MADISON, Wis.-With the clock ticking down to January implementation of several Consumer Financial Protection Bureau mortgage regulations, one expert attempted to bust eight myths about the rules during a Tuesday webcast during the CUNA Mutual Online Discovery conference.
Lauren Capitini, regulatory compliance manager for CUNA Mutual Group, said some of these myths are dangerous because they give many credit unions executives a false sense of security.
Capitini noted CUs have just over three months to prepare for a number of mortgage-related rules. "That is not much time," she said. Of seven mortgage rules expected from the CFPB, six are now in final form. The four that go into effect on Jan. 10 are the ability to repay rule, high-cost loans (HOEPA) & homeownership counseling, mortgage loan originator guidelines, and mortgage servicing rules under Reg Z and Reg X
Following closely behind on Jan. 1 will be rules covering appraisals for higher-priced mortgage loans (HPML). Capitini warned RESPA/TILA integrated disclosures also are also on the way.
"Credit unions need to take action now," she advised. "Business decisions will have to be made ASAP, credit unions will need to review new and modified forms and disclosures, and they will have to train their staffs. Also, many staff may need to get mandatory education."
Myth 1: I don't do mortgage lending, so these rules do not apply to me.
Many rules apply to open-end and closed-end loans, as well as dwelling-secured transactions, including motor homes, RVs, trailers and boats. "Credit unions need to think more broadly, because if they do any of these types of lending they will be impacted," Capitini warned. "There are exemptions, but the bottom line is, assume you are in unless you find you are out."
Myth 2: I only originate HELOCs, so these rules do not apply to me.
(See Myth. 1.) There are many types of lending that will be caught up in the new rules.
Myth No. 3: You are now required to originate qualified mortgages.
This is a common misconception, Capitini noted. To meet the requirements of the Ability to Repay rule, lenders have to determine if the borrower has the ability to repay before giving the loan.
"The CFPB has been very good about pointing out credit unions did not do crazy loans, but they still have to comply with rules," she said. "But, not all mortgages have to be qualified mortgages. Credit unions can originate a QM, or verify and document eight underwriting criteria."
To be a QM, in addition to checking income, points and fees cannot exceed 3% of loan, the term cannot exceed 30 years and the borrower must have a debt-to-income ratio of 43% or less. "Fannie and Freddie only will be buying QMs starting Jan. 10, 2014.
The QM rule includes some exceptions for "small creditors," defined as having less than $2 billion in assets and the CU and its affiliates cannot originate more than 500 closed-end first lien transactions per year. In such cases, the credit union can relax the 43% DTI, but must hold the loan in portfolio for three years.
"A qualified mortgage provides a safe harbor," she explained. "It avoids lawsuits charging the lender did not check the borrower's ability to repay. We do not know how examiners are going to treat this, but we have to imagine they will ask questions if a credit union is not writing qualified mortgages. CUs have to decide now if they will originate non-qualified mortgages."
Myth No. 4: I don't originate HOEPA loans, so I don't need to review the new HOEPA rule.
Very few credit unions do HOEPA loans, but Capitini said all CUs should review the new rule because it expands types of mortgages potentially subject to HOEPA. It adds purchase-money mortgages and HELOCs, whereas the old rule only covered refinancings and home equity loans.
The new rule also revises and expands triggers for HOEPA coverage, including APRs, points and fees, or pre-payment penalties above certain thresholds.
Myth No. 5: We're going to meet the homeownership counseling requirements (for those members who are required to attend counseling) by sending our members to our in-house homeownership counselor.
The problem is, Capitini said, there are steering provisions in the rule. For HOEPA loan counseling requirements, the counselor cannot be affiliated with or employed by the organization. In addition, members can't be steered to a particular agency.
Myth No. 6: I am a state-chartered credit union and impose pre-payment penalties on mortgage loans. Now I have to stop charging them.
CUs can charge pre-payment penalties, but they have to be "very careful and very knowledgeable," Capitini warned. For QMs, pre-payment penalties cannot exceed 2% of outstanding loan balance pre-paid during first two years, and 1% of the outstanding loan balance pre-paid in the third year.
"If you make HOEPA loans, you cannot charge pre-payment penalties," she said, adding all CUs should check to make sure their contract language is written appropriately.
Myth No. 7: My mortgage loan originators are already registered under the SAFE Act, so we're good to go.
There are changes, especially if the mortgage loan originator is hired after Jan. 14. There are also new training requirements for all loan originators, and the definition of "loan originator" is more expansive under new rule. That means more individuals are considered "loan originators" now.
Myth No. 8: I am a small credit union or a CU in a rural area. So these rules don't apply to me. I'm exempt.
There are very few exceptions and caveats for creditors operating in predominately rural or underserved areas, small creditors or small servicers, according to Capitini. "Once again, assume you are in unless you review all the rules and find you are out."
The biggest problem with this myth, she explained, is that the "small creditor" definition varies by rule. Small servicer, per the servicing rule, is 5,000 or fewer mortgages including affiliates.
"Servicing has some exemptions for small servicers, but they must review the rules line by line," Capitini said, adding the appraisal rules give relief for creditors in predominately rural or underserved areas, who do not have to get a second appraisal for flipped properties.