Brief Overview of the Military Lending Act

Well, it’s been 2 month’s since the Military Lending Act took effect. If you’re institution hasn’t determined whether you’re ready and compliant yet, contact me because you’ve got some catching up to do. At least the credit card provisions haven’t kicked in yet, so if you offer credit cards you still have time for those.

It’s overdue then to give a brief overview of the act, including what I think are some helpful ways of identifying products that might fall under its umbrella.

One Sentence Summary

“A lending institution cannot impose a Military Annual Percentage Rate (MAPR) above 36 percent on any non-exempt consumer credit extended to a Covered Borrower.”

This is my one sentence summary that breaks down the big three elements that most institutions should be primarily focused on.

Non-Exempt Consumer Credit

Consumer credit must comply with MLA guidelines if: 1) it charges a finance charge (as defined under TILA), or 2) it is payable in installment payments of more than 4 installments, and 3) is not an exempt transaction.

Exempt transactions are:

  1. Those not covered under TILA (12 CFR § 1026.3) or state law;
  2. Purchase-money financing for vehicles;
  3. Purchase-money financing for personal property;
  4. Residential mortgage credit transactions, including purchases, refinances, construction loans, HELOCS, HE Loans, and reverse mortgages;

Technically the regulation mentions a fifth, which is any transaction not involving a covered borrower identified through the safe harbor method. But that logic is a bit too circular for me, so I consider the question of if a consumer is a covered borrower as its own separate step.

Cover Borrowers, Defined and Identified

A “covered borrower” under the MLA is a full-time active duty Service member (Armed Forces, Coast Guard, National Guard, and Reserve) who are under a call or order to serve for more than 30 days. It also includes the service member’s dependents, defined as a spouse, child under 21, parents or in-laws residing with and depending on the Service member for support, and unmarried people who the Service member has custody.

A covered borrower is only a covered borrower at the time of the transaction, and only remains a covered borrower during the service period.

Creditors are free to determine whether a consumer is a covered borrower however they wish. BUT there are two safe harbor methods of verifying a consumer’s status as a covered borrower:

  1. Through the Department of Defense’s database, located here: https://mla.dmdc.osd.mil/
  2. Through the credit reporting agencies, who have all updated their reports to reflect whether or not an applicant is an active service member.

Using one of those two methods, and documenting the result, “conclusively determines” the issue of whether an applicant is a covered borrower under the MLA.

Military Annual Percentage Rate (MAPR)

The MLA also adds new fees to be considered finance charges when calculating the MAPR. These fees include:

  1. Premiums or fees for credit insurance;
  2. Fees for a debt cancellation contract or debt suspension agreement;
  3. Fees for a credit-related ancillary product sold in connection to the credit transaction or account;
  4. Application fees (with some exceptions);
  5. Participation fees;

When you have a non-exempt transaction to a covered borrower, then you need to calculate the MAPR to include the new finance charges with the standard TILA finance charges also. The MLA then caps the rate you can charge a covered member at 36%. If calculating the MAPR with all the fees, new and old, results in a MAPR above 36%, then the creditor has the option of waiving fees and charges above that limit to comply with the MLA cap.

That’s just a brief overview of the basic elements of the MLA. It does not include disclosure requirements, limited terms in agreements, penalties, or other aspects of the MLA. The MLA is already in effect though, so if you’re not sure if you’re compliant with it yet then there is no time to waste.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Curing Defects on Closing Disclosures

Mistakes happen. Things change. Life is unpredictable.

Sometimes after closing things happen that make the CD the borrower received to be no longer accurate, or you’ll notice a mistake was made and the borrower paid a higher fee than he or she should have.

Here’s how to fix those mistakes.

Change Due to Events Occurring after Consummation

This is probably the more well-known rule. If an event occurs in connection with a settlement within 30-days after closing, and the event causes the consumer to actually pay a different amount than what is disclosed on the CD, then the creditor needs to place in the mail corrected CDs no later than 30-days after discovering the event occurred.

