We have come to the third part in our series of featured stories related to the impact of the Dodd-Frank Act on the manufactured housing industry. First, we discussed the act itself with the challenges and pitfalls in the text of the statute. However, and arguably to an unprecedented degree, so much of the implementation of the act was left to the then unwritten administrative rules. 

Our second installment in the last issue focused on the proposed rules published by the Consumer Finance Protection Bureau (CFPB), and did they ever propose a lot. With 3,120 pages of proposed rules on mortgage related issues alone the task of reading and responding to the proposed rules was not for the faint of heart.

Following the back and forth with the public, including TMHA who submitted comments on all pertinent rules impacting the MH industry, the CFPB published its final rules at the end of January.

Now here we are.  It has taken yet another tremendous effort to read, decipher, scratch one’s head, re-read, spit in disgust, celebrate victories, and cry into one’s beer. The following series of articles will generally breakdown the recent federal rules and provide insight into the impact these rules will have on our industry.

In our effort to address the complexity and volume of these rules and to educate TMHA members, we coordinated with federal mortgage lending attorney Jim Milano from Weiner, Brodsky, Kider P.C.  Jim and others involved throughout this process have provided specific insight in this issue. 

TMHA will be expanding on these complex issues with a series of webinars, online resources and live educational events starting this summer and carrying on throughout the year. 

As you will uncover for yourself, deciphering these rules is a laborious process, but TMHA will continue to prepare our members for the future.

Forks in the Road – Flat and Paved or Jagged and Steep

There are three mountainous rules that prove the most challenging to our industry: 1.) the Ability to Repay (ATR) Rule, 2.) the High-Cost Mortgage Loan/ Home Ownership and Equity Protections Act (HOEPA) Rule, and 3.) the Loan Originator Compensation (LO Comp) Rule. The severity of the slope and the skill necessary to ascend to the top of these mountains depends on the path taken, or, in many cases, not taken.

Our industry must learn, adapt and navigate these rules.  And we have to find our way before January 2014 when all of these rules go into effect.

Ability to Repay, also knows as the Qualified Mortgage or the “QM” Rule – The Straight and Narrow

The rule primarily focuses on what was perceived as the pre-financial crisis “sins” of home buyers lacking the ability to repay mortgages they were being provided by lenders. The Dodd-Frank Act and this corresponding rule reason all mortgage consumers must be verified they can indeed pay on the mortgage they are being offered. 

Ostensibly, this need arose politically after the pre-2008 use of “no doc loans,” “no income verified loans,” falsified income, or borrower income and payoff ability tied not to traditionally thought of lending products – 30 year, fixed rate, fully amortizing loans – but rather loans based on adjustable rates, interest only and other permutations of more exotic loans.

There are three key areas to understand the Ability to Repay (ATR) rule: 1.) “The Rule of Eight,” 2.) “safe harbor” or “rebuttable presumption” with QMs, and 3.) consequences and liability.

“The Rule of Eight”

The final rule outlines eight criteria every lender must verify and consider using third-party sources for every would-be borrower before extending credit.
1.) Consumer’s current or reasonably-expected income or assets, excluding the dwelling in question;
2.) Consumer’s current employment status, assuming the consumer relies on his/her job for income;
3.)  Consumer’s monthly payment on the covered transaction;
4.) Consumer’s monthly payment on any simultaneous loans that the lender knows or has reason to know will be made;
5.) Consumer’s monthly payment for mortgage-related obligations, including property taxes, premiums, lot rent, and similar charges;
6.) Consumer’s current debt obligations, alimony, and child support;
7.) Consumer’s monthly debt-to-income ratio or residual income; and
8.) Consumer’s credit history.

The rule stresses the importance of documenting and verifying income, assets and debts using reliable third-party records. Numerous times the rule provides an example of a consumer’s tax return as an example of what is considered reliable third-party records.

The rule goes into additional detail with examples of third-party records, how to calculate the monthly payments and how to calculate a borrower’s debt-to-income ratio. 
The rule addresses more non-traditional lending platforms, such as balloon loans and other exotic loan types. However, the nuance of such specific lending transactions must be addressed in a separate forum in order to achieve the level of understanding necessary to even begin to consider making a business decision to participate in such lending products.

The key takeaways from the ATR rule are the distinctions of what constitutes a “qualified mortgage”(QM) and why in terms of liability exposure to a lender the QM matters so much.

QM the Path to a Safe Harbor, Rebuttable Presumption or Hanging on by Your Fingernails

In terms of the path ahead, I’d analogize the liability protection afforded by the safe harbor provisions of the QM as standing in front of paved flat, West Texas road with no risk, no danger and no one within miles who could do you harm. The rebuttable presumption is not as secure, but it still provides a steady uphill, sure-footed hike in the rolling hills.  However, once you are outside of these two paths life becomes more treacherous quickly. 

The safe harbor provisions of the QM mean a lender who issues a loan within the safe harbor QM standards is deemed to have complied with all of the necessary ATR provisions.  In order to achieve QM safe harbor status the loan must (note these are different and more specific than the general requirements in the ATR rule):
1.) Call for substantially equal periodic payments, and such payments do not increase the principal balance or allow the consumer to defer payment of principal.  The loan also cannot, generally speaking and later in this article we address specific exceptions, be a balloon loan;
2.) Loan term cannot exceed 30 years;
3.) Total points and fees for the loan cannot exceed 3 percent of the loan (for loans over $100,000 with slightly higher allowances for loans under $100,000, which we will discuss in detail later);
4.) Lender underwriting for the loan takes into account the maximum interest rate that will be charged in the first five years of the loan, and payments of principal and interest will repay the outstanding principal balance of the loan;
5.) Lender verifies the consumers reasonably-expected incomes or assets, current debt obligations, alimony and child support using specific methods outlined in the final rule;
6.) With the home loan the consumer’s debt-to-income ratio cannot exceed 43 percent; and
7.) The interest rate charged on the loan cannot be higher than 1.5 percent above the prime offer rate for comparable transactions (the prime offer rate on April 22, 2013 for a 15-year loan was 2.74 percent, any loan above 4.24 percent fails this QM criteria).

