Mortgage Origination: Regulations and Best Practices

1. Mortgage Origination: Regulations and Best Practices Presented by: Natosha Reid Rice HFHI Associate General Counsel, Real Estate and Finance

2. Today’s goal: Provide an overview of key regulations that impact HFH Affiliates Agenda: • What is MPAR? • Consumer Finance Protection Bureau (CFPB) • Preliminary Considerations • Review of Mortgage Origination Regulations and Best Practices • MPAR Resources

3. MPAR Initiative The Mortgage Procedures and Regulations (MPAR) initiative was established by HFHI in 2010 to help strengthen Affiliates’ mortgage lending practices. MPAR offers affiliates training and resource collections that are useful in improving the origination and servicing of mortgage loans and assist Affiliates in complying with applicable lending laws and regulations. MPAR University homepage on My.Habitat

4. Foundational Objectives • Fund the Mission • Compliant performing mortgages can be leveraged/sold to provide unrestricted funds to serve other families. Build or expand relationships with financial partners. • Grow Skills & Leadership Capabilities • Using the MPAR resources to enhance knowledge of lending regulations, allows for better oversight, process alignment, and organizational effectiveness. Evaluate staffing roles and requirements. • Operate with Excellence • When you know the laws and procedures that must be complied with, your operations become effective and efficient. Implement and enforce consistent application of policies / procedures. HFH’s Strategic Plan & MPAR Impact Goals

5. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 = The most comprehensive financial regulatory reform since the Great Depression. What did Dodd-Frank do? • Amended existing laws • Created the Consumer Financial Protection Bureau • Consolidated jurisdiction over federal consumer protections • Implements regulations to new rules to existing laws and regulations • Supervises consumer protection industries • Enforces rules

6. Consumer Finance Protection Bureau (CFPB) Housing Crisis  Legal and Regulatory Reform • Many loan defaults caused by loans made when: • adequate income not verified • credit history not evaluated • borrowers did not fully understand loan products

7. Why you SHOULD be paying attention? • Increased government regulation • Increased scrutiny • Harsh penalties for non-compliance • Impact beyond regulators: • Donors • Media & general public • Families • Community partners (banks, governments, etc.)

8. CFPB COMPLAINT PORTAL

10. To ensure that each consumer is not being deceived or unfairly treated, and can understand the transactions that they are entering into. What are MPAR’s goals? To ensure all Habitat affiliates have sufficient resources to establish fully compliant mortgage origination and servicing practices (so that every partner family is treated fairly and understand the transactions that they are entering into). What are CFPB’s goals?

11. Deep Breath: Addressing our new reality

12. Federal Regulator – CFPB State Regulator Preliminary Considerations Secure and Fair Enforcement for Mortage Licensing (SAFE Act) Purpose: Protect consumers by setting minimum standards for licensing and registering mortgage loan originators. As well as, provide consumers with access to MLO’s history including if their license has been revoked or application denied within the past 5 years. Actions: • Determine if exemption for bona fide nonprofits in state • Unless exempted by state, each MLO must be licensed and registered with the Nationwide Mortgage Licensing & Registry System (NMLRS)

13. Preliminary Considerations • Truth in Lending Act (TILA) – Loan Originator • Does not affect SAFE Act Exemptionfor Loan Originator Organizations • Loan Originator = Individuals who are compensated to perform activities such as: • Taking an application for purchase money mortgage or repair loan secured by real property • Arranging a credit transaction • Assisting a consumer in applying for credit • Offering or negotiating credit terms • Making an extension of credit • Referring a consumer to a loan originator or creditor • Advertising or communicating to the public that you can or will perform any loan origination services  • Habitat policy = “key volunteers” too! • Not Loan Originator: • Solely clerical or administrative tasks. • Front desk just accepts application without discussion. • Board member only reviews docs. • Solely number crunching.

