Effective Date: January 10, 2014
With all the new regulations effective as of January 10, it’s easy to feel a little lost. From periodic statements to loss mitigation procedures, it seems almost no regulation has been spared alteration. The very survival of your institution may rely on your ability to guide it through the complex wilderness of this year’s increasingly complicated compliance. But just as Lewis and Clark had Sacagawea, you too can rely on knowledgeable guides to help you reach your destination. Herein we present a short map that surveys the modifications to homeownership counseling and HOEPA requirements, based on NCUA’s Letter to Credit Unions 14-RA-02.
Homeownership Counseling for Non-HOEPA Loans
Prior to January 10th, homeownership counseling rules only pertained to HOEPA or high-cost mortgage loans. Beginning on January 10th, credit unions must now provide a list of homeownership counseling organizations to mortgage applicants for both closed-end and open-end mortgages (whether or not they are high-cost mortgages) within three days of application. This list must include:
- Relevant counseling services in the applicant’s location;
- 10 U.S. Department of Housing and Urban Development (HUD) approved counseling agencies closest to the applicant’s location; and
- An explanation that the applicant can find other approved counseling agencies by contacting the CFPB or HUD directly.
Lists may be obtained by using a tool on the CFPB website or by using data made available by HUD or the CFPB. It is only necessary to provide the list to the primary applicant. The list may be provided electronically, but is subject to the E-Sign Act, and it may be provided in conjunction with other required disclosures.
In addition, you must ensure that first-time borrowers who apply for closed-end or open-end mortgage loans that permit negative amortization (whether or not it’s a high cost mortgage) have received homeownership counseling before closing the loan. Again, this counseling must be provided by an approved homeownership counselor. Applicants must be permitted to choose their counselor. The credit union cannot direct the applicant to a particular counselor.
This requirement does not apply to reverse mortgages or loans for timeshares.
New Homeownership Counseling Requirements for HOEPA Loans
Before you make a HOEPA loan you must obtain written certification from an unaffiliated, certified, or approved counselor that the applicant has received counseling on the advisability of taking out the HOEPA loan. The applicant is not to receive the counseling until after he or she receives the initial good faith estimate of closing costs or initial HELOC disclosure. Again, you can’t direct the applicant to a particular counseling agency. The applicant can finance the counseling fee or the credit union can elect to pay the fee as long as you don’t condition the payment on the loan closing.
New High Cost or HOEPA Mortgage Loan Provisions
The HOEPA rule is now expanded to cover both purchase money mortgages and HELOCs secured by the applicant’s primary residence. Previously, the rule only covered refinanced loans and closed-end home equity loans with high rates or high fees. Construction loans, reverse mortgages and loans made by a Housing Finance Agency or through the U.S. Department of Agriculture (USDA) Rural Housing Service Section 502 Direct Loan Program are, in certain cases, exempt from the HOEPA rule.
The tests for determining whether a loan qualifies as a high-cost or HOEPA mortgage have changed. In making the determination you need to evaluate both the APR and the points and fees that are charged.
The new test for evaluating if a loan is a high cost mortgage based on the APR is if the APR exceeds the average prime offer rate (APOR) for a comparable transactions by more than:
- 650 basis points (6.5%) for a first lien mortgage;
- 850 basis points (8.5%) for first lien mortgages loan that are less than $50,000 and secured by a dwelling that is personal property (manufactured or mobile home or RV that is titled as personal property); or
- 850 basis points (8.5%) for junior lien mortgages.
Please see the HOEPA rule for guidance on how to calculate the APR for HOEPA loans as it is different from the calculation used in the TILA disclosures.
The new test for evaluating if a loan is a high-cost mortgage based on the points and fees that are being charged is based on whether the total points and fees exceed:
- 5% of the total loan amount if the loan is for $20,000 or more; or
- For loans less than $20,000, the lesser of 8% of the total loan amount or $1,000.
For more information on how to calculate the total points and fees, you should refer to the CFPB’ s Ability to Repay and Qualified Mortgage Rule.
New HOEPA Disclosures
Although most credit unions don’t make loans that qualify as HOEPA loans, if you do you need to be aware that there are new disclosure requirements. Specifically, the disclosure that must be provided at least three business days before the loan is closed or account opened must now include:
- A statement that the loan is not effective until the transaction is closed or the account is opened;
- An explanation of the consequences of default;
- A disclosure of certain loans terms, such as APR, amount borrowed, and monthly payments; and
- For variable rate loans, an explanation of the maximum monthly payment that could be required.
New Restrictions on Loan Terms for HOEPA Loans
Balloon payments are generally prohibited, except in specific narrow circumstances. State-chartered credit unions in states that permit credit unions to impose prepayment penalties must cap the prepayment penalty to no more than 2% of any prepayment amount and cannot charge the penalty within the first 36 months after consummation or account opening. “Due on demand” clauses are only permitted in certain situations. Points and fees cannot be financed for HOEPA loans, but you are permitted to finance other fees, such as bona fide third-party charges. Late fees are limited to 4% of the past due amount. See the HOEPA rule for other limitations.
Although it is impossible to briefly delineate every change (and for that reason, it is always judicious to consult the CFPB’s official guide), we hope that this abridged overview will help orient your institution’s compliance program on the seemingly endless frontier of compliance.