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First Mortgage Corporation’s “ MDIA” Training

First Mortgage Corporation’s “ MDIA” Training

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First Mortgage Corporation’s “ MDIA” Training

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  1. First Mortgage Corporation’s“MDIA” Training (Mortgage Disclosure Improvement Act) July 2009 Desktop Underwriter is a registered trademark of Fannie Mae. Loan Prospector is a registered trademark of Freddie Mac. This presentation is a summary and is not complete. This information is for mortgage professionals only and should not be distributed to or used by consumers or other third-parties. Information is accurate as of the date shown below and is subject to change without notice. 07/27/2009

  2. Agenda • Background • Regulatory Terms • Background of the MDIA • Mortgage Disclosure Improvement Act • What constitutes an application • Timing of disclosures • Closing requirements • Waivers • Other Issues • New advertising rules • Required Documentation • Additional Resources FIRST MORTGAGE

  3. Terms/Definitions • Creditor: The entity to whom the initial payment is payable as named on the face of the Note. i.e. First Mortgage Corporation. • Consummation: The time when the consumer becomes contractually obligated on the credit transaction or date the Borrower(s) execute loan closing documents. i.e. Closing Date. • General Business Day: Under Reg Z, days in which a lender’s office’s are open to the public for carrying on substantially all of it’s business functions (i.e. for FMC this is all calendar days (M-F) excluding Saturdays, Sundays and specific Federal legal public holidays). RESPA disclosures follow this definition. • Specific Business Day: Same as rescission period which is Monday through Saturday excluding Sundays and specified Federal legal public holidays. This is used for the purpose of the new 7 and 3 day rules. FIRST MORTGAGE

  4. BACKGROUND Common “Mortgage” Regulations Introduction to “MDIA”

  5. Common Regulations • REG B: Equal Credit Opportunity Act (ECOA) – Prohibits discrimination against consumer credit applicants on various basis. • REG C: Home Mortgage Disclosure Act (HMDA) – Requires lenders to compile and disclose data on where they’re lending to determine if they’re refusing to lend in certain areas aka redlining. • REG X: Real Estate Protection Act (RESPA) – Requires the borrower be provided a Good Faith Estimate (GFE) of their closing costs. • REG Z: Truth in Lending Act (TILA) – Requires borrowers be provided in advance with a full disclosure of all costs included in securing a loan, in the form of a dollar amount and as an APR. • HOEPA: Home Ownership and Protection Act of 1994 (Implemented by Section-32 of Reg Z) – Designed to notify consumers when their loan is classified “high-rate” or “high-fee” mortgage, aka Section 32 or HOEPA loans. • FCRA: Fair Credit Reporting Act – Regulates users of consumer reporting to ensure fair, timely, and accurate reporting of credit information. FIRST MORTGAGE

  6. Background • On July 30, 2008, the Federal Reserve Board published a final rule amending Reg. Z, implementing the TILA and HOEPA (the “July Rule”). • Among other changes: • Requires creditors to give consumers transaction specific cost disclosures shortly after application for closed-end loans secured by a consumer’s principal dwelling. • Requires disclosures to be provided before the consumer pays any fee, other than a fee for obtaining credit history. • On the same day, July 30, 2008, Congress amended TILA by enacting and passing the Mortgage Disclosure Improvement Act, hereinafter referred to as “MDIA”. FIRST MORTGAGE

  7. Background • The “MDIA” broadens and further amends the Truth in Lending Act by: • Requires early disclosures for mortgage loans secured by dwellings, beyond the consumer’s principal dwelling • Requires waiting periods between the time when disclosures are given and consummation of the mortgage transaction; hence, the 7 & 3 day waiting periods. • Reiterates restriction against fees before disclosures. • Advances the compliance date for implementation. • In December 2008, the FRB proposed a rule to implement the MDIA. The rule was finalized in May 2009. • Except for certain variable rate disclosure requirements and changes to statutory damages, MDIA rules are effective with loan applications taken on or after July 30, 2009. FIRST MORTGAGE

  8. COVERAGE “MDIA” Covered loans

  9. Coverage • “MDIA” final rule applies to all RESPA-covered loans secured by the dwelling of a consumer. • New disclosure requirements apply to home purchase loans, home refinance loans, and home equity loans. • Final rule does not revise HELOC requirements. • Credit extended to acquire, improve, or maintain rental property that is not owner-occupied is deemed to be for “business purposes,” and thus exempt from the rule. • Not owner occupied is defined as property in which the owner does not expect to live for more than fourteen days during the coming year. FIRST MORTGAGE

