By now it is common knowledge among those who engage in residential mortgage loan origination activities that the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 ("Dodd-Frank Act") was signed into law on July 21, 2010.  The Dodd-Frank Act, comprised of 16 titles, is intended to, among other things, address and prevent the events that are believed to have caused the financial crisis beginning in 2007 by providing for financial regulatory reform and protections for consumers. 

Of particular importance to the residential mortgage lending industry are the following provisions of Title XIV of the Dodd-Frank Act, all of which are part of the "Mortgage Reform and Anti-Predatory Lending Act," as well as the following sections from Title X that affect mortgage originations:

• Subtitle A - Residential Mortgage Loan Origination Standards
• Subtitle B - Minimum Standards for Mortgages
• Subtitle C - High-Cost Mortgages
• Subtitle D - Office of Housing Counseling
• Subtitle F - Appraisal Activities
• Sections 1032(f), 1076, 1083, 1094, 1098, and 1100A

Following are some key points from Title XIV and Title X of the Dodd-Frank Act:

• A combined mortgage loan disclosure: Under Section 1032(f) of the Act, the new Bureau of Consumer Financial Protection ("Bureau") must propose a single integrated model disclosure that combines the disclosures required by the federal Truth-in-Lending Act ("TILA") with the good faith estimate, the Department of Housing and Urban Development ("HUD") special information booklet, and the HUD-1 or HUD-1A settlement statement required by the federal Real Estate Settlement Procedures Act of 1974 ("RESPA"). The Bureau must propose the model disclosure within one year after the designated transfer date unless the Bureau determines that any proposal issued by the Board of Governors of the Federal Reserve System ("Board") and HUD carries out the same purpose.
• Amendments to Alternative Mortgage Transaction Parity Act: Under Section 1083, the scope of the Parity Act will be significantly limited. Loans with balloon payments, interest-only payments, negative amortization or other alternative mortgage features will not be considered alternative mortgage transactions any longer unless they also have a variable rate or renegotiable rate feature. Preemption will be limited to those state laws that prohibit a type of variable rate or renegotiable rate transactions.
• Amendments to the Home Mortgage Disclosure Act of 1975: Section 1094 will require much more information to be reported, including:
  • Age of applicants,
  • Total points and fees,
  • Difference between the APR and a benchmark rate determined by the Bureau
  • Length of any prepayment period,
  • Value of the real property securing the loan,
  • Length of any introductory rate period,
  • Presence of interest-only or negative amortization periods,
  • Term of the transaction,
  • The channel through which the application was received, such as retail, broker or other,
  • And, as the CFPB may determine to be appropriate
    • The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act") unique identifier for the loan originator
    • A universal loan identifier
    • The parcel number of the property to be pledged
    • The credit score of the applicants, and
    • Any other information the Bureau may require.
• Expanded definition of "mortgage originator": Section 1401 of the Dodd-Frank Act amends TILA by adding new definitions, including expanding upon the definition of a "loan originator" in the SAFE Act. Under Section 1401, a "mortgage originator" is any person who, for (or in the expectation of) direct or indirect compensation or gain: (i) takes a residential mortgage loan application; (ii) assists a consumer in obtaining or applying to obtain a residential mortgage loan (e.g., advising on loan terms, preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan); (iii) offers or negotiates terms of a residential mortgage loan; or (iv) represents to the public that he/she can or will perform any of such services. The SAFE Act's definition is limited to persons who perform the services described in (i) and (iii) above. Additionally, most of the state laws that implement the SAFE Act define the term to include persons who perform the services described in (i) or (iii) above. A "mortgage originator" under Title XIV, Subtitle A of the Dodd-Frank Act will cover more individuals than are covered by the SAFE Act. This means that there will be some individuals who will be subject to the new TILA restrictions relating to mortgage originators (discussed below) but who will not be required to be licensed or registered in accordance with the SAFE Act. Note that loan servicers and their employees and agents who negotiate loan modifications are excluded from the definition of a "mortgage originator."