14. Preliminary Considerations Loan Originator Qualifications Affiliate must: 1. Obtain: • Criminal background check • Credit report and • Information from the individual originator related to any civil, criminal or administrative decision 2. Make determinationthat individual meets financial responsibility, character and general fitness standards: • How you will evaluate this information? • Affiliate must have Board-approved policy and procedures. • At minimum, confirm no conviction of (or plead to): • Any felony during last 7 years, or • Any felony involving fraud, dishonesty, breach of trust, or money laundering at any time • Also, indications that individual will operate honestly, fairly and efficiently 3. Ensure they have initial and ongoing training. • at least once every 12 months • 11 ABA trainings will meet the federal training requirement

15. Preliminary Considerations: Federal Anti-Money Laundering (AML) Bank Secrecy Act (BSA) Issued by the Treasury Department’s Financial Crimes Enforcement Network, effective as of August 13, 2012 Does not exempt any affiliate, regardless of size or capacity Non-compliance carries severe criminal and civil penalties Requires adoption and implementation of affiliate-level policies & procedures (see next slide). USA PATRIOT Act – requires: All Affiliates are required to search all applicants against the Specially Designated Nationals (SDN) List, initially and ongoing IRS/FinCEN form 8300 to report cash transactions over $10,000 Federal Regulator - IRS

16. Preliminary Considerations: Federal Anti-Money Laundering (AML) Federal Regulator – IRS

17. Family Selection -- Marketing & Outreach • Family Outreach: • Assess community needs for housing • Board approved written policy that ensures no discrimination – establish selection criteria and selection process • Focus on creating the right kinds of messages and using the right media to reach target audience within the geographic service area • Fair Housing Act requires: • Ensure marketing graphics, words, phrases are inclusive and non-discriminatory (all medium – print, electronic, radio etc. should not indicate any preference, limitation or discrimination) • Fair Housing Equal Opportunity logo must be on all client facing marketing including application • Any place an application is taken must display the Equal Housing Opportunity / Lender sign and or poster • Truth in Lending Act requires no misleading advertisements/materials: • Actually available terms • Clear and conspicuous standard • Advertisement of rate of finance charge • Advertisement of terms that require additional disclosures (triggering terms) • Unfair and Deceptive Acts and Practices Statutes (under state law and Dodd Frank) – focus on offering and servicing financial products

18. Family Selection -- Application Equal Credit Opportunity Act (ECOA) • Applications must be available in multiple venues. • Follow board-approved policies consistently to collect application information. • Do not take family information over the phone. • This may constitute an “application” and trigger ECOA • Explain program requirements to potential partner families. • What would it take for the applicant to be successful in qualifying for the Habitat program? • How long is it likely take to make a decision on the applicant’s qualifications? To build the house? To close on the sale? • Application must include: [Per ECOA] • Right to Receive Copy of Appraisal Disclosure Notice • Provide within 3 days of receiving application

19. Family Selection -- Assessment • Need; Willingness to Partner; Ability to Pay • Apply board-approved policies consistently • Immigration Status – tied to ability to pay • Sex offender registry check (required) • Two options: • Any hit results in denial of application (or de-selection) • Evaluate the relation between any offense and the risk to the affiliate, taking into account the nature of any conviction, the time since the conviction and completion of sentence. • Background check (optional but recommended) • If performed, evaluate the relation between any conviction and the risk to the affiliate, taking into account the nature of any conviction, the time since the conviction and completion of sentence • Comply with all Federal, State and Local laws

20. Family Selection -- Assessment Make sure your Affiliate implements its selection policy on a non-discriminatory basis. (Fair Lending Laws - ECOA, Fair Housing Act, ADA) CFPB asks (among other things): • Are the creditor’s policies, procedures, or guidelines vague or unduly subjective with respect to (i) underwriting; (ii) pricing; (iii) referring applicants to [other lending channels]; (iv) classifying applicants as “prime” or “sub-prime” borrowers; or (v) deciding what kinds of alternative loan products should be offered or recommended to applicants? • Does the creditor allow exceptions to its underwriting, pricing, or product recommendation policies and procedures to be made subjectively or without clear guidance? Even if the policies and procedures are clear, does the creditor make a large number of such exceptions?

