Alston & Bird Consumer Finance Blog

Mortgage Loans

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.

The Fate of the QM Patch

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A&B Abstract:

With the January 2021 expiration of the so-called “QM Patch” looming, what courses of action are available to the CFPB?

Background

One of the most vexing issues currently facing the Consumer Financial Protection Bureau (“CFPB”) is the fate of the so-called “QM Patch”.  The CFPB’s ability-to-repay/qualified mortgage regulations promulgated pursuant to the Dodd-Frank Act require creditors to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms.  (The obligation applies to a consumer credit transaction secured by a dwelling.)

The regulations provide:

  • a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a qualified mortgage and are not higher-priced mortgage loans; and
  • a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.

A “higher-priced mortgage loan” has an APR exceeding the average prime offer rate by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.

What is the QM Patch?

In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q.  However, the CFPB regulations eliminate this particular requirement if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac.  Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs, and meets certain other QM criteria.  (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)

The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans.   The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs or January 10, 2021.  What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations.  With no conservatorship termination in sight, the January 2021 QM Patch expiration looms large.  Indeed, the CFPB must act soon to enable the market to adjust to any significant departures from the current arrangement.

How Might the CFPB Address the QM Patch’s Pending Expiration?

The CFPB has a number of options at its disposal.  First, it could opt to extend the current QM Patch.  Logistically, this may be the path of least resistance.  However, to GSE critics who want to shrink the government mortgage footprint, this option is unpalatable. These critics believe that the QM Patch impact is too substantial and that the GSE backstop crowds out the private sector.  The open question is whether the private sector could realistically absorb the market share currently held by the GSEs through the current QM Patch.

Second, the CFPB could eliminate both the QM Patch and Appendix Q and create a level playing field for the QM market.  This approach would retain most of the ATR/QM product eligibility features and a bright line delineation between Safe Harbor and Rebuttable Presumption QM loans based upon the APR.  This option would eliminate the current debt-to-income ratio requirements, but ensure that only the most low risk loans be accorded the Safe Harbor QM designation.

Third, the CFPB could eliminate the QM Patch and Appendix Q and permit lenders to underwrite loans to an established underwriting guide such as the FHA.  The challenge for this approach is identifying a benchmark that is acceptable to a wide range of the market.

Other options at the CFPB’s disposal include: (1) allowing the lender to underwrite using its own approved and validated underwriting model (while retaining the other components of the ATR/QM criteria, including the Safe Harbor/Rebuttable Presumption bright line tests; and (2)  appointing industry stakeholders to create a de novo AUS that everyone would ultimately use.

Takeaway

With the January 2021 deadline looming, the CFPB needs to act soon to enable markets to adjust to the QM Patch replacement.

Appraisal Reform Act of 2019 Would Impact TRID

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A&B Abstract: 

If enacted, the recently introduced Appraisal Reform Act of 2019 would amend RESPA to require the disclosure of the appraisal management fee separate from the appraisal fee on the loan estimate (LE) and closing disclosure (CD).  This could impose an additional burden on lenders and appraisal management companies (AMCs).

 Background

 The LE provides disclosures intended to be helpful to consumers in understanding the mortgage loan transaction.  By contrast, the CD must provide the actual costs of the transaction.  As amended by the Dodd Frank Act, Section 4(c) of RESPA permits the optional disclosure of the appraisal management fee separate from the appraisal fee.  However, it does not require separate itemization on the LE and CD.  HR 3619, the Appraisal Reform Act of 2019, would make such disclosure mandatory.  The measure, which Rep. William Lacy Clay (MO) is sponsoring, was introduced in the House on July 5, 2019 and referred to the House Financial Services Committee on the same date.

Impact on Current Law

AMCs facilitate more than two-thirds of all appraisals, according to estimates.  For closed-end forward mortgage transactions, TRID  requires a creditor to provide the consumer with a good faith estimate of the credit costs and transaction terms no later than the third business day after receiving the application.  For certain unaffiliated charges for which the consumer is not allowed to shop (such as appraisal fees), the creditor must not charge the consumer more than the amount disclosed on the LE unless there is a valid changed circumstance. These are “zero tolerance” fees, meaning that the creditor must reimburse the consumer for the amount by which the actual charge exceeds the amount disclosed on the LE.

For purposes of providing a revised estimate and resetting the tolerance, a “changed circumstance” is:

  • an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
  • information specific to the consumer or transaction that the creditor relied upon when providing the disclosure and that was inaccurate or changed after the disclosures were provided; or
  • new information specific to the consumer or transaction that the creditor did not rely when providing the disclosure.

Absent a valid changed circumstance, a creditor cannot adjust the amount of the appraisal management fee three days after the application is provided even if it determines that additional work is required.

