Managing Complex Changes

The CFPB’s set of several mortgage lending rules are testing the strength of compliance processes

By Mary Thorson

Since the Consumer Financial Protection Bureau brought a firestorm of final mortgage lending rules in January, many of us in community banking have been shaking our heads as if to divide all the information into the right areas of our brains, much like coaxing a marble through a maze game! We’ve become accustomed to digesting a lot of complex regulatory language and then applying it in a practical manner—but usually we do that one rule at a time.

While all are certainly complex, the CFPB’s new set of mortgage rules also create overlapping areas of compliance to cover and present many new terms, definitions and prohibitions to learn. The bureau’s mortgage rules run the gamut of compliance, process and coverage requirements. Altogether, the rules encompass five major areas of lending activities and regulations.

– Rules to strengthen high-cost mortgage prohibitions and requirements: provide escrow account rules, Home Ownership Equity Protection Act coverage, and ability-to-repay and qualified mortgages standards.

– Joint appraisal rules: cover applications for and extensions of higher-priced mortgage loans.

– Regulation B appraisal rules: prescribe the timing of appraisal disclosures for consumers and prohibitions on fees for providing
– an appraisal.

– Mortgage loan originator compensation rules: prohibit steering and dual compensation and designating mortgage originator qualification standards.

– Mortgage servicing rules: require certain servicing procedures, including those for periodic billing, ARM adjustments, payoffs, force-placed insurance, error resolution, contact with borrowers and loss mitigation.

Defining essential steps

The key to effective compliance management for the whole set of CFPB rules is interpreting what each rule covers and requires. Becoming familiar with the definitions of the terms used in the regulations is essential.

The first step in addressing a new rule is to ask yourself three important questions: What is the requirement? What does it cover? Does it apply to my bank?

I help answer compliance questions from community bankers via the ICBA HelpDesk online portal. One community banker asked me about the new rules covering higher-priced mortgage loans and the five-year escrow account requirements. Part of the banker’s question was whether his bank could continue to offer three-year balloon mortgages in the face of the new rules, which establish a minimum escrow term of five years for such loans and consider them to be higher-priced mortgage loans. He also asked whether his bank would need to offer a five-year balloon mortgage to coincide with the five-year escrow account standard.

I said the answer depends on whether the three-year balloon mortgage loan product fell under the definition of a higher-priced mortgage loan. Many key terms in the new mortgage rules sound similar—or sound like they might be similar—but it is necessary to look at the definitions to be sure.

Take, for instance, the two new categories of higher-priced mortgages and qualified mortgages that the CFPB rules are creating. Those higher-priced mortgages are defined as closed-end residential mortgage loans secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate for comparable transactions by any of the following thresholds:

– 1.5 percentage points for a first-lien conforming residential mortgage loan;

– 2.5 percentage points for a first-lien jumbo residential mortgage loan; or

– 3.5 percentage points for a subordinate-lien residential mortgage loan.

The term “qualified mortgage” was first used within the text of the Dodd-Frank Act of 2010. The law provides a general definition of the qualified mortgage loan, and the CFPB finalized a more complete definition this past January. Today, a qualified mortgage is defined more by what it isn’t than what it is.

The key features of a qualified mortgage are:

– No excessive up-front points and fees. The qualified mortgage rule puts a limit on these additional charges, including those used to compensate mortgage brokers and loan officers.

– No “toxic” features. Qualified mortgages can’t have interest-only or negative amortization features. They also can’t have payment terms beyond 30 years. (At press time, the bureau was still considering how balloon loans will or won’t be treated under the definition.)

– Limits on borrower leverage. The qualified mortgage will not be granted to borrowers with debt-to-income ratios higher than 43 percent.

Questions to consider

As you can see, it’s important to know the definitions of a regulation’s key terms, understand their differences, and determine how those definitions apply to your community bank’s loan products and services.

The next steps in preparing for the new mortgage lending rules will depend on how you and your community bank answer the following series of questions.

If a regulation does apply to your bank, ask …

– What is the rule’s effective date? When must we be prepared to comply with it?

– What departments, people, products, policies and procedures are affected?

– What systems or forms will need to be changed?

– What internal or external checks need to be built into our compliance program?

– What mechanisms do we have in place to ensure the new requirement is continually monitored through our internal auditing program?

If a regulation doesn’t apply to us, ask …

– What controls do we have in place to monitor and confirm that we do not become subject to the requirements later on?

These questions are good ones to ask when figuring out any new or changed rules. When regulations are as complex and voluminous as the CFPB’s new mortgage loan rules, addressing these questions, along with the use of a calculated method to evaluate their requirements over time, will become essential for overall effective compliance management.

Mary Thorson is vice president of Chartwell Compliance, an ICBA Compliance & Risk Management service provider.