• NEW MORTGAGE LOAN RULES AND DISCLOSURES: HERE WE GO!
• MARYLAND “COVERED LOAN” LAW NOT A PROBLEM UNDER NEW REGULATIONS
• RECAPTURE OF CLOSING COSTS NEEDS REVIEW UNDER NEW REGULATIONS
• ARE DEALER MARKUPS DEAD?
All of the long awaited home loan mortgage rules mandated by Title 14 of the Dodd Frank Act and made final by the CFPB become effective in January 2014. In December 2013, the CFPB updated its Dodd-Frank Mortgage Rules Readiness Guide which provides a checklist for implementation of the new mortgage loan requirements. Review of this Guide might help your business tie up “loose ends” for full compliance. Because some of the federal rules impose new disclosure obligations, we have updated our sample list of closed-end residential mortgage disclosures required at application by Maryland and federal law. Please contact Margie Corwin if you need help with mortgage loan compliance.
MARYLAND “COVERED LOAN” LAW NOT A PROBLEM UNDER NEW REGULATIONS
Beginning in 2002, Maryland law imposed restrictions on consumer mortgage “covered loans.” Maryland “covered loans” are defined by reference to the definition of “high-cost mortgage” in the Truth in Lending Act (TILA), as that definition may be modified by TILA Regulation Z. A loan will be a Maryland covered loan based on the TILA definition of “high-cost mortgage” minus 1%. This Maryland covered loans formula (TILA high-cost mortgage triggers minus 1%) will continue with the new TILA “high-cost mortgage” APR index and new TILA expanded points & fees definition, both effective beginning January 10, 2014. Even so, the change in APR index and points & fees definition should not be a problem for Maryland mortgage lenders. Why? Because in 2008 and again in 2010, Maryland law changed and certain restrictions that had applied solely to Maryland covered loans were made applicable to many more mortgage loans. For example, in 2002, a Maryland lender was required to consider the borrower’s ability to repay only in connection with covered loans. In 2008, Maryland law changed and lenders now must consider the borrower’s ability to repay in connection with all Maryland mortgage loans. In fact, at this time, there is only one “covered loan” restriction that remains: a lender may not finance single premium credit insurance in connection with a Maryland covered loan. Thus, unless a mortgage lender finances single premium credit insurance, Maryland’s current “covered loan” law has no relevant impact. Please contact Margie Corwin if you would like to discuss this subject further.
In 2008, the General Assembly amended Maryland credit law applicable to HELOCs and certain closed end mortgage loans to clarify that Maryland creditors are permitted to waive collection of certain third-party closing costs but retain the right to recover those costs from the borrower if the loan is paid off early (often referred to as “recapture”). A compliant recapture program continues to be permitted under Maryland law. However, beginning January 10, 2014, some recapture programs will be considered prepayment penalties under the Truth in Lending Act (TILA). If a recapture program results in TILA prepayment penalties, it might trigger coverage as a TILA “high-cost mortgage” for both HELOCs and closed end mortgage loans. For closed end loans, a recapture program also might impact whether the loan is a TILA “qualified mortgage,” because it could increase the amount of TILA points & fees. Finally, compliance with the TILA ability to repay rule limitations on prepayment penalties should be considered if a recapture program is offered. We recommend that all closing cost recapture programs be reviewed at this time in light of the new federal mortgage regulations. Please contact Margie Corwin for assistance.
Based on a consent order entered on December 20, 2013, automobile dealer markups may not be dead, but they were struck a blow. Any financing source that allows dealer markups must reexamine its program in light of this recent action by the CFPB. After putting lenders on notice in March 2013 that it was interested in dealer financing discrimination issues, the CFPB, together with the Department of Justice, investigated a bank’s indirect auto financing program. The bank’s policy permitted dealers discretion to mark up a consumer’s interest rate above the bank’s buy rate and compensated dealers with the difference. Dealer markup was limited, but was discretionary within the limits. The bank did not monitor whether markups resulted in discrimination on a prohibited basis and generally did not offer comprehensive fair lending training to its dealers. The agencies focused on the difference between a customer’s contract rate and the bank’s buy rate. Because retail installment contracts do not contain information on customer race or national origin, the agencies used a proxy methodology that assigns race and national origin probabilities based on geography and name, and concluded that African American, Hispanic, and Asian/Pacific Islander customers were charged more dealer markup than similarly situated non-Hispanic whites based on race and not on creditworthiness. The CFPB alleged violations of the Equal Credit Opportunity Act and Regulation B and the bank and its holding company, while denying the CFPB’s findings and conclusions, agreed to a consent order that includes a civil money penalty of $18,000,000 and a deposit of $80,000,000 into a settlement fund for consumers. The consent order does not ban the bank’s dealer markup program, but does require the bank to set up a compliance program to ensure that dealer markup does not result in discrimination. The bank must establish a compliance committee and submit a compliance plan that limits dealer markup, trains dealers on compliance with the ECOA and non-discrimination laws and regulations, and, if the bank maintains its discretionary dealer markup program, periodically analyzes retail installment contract pricing data for discrimination on a prohibited basis using the same methodology the agencies applied in their investigation. If discrimination on a prohibited basis is found, the bank must take corrective action with offending dealers and remunerate any adversely affected consumers. To avoid the periodic analysis of retail installment contract pricing data for disparities on a prohibited basis, the bank may implement a non-discretionary dealer compensation structure that includes a compliance management system that ensures compliance with the ECOA. While dealer markups may not be dead, they have been impacted by this action. However, the CFPB has provided a clear roadmap of the minimal compliance procedures necessary to avoid ECOA issues. Please contact Margie Corwin, or John Morton if you would like to have your compliance program for dealer markups reviewed.