21. Family Selection – Assessment Remember TILA: Ability-to-Repay (ATR)/ Qualified Mortgage (QM) Requires a good faith determination of borrower’s ability to repay loan ATR Exemption - for nonprofit organization that: • Provides credit only to low- or moderate-income consumers • Extends credit less than 200 times annually*; and • Follows its own written policy and procedures to determine ability to repay. *****New provision added to the ATR exemption in October 2014***** Any interest-free, forgivable subordinate mortgage “soft seconds,” will no longer count toward the 200-mortgage loan limit, which when exceeded takes away the exemption in the next calendar year. Affiliates must follow their own written procedures to determine that consumers have a reasonable ability to repay loans. This is the reason we were able to obtain the exemption! • A loan that is ATR exempt is not subject to the QM provisions. Exemption follows the loan, even if sold, or otherwise transferred to a creditor that does not qualify for the ATR exemption.

22. Family Selection -- Assessment • If no ATR exemption, then 8 underwriting factors must be considered & verified by a third-party source: • Expected income or assets to repay the loan • Employment status –if wages is relied on for repaying loan • Monthly mortgage payment for loan • Monthly payments on simultaneous loans secured by the same property • Monthly payments for property taxes and insurance, and other related costs for the property such as HOAs • Debts, including alimony and child support payments • Monthly DTI ratio for all mortgage and non-mortgage obligations as a ration to gross monthly income Credit history These are reasonable considerations for your affiliate’s policy!

23. Family Selection – Notification Equal Credit Opportunity Act Goals: Prevent discrimination; keep applicant informed Requirements: Communicate credit decisions within 3 required timelines, triggered by submission, completion and denial of application. What is an “Application”? ECOA vs. RESPA: different requirements and timing for Habitat. ECOA - Affiliate defines “Application” - All information required of applicant, incl. verifications, credit check, home visit, board approval Distinguish Inquiry vs. Application: avoid turning inquiries into applications, invoking notice requirements for credit decisions • Affiliate staff gives opinion about likelihood of acceptance • Applicant provides sufficient information to allow Affiliate to make a determination of credit-worthiness based on its policies • Don’t take any information over the phone!

24. Notices Required: 1. Within 30 days after receipt of first piece of financial information (orally or written) send one of these:f Incompleteness

25. 2. Within 30 days of “completed application” (if first Notice of Action was a Notice of Incompleteness), send either: • f Incompleteness 3.Within 30 days of making a decision to deny credit, at any point in application or partnership process, send: Withdrawal: If applicant withdraws, affiliate should send a Withdrawal Form within a reasonable time period. Provide copy to family and place copy in folder. Notify all parties within the affiliate.

26. Family Selection - Notification Fair Credit Reporting Act/Reg V (FCRA) • Goals: Accuracy & Privacy of Reported Credit Info • Requirements: • Use “consumer reports” only for permissible purposes • Notify applicant when denial of application is based in whole or in part on any info from a “consumer report” (including credit score or criminal background check). • Send within 30 days of making decision to deny. • Template Adverse Action Notice on My.Habitat is ECOA and FCRA compliant. • Two notifications when denial of employment is based on consumer report (think background checks for loan originators!). • Pre-Adverse Action Letter. See FCRA Legal Advisory Exhibit D. • Template Adverse Action Notice on My.Habitat is ECOA and FCRA compliant.

27. Family Selection - Notification • Initial evaluation reveals family meets partnership criteria • Board approval is obtained • Provide Partnership Agreement (ECOA - Notice of Approval) and include expectations and conditions • Next steps in the process; Sweat equity; Financial literacy; Maintain or improve creditworthiness; Down payment requirement • If family fails to meet conditions in Partnership Agreement at any time prior to closing: • Extend deadline to meet requirements; OR • De-Select/Denial • Send Adverse Action Notice within 30 days of making decision. • Must be ECOA and FCRA compliant!

28. Preparing for Sale • Order Title Exam • Get to know your property – review all title encumbrances or use restrictions that could interfere with partner family’s use. • You need marketable title to convey marketable title (Policy 22). • Best Practice: Order Title Insurance (owner’s vs. lender’s policy) • provides coverage for future claims or future losses due to hazards and defects already existing in the title at time of purchase. • Verify Schedule A details • Title insurance covers: Mistakes in title examination, Property or title claims of third parties, Gap between closing and time of recording the documents, Helps protect Affiliate and Homeowner