  10. Coverage:Construction Loans • According to regulations, the estimated disclosures are only required in mortgage transactions subject to RESPA. • RESPA doesnot cover construction-only loans (except transfer of title). • A construction-perm or loan where permanent financing may be provided by the lender within two • years is covered. • Follow RESPA rules when dealing with Construction loans. FIRST MORTGAGE

  11. Coverage cont’d… • The secured property could be: • Primary Residence • 2nd Home • Manufactured Home used as primary residence • New rules do not apply to: • Investment Properties • Time Shares (RESPA may apply) • Open-end Loans – HELOC’s • Bridge Loans • Swing Loans, • Construction Only Loans (with < 2 year term) • Loans secured by parcels larger than 25 acres • Loans secured by Commercial Property • Loan Modifications • Land Contracts • Leases with option to purchase • Loans by private persons FIRST MORTGAGE

  12. “MDIA” EFFECTIVE DATE New MDIA rules will apply to all loans for which creditor receives an application on or after July 30, 2009

  13. APPLICATION What is an Application per “MDIA”?

  14. What is an Application? • In the beginning, the Federal Reserve Board did not define an “application.” • – The staff attorneys told us to use the definition from ECOA. • – This resulted in just about anything being an application • including oral requests for credit. • For purposes of the new rule, use the RESPA definition: • “Application means the submission of a borrower’s financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the: • Borrower’s name • Borrower’s monthly income • Borrower’s social security number to obtain a credit report • Property address • Estimate of the value of the property • Mortgage loan amount sought, AND • Any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application.” FIRST MORTGAGE

  15. Application Continues… • This definition allows lenders to control the distribution of TILA • disclosures. • No disclosures must be provided until the lender receive a written application. • A submission that is missing one of the six enumerated items is not an “application” for purposes of providing disclosures. • Oral discussions between a lender and the borrower or between the lender and a broker that are not written down are not “applications”. • The new definition is suppose to facilitate informal shopping. • Borrowers can discuss rates and terms with a lender without the lender fearing that disclosures must be provided. • Brokers can submit borrower information without property values and not trigger disclosure requirements. • The submission of information in oral form still triggers Regulation B and FCRA notification requirements. FIRST MORTGAGE

  16. TIME FRAMES Collection of Fees: 3-days Consummation: 7-days Re-disclosure: 3-days Electronic Delivery Method Other Delivery Methods

  17. Specific Business Days • “Business days” (revised) are the same for a rescission period. • Saturdays count • Sundays do not count • Federal holidays do not count. • Four Federal legal holidays identified in US code by specific date: • New Year’s Day, January 1 • Independence Day, July 4 • Veterans Day, November 11 • Christmas Day, December 25 • When one of these holidays (July 4, for example) falls on a Saturday, Federal offices and other entities might observe the holiday on the preceding Friday (July 3). In cases where the more precise rule applies, the observed holiday (in the example, July 3) is a business day. FIRST MORTGAGE

  18. Waiting Periods • “MDIA” requires three different waiting periods: • 3-day waiting period: Fee Collection • Waiting period before imposing fees except for actual credit report fee • 7-day waiting period: For consummation • Count from time of Initial Disclosure • Does not start over when re-disclosures are provided • 3-day waiting period: Re-disclosure • Waiting period if initial disclosures are out of tolerance from final disclosures at closing FIRST MORTGAGE

  19. 7 and 3 day counting… Count the seven and three business day waiting periods independent of each other – the closing date must pass both timing tests. • 7-day waiting period: For consummation • Based on initial disclosures: The 7-day waiting period before consummation begins when the creditor delivers or places the early disclosures in the mail, NOT when the consumer receives them. • 3-day waiting period: Re-disclosure • On re-disclosures, the consummation may not occur until 3-days after the consumer receives the corrected disclosures. • 3-day waiting period: Fee collection • In terms of imposing fees, the lender may impose fees 3-days after mailing the initial disclosures, unless lender can prove that the disclosures were received earlier. • If delivery was done face-to-face, fees may be imposed when the disclosures are handed over to the borrower. • For faxed, e-mailed, or FedEx, etc. delivery, if you can prove the borrower received the disclosure before the 3-day rule expires, you can impose a fee at the time of delivery of the disclosure. FIRST MORTGAGE

  20. Electronic delivery • The Board is not adopting separate rules or presumptions • regarding the delivery of disclosures by overnight courier, • electronic transmission, or other means. • A creditor that uses e-mail or overnight courier may follow the presumption approach. • If creditor wants to start the 3-day count quicker, it would have to rely on positive (not presumed) evidence of actual delivery (signed confirmation that the mortgage loan disclosure was delivered by certified mail or overnight delivery, or e-mail). • State laws may restrict the ability of the lender to send disclosures electronically. FIRST MORTGAGE