• Definition of "residential mortgage loan" will extend to not only the borrower's principal residence, but to the borrower's second home as well.
• New duty of care standards will be implemented: Mortgage originators are required to include on all "loan documents" any unique identifier of the mortgage originator that is provided by the Nationwide Mortgage Licensing System and Registry ("Nationwide Registry").
• Yield spread premiums (YSPs) and other steering incentives will be prohibited: Mortgage originators may not receive, and no person may pay, any compensation that varies based on the terms of a residential mortgage loan, other than the principal amount of the loan. This is intended to prohibit YSPs and other payments that are tied to the interest rate, points, or other fees relating to the loan.
• Origination Fees: If a mortgage originator is receiving any compensation directly from the consumer/borrower, he/she may not also receive any compensation from the lender or any other person. However, the mortgage originator may receive compensation from the creditor or other person if (i) the mortgage originator is not receiving any compensation directly from the consumer, and (ii) the consumer does not make any "upfront" payment of discount points, origination points, or fees (although bona fide third party charges are permissible as long as they are not retained by the creditor, mortgage originator, or any of their respective affiliates).
• New ability to repay standards: Creditors will be required to make a reasonable and good faith determination that a consumer has a reasonable ability to repay a residential mortgage loan in accordance with its terms, including principal, interest, taxes, insurance, mortgage guaranty insurance, and assessments at the time the loan is consummated. The creditor's determination must be based on verified and documented information. However, note that another section of the Dodd-Frank Act offers a "safe harbor" for compliance with the "ability to repay" requirements.
  
  A creditor and its assignees may "presume" that a loan meets the ability to repay requirements if the loan is a "qualified mortgage."  A "qualified mortgage" is a residential mortgage loan that meets all of the following criteria: 
  • There is no negative amortization.
  • Repayment of principal cannot be deferred by the consumer (note an exception with respect to certain balloon loans).
  • There is no balloon payment (note an exception with respect to certain balloon loans). For this purpose, a "balloon payment" is one where a scheduled payment is more than twice as large as the average of earlier scheduled payments.
  • The income and financial resources relied upon to qualify the consumer are verified and documented.
  • If the loan has a fixed rate, the loan must be underwritten on the basis of a fully amortizing loan that takes all applicable taxes, insurance, and assessments into consideration.
  • If the loan has an adjustable rate, the loan must be underwritten on the basis of the maximum rate that is permitted under the loan during the first five years and a payment schedule that fully amortizes the loan over the scheduled term, taking into consideration all applicable taxes, insurance, and assessments.
  • The loan must comply with any Board regulations or guidelines relating to debt-to-income ratios or residual income.
  • The total points and fees for the loan may not exceed 3% of the total loan amount. With regard to the application of the points and fees test, note the following:
    • Certain bona fide discount points paid by the consumer may be excluded in computing the points and fees, as follows: (i) up to and including 2 bona fide discount points may be excluded if the interest rate to be discounted does not exceed by more than 1% the Average Prime Offer Rate; (ii) up to and including 1 bona fide discount point may be excluded if the interest rate to be discounted does not exceed by more than 2% the Average Prime Offer Rate; (iii) the amount in item (ii) can only be excluded if the amount in item (i) is not being excluded; (iv) the bona fide discount points must be "knowingly" paid by the consumer for the purpose of obtaining the interest rate reduction, and must actually result in a bona fide reduction of the interest rate; and (v) the interest rate reduction must be "reasonably consistent with established industry norms and practices for secondary market transactions"
      The "Average Prime Offer Rate" is defined to mean the average prime offer rate for a comparable transaction as of the date on which the interest rate is set, as published by the Board. 
  • The scheduled loan term may not exceed 30 years, subject to any exception that the Board may create, such as for high-cost areas.
• Including an arbitration or other nonjudicial procedure clause in a residential mortgage loan or an open-end consumer credit loan that is secured by the principal dwelling of the consumer is prohibited.