A safe harbor QM is a “vanilla” loan that is fully amortizing with a low fixed interest rate or an adjustable rate that falls within specific parameters, low points and fees and is provided to a consumer with limited debt compared to their verified income.  If you are interested in a leisurely hike up a hill there are QM’s that provide a rebuttable presumption.  The difference from the safe harbor QM is all tied to the rate. 

A loan that exceeds the prime offer rate by more than 1.5 percent, (but is not a high-cost/”predatory loan,” more on this in a bit) but complies with all the other QM provisions (1-6 above) receives a “rebuttable presumption” of ATR compliance.  A rebuttable presumption is not as safe as, dare I say, the safe harbor, but it is still a relatively high legal standard of presumed compliance.  Unlike the safer harbor provision, which a consumer could not refute in court, the rebuttable presumption can be challenged in court by a borrower. However, the heavy burden of proof to rebut the presumption is on the borrower.  A borrower must demonstrate in court that a lender did not make a reasonable and good faith determination of the borrower’s repayment ability at the time they entered into the loan.

The third area of loan options within the ATR Rule is a loan that does not satisfy either the safe harbor or rebuttable presumption QM standards. Following the implementation next January of the ATR Rule, all loans must comply with “the rule of eight” provisions in ATR.  For loans outside of any QM liability protection, the burden is on the creditor offering non-QM loans to prove they complied with the “rule of eight.”

Foreclosure Defense – The Ultimate Trip on Your Shoelace

There is one large “trip on your shoelace” provision in the final rule that doesn’t matter if you are walking on the flattest, straightest road, or the hilly hike. The “shoelace trip” that can leave a lender face down in the dirt regardless of the path taken is foreclosure defense. Under the final ATR Rule a consumer can always assert a defense against foreclosure by demonstrating that the loan they entered into (safe harbor or rebuttable presumption QM) never actually met the QM requirements.

And We All Fall Down…

Many must be wondering, “What happens if we don’t comply with the ATR Rule?” 
For the less than sophisticated movie goers out there (I’m included in this category) there was a movie many years ago that was justifiably overlooked by the Academy Awards, but I think provides the correct context for what liability will be out there when the ATR Rule goes into effect. The movie stared Sylvester Stallone, and appropriate to our theme was titled Cliffhanger. 

In the first scene of the movie a novice climber is stranded high up in the mountains and needs a big, strong, human growth hormonally enhanced Sly to come rescue her. He of course reaches the woman only to realize the only path of escape is to traverse across a rope to another mountain top where a rescue helicopter awaits.

Sly’s character secures her in a harness and sends her out to cross the hundreds of feet of empty space below her as she makes her way slowly and terrifyingly across the two mountain tops. 

Halfway across it becomes evident Sly did not comply with the Ability to Repay Rule of securing her in her safety harness (ok, I’m stretching here, but stay with me). Things go from bad to worse quickly, and despite a heroic effort by Sly to reach the girl as her harness gives way and she hangs over the gorge below, in the end he is unable to hold on to her as her hand slips out of his. The poor novice climber then falls in slow motion to what we all can presume would be an unfortunate abrupt stop when she finally finds the bottom.

Yes, that was a long narrative to describe a simple point – lenders who fail to comply with the ATR Rule could experience the brief feeling of falling, until the rather harsh end when they hit the bottom.

What does falling to the bottom look like?

As you can guess it isn’t pretty. 

First, the CFPB can bring civil actions in court and administrative enforcement proceedings to obtain remedies such as civil penalties and cease-and-desist orders.

A consumer who brings an action against a creditor for a violation of the ability-to-repay requirements within three years from when the violation occurs may be able to recover special statutory damages equal to the sum of all finance charges and fees paid by the consumer; actual damages; statutory damages in an individual action or class action, up to a prescribed threshold; and court costs and attorney fees that would be available for violations of other Truth In Lending Act (TILA) provisions.

After the expiration of the three-year time period, the consumer is precluded from bringing an affirmative claim against the creditor. However, as we previously discussed, at any time when a creditor or an assignee initiates a foreclosure action a consumer may assert a violation of these provisions “as a matter of defense by recoupment or setoff.” There is no time limit on the use of this defense, although the recoupment or setoff of finance charge and fees is limited to the first three years of finance charges and fees paid by the consumer under the mortgage.

Points and Fees – Forget Roads, Hills, and Mountains; Welcome to the Labyrinth

For many lenders (including a majority of lenders in our industry) one of the most convoluted and complex areas in taking several final rules together is deciphering the computation of points and fees. For our industry there are two main problems: 1.) a math problem, and 2.) an “is that really included?” problem.

The math problem comes from the fact our industry lenders typically deal in lower balanced loans. With lower balanced loans the application of percentages has a disproportionate negative impact on those lending portfolios, and therefore the consumers in those markets. 

Quite simply, three percent on a $200,000 loan is $6,000.  This is the amount which would be available under the QM rule to cover various fixed costs associated with the origination of any loan. It is also important to recognize the strict standards and lending compliance requirements that will come into play with these rules will only increase loan origination fixed costs. 