29. Preparing for Sale Valuation of Property • Obtain Appraisal/Other Written Valuation (ECOA /TILA) • No conflicts of interest: Do not use staff or board member. • Donated appraisals are allowed (per CFPB verbal approval) • May collect actual cost of appraisal (check state law), but no charge for copy • Disclose (ECOA): • Right to Receive Copy of Appraisal Disclosure Notice • 3 days after application • Copy of property valuation(s) associated with transaction • “Promptly” upon completion and 3 before closing • Determine Sales Price: • Sales Price = FMV

30. Preparing for Sale --Flood Disaster Protection Act (FDPA) • Flood Determination for each loan: certified vendor or FEMA website • Best Practice* to obtain Flood Insurance when: • Property is located in a “special flood hazard area” as identified by FEMA; • The community participates in the National Flood Insurance Program *Required when the loan is insured by or sold to GSE or federal agency.

31. Preparing for Sale – Final Underwriting • Prior to closing, update creditworthiness determination: • Re-verify all ability to pay factors based on Affiliate’s policy • Re-verify other factors as required by Affiliate’s policy • Extend timelines if appropriate • Apply Affiliate policies consistently • Determine financing: • First mortgage calculation • Affordability Index (not more than 30% of gross household income)

32. Final Underwriting –REMINDER • De-selection/Denial: If you deselect/deny a partner family at any time during this process: • Send Adverse Action Notice. • Must be ECOA and FCRA compliant! • Within 30 days of making decision to deselect/deny • Withdrawal: If a partner family withdraws at any time during this process: • Ensure loan file is properly documented. • Send confirmation of withdrawal to partner family. • Notify all parties within affiliate. • Partner family will need to start process from beginningif they want to be reconsidered for Habitat program.

33. Preparing for Sale – Initial Disclosures What?Initial Disclosures When? Within 3 business days of “completedRESPA application” and at least 7 days prior to closing (includes Saturdays) *Completed RESPA Loan Application = Borrower’s name; Borrower’s monthly income; Borrower’s SSN; Property Address; Estimate of value of property; Loan amount; and Other information needed by lender* Why? The law says so! (RESPA; TILA; ECOA; FDPA; GLBA)

34. Preparing for Sale – Initial Disclosures Templates for all Initial Disclosures can be found on MPAR U, Initial Disclosures Collection

35. Template Privacy Notice can be found in GLBA Legal Advisory on My.Habitat. Gramm-Leach-Bliley Act (GLBA): governs the sharing of consumer and customer non-public personal information Must provide Privacy Notices disclosing the affiliate’s privacy policies and practices, what information is collected, with whom it is shared, how affiliate safeguards it, and the opportunity to “opt-out” if affiliate shares information with a non-affiliated third-party.

36. Preparing for the Sale Closing • Prepare documentation • Form of Deed; Promissory Note; Form of Security (Mortgage or Deed of Trust) • Updates to Initial Disclosures • Limited revisions allowed after initial GFE and TIL disclosure statement. • Get it right the first time. • Timing: Could delay loan closing. • Obtain Proof of Insurance (incl. flood, where applicable and if not yet obtained)

37. Preparing for the Sale Closing Disclosures HUD-1 settlement statement (RESPA) • Make available at least one day prior to closing • Initial escrow statement (RESPA) • At closing or no later than 45 days post closing • Repair Loans - Right of Rescission (TILA) • 2 copies, to each owner • Only for repair products when lien is placed on house • Borrower has until midnight of third business day to rescind loan.

38. See CFPB’s Small Entity Compliance Guide Still to come: Integrated Disclosures • Effective August 1, 2015 • Required by Dodd-Frank Act • Loan Estimate: disclosures for key features, costs, and risks of the mortgage loan (replaces GFE & TIL) • Closing Disclosure: disclosures of all of the costs of the transaction (replaces HUD-1 and Final TIL) • Must be provided 3 business days before consummation

39. Additional materials to help you and your affiliate: • Mortgage Origination Checklist • MPAR Legal Advisory • MPAR Toolkit • Which can all be found in…

40. MPAR University Homepage

42. Contact Information: Natosha Reid Rice HFHI Associate General Counsel, Real Estate and Finance nreidrice@habitat.org 404-979-3700 Habitat for Humanity International – Affiliate Conference 2015