Takeaway

HR 3919 is worth watching as it would in effect lock in the appraisal management fee at time of application.

Connecticut Officially Becomes an Attorney Closing State

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A&B Abstract:

Effective October 1, 2019 only Connecticut licensed attorneys can conduct real estate closings in the state for certain mortgage loan transactions.

Real Estate Closings

The process of closing a loan generally involves four core functions:

  • transferring title to the buyer;
  • transmitting payment to the seller (usually through an escrow agent);
  • discharging any outstanding liens on the property; and
  • creating a lien on the property in favor of the buyer’s lender.

In a mortgage transaction, the “closing agent” is the person responsible for coordinating the activities of various parties involved in the transaction.  Several states – whether by case law or bar opinion – hold that it is the unauthorized practice of law for someone other than a duly licensed attorney in the relevant jurisdiction to conduct real estate closings.

Impact of New Connecticut Law

Historically, no explicit authority has held that only an attorney may act as a closing agent in Connecticut.  However, as a general matter, almost all loans in Connecticut are closed by an attorney.  Connecticut Senate Bill 320 (Public Act No. 19-88) has codified that long-standing practice.  As a result, as of October 1, 2019, only a duly licensed Connecticut attorney in good standing may conduct real estate closings.

The measure defines “real estate closing” as a closing for:

  • a mortgage loan transaction, other than a home equity line of credit transaction or any other loan transaction that does not involve the issuance of a lender’s or mortgagee’s policy of title insurance in connection with such transaction, to be secured by real property in Connecticut, or
  • any transaction wherein consideration is paid by a party to such transaction to effectuate a change in the ownership of real property in Connecticut.

A violation of the new requirement constitutes a Class D felony, punishable by a $5,000 penalty or five years in jail.

Takeaway

Lenders should ensure that only a Connecticut licensed attorney conducts the closing on any first- or second lien mortgage loan, other than a home equity line of credit, that require the issuance of title insurance.

Maine Creates Mortgage Servicer Duty of Good Faith

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Maine is joining the ranks of states whose requirements for mortgage servicers may exceed those of the CFPB’s Mortgage Servicing Rules.  Effective September 19, Senate Paper 415 (2019 Me. Laws 363) creates a mortgage servicer duty of “good faith,” meaning honesty in fact, and the observance of reasonable commercial standards of fair dealing.  This duty applies to the servicing of a residential mortgage (including in any related foreclosure action).  Further, the measure applies the duty to existing provisions of Maine law relating to the conduct of foreclosure mediation, permitting a court to impose sanctions on a servicer who fails to participate in good faith in mediation.

What Activities Are Covered?

“Servicing,” for purposes of the new requirement, means any combination of:

  • receiving a periodic payment from an obligor under the terms of an obligation, including an amount received for an escrow account;
  • making or advancing payments to the owner of an obligation on account of an amount due from the obligor under a mortgage servicing loan document or a servicing contract;
  • making a payment to the obligor under a home equity conversion mortgage or reverse mortgage;
  • evaluating the obligor for, or communicating with the obligor with respect to, loss mitigation;
  • collecting funds from a homeowner for deposit into, and making payments out of, an escrow account; and
  • taking any other action with respect to an obligation that affects the obligor’s payment or performance of the obligation or that relates to enforcement of the obligation.)

What Entities Are Covered?

While the duty of good faith applies broadly, certain entities are exempt.  For purposes of the new requirement, a “mortgage servicer” is a person responsible for:

  • receiving scheduled periodic payments from an obligor pursuant to the terms of a mortgage, including amounts for escrow accounts;
  • making or advancing payments to the owner of the loan or other third parties with respect to amounts received from the obligor pursuant to a loan servicing contract; and
  • evaluating obligors for loss mitigation or loan modification options.

The term includes a person that holds, owns, or originates a mortgage loan obligation if the person also services the obligation.  However, among others, the term does not include a “supervised financial organization,” a “financial institution holding company,” a “credit union service organization,” or a subsidiary of any such entity.  Accordingly, for purposes of the good faith requirement, the term is limited to non-depository entities (i.e., state-licensed servicers).

Penalties

The measure creates substantial penalties for a servicer’s failure to act in good faith.  A violation in connection with a foreclosure action may be remedied by dismissal or stay of the action, or by the imposition of other sanctions that the court deems appropriate for so long as the violation continues.  For violations more generally, an injured homeowner or obligor may recover actual damages and the costs and attorney’s fees incurred in bringing such an action.  Additionally, statutory damages of up to $15,000 are available if the servicer has engaged in a pattern or practice of violating the duty of good faith.  The measure further prohibits a servicer from charging a loan owner for, or adding to the amount of the obligation, any attorney’s fees or other costs incurred as the result of its violation of the duty of good faith.