However, unlike a $200,000 loan, three percent of a $25,000 loan is only $750. Lenders in this space (both large institutional lenders as well as many owner-finance lenders) recognize the limitations of this percentage cap. To a certain degree, in crafting their final rules the CFPB also recognized this challenge. And while the increases allowed to lower balance loans was welcomed and advocated for by our industry, the end result still didn’t go far enough for many large segments of the national MH lending portfolios.

The final rule outlined specific tiers when in the low balance loan (less than $100,000) category. The tiers allow for the following levels of points and fees to be charged and remain eligible for QM status (assuming all other criteria of the QM are still met):
- $3,000 for a loan greater than or equal to $60,000 but less than $100,000
- 5 percent of the loan amount for a loan greater than or equal to $20,000 but less than $60,000
- $1,000 for a loan greater than or equal to $12,500 but less than $20,000
- 8 percent for the total loan amount for a loan less than $12,500

The non-math portion of our problem with points and fees is what the CFPB determined is included in the calculation of what constitutes points and fees. First, if any of the fees are paid for the origination of the loan to an affiliate of the lender, those amounts are included. However, bonified third-party charges to non-lender affiliated providers are not included in points and fees.

The most troubling aspect of points and fees is in the Loan Originator Compensation (LO Comp) final rule. Within this rule included in the points and fees calculation is all compensation paid, directly or indirectly, by a consumer or a lender to a “loan originator.”

We will get into the complexity of the LO Comp Rule later, but to provide a bit of foreshadowing, the final rule creates a new definition based on the specific types of activities a person does or does not do related to a potential borrower in order to determine if the person is a loan originator.

For those thinking SAFE Act, I caution you to stop thinking in SAFE Act terms.  While the definitions and phrasings can appear similar, they are in fact different and will be applied differently – and much more broadly.

ATR Alternatives and Special QMs: Government paves its own flat road around its own rules

The final rule creates a temporary QM status for loans originated under government supported mortgage lending models until 2021.  QM status is granted to loans that meet the first three QM standards and are then one of the following:
1.) Eligible for purchase or guaranty by Fannie Mae or Freddie Mac;
2.) Eligible for insurance by HUD;
3.) Eligible for guaranty by the VA;
4.) Eligible for guaranty by the Department of Agriculture; or
5.) Eligible for insurance by the Rural Housing Service.

Non-Popping Balloon Loans

As previous discussed, generally balloon loans are not eligible loan types for QM status.  However, the CFPB created an exception to the balloon loan restriction when they gave small deference primarily to the small banks and creditors.  The acceptable balloon loan provisions require a combination of underwriting conditions as well as lender characteristics in order to be eligible.

First, the loan must comply with all of the following:
1.) No negative amortization loans;
2.) Loan term of at least 5 years but not more than 30 years;
3.) Loan must remain under the general QM points and fees caps (generally 3 percent over $100,000, with previously discussed higher tiered allowances for lower balanced loans);
4.) Lender must verify consumers reasonably expected income, assets and debt obligations, but without having to use the standard set out in the final rule for all other QM loans;
5.) Lender must determine a borrower can make all monthly debt payments, but not including the final balloon payment;
6.) Lender must consider the borrowers debt-to-income ratio, but is not strictly limited to a 43 percent DTI ratio cap;
7.) Loan payments are substantially equal and do not exceed 30 years; and
8.) Loan has a fixed interest rate.

If all of the above eight criteria are satisfied, then step one of two is compete for making an acceptable QM balloon loan.

The second step is based on the characteristics specific to the lender.  To be eligible a lender must:
1.) Originate at least 50 percent of its first-lien mortgage loans in areas that are “rural or underserved;”
2.) Must have less than $2 billion in assets; and
3.) Cannot (including all affiliates) originate more than 500 first-lien mortgages per year.

Finally, the balloon QM status is lost if the balloon QM is sold, assigned or transferred after the loan is consummated, unless the loan is sold, assigned or transferred to another lender who meets the three eligibility standards listed above after at least three years from when the loan was entered into.

HOEPA/”High-Cost Mortgages” – Free Solo Climbing

I recall a story on 60 Minutes about a rock climber who scales some of the most difficult and treacherous mountain faces in the world, and he does it without using any ropes.  They call this “insanity.”  Wait, that’s not right.  This is what I call it.  In rock climbing parlance it is called “free solo climbing.” There is no margin for even small errors when free solo climbing.  One false step or unsecure handhold and the results are instantly disastrous.

The free solo climbing of the coming mortgage lending changes are the high-cost mortgage provisions of Dodd-Frank.  The provisions, liabilities and penalties of this type of loan are such that only an exceptionally rare few, if any, lenders would dare to get out on a sheer rock ledge hundreds of feet above the ground with only a pair of climbing shoes and hand chalk.

We have discussed HOEPA laws in previous issues, but as a refresher, Dodd-Frank took what were previous parameters of the Home Ownership and Equity Protections Act of 1994 (or HOEPA) that placed restrictions and increased liabilities on home equity loans and applied these similar parameters for the first time on purchase money transaction (initial purchases rather than limited to only home equity loans), refinances, closed-end home equity loans and open-end credit plans. 

The HOEPA law addressed certain deceptive and unfair practices in home equity lending. The HOEPA law amended the Truth in Lending Act (TILA) and established requirements for certain home equity loans with high rates and/or high fees.  The Dodd-Frank Act took the provisions of HOEPA, revised the triggers for covered loans, and expanded the restrictions of HOEPA loans, then incorporated these changes into the “high-cost mortgage” provisions of the act. Dodd-Frank simultaneously amended RESPA to incorporate required pre-loan consumer mortgage counseling to work in tandem with the new high-cost provisions.