• TILA amendments: TILA will add new disclosures for closed-end residential mortgage loans, as follows:
  • ARMs with Escrows. If a residential mortgage loan has a variable rate and an escrow account will be established for all taxes, insurance and assessments, then the Regulation Z disclosure statement must disclose: (i) the initial monthly payment of principal and interest only; (ii) the initial monthly payment of principal, interest, and all taxes, insurance and assessments; (iii) the fully-indexed monthly payment of principal and interest only; and (iv) the fully-indexed monthly payment of principal, interest, and all taxes, insurance and assessments.
  • Settlement Charges. The Regulation Z disclosure statement must disclose the aggregate amount of "settlement charges for all settlement services" provided in connection with the loan, the amount of charges that are included in the loan, the amount of charges that the consumer must pay at closing, the approximate amount of the "wholesale rate of funds" in connection with the loan, and the aggregate amount of other fees or required payments in connection with the loan.
  • Mortgage Originator Fees. The Regulation Z disclosure statement must include the aggregate amount of fees paid to the mortgage originator, the amount of fees paid to the mortgage originator by the consumer, and the amount of fees paid by the creditor to the mortgage originator.
  • Interest Paid as a Percentage of Principal. The Regulation Z disclosure statement must disclose the total amount of interest that the consumer will pay over the scheduled life of the loan as a percentage of the principal of the loan. This calculation will assume all of the scheduled payments are made in the exact amount due and on time.
• Dodd-Frank Act makes significant changes to high-cost provisions in TILA:
  • Definition of "high cost mortgage" now extends to residential mortgage transactions (i.e., loans secured by a principal dwelling to finance the acquisition or initial construction of the dwelling) and open-end credit.
  • To be a "high-cost mortgage" under the amended definition, at least one of the following must occur:
    • First Lien Loan. If the loan is a first lien and the APR at consummation exceeds by more than 6.5% (8.5% if the dwelling is personal property and for less than $50,000) the Average Prime Offer Rate for a comparable transaction. This definition is in contrast to the existing regulation under which a first lien loan is covered if the APR exceeds by more than 8% the yield on Treasury securities having a comparable period of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the loan application was received by the creditor.
    • Subordinate Lien Loan. If the loan is a subordinate lien and the APR at consummation exceeds by more than 8.5% the Average Prime Offer Rate for a comparable transaction. Compare this definition to the existing regulation under which a subordinate lien loan is covered if the APR exceeds by more than 10% the yield on Treasury securities having a comparable period of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the loan application was received by the creditor.
    • Points and Fees. The total points and fees (other than third party charges not retained by the mortgage originator, creditor, or an affiliate of either) exceeds (i) for a transaction of $20,000 or more, 5% of the total transaction amount or (ii) for a transaction of less than $20,000, the lesser of 8% of the total transaction amount or $1,000 (which dollar amount is subject to revision by Board regulation). This new points and fees test is substantially different than the current test, which is triggered when the total points and fees exceed the greater of 8% of the total loan amount or a small dollar amount that is subject to annual adjustment. The new points and fees test is also different in that it covers all points and fees paid "in connection with the transaction," whereas the existing test covers only points and fees payable by the consumer at or before closing." This means that the new test includes points and fees payable at any time during the loan term. Also, the new test literally includes points and fees paid by a person other than the consumer. However, note the special treatment of certain mortgage insurance premiums in the points and fees test, discussed below.
    • Prepayment Fees. The loan documents allow the creditor to charge or collect any prepayment fees or penalties more than 36 months after the transaction closing, or if these fees and penalties have an aggregate amount of more than 2% of the amount prepaid.
    • Introductory Rates Taken Into Account. In calculating the "annual percentage rate of interest" for purposes of the first lien and subordinate lien tests discussed above, the following three unique rules are applied. While the first lien and subordinate lien tests refer only to the "annual percentage rate," it appears that Congress intended that the three rules be used solely to determine the interest component of the APR. It would follow that other finance charges should be included in the calculation of the APR in the normal manner.