  21. Additional Notes – Electronic Delivery • TILA disclosures may be provided by email, or fax provided: • The borrower agrees to receive the disclosures electronically • The creditor confirms that the borrower has the ability to save or print the disclosures • TILA disclosures by FedEx, UPS, USPS, etc. • A tracking number showing package was delivered does not rise to the level or affirmative evidence of receipt by the applicant. • Requesting a “signature upon delivery” from the borrower receipt may satisfy evidence of delivery. • Recommendation: • Use pre-arranged passwords or printed read-receipt, etc. • Confirm the identity of the person who will receive the disclosures. • Send the disclosures through a secure means that only the person intended will receive. • Obtain confirmation from the person receiving the disclosures that they were received. • Be able to reproduce the disclosure in paper format for regulators or in litigation. FIRST MORTGAGE

  22. Waiting WaitingWaiting…….. • Once you MAIL the initial estimated disclosures, you must wait seven (7) business days before a closing is permitted. • Earliest a closing can occur is the seventh business day after you send the initial disclosures. FIRST MORTGAGE

  23. Sample: Consummation • Let’s look at a scenario where creditor delivers the early • disclosures to the consumer in person or placed them in the • mail on Monday, June 1st. • Consummation may occuron or after Tuesday, June 9, the seventh business day following delivery or mailing of the early disclosures. • The seven-business-day waiting period begins when the creditor delivers or places the early disclosures in the mail;NOT when the consumer receives or is deemed to receive the early disclosures. • If the consumer is denied credit, or withdraws the loan application, within three business days after creditor receives it, the early disclosures need not be given. FIRST MORTGAGE

  24. Sample: Re-disclosure • Assume a creditor delivered the early disclosures to the consumer in person or placed them in the mail on Monday, June 1st. • Creditor then delivered corrected disclosures in person to the consumer on Wednesday, June 3rd. • Although Saturday, June 6 is the third business day after the consumer received the corrected disclosures, consummation may not occur before Tuesday, June 9, the seventh business day following delivery or mailing of the early disclosures. FIRST MORTGAGE

  25. COLLECTION OF FEES When can you start collecting fees?

  26. Collection of Fees • Disclosures must be delivered before the consumer pays any fee, • other than a “bona fide” and reasonable fee for obtaining consumer’s • credit history. Term “reasonable” is not defined. • If the disclosure is mailed, the consumer is deemed to receive the initial TIL disclosure 3 business days after mailing. • The specific “business day” definition applies to the mailing rule. • Restriction applies to the creditor and any other person. Eg., broker. • Many lenders are billed monthly for credit reports and, therefore, cannot discern the credit report cost at the time of the application. • Imposing an “average charge” is not a safe harbor for purposes of TILA. FIRST MORTGAGE

  27. Additional Notes -Collection of Fees • Careful with including other fees for related services in the “credit report” charge - even if its nominal. • OFAC checks or Identity or Fraud detection charges • Collecting “post-dated” checks at application that will not be cashed until AFTER expiration of 3-day period. • What about obtaining pre-authorized credit card information that will not be charged until expiration of a 3-day period? • What about ordering appraisal at application, but charging consumer only AFTER expiration of 3-day period? • Can do it only after 3 days; otherwise, lender “eats” the fee if consumer walks away from the deal. • Lock-In Fees at application: The prohibition against the collection of fees during three-day waiting period would appear to include any “lock-in” fees. • Some will seek to argue that “lock-in” agreement is separate from the mortgage/loan agreement. FIRST MORTGAGE

  28. Sample: Fee Collection • Scenario: • If applicant is in the mortgage company’s office doing a face-to- • face interview and the Loan Officer physically hands them the • early disclosures, can lender start to impose fees (rate lock, • appraisal, etc.) immediately? • Answer: • Yes. Absent any other restriction, once the consumer has • received the disclosures, the rule Does Not prohibit imposing a • fee. FIRST MORTGAGE

  29. DISCLOSURES Initial Disclosures Re-Disclosure

  30. Who’s Responsible? • Who is responsible for issuing the “Initial” • estimated TILA disclosures? • The LENDER,not the broker, is responsible for providing the initial TILA disclosures. i.e. • Retail – Loan Officer • Wholesale – Account Executive • The mortgage broker or any other independent person cannot satisfy the lender’s obligation to provide TILA disclosures. FIRST MORTGAGE