A loan is classified as a high-cost loan based on tripping one of two triggers: 1) the annual percentage rate (APR) cap or 2) the total points and fees cap.  Dodd-Frank lowered the previous HOEPA triggers in both categories.  Under Dodd-Frank a loan with an APR higher than 6.5 percent over the prime offer rate for a comparable transaction is considered a high-cost loan.  However, if the loan is a personal property home loan and less than $50,000 the cap is 8.5 percent.

The points and fees trigger for a HOEPA classification was set at any loan with total points and fees exceeding 5 percent of the total cost of the home for transactions of $20,000 or more (8 percent or $1,000 for transactions less than $20,000).

To put this in perspective of many typical loans found in our industry, for a home over $50,000 on a 15-year fixed rate note when the prime offer rate for a comparable 15-year note is 2.74 percent (as it was on April 22, 2013), any loan with an annual percentage rate (APR) exceeding 9.24 percent is now classified as a high-cost/HOEPA, or a “predatory loan.”  If the loan is personal property and less than $50,000, then the APR cap is 11.24 percent.  It is important to remember annual percentage rate (APR) differs from the interest rate because APR takes into consideration the financing of points and fees.

All retailers and community operators selling homes in the last several years should be able to quickly ballpark the impact these caps will have on home sales they executed that would have blown these limits.

Dodd-Frank does provide limited exceptions to the HOEPA provisions for loans financing initial construction, loans originated and financed by Housing Finance Agencies and loans under the USDA Rural Housing Service Section 502 Direct Loan Program.

Under the high-cost final rule loan terms and origination practices for high-cost loans include:
- General ban on balloon payments unless they are to account for the seasonal or irregular income of the borrower, they are part of a short-term bridge loan, or they are made by creditors meeting specified criteria, including operating predominately in rural or underserved areas.
- Prohibition on charging prepayment penalties and financing points and fees.
- Restrictions on late fees to 4% of the amount that is past due.
- Restrictions on fees for providing payoff statements.
- Prohibition on fees for loan modifications and loan deferrals.
- Ability to repay assessments for open-end credit plans.
- Prohibition on recommending or encouraging a consumer to default on a loan or debt to be refinanced by a high-cost mortgage.
- Before making a high-cost mortgage, requirement to obtain confirmation from a federally certified or approved homeownership counselor that the consumer has received counseling on the advisability of the mortgage.

There might still be some of you looking at the parameters and considering an attempt at your own free soloing climb into high-cost loans.  There may very well be a select segment of brave souls willing to try.  However, for the majority of lenders including all major lenders in our industry, the prospect of free soloing is way too dangerous because HOEPA lenders must provide special pre-closing disclosures, restrict prepayment penalties and other loan terms, and regulate various lender practices. 

The nature of a HOEPA loan exposes HOEPA lenders to mechanisms for consumers to rescind covered loans that included certain prohibited terms, and exposes HOEPA lenders to higher damages than are allowed for other types of TILA violations, including finance charges and fees paid by the consumer.

Finally, the rule increases the liability to purchasers of high-cost mortgages. Purchasers and assignees of loans not covered by HOEPA generally are liable only for violations of TILA which are apparent on the face of the disclosure statements, whereas purchasers of high-cost mortgages generally are subject to all claims and defenses against the original creditor with respect to the mortgage.

Loan Originator Compensation Rule – “The Fall Will Probably Kill’ya”

Moving from my more obscure and less critically acclaimed movie reference of Stallone’s Cliffhanger, to an absolute classic in Butch Cassidy and the Sundance Kid, I’ll attempt to personify the feeling many lenders have when facing the final LO Comp Rule. 

For those still willing to play along, imagine the role of Robert Redford’s Sundance in our industry is played by retailers, salespersons and community owners who also sell homes.  The Sundance in our industry are the ones feverishly lamenting and scratching their heads on issues like SAFE Act licensure, anti-money laundering and escrow requirements; just as Sundance looked over a 150 foot cliff to the water below concerned that he doesn’t know how to swim.  The lenders and lawyers who have been monitoring these developments are Paul Newman’s Butch Cassidy, and when it comes to the LO Comp Rule their attitudes can be summed up as, “Are you crazy? The fall will probably kill ya.”

The reasons the fall from LO Comp is such a major concern is because 1.) the analysis of if a person is a “loan originator” is an activities based test, not an absolute bright line, and 2.) compensation paid to a loan originator must be included in the calculation of “points and fees,” which means it is tied to every other rule, limit and increased liability that comes with exceeding various points and fee thresholds. 

Loan Originator Defined – What you do or don’t do can Keep you on the Edge of the Cliff or Push you off it

For purposes of both the compensation provisions and the qualification provisions, the definition of a “loan originator” has been expanded to include a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities:
- Takes an application;
- Offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or
- Through advertising or other means of communication represents to the public that such person can or will perform any of these activities.

The final rule goes on to expressly include in the definition of a loan originator any person referring a consumer to any person who participates in the origination process as a loan originator. Referring includes any oral or written action directed to a consumer that can affirmatively influence the consumer to select a particular loan originator or creditor to obtain an extension of credit when the consumer will pay for such credit.

The rule does exempt a person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor, but who performs purely administrative or clerical tasks on behalf of a person who is the loan originator. However, managers, administrative and clerical staff, and similar individuals who are employed by (or a contractor or an agent of) a creditor or loan originator organization and take an application, offer, arrange, assist a consumer in obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person are loan originators.