      • Fixed Rate Transactions. In a fixed rate transaction in which the APR will not vary during the full term of the loan, the interest rate in effect on the day of consummation will be used. This would exclude a step rate loan that contains a series of fixed rates.
      • Variable Rate Transactions. In a variable rate transaction in which the rate of interest varies solely in accordance with an index, the interest rate is determined by adding the index value on the day of consummation to the maximum margin value during the term of the loan. Although this refers to an interest rate that may vary solely in accordance with an index, it implicitly also applies to a variable rate loan with a series of margins
      • Other Transactions. For any other transaction, the highest interest rate that may be charged during the loan term will be used. For example, if the loan is a step rate loan that contains a series of fixed rates, the highest fixed rate will be used. If the loan is a step rate loan that contains a series of fixed rates but also contains a variable rate feature, the highest rate that can be charged - whether it is one of the fixed rates or the maximum interest rate cap for the variable rate feature - must be used.
    • Mortgage Insurance. In applying the points and fees test discussed above, there is a special rule for the treatment of certain mortgage insurance premiums. First, any mortgage insurance premium provided by an agency of the federal or state governments may be excluded from points and fees. Second, any mortgage insurance premium that does not exceed the premium payable at the time of loan origination under a Mutual Mortgage Insurance Fund policy, as set forth in 12 U.S.C. § 1709(c)(2)(A), may be excluded from points and fees. This is conditioned on the premium being refundable on a prorated basis upon loan payoff, and the refund being automatically issued at that time. This exclusion from points and fees should apply to any private mortgage insurance premium that meets these standards. Third, any mortgage insurance premium paid by the consumer after loan closing is excluded from points and fees
    • Late fees for high cost mortgages may not exceed 4% of the "amount of the payment past due."
    • Pre-Loan Counseling. The creditor may not make a high-cost mortgage unless it first receives a certification from a HUD-approved counselor that the consumer has received counseling on the advisability of the mortgage.
• Appraisals: A physical property visit is required for a "higher-risk" mortgage. In addition, a second appraisal is required if the higher-risk mortgage finances the purchase or acquisition of property within 180 days of the seller's own purchase or acquisition of the same property, where the seller's purchase or acquisition was at a lower price. A "higher-risk mortgage" is a residential mortgage loan that is secured by a principal dwelling and has the following characteristics:
  • The loan is not a "qualified mortgage"
  • If the loan is a first lien loan that is equal to or less than the applicable Freddie Mac conforming loan limit and the APR of the loan exceeds the Average Prime Offer Rate for a comparable transaction as of the date that the interest rate is set by 1.5% or more
  • If the loan is a first lien loan that exceeds the applicable Freddie Mac conforming loan limit and the APR of the loan exceeds the Average Prime Offer Rate for a comparable transaction as of the date that the interest rate is set by 2.5% or more.
  • If the loan is a subordinate lien loan, the APR of the loan exceeds the Average Prime Offer Rate for a comparable transaction as of the date that the interest rate is set by 3.5% or more.
  • The loan is not a reverse mortgage that is a qualified mortgage.
• New appraisal independence requirements. When the interim final Board regulations are promulgated, the Home Valuation Code of Conduct ("HVCC") announced by the FHFA on December 23, 2008 will have no force or effect. However, the HVCC remains applicable to actions and transactions prior to that date.

For more details and specific references to the provisions of the Dodd-Frank Act relating to the above, and more, please refer to Morrison Foerster's Dodd-Frank Act Residential Mortgage User Guide.  In addition, please note that DocMagic, Inc.'s Compliance Department has created a Dodd-Frank Act page on its site.  Over the coming months as implementing regulations for the Dodd-Frank Act are adopted, articles and resources pertaining to the Dodd-Frank Act will be posted to this page for our readers' convenience.