  31. “Initial” Estimated Disclosure • Receipt of a written application (or one the loan officer writes down) • triggers the requirement to send an estimated TIL disclosure. • Must provide or mail initial TIL disclosure no later than 3 business days after application, and at least 7 business days before consummation. • Disclosure clock begins on business day following receipt of consumer’s written application. • It’s the same estimated TILA disclosure you are familiar with, but with an added sentence: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” • Rules on labeling initial disclosures as “estimates” are not changed. Numeric disclosures are still marked with an “e” for estimated. • The estimated disclosures must be provided for all consumer purpose residential mortgage loans, including refinance loans and second mortgage loans. FIRST MORTGAGE

  32. Disclosure • Required Disclosure: ‘‘You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.’’ • Must be grouped together with the rest of the early disclosures. • Disclosure must be included in both initial and any corrected estimated disclosures. • The rule implies that a final disclosure will also be provided at closing, but this is not clear. • HUD FAQ’s • Stay alert to possible edits to details pertaining to RESPA final rule. • Communications with HUD staff suggest that there will be 2-3 different FAQ issuances, extending over several weeks. • FIRST MORTGAGE

  33. Tolerances for:Estimated Disclosure • If the terms that a creditor intends to offer to the borrower at the • closing will result in the estimated APR being off by more than • 0.125%, then the creditor must provide new estimated • disclosures to the borrower at least 3 business days before • closing. • The borrower must RECEIVE the new estimated disclosures at least three (3) business days before closing. • If the new estimated disclosures are mailed, the law presumes that the borrower does not receive the disclosures until 3 business days after mailing. • The specific “business day” definition applies to the re-disclosure period and mailing rule. • Regardless of delivery method, a record of when and how the disclosures were sent is critical, and confirmation of receipt is critical. FIRST MORTGAGE

  34. Additional Notes -Disclosure Tolerances • Must lender re-disclose if the original disclosed APR EXCEEDS the actual APR? • FRB staff have orally opined NO; however, there is no written confirmation. • Per written statement in 74FR 23293: In instances where the disclosed APR overstates the actual APR, corrected disclosures are not required where the APR previously disclosed is considered accurate under the tolerances in §226.22. (Implication: No categorical exception for over disclosures.) • The latter section specifies that over-disclosures shall be treated as accurate if the finance charge is greater than the amount required to be disclosed. • Please NOTE: Cannot set-up system to automatically overstate APR to avoid re-disclosure. FIRST MORTGAGE

  35. Additional Notes -Disclosure Tolerances • Is re-disclosure required if finance charges • increase OR decrease by $100 or more if the APR • is still within tolerance? • The new regulation states that the only trigger of relevance under the re-disclosure requirements is the APR. • Please NOTE: • Do not re-disclose every time APR changes over 1/8% throughout the loan. Disclose only at initial and at closing. • To determine if you should re-disclose at closing, compare the APR at closing with the APR in the most recently provided corrected disclosures (NOT the first set of disclosures provided) FIRST MORTGAGE

  36. What must be re-disclosed? • If re-disclosure is required (when going to closing), the • creditor may provide a complete set of new disclosures, or • may re-disclose only the changed terms. • If the creditor chooses to provide a complete set of new disclosures, the creditor may, but need not highlight the new terms, provided that the disclosures comply with the format requirements of §226.17(a). • If the creditor chooses to disclose only the new terms, all the new terms must be disclosed. FIRST MORTGAGE

  37. Re-disclosure Samples • A different APR will almost always produce a different finance charge, and often a new schedule of payments; all of these changes would have to be disclosed. • Unrelated terms such as the amount financed or pre-payment penalty vary from those originally disclosed; the accurate terms must be disclosed. • No new disclosures are required if the only inaccuracies involve estimates other than the annual percentage rate, and no variable rate feature has been added. FIRST MORTGAGE

  38. Sample 1 • Assume consummation is scheduled for Thursday, June 11 • and the early disclosures for a regular mortgage transaction • disclosed an annual percentage rate of 7.00%. • Situation: • On Thursday, June 11, the annual percentage rate will be 7.10%. • Is the creditor required to make corrected disclosures? • Response: • The creditor is not required to make corrected disclosures. FIRST MORTGAGE

  39. Sample 2 • Assume consummation is scheduled for Thursday, June 11 • and the early disclosures for a regular mortgage transaction • disclosed an annual percentage rate of 7.00%. • Situation: • On Thursday, June 11, the annual percentage rate will be 7.15%. • Is the creditor required to make corrected disclosures? • Response: • The creditor must make corrected disclosures so that the • consumer receives them on or before Monday. June 8. • Note:Closing can occur ON the third business day following receipt of the • revised disclosures. FIRST MORTGAGE

