By Timothy A. Raty, Sr. Regulatory Compliance Specialist
On May 24th, President Donald J. Trump (R) and a Republican Congress (with a fair number of Democratic and independent support), passed into law the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (“EGRRCPA”), a 196 page act which amends a notable number of Federal laws.
Some news organizations have alleged that the EGRRCPA is a “major rollback” of the Dodd-Frank Act passed in 2010. Others have alleged that the EGRRCPA “does not make the sweeping changes” to the Dodd-Frank Act that other proposed bills have called for. Obviously, both of these cannot be correct.
While there are enough changes to Federal law in the EGRRCPA for everyone in the industry to have their own “I Find These Things Interesting” list, here is ours from Docutech and our opinion on whether this is a “major rollback” of the Dodd-Frank Act or not.
New QM Type
Right off the bat, the first change in EGRRCPA (Section 101) is the inclusion of the following to TILA, which holds that a residential mortgage loan which has the following features is considered a qualified mortgage (“QM”):
- It is originated and retained in portfolio by a covered institution;
- It complies with the limitations on prepayment penalties which are applicable to other QMs;
- Total points and fees for the loan do not exceed 3% of the total loan amount;
- The loan does not have negative amortization or interest-only features; and
- The covered institution documents the debt, income, and financial resources of the consumer in accordance with new requirements under the EGRRCPA (see 15 USCA § 1639c[b][ii][F][I] & [II]).
Of course, there are caveats to this, such as the loan not qualifying as a QM under these rules if it is transferred to another person without certain procedures being met (see Ibid. § 1639c[b][iii]). However, this new rule will definitely be under scrutiny by software vendors who perform QM checks.
No Appraisal For You!
Section 103 of EGRRCPA amends Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (codified in 12 USCA §§ 3331 et seq., which deals with the duties and powers of the FFIEC’s Appraisal Subcommittee), an appraisal will not be required “in connection with a federally related transaction [properly defined] involving real property or an interest in real property” (regardless of what any other laws state) if:
- The real property (or interest therein) is located in a rural area, as defined under 12 CFR § 1026.35(b)(2)(iv)(A);
- Not later than 3 (calendar) days after the date on which the CD is given to the consumer (e., either at or a day or two before consummation; TRID gurus should have loads of fun thinking about the timing requirements of this), the mortgage originator has contacted at least three State certified or licensed appraisals within the market area as defined by the FRB-version of Regulation Z (12 CFR Pt. 226; it’s anyone’s guess as to why the CFPB-version was not cross-referenced) and has documented that none of them were available within five business days “beyond customary and reasonable fee and timeliness standards for comparably appraisal assignments, as documented by the mortgage originator or its agent”;
- The loan is less than $400,000; and
- The mortgage originator is subject to oversight by a Federal financial institutions regulatory agency.
In other words, an appraisal is not required if the subject property is located in a rural area, an appraiser is not reasonably available, the loan is less than $400,000, and the originator is regulated as specified. There are limitations on how a loan can be treated post-consummation if an appraisal was not conducted and there are some exceptions to these exceptions, most notably for high-cost mortgage loans (“HCLs”).
This provision provides a stark contrast to the “double appraisal” requirements found in 12 CFR § 1026.35(c), which were implemented as a part of Title XIV of the Dodd-Frank Act, and which are applicable to “higher-risk mortgages” (“HRMs”, which are a special subcategory of higher-priced mortgage loans or “HPMLs”). As long as the loan qualifies for the exemptions under these new exemptions, no appraisal will be required under Regulation Z.
“Give them . . . their money.”
“I can’t, Kate; it’s in escrow.”
“Put your hand in your pocket and get it out of escrow.”
Under 15 USCA § 1639d(a) (a part of TILA), with certain exceptions, “a creditor, in connection with the consummation of a consumer credit transaction secured by a first lien on the principal dwelling of the consumer . . . shall establish, before the consummation of such transaction, an escrow or impound account for the payment of taxes and hazard insurance, and, if applicable, flood insurance, mortgage insurance, ground rents, and any other required periodic payments or premiums with respect to the property or the loan terms . . .”
Under Section 108 of EGRRCPA, a new exception is added under Ibid. § 1639d(c)(2), which permits the Bureau of Consumer Financial Protection (“Bureau”) to exempt “any loan made by an insured depository institution or an insured credit union” for a loan which is:
- Secured by a first lien on the principal dwelling of the consumer;
- Made by either the aforementioned entities which have assets of $10 billion or less;
- Made be either of the aforementioned entities which have originated a thousand or fewer loans secured by a first lien of the principal dwelling of a consumer over the preceding calendar year; and
- Exempt, or made by an exempt entity, meeting the exemptions under 12 CFR § 1026.35(b) applicable to HPMLs (which are too convoluted for a brief summary; see § 1026.35[b][iii][A], [b][iii][D], & [b][v] for details).
Thus, an escrow account need not be created for the most common type of loans (first lien, primary residence) made by relatively small financial institutions, in a very narrow set of circumstances.
(And if anyone can name the T.V. show that the above quote is from, they deserve a week at the Shady Rest.)
Why Wait for a Good Thing?
Corrected February 1, 2019
Currently under 12 CFR §§ 1026.31(c)(1) & 1026.32(c), certain disclosures must be given to a consumer in connection with a “high-cost mortgage” at least three business days prior to consummation or account opening. Under Ibid. § 1026.31(c)(1)(i), “if the creditor changes any term that makes the disclosures inaccurate, new disclosures shall be provided in accordance with the requirements of this subpart.”