The rule includes examples of activities that, in the absence of any other activities, will not render a manager, administrative or clerical staff member, or similar employee a loan originator for these purposes. There is a key precondition to possible eligibility under the clerical and administrative exception that the clerical person must work for and under the supervision of a loan originator. If a person does work for a loan originator, then the clerical and administrative exception would apply if the persons:
- At the request of the consumer provides an application form to the consumer;
- Accept a completed application form from the consumer;
- Deliver an application to a loan originator or creditor without assisting the consumer in completing the application, processing or analyzing the information, or discussing specific credit terms or products available from a creditor with the consumer;
- Provide general explanations, information, or descriptions in response to consumer questions;
- As employees of a creditor or loan originator, provide loan originator or creditor contact information in response to the consumer’s request, provided that the employee does not discuss particular credit terms available from a creditor and does not refer the consumer, based on the employee’s assessment of the consumer’s financial characteristics, to a particular loan originator or creditor seeking to originate particular credit transactions to consumers with those financial characteristics;
- Describe other product-related services;
- Explain or describe the steps that a consumer would need to take to obtain an offer of credit, including providing general guidance on qualifications or criteria that would need to be met that is not specific to that consumer’s circumstances.

Pursuant to the Dodd-Frank Act, seller financers are exempt from the definition of loan originator if:
- The person provides seller financing for the sale of three or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing.
- The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.
- The person provides seller financing that meets the following requirements:
o The financing is fully amortizing.
o The financing is one that the person determines in good faith the consumer has a reasonable ability to repay.
o The financing has a fixed rate or an adjustable rate that is adjustable after five or more years, subject to reasonable annual and lifetime limitations on interest rate increases.
The final rule is 541 pages and there are countless details and examples as to how this rule is to be practically applied.  For our industry the issue breaks down very simply:  a lender cannot control the activities on a retail lot of retailers or salespersons to know if the activity based lines are or are not crossed at the time of the home sales transaction.  This doubt puts in jeopardy the entirety of the loan for the simple fact that if a line is crossed at the sales transaction level, then all compensation, including sale commission and retailer markup, becomes part of the computation of points and fees.  At those levels the caps previously discussed in both the QM provisions and the high-cost mortgage loan rules become instantly applicable.

To best illustrate the concern of falling off the cliff from a lender perspective would be the following hypothetical:
- A consumer comes onto a retail lot looking for a home. 
- They select a home and arrive at a price through typical sales transaction conversations. 
- The consumer is in need of financing and is able to secure financing through a lender, who assumes all of the activities engaged in by the retailer or salesperson never crossed the line triggering either or both of them to be considered loan originators. 
- Based on this assumption the lender properly offers the consumer a loan that does not have terms with the interest rate or points and fees that exceed the HOEPA thresholds. 
- Then two years later all-you-know-what breaks loose. 
- The consumer then sues (or a regulator investigates through an audit) claiming that the retailer actually did engage in LO activity when, for example, the retailer referred the consumer to a specific lender, or had a sign posted at the lot saying, “Bad credit, no problem. We can get you financed” etc. 
- At this point the loan the lender previous thought was a good safe loan now has to be recalculated to determine the real amount charged for points and fees since the retailer compensation now must be included. 
- On a sale of $65,000 home the retailer markup is 15 percent or approximately $9,750. 
- Once the retailers compensation is reclassified as LO compensation, the 5 percent max cap on points and fees for high-cost loans is now far exceeded. 
- However, none of the requisite disclosures or per-purchase HUD approved credit counseling was conducted because at the time of consummation of the loan the lender assumed the loan was not a high-cost loan. 
- The lenders loan is now in jeopardy as well as opening themselves up to additional and harsh penalties and liabilities for making a non-compliant high-cost loan.
- Finally, if the original lender has sold or assigned the loan, which is now a high-cost/HOEPA loan, the liabilities follow the loan to the new lender/investor.

The above hypothetical illustrates the danger of this rule. Licensing and qualification requirements, as arduous as they may be, only serve as a smaller part of the main problem. The real danger lies in loans being reclassified later in time as either non-QMs, or worse high-cost/HOEPA loans, based on the actions taken when selling the home that the lender cannot control nor have knowledge of.

The specific activities that can and cannot be engaged in are a complex web of do’s and don’ts. Rather than recreating the lengthy explanations and examples in the various rules, I’d encourage interested members to sign up for our future webinar series where we will go deeper into the details.

How bad does the fall hurt?

Similar to the reactions to several of the other rules, a common question we get is what happens if you violate the LO Comp Rule?

In addition to administrative penalties and liabilities, TILA provides civil liability for any mortgage originator who fails to comply with the requirements of TILA and any of its implementing regulations regarding the loan originator compensation and qualification provisions. The Dodd-Frank Act added liability for individual loan originators for violations of certain aspects of TILA, including those related to originator compensation, steering and qualification, in the same amounts and manner as those applicable to creditors under TILA.

Violations of these provisions will subject the violator to TILA civil damages: 1.) the consumer’s actual damages; 2.) statutory damages up to $4,000; 3.) an amount equal to the sum of all finance charges and fees paid by the consumer; and 4.) the costs of the action, together with a reasonable attorney’s fee as determined by the court. The liability of a mortgage originator to a consumer for a violation is limited to the greater of 1.) actual damages or 2.) an amount equal to three times the total amount of direct and indirect compensation or gain received by a mortgage originator in connection with the residential mortgage loan involved in the violation, plus the costs to the consumer of the action, including reasonable attorney’s fees. The Dodd-Frank Act also extended the period for statute of limitations from one to three years, beginning on the date of the occurrence of the violation.

