Making Sense of the Financial-Reform Bill i g ns of the Fi - e B
Sweeping legislation could start a new era for mortgage brokers and housing finance
The financial-reform bill Presi- dent Barack Obama signed this past July 21 affects mortgage-origination, underwriting and servicing standards. It also outlines rules for
mortgage-broker compensation, impacts the way brokers and property appraisers interact, and sets the stage for
a new era in mortgage lending.
Many of the changes discussed in
the 2,319-page act address mortgage
origination, underwriting and servicing
and represent revisions to the Truth in
Lending Act ( TILA).
Formally titled the Dodd-Frank Wall
Street Reform and Consumer Protection Act, the financial-reform bill includes two acts pertinent to mortgage
brokers:
1. The Consumer Financial Protection
Act, which calls for the creation of
the Bureau of Consumer Financial
Protection under the Federal Reserve
Board. The bureau will regulate consumer finance, including residential
mortgage financing. Many details of
its authority will be finalized in the
next several months.
2. The Mortgage Reform and Anti-Predatory Lending Act, which aims
to protect, limit and regulate residential mortgage lending to strengthen
economic stability and to ensure
consumer access to responsible and
affordable mortgages.
Although many regulatory specifics
will emerge following rulemaking processes in the months ahead, brokers
should understand the legislation’s
general scope and pay close attention
to the establishment of the Bureau of
Consumer Financial Protection and interpretations of the Mortgage Reform
and Anti-Predatory Lending Act.
The U.S. Department of the Treasury
is responsible for planning, creating
and organizing the Bureau of Consumer
Financial Protection until Obama nomi-
nates and the Senate confirms a di-
financial-reform act specifically rein-
forces the requirement for mortgage
originators to be qualified, licensed and
registered in accordance with the Na-
tionwide Mortgage Licensing System
and Registry. It does not, however, offer
clarity about whether mortgage brokers
must act with a fiduciary responsibil-
ity toward their clients, a point that re-
mains open to regulatory interpretation.
On the Web O
• Dodd-Frank Wall Street Reform
and Consumer Protection Act:
sctsm.in/frbill
• Discuss this article: sctsm.in/
C4249
“The financial-reform act generally prohibits
residential mortgage originators from receiving
compensation that varies based on loan
terms other than the principal amount.”
rector. The bureau should assume its
full authority for protecting consumers by July, according to the Treasury
Department.
Here is a closer look at some of the
major changes in the reform bill of
which brokers should be aware.
development. Fiduciary duty would require brokers to act with the highest
degree of honesty and loyalty toward
their clients’ best interests.
In addition, the act calls for the Bureau of Consumer Financial Protection
to issue rules and disclosures for public
comment that combine the disclosures
required under TILA and the Real Estate
Settlement Procedures Act.
The act does, however, specifically
prohibit steering consumers to loans
that:
• They can’t reasonably repay;
• Have predatory characteristics,
including equity-stripping, excessive
fees or abusive terms;
• Discriminate based on race, ethnic-
ity, gender or age;
• Mischaracterize the property value
or the borrower’s qualifications; or
• Are not qualified mortgages if the
consumer meets the requirements
for a qualified mortgage.
The legislation doesn’t intend to restrict consumers’ ability to finance origination fees as long as the fees don’t
vary based on the loan terms, other
than the principal amount, or consumers’ decisions about whether to finance
such fees.
NAMB’s Stance
NAMB — The Association of Mortgage Professionals has stated the
Dodd-Frank Wall Street Reform
and Consumer Protection Act will
adversely affect consumers and
small businesses and create consequences such as higher costs
for consumers and continued
job losses for small mortgage
businesses.
The group, formerly known as
the National Association of Mortgage Brokers, said in a statement
( sctsm.in/frnamb) that the bill
will deprive consumers of their
existing choices and options for
financing mortgage-closing costs.
It also said lawmakers failed to
show any evidence to support
provisions in the bill that tie broker compensation to consumers’
ability to repay a loan.
NAMB has pledged to work
with regulators through the rule-writing process.
Origination standards
The financial-reform legislation mandates that creditors make reasonable
and good-faith determinations that
consumers can repay the loans they
take out. Creditors must base these
determinations on verified and documented information collected at the
under writing level.
Loans meeting this requirement will
be considered “qualified mortgages.”
Generally, qualified mortgages:
• Use payment schedules that fully
amortize the loan;
• Rely on full documentation of income
and assets, including Internal Revenue Service verification;
• Don’t use any negative amortization;
• Don’t include balloon payments; and
• Don’t charge total points and fees
greater than 3 percent of the total
loan amount.
In the case of adjustable-rate loans,
the underwriting must be based on the
maximum interest rate permitted under
the loan in the first five years.
Although the law doesn’t explicitly
make reduced-documentation loans
illegal, it does make lender liability
so great that these loans likely will be
unfeasible.
These changes are amendments to
TILA. Brokers also should note that the
Compensation
The financial-reform act generally prohibits residential mortgage originators
from receiving compensation that varies
based on loan terms other than the principal amount. This change, also reflected
in TILA, places originator compensation
under regulatory oversight of the Bureau
of Consumer Financial Protection.
Under the financial-reform legislation, mortgage originators cannot receive any origination fee from anyone
other than the consumer, unless the
originator does not receive compensation directly from the consumer. This
seems to require that consumers pay
all origination fees directly and upfront
or pay all origination fees indirectly,
with premiums from the rate.
Although this rule protects consumers
from abuses, it also could restrict their
flexibility to choose creative loan terms.
Whether it eliminates yield-spread premium (YSP), however, remains unclear
pending final rulemaking.
“I think we have some interpreting to
do here,” says Bill Howe, president of
NAMB — The Association of Mortgage
Professionals. “There isn’t clarity on
the issue [of YSP].”
Appraisals
The financial-reform bill calls for the
Federal Reserve to implement interim
appraisal-independence standards by
Oct. 20. Those rules will end the Home
Valuation Code of Conduct, which is set
to sunset on Nov. 1, while maintaining
appraiser independence. As of press
time, it was unknown whether the Fed
will accept public comment on the interim standards.
The Federal Reserve, the Comptroller of the Currency, the Federal Deposit
Insurance Corp., the National Credit
Union Administration Board, the Federal Housing Finance Agency and the
Bureau of Consumer Financial Protection will implement final appraisal regulations jointly.
The new appraisal standards will
become a part of TILA and ensure appraiser independence. The standards
will address appraisal portability and
Richard Smith is the retail manager with
American Acceptance Mortgage Inc. in Chattanooga, Tenn. He has originated government, conventional and jumbo loans since
the company opened in 1994. He supervises
origination in two offices. The company
lends in Tennessee and Georgia. Reach
Smith at (423) 899-6898, (888) 474-9920
or rsmith@aamonline.com. Visit www.
RichardSmithHomeLoans.com for more
information.