However, under amendments to 15 USCA § 1639(b)(3) (catchingly subtitled “No Wait for Lower Rate”) set forth in Subsection 109(a) of EGRRCPA, a “reset” of the three business day waiting period is not required “if a creditor extends to a consumer a second offer of credit with a lower annual percentage rate.”
The rationale – as implied by its subtitle – is that there is no need to delay consummation for the consumer if the loan being offered is “better” (using the APR as the standard) for the consumer.
The Sixth Sense of Congress
Notably, in Subsection (b) of Section 109 of the EGRRCPA, Congress expresses “its sense” that the Bureau “should endeavor to provide clearer, authoritative guidance” on the applicability of TRID to both mortgage assumption transactions and construction-to-permanent home loans (in the latter case, as well as how these loans are to be properly originated) and the extent to which lenders can rely on the model TRID forms in 12 CFR Pt. 1026, App. H if such forms are not updated to reflect subsequent changes to TRID (such as TRID 2.0).
While the Bureau did provide further guidance for construction-to-permanent loans in TRID 2.0, it will be very interesting to see what new guidance the Bureau may provide due to this request (TRID 3.0, anyone?).
Permission to Compare
Turning away from TILA and TRID, Section 215 of the EGRRCPA authorizes the establishment of a database maintained by the Commissioner of the Social Security Administration (“SSA”), where financial institutions can “compare fraud protection data provided in an inquiry” and validate it, in order to “reduce the prevalence of synthetic identity fraud.”
However, before doing so, the financial institution must obtain the written/electronic consent from the individual who is the subject of the request for validation. Whether the SSA will provide their own consent form and/or electronic consent website (or something else) is not known at this time. For document vendors, it will be something to monitor for.
Section 301 of the EGRRCPA sets forth new requirements under FCRA concerning “security freezes” placed on a consumer’s credit report. One of these includes adding to 15 USCA § 1681c – 1 a new subsection (i), Clause (3)(D) of which holds that if a third party encounters a “security freeze” when running a credit report on a consumer in connection with an application for credit – and the consumer does not allow the report to be accessed, even with a temporary “thawing” – the third party may treat the application as incomplete.
This impacts ECOA, as it can make a difference as to which type of adverse action notices must be provided to borrowers under 12 CFR § 1002.9.
Net Tangible Benefit to Veterans
Section 309 of the EGRRCPA adds a new section of law (38 USCA § 3709) which holds that certain refinance transactions will not be guaranteed or insured by the VA unless:
- The “issuer” provides the VA a certification concerning the recoupment period for fees, closing costs, and any expenses that are incurred by the borrower in refinancing the loan;
- All of the fees and costs incurred will be recouped on or before 36 months from the date of loan issuance; and
- The recoupment is calculated through lower regular monthly payments as a result of the refinance.
In addition, the “issuer” must provide the borrower with a “net tangible benefit test,” in which the borrower receives certain specified net tangible benefits, dependent upon the type of loan being refinanced (e.g., if refinancing a fixed-rate mortgage with an adjustable-rate one, the new loan must have an interest rate that is “not less than 200 basis points less than the previous loan”).
The VA is authorized to promulgate regulations for carrying out these requirements. Whether the VA will use new, current, or modifications of current forms is not now known. Similar to the consent requirements for the SSA’s validation system, document vendors will want to monitor these changes.
It is important to remember that the Dodd-Frank Act was over 900 pages in length, amended a significant number of laws affected a wide scope of the financial industry, and made some of the following changes (to name a small fraction of them):
- Required financial institutions to provide consumers with copies of appraisal reports;
- Set forth ability-to-repay (ATR) and QM requirements;
- Promulgated new servicing requirements under Regulations X and Z;
- Integrated the initial TIL and GFE into a new LE and integrated the final TIL and HUD-1 into a new CD;
- Modified the criteria and requirements for HCLs and HPMLs;
- Required new appraisal requirements for HRMs;
- Enacted convoluted rules concerning loan originator compensation;
- Required the NMLS of the loan originator and lender to appear on several important documents;
- Prohibited the financing of credit insurance; and
- Prohibited arbitration clauses in consumer credit transaction agreements.
Which of these significant Dodd-Frank requirements have been rolled-back under EGRRCPA? Zero, zilch, nada.
To be sure, EGRRCPA does provide exemptions to certain requirements under certain conditions (some broad, some extremely narrow). This is nothing new, as exemptions were also “baked into” the Dodd-Frank Act (HRMs being a prime example). Allegedly, these exemptions are to relieve “small” financial institutions from some of these requirements, since the cost of maintaining compliance may be too much to bear (and, considering the millions spent on compliance professionals in this industry, these arguments are not without merit). Despite this, however, EGRRCPA does impose additional requirements on financial institutions, as outlined in the parts above concerning the SSA’s validation database and the VA’s new requirements concerning net tangible benefit.
While the arguments will still continue about whether the Dodd-Frank Act is a good or bad thing (and the same arguments will continue over EGRRCPA), it is clear that EGRRCPA is not a “major” (or even notable) “rollback” of the Dodd-Frank Act, but may be more aptly described as a smorgasbord of statutory amendments, affecting ECOA, FCRA, and TILA, as well as the SSA and VA.