Steering right over the edge

While our series of webinar and educational events in the future will go through in greater detail the actions and examples of when lines are crossed into loan origination activities under the final rules, there is a significant issue tied to the LO Comp Rule that is particularly troubling for our industry (and I’ll add for all industries).  The CFPB’s interpretation, and expansion, of the term “offers” a loan poses a disastrous scenario for our industry’s selling business model.

The CFPB interprets “offers” for purposes of the definition of loan originator to include persons who: 1.) present for consideration by a consumer particular credit terms; or 2.) recommend, refer, or steer a consumer to a particular loan originator, creditor, credit terms, or credit product. 

The CFPB believes that, even at initial stages of the mortgage origination process, persons who recommend, refer, or steer consumers to a particular loan originator, creditor, set of credit terms, or credit product could have influence over the particular credit products or credit terms that a consumer seeks or ultimately obtains.  Moreover, because a loan originator is someone who offers credit for, or in the expectation of, direct or indirect compensation or gain, there not only is an incentive to steer the consumer to benefit the referrer but the referrer also is effectively participating in the extending of an offer of consumer credit on behalf of the person who pays the referrer’s compensation. The CFPB believes that the Dodd-Frank Act was intended to reach such situations and that it appropriately may regulate these activities.

The CFPB also believes that referral activities are encompassed within the language, “assists a consumer in obtaining or applying to obtain a residential mortgage loan,” in TILA. TILA provides that, “‘a person assists a consumer in obtaining or applying to obtain a residential mortgage loan by, among other things, advising on residential mortgage loan terms.…” The CFPB believes that “among other things” encompasses a referral, which in the CFPB’s view is a form of advising a consumer as to where to obtain consumer credit.  To the extent there is any uncertainty with respect to whether a person engaging in referral activity for or in expectation of direct or indirect compensation is a loan originator, the CFPB exercised its authority under TILA to prescribe rules that included such additional requirements. The CFPB states that it believes them to be necessary and proper to effectuate the purposes of TILA and to prevent circumvention or evasion.

The result in our industry is that salespersons and/or retailers who refer consumers to particular credit providers would or could be considered loan originators under the LO Comp Rule if they are compensated for such activity.

Many might read this and think they have nothing to worry about because they are not compensated directly for providing financing. This concept of direct and specific compensation related to financing exists in our current Texas state law regarding SAFE Act. 

However, and this is critically important to understand the distinction, the federal rule has nothing to do with state SAFE Act laws. 

Under the federal law and rules compensation, any compensation, is defined broadly, and includes compensation received directly or indirectly.  Therefore, there is serious concern in the course of a typical retail sales transaction if the retailer or salesperson merely directs a consumer to a lender the retailer has knowledge might lend to the consumer, the lender does fund the loan and the retailer receives the value of the sales transaction, meaning the home sales price, this would be compensation under the federal rule, therefore making the retailer, by definition, a loan originator. As previously discussed, once the retailer is defined by the actions of a referral as a loan originator, all of the retailer’s markup, profits and/or sales commission must be added to the calculation of points and fees. Again, with these levels of broad based retailer or salesperson compensation included in points and fees it becomes nearly impossible in a current selling with lending scenario in our industry for the loan to not exceed the five percent points and fees threshold making the loan a high-cost/HOEPA (“predatory”) loan.

Additionally, the CFPB’s interpretation of referring and as it relates to steering consumers towards lenders or lending products adds additional concerns for owner-finance MH sellers, in particularly communities with owner-finance operations. Many times consumers interested in purchasing a home within a community are limited in their financing options due to credit worthiness and other qualifying criteria.  For some of these consumers their only financing option is through the in-house financing offered by a community owner/seller through their seller-financing program.  However, for seller financing operations that exceed the de minimus amount (three or less) who direct a consumer to the in-house seller financing option could trigger the steering provisions of the federal rules and fall within the definition of a loan originator.  Once classified as a loan originator the owner-financing community lender comes under all of the trappings that come along with this classification.
The steering and referring provisions and federal interpretations poses huge risks to retailers and/or salespersons actions. Even helpful and sensible actions by a retailer that only benefit a consumer who has no idea what their realistic financing options are, can inadvertently steer the entire transaction off a cliff with damage from the fall extended to all sellers and lenders involved.

The Path for All; And the Road for Some

The majority of this issue focuses on the big three of ATR, HOEPA and LO Compensation.  However, there were several other final rules also published.  With over 3,000 pages of mortgage related rules the CFPB covered quite a lot of ground. Below are brief general summaries of these other rules.

Appraisals

Which Loans Are Covered?

The Rule applies to High-Priced Mortgage Loans, defined as consumer mortgage loans, with certain enumerated exceptions, whose annual percentage rates (APRs) exceed the average prime offer rate for a comparable transaction as of the date the interest rate is set, by the 1.5 percent for non-jumbo first-lien mortgage loans.

Key Exceptions – Including New Manufactured Homes.

The Rule does not apply to Qualified Mortgages, loans not secured by a principal dwelling, open-end mortgage loans, reverse mortgage loans, initial construction loans, bridge loans, loans secured by new manufactured housing, and loans secured by mobile homes, boats or trailers.  The exclusion of new manufactured homes and mobile homes is viewed by many as a significant victory for our industry.  Still ongoing is the discussion of how to treat used manufactured homes and smaller dollar loans which we anticipate will be addressed in future rule writings this summer.

