priced mortgage loans (HPMLs) are promulgated in 78 FR 4726 (with proposed, clarifying rules set forth in 78 FR 23171). These rules revise Subsection (a), (b), and create a new Subsection (d) of 12 CFR § 1026.35 and changes certain aspects of HPMLs substantively.
The CFPB summarizes their new rules as having three main elements: (1) changing the general requirement that an escrow account be maintained for first lien HPMLs for one year to requiring it for five years; (2) providing an exemption to the escrow account requirement for small creditors who operate predominately in rural or underserved areas; and (3) certain exemptions for escrowing insurance premiums for condominium units wherein the subject property is covered by a master insurance policy (see 78 FR 4726).
Other changes include a more streamlined regulatory structure for determining whether a loan is a HPML or not and a reiteration of the prohibition against structuring a loan to be an open-end credit plan in order to evade the provisions of the section.
In regards to escrow accounts, the current version of the regulations require that an escrow account for the payment of taxes and certain insurance premiums be establish for HPMLs secured by a first lien on the consumer’s principal dwelling and that such an account should be maintained for at least one year (see current 12 CFR § 1026.35[b]). Specifically exempt from this requirement are:
- Loans secured by shares in a cooperative; and
- In regards to the escrowing of insurance premiums, loans secured by condominium units, where the condominium association is obligated to maintain a master policy of insurance (an escrow account is still required to be created and maintained for taxes, however).
The following are also exempt from this requirement, since they cannot be considered HPMLs (see current 12 CFR § 1026.35[a]):
- A transaction to finance the initial construction of a dwelling;
- A bridge loan with a term of twelve months or less;
- A reverse mortgage transaction; or
- A home equity line of credit (HELOC).
Under the new regulations, these exemptions are largely left intact. There are, however, a few differences. The exemption applicable to condominium units concerning the escrowing of insurance premiums has been expanded to also include planned unit developments (PUDs) and other common interest communities.
In addition, the general exemption towards bridge loans, construction loans, reverse mortgages, and HELOCs no longer exists under the new regulations – meaning that they can be considered HPMLs (except HELOCs, since the definition of a HPML restrict HPMLs to closed-end transactions). These exempt transactions are now, however, specifically exempt from the escrow account requirements, thus this difference is largely one of regulatory structure.
The one major difference is the inclusion of a new exemption which applies not to the nature of the loan, but to the nature of the creditor. A creditor is exempt from establishing an escrow account if all of the following apply:
- During the preceding calendar year the creditor extended more than 50% of its total first lien, covered transactions on properties located in counties that are considered either “rural” or “underserved” (as practically determined by the CFPB in their proposed clarifying rules);
- During the preceding calendar year the creditor (and its affiliates) originated 500 or fewer first lien, covered transactions;
- The creditor had total assets of less than two billion dollars at the end of the preceding calendar year (this dollar amount adjusts each year);
- Neither the creditor (or its affiliates) maintains escrow accounts that it currently services, other than: (a) accounts established between April 1, 2010 and June 1, 2013 pursuant to the current regulations; or (b) accounts established after consummation as an accommodation to distressed consumers.
However, such a creditor is not exempt if there is a commitment to sell the loan to another person who is not also exempt.
The proposed clarifying rules aforementioned would also include a new, temporary Subsection (e), which would reiterate the current prepayment penalty prohibitions and repayment ability requirements currently set forth in 12 CFR § 1026(b)(1) & (b)(2), which are deleted under the final version of the rules. This Subsection (e) would be in effect between June 1, 2013 and January 10, 2014, when these provisions would be substantively replaced by new 12 CFR § 1026.43.
No new disclosures are required or necessitated by these new rules. DocuTech does, however, provide a data integrity check for HPMLs submitted through the ConformX system, to determine whether an escrow account will be established for the loan or not. If an account is not being established, then a so-called “hard stop” warning is triggered which alerts clients of the fact that Section 35 of Regulation Z requires that an account must be established.
DocuTech is planning on updating its data integrity check to reflect these new, yet few, changes. One change is to include a check as to whether the loan is secured by shares in cooperative property. We will also be adding prompts informing clients of the exemption to “rural creditors.”
Prohibition Against Mandatory Arbitration
The new rules promulgating the prohibition of mandatory arbitration provisions were snuck into the final rules concerning loan originator compensation which generally take effect in January, 2014, although the prohibition on arbitration provisions takes effect six months earlier. This prohibition is promulgated in 78 FR 11280 and will be codified as new 12 CFR § 1026.36(h).