  40. Sample 3 • A regular mortgage transaction is scheduled for • Thursday, June 11th. • The early disclosures provided in May stated an APR of 7.00%. • Corrected disclosures received by the consumer on Friday, June • 5th stated an APR of 7.15%. • Situation: • On Thursday, June 11, the annual percentage rate will be 7.25% which exceeds the most recently disclosed APR by less than the applicable tolerance. • Is the creditor required to make corrected disclosures? • Response: • The creditor is not required to make additional corrected • disclosures or wait an additional 3 business days. FIRST MORTGAGE

  41. Sample 4 • A regular mortgage transaction is scheduled for • Thursday, June 11th. • The early disclosures provided in May stated an APR of 7.00%. • Corrected disclosures received by the consumer on Friday, June 5th stated an APR of 7.15%. • Situation: • On Thursday, June 11, the annual percentage rate will be 7.30% which exceeds the most recently disclosed APR by more than the applicable tolerance. • Is the creditor required to make corrected disclosures? • Response: • The creditor must make corrected disclosures such that the • consumer receives them on or before Monday, June 8. FIRST MORTGAGE

  42. Additional NotesCont’d… • Must all property owners, including non-borrowing owners, • receive the early disclosures and re-disclosures? • Such requirement does not appear in the final rule, but is a concept that is found under general TILA principles. Generally, 226.17(d) allows for disclosures to be provided to the “principal debtor only.” • HOWEVER, the right of rescission provisions, must be signed by “each consumer”. Industry will therefore seek further clarity on this issue. • In transactions subject to a right to cancel, we recommend re-disclosure at closing, to make sure that disclosures are within tolerances ($100) for the right to cancel and to make sure each person who has a right to cancel gets their own copy of the disclosure. FIRST MORTGAGE

  43. Complication How do you confirm that each borrower received the revised disclosure when the borrowers share an email address or a Home address? • This is one more reason to provide final disclosures at the closing, at least when you have a refinance loan. • If You Do Not Succeed at First… • Compare the projected closing APR with the most recent disclosure given to the borrower. • If your APR moves after sending a corrected disclosure, you may need to re-disclose again. FIRST MORTGAGE

  44. WAIVERS Time Frame

  45. Waiver is a Long Four Letter Word • The rule allows a creditor to permit the borrower to waive the seven (7) business day and/or the three (3) business day waiting periods when the borrower demonstrates a “personal financial emergency”. • The FRB provided no guidance on what constitutes a “personal financial emergency”. • The sole waiver expressly authorized by the FRB is in a refinance transaction when the borrower(s) will lose their primary residence before the waiting period expires due to expiration of a mortgage foreclosure redemption period. • i.e. Where the foreclosure sale will proceed unless loan proceeds are made available to the borrower during the waiting period. • Without further guidance, most creditors and investors are not going to permit waivers of the waiting periods for any reason except for that as stated above. FIRST MORTGAGE

  46. Additional Notes –Waivers • Whether a “bona fide personal financial emergency” exists is to be determined by the facts surrounding individual situations. • Buyers and sellers may “manufacture” an emergency before closing by changing the purchase agreement terms. This is not what the FRB intended as an emergency that supports a waiver. • Note: The Board did not adopt a comment stating that the existence of a consumer’s waiver insulates a creditor from liability in connection with such waiver. • The Board’s preamble states that waivers should not be used routinely to expedite consummation for reasons of convenience. • To waive or modify a waiting period, the consumer must provide the creditor with a dated written statement that describes the emergency and specifically waives the waiting period. • The statement must be signed by all of the consumers who are primarily liable on the legal obligation. • Printed forms are not permitted. FIRST MORTGAGE

  47. WHAT ELSE? Penalty for Non-Compliance Other Up-Coming Regulatory Changes

  48. Statutory Damages • What is the penalty for non-compliance? • MDIA increased the statutory damages from a minimum of $200 and a maximum of $2,000 to a minimum of $400 and a maximum of $4,000. • However, when adding in Legal fees and Attorney fees, plus the headache involved, the violation is going to far exceed the actual penalty as shown above. FIRST MORTGAGE

  49. ARM Loans:Estimated Disclosures To Be Determined and Implemented By January 11, 2010 FIRST MORTGAGE

  50. Other Upcoming Rules… Estimated Disclosures for ARM loans New Servicing Rules for HOEPA Lite Loans New Servicing Rules for Primary Residence. FIRST MORTGAGE