For all other non-excluded higher-priced mortgage loans, the new appraisal rule requires any creditor making a HPML must:
- Obtain a written appraisal by a certified or licensed appraiser who has conducted a physical visit of the interior of the property;
- Provide the borrower, at the time of initial mortgage application, with a statement that informs the borrower that any appraisal is for the creditor’s sole use but that the borrower may choose to have a separate appraisal conducted at the borrower’s expense; and
- Provide the borrower with one copy of each appraisal, without charge, at least three business days prior to the transaction closing date.
Note that the borrower of a HPML may not waive the requirement that the appraisal copies be provided three business days in advance of closing, unlike the analogous ECOA provision.

ECOA Valuation Disclosure

On January 18, 2013, the CFPB issued a final rule implementing new appraisal requirements under Equal Credit Opportunity Act (ECOA), which become effective on January 18, 2014. The Rule applies to first-lien loans secured by a dwelling, requiring creditors to automatically provide a copy of each valuation to the applicant, as well as a related disclosure at the beginning of the application process.

It is important to distinguish that while similar the ECOA Valuation Disclosure is different than, and more broadly applied to all loans, the High-Cost Appraisal Rule.

Which Loans Are Covered?

The Rule applies to all applications for credit secured by a first lien on a dwelling, whether or not the loan is completed or consummated. The Rule applies regardless of whether the loan is for a business or consumer purpose, and regardless of whether the dwelling is attached to real property (e.g., a mobile or manufactured home is included).

Disclosure Requirement

The Rule requires creditors to mail or deliver, within three business days of receiving an application, a notice in writing of the applicant’s right to receive a copy of all written appraisals developed in connection with the application. 

Creditors may provide this disclosure in electronic form subject to compliance with the E-Sign Act, but if the applicant accesses the application in electronic form, the disclosure may be provided electronically without regard to the E-Sign Act. In transactions involving Higher-Priced Mortgage Loans, a single disclosure may be used to satisfy the appraisal disclosure requirements of both TILA and ECOA.

Creditors Must Automatically Provide Copies of All Valuations

Creditors must provide copies of valuations promptly upon completion or at least three business days prior to consummation or completion of the transaction, whichever is earlier.
A creditor must provide a copy of each written valuation promptly to the applicant. This extends far beyond appraisals, to all documents that estimate or assign value to the property in connection with the application for credit, including automatic valuation models, broker price options and documents prepared internally by a creditor’s staff. If multiple versions of a single valuation are prepared, only the final version must be provided to the applicant (but multiple versions may end up being provided in order to comply with the requirement to do so promptly). While a creditor may require an applicant to pay for a valuation if otherwise permitted by law, the creditor may not charge an additional fee to provide the required copies of valuations.

Promptness is evaluated based upon both the length of time between the creditor obtaining the valuation and disclosure, as well as there being adequate time between disclosures and the completion or consummation of the transaction.
An applicant may waive the timing requirement, but in any case copies of the valuations must be provided no later than the time of consummation or completion of the transaction.

Servicing

On January 17, 2013, the CFPB issued its final servicing rules amending Regulation X and Regulation Z. The six Regulation X reforms are more expansive in scope and create more affirmative obligations than the three Regulation Z reforms, which merely create new disclosure requirements. These final rules create a myriad of additional disclosure requirements for companies servicing federally-related mortgage loans, and they also create a comprehensive, if not confusing, new scheme of loss mitigation and error resolution mechanisms.

Unfortunately, the amendments to Regulation X eschew a clear and straight-forward statement of responsibilities for servicers by creating a dizzying maze of cross-references between various sections. The CFPB has also included model forms for each of the disclosures and statements that are required under the new rules.
However, in what can be described as some small victories for the MH industry, there are several carve outs worth mentioning. First, if a servicer is only servicing personal property loans in a portfolio, then none of the six Reg X new servicing requirements apply. 

Additionally, there is a specific small servicer exception to the rule. Small servicers are defined generally as a company that services less than 5,000 loans (Note: this threshold amount of 5,000 was increased from the proposed rules’ 1,000 limit). Small servicers, or an affiliate of the small servicer, must either be the creditor (meaning originate the loans) or assignee (meaning own the loans) of the loans it services, and the 5,000 limit is determined on January 1 of each calendar year.

If the servicer crosses the 5,000 loans threshold within that calendar year, it has until the later of the following January 1 or six months after the date it crosses the threshold to begin compliance with these rules.  Small servicers are further carved out of one of the three Reg Z requirements of providing Periodic Billing Statements.

For servicers of only personal property MH loans who fall within the definition of a small servicer the nine new servicing requirements can be reduced to only two: 1.) Prompt Payment Crediting; and 2.) if applicable, Adjustable Rate Mortgage Payment Change Disclosures

Small Creditor Lending

In conjunction with the issuance of the final Ability-to-Repay Rule, the CFPB issued a Concurrent Proposal requesting comment on changes to the ATR Rule that it indicated it might make before the effective date of the final ATR-QM Rule (January 10, 2014). In the Concurrent Proposal the CFPB addressed six areas of concern.  One of the six issues addressed were proposed exemptions for qualified loans held in portfolio by small creditors.  TMHA and other industry representatives provided public comment to the CFPB on the Concurrent Proposal, and at the time of publication the CFPB has not issued a final Concurrent Rule.

In the Concurrent Proposal the CFPB seeks to create another Qualified Mortgage (QM) provision specifically and limitedly to the proposed definition of a “small creditor.”
The final ATR Rule already includes as a QM a balloon mortgage offered by a small creditor operating primarily in rural areas.  We note that under the Concurrent Proposal, the newly proposed category of QMs held in portfolio by creditors would not be limited to small creditors operating predominantly in rural areas, and would not include loans that have balloon payments.