This prohibition covers two subjects, which are set forth in two subsections. The first subject prohibits arbitration clauses, as follows:
“A contract or other agreement for a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not include terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction. This prohibition does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.” (12 CFR § 1026.36[h])
The second subject further prohibits inclusion in any contracts or agreements of clauses that would bar a consumer from “his day in court,” as follows:
“A contract or other agreement relating to a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling) may not be applied or interpreted to bar a consumer from bringing a claim in court pursuant to any provision of law for damages or other relief in connection with any alleged violation of any Federal law. This prohibition does not limit a consumer and creditor or any assignee from agreeing, after a dispute or claim under the transaction arises, to settle or use arbitration or other non-judicial procedure to resolve that dispute or claim.” (12 CFR § 1026.36[h])
DocuTech has researched all of the documents in its library and determined that all of its generic disclosures do not violate these prohibitions. There are some Department of Housing and Urban Development (HUD) forms which are given in connection with so-called Section 203(k) mortgages in which HUD suggests that the borrower should include a binding arbitration provision in contracts with the contractors performing the rehabilitation work on the subject property (see form HUD-92700-A). However, such contracts are not ones made for a consumer credit transaction (i.e. they are for performing construction work), so HUD’s encouragement for an arbitration provision in such contracts does not run contrary to the new prohibition.
The only generic document which will be affected by this change is the Maryland DLLR Disclosure (Cx13900), given pursuant to Md. Code Regs. 09.03.10.03(B)(3) (2013), which contains a notice (among others) informing and cautioning the borrower that their loan contains a provision concerning mandatory arbitration (which language only prints where a client has requested it). Because this notice will no longer apply to any loans submitted through the ConformX system, we will be configuring this notice to no longer print for any clients. Other notices in Cx13900 concerning balloon payments and additional payments will continue to print, when applicable.
We have also researched custom documents which contain arbitration clauses, which may or may not be in violation of this new prohibition. We will be contacting clients who use these documents, informing them about this new restriction on their business practice, and inquiring as to whether they would like any changes made to these documents or not.
Single-Premium Credit Insurance
Like the prohibition against mandatory arbitration, the new rules prohibiting the financing of single-premium credit insurance were snuck into the final rules concerning loan originator compensation in 78 FR 11280. This prohibition will be codified as new 12 CFR § 1026.36(i).
Also similar to the prohibition against mandatory arbitration, this prohibition is divided into two subsections. The first sets forth the prohibition, as follows:
“A creditor may not finance, directly or indirectly, any premiums or fees for credit insurance in connection with a consumer credit transaction secured by a dwelling (including a home equity line of credit secured by the consumer’s principal dwelling). This prohibition does not apply to credit insurance for which premiums or fees are calculated and paid in full on a monthly basis.” (Ibid. § 1026.36[i])
The second subsection provides a definition of “credit insurance” – as well as a caveat to the prohibition, as follows:
“For purposes of this paragraph (i), ‘credit insurance’:
(i) Means credit life, credit disability, credit unemployment, or credit property insurance, or any other accident, loss-of-income, life, or health insurance, or any payments directly or indirectly for any debt cancellation or suspension agreement or contract, but
(ii) Excludes credit unemployment insurance for which the unemployment insurance premiums are reasonable, the creditor receives no direct or indirect compensation in connection with the unemployment insurance premiums, and the unemployment insurance premiums are paid pursuant to a separate insurance contract and are not paid to an affiliate of the creditor.” (Ibid. § 1026.36[i])
Taken together, this new rule basically prohibits the financing (not charging) of any up-front premiums for credit insurance, except for credit unemployment insurance when the premiums are reasonable, the creditor receives no compensation in connection with the premiums, and the premiums are paid pursuant to a separate contract than the loan contract.
DocuTech has conducted a search of our disclosures (particularly state disclosures) and determined that none of them require changes in connection with this rule. Most of these disclosures deal with matters besides the premiums of the credit insurance (e.g. the rights of the consumer to choose their own insurance agent). What few which do specify the premiums of the credit insurance do not contain any stipulations that the premiums will be financed by the creditor.
Conclusion to the Beginning
DocuTech is prepared and ready for the first of the massive wave of changes created by Dodd-Frank and in helping to ensure that its clients may continue to perform their trade with little-to-no problems from Federal agencies and auditors.
DocuTech is also preparing for the other upcoming changes taking effect in January, particularly the ones that effect disclosures, such as the new appraisal rights disclosures and list of homeownership counselors, and will be posting updates concerning what actions will be taken.