Under the Concurrent Proposal, a Qualified Loan Held in Portfolio by a Small Creditor must meet the QM loan specific terms noted in our previous article (fully amortizing, loan term no longer than 30 years and points and fees not greater than 3 percent of the total loan amount), and the creditor would be required to take into account the borrower's monthly mortgage repayment and mortgage related obligations, as well as the borrower’s DTI or residual income ratio.  However, under this Qualified Loan Held in Portfolio by a Small Creditor Concurrent Proposal, the DTI ratio need not be 43% nor would it be required to be underwritten pursuant to Appendix Q.

Under this Concurrent Proposal for such Qualified Loans Held in Portfolio by a Small Creditor, the creditor would need to total assets not exceeding $2 billion as of the end of the preceding calendar year, and, together with all affiliates, not have made more than 500 first lien loans during the prior year.

Such QMs held in Portfolio by such a Small Creditor, as proposed, could qualify for the safe harbor if the APR did not exceed the average prime offer rate for comparable transactions by 3.5 percentage points.  However, the small creditor could not have a forward commitment to sell such loans, and if the small creditor sells the loan it must sell them to another small creditor.

Escrow

On January 10, 2013, the CFPB issued a Final Rule to implement changes made by Dodd-Frank that extend the length of time that an escrow account must be maintained on certain higher-priced mortgages (“Final Escrow Rule”).

Unlike most of the new rules published which take effect in January of 2014, The Final Escrow Rule takes effect on June 1, 2013.

Currently under Regulation Z, creditors are required to establish escrow accounts for closed-end, higher-priced mortgage loans secured by a first lien on a consumer’s principal dwelling for a minimum of one year. The Final Escrow Rule amends the regulation to require generally that the accounts be maintained for at least five years.

A “higher-priced mortgage loan” generally is triggered by a home loan with an APR of 1.5 percentage points above the average prime offer rate.

The mandatory escrow account may be cancelled upon the termination of the underlying debt obligation, including by repayment, refinancing, rescission and foreclosure. In addition, the creditor may cancel the escrow upon the receipt of a consumer’s request to cancel the escrow account at least five years after closing; provided, however 1.) the unpaid principal balance is less than 80% of the original value of the property securing the underlying debt obligation, and 2.) the consumer currently is not delinquent or in default on the underlying debt obligation.

The Final Escrow Rule creates an exemption from the escrow requirement for small creditors that operate predominately in rural or underserved areas. Specifically, to be eligible for the exemption, a creditor must: 1.) make more than half of its first-lien mortgages in rural or underserved areas; 2.) have an asset size less than $2 billion; 3.) together with its affiliates, have originated 500 or fewer first-lien mortgages during the preceding calendar year; and 4.) together with its affiliates, not escrow for any mortgage it or its affiliates currently services, except in limited instances.

Rural and Underserved

Four of the CFPB’s January 2013 mortgage rules included provisions that provide for special treatment under various Regulation Z requirements for certain credit transactions made by creditors operating predominantly in “rural” or “underserved” areas.  The special provision includes an exemption to the 2013 Escrows Final Rule’s escrow requirement for HPMLs; an allowance to originate balloon-payment qualified mortgages under the 2013 ATR Final Rule; an exemption from the balloon payment prohibition on high-cost mortgages under the 2013 HOEPA Final Rule; and provides an exemption from a requirement to obtain a second appraisal for certain HPMLs under the 2013 Interagency Appraisals Final Rule.

Through the 2013 Escrows Final Rule, the CFPB defined “rural” and “underserved” respectively for the purposes of the four rules discussed above that contain special provisions that use one or both of those terms. The 2013 Escrows Final Rule also provided comment to clarify further the criteria for “rural” and “underserved” counties, and provided that the CFPB will annually update on its public website a list of counties that meet the definitions of rural and underserved. 

In advance of the rule’s June 1, 2013 effective date, the CFPB is proposing to amend and clarify how to determine whether a county is rural or underserved for the purposes of these provisions.

As adopted, the CFPB will designate or determine which counties are rural or underserved for the purposes of the special provisions of the four rules discussed above. However, this was not the CFPB’s original intent.  Rather, the CFPB intended to require determinations of “rural” or “underserved” status to be made by creditors, but also intended for the CFPB to apply both tests to each U.S. county and publish an annual list of counties that satisfy either test for a given calendar year, which creditors may rely upon as a safe harbor. 

The CFPB is proposing changes to clarify how a county’s “rural” and “underserved” status may be determined based on currently applicable Urban Influence Codes (UICs) established by the United States Department of Agriculture, Economic Research Service (USDA-ERS) (for “rural”) or based on Home Mortgage Disclosure Act (HMDA) data (for “underserved”) and to provide illustrations of the rule to facilitate compliance.

The CFPB has published a preliminary list of counties by state on its website that fall within its definition of rural and underserved.  The full list can be found at: http://files.consumerfinance.gov/f/201303_cfpb_preliminary-list_rural-or-underserved-counties.pdf.  Included on the preliminary list for Texas there are 152 counties listed as falling within the definition of rural and underserved.

Ban on Mandatory Arbitration Clauses

A contract or other agreement for a covered transaction 1.) 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, and 2.) 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 applies to the terms of the whole transaction, regardless of which particular document contains those terms, but 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. The prohibition applies to all closed-end consumer credit transactions secured by a dwelling and open-end home equity lines of credit secured by the consumer’s principal dwelling (i.e., HELOCs).