But if the event causes the consumer to pay an amount above tolerance, then see the 60-day refund rule.

Changes Due to Clerical Errors

Non-numeric clerical errors can be cured by placing corrected CDs in the mail no later than 60 days after closing.

60-Day Refund Rule

If, within 60 days after closing, it is discovered that the consumer actually paid more than what was disclosed on the LE, or more than what was allowed under the tolerance rules, then the creditor must refund the excess amount with a revised closing disclosure.

So, for example, if the consumer pays an extra $30, $25, $25, and $10 over the disclosed LE fees on four itemized services subject to 0% tolerance, then the excess $90 must be refunded within 60 days of the closing. If the consumer also pays $1,190 on a service the LE estimated at $1,000 subject to 10% tolerance,* then the creditor must refund the excess $90 there as well (for a total of $180) no later than 60 days after the closing.

Don’t forget to take advantage of these rules to fix any mistakes discovered. The costs of fixing and refunding will be much less than if you are forced to do it by a regulator.

* The 10% tolerance means the consumer can pay up to $1,100 on a fee estimated at $1,000 on the LE. Thus, the extra $90.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Understanding Intent to Proceed

Here’s a short cheat sheet on intent to proceed information:

Q:           Can a borrower give intent to proceed before receiving an LE?

A:            No. Section 1026.19(e)(2)(i)(A) requires the borrower to receive the disclosures before indicating an intent to proceed “with the transaction described by those disclosures.” Only after those events occurred in that order can a fee be imposed (with one exception listed below).

 

Q:           What fees can be imposed or received before a creditor receives an intent to proceed?

A:            Section 1026.19(e)(2)(i)(B) allows for a bona fide fee to obtain a consumer’s credit report before the consumer received the LE.

 

Q:           Is signing the LE considered to be intent to proceed?

A:            No. The signature lines on an LE are optional, and are only for confirming receipt of the disclosure.

 

Q:           What if we close the loan without ever receiving intent to proceed, isn’t intent to proceed implied?

A:            No, it must be expressly given. Comment 2 to § 1026.19(e)(2)(i)(A) states “a consumer’s silence is not indicative of intent because it cannot be documented to satisfy the requirements of § 1026.25.”

 

Q:           How may a consumer indicate intent to proceed?

A:            Section 1026.19(e)(2)(i)(A) lets the consumer indicate an intent to proceed in any way the consumer chooses, unless the creditor requires a particular manner. The creditor must document the intent to proceed to satisfy the documentation requirements of § 1026.25.

 

Q:           Do you always need intent to proceed, even if you aren’t charging up front fees?

A:            Yes, Comment 5 to § 1026.19(e)(2)(i)(A) states “a fee is ‘imposed by’ a person if the person requires a consumer to provide a method for payment, even if the payment is not made at that time.”

 

Q:           Do you need a new intent to proceed with every new LE?

A:            No, only the initial LE.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

 

Are Discharge Tracking Fees a Finance Charge?

When a mortgage is paid off, a discharge needs to be filed in the registry where the mortgage was recorded. The registry of deeds exists and its records are public to give notice to any subsequent creditor that a lien exists on a piece of property, so that the creditor isn’t making a loan on something that is already encumbered by another lien. It’s a notice system, and so when a mortgage is paid off a discharge is filed to let other creditors know that the previous obligation and security interest no longer exists. Without a discharge being recorded, creditors assume the obligation is still outstanding on the mortgage.

Sometimes things fall through the crack and discharges aren’t filed though, even when the loan is paid off. Some attorneys and other third-parties will sometimes charge a “discharge tracking fee” on a loan. This is to “track, obtain, and record” discharges. If a creditor is making a loan to purchase or refinance a mortgage, it wants to make sure it gets first-lien priority by ensuring any previous mortgages have a discharge recorded with them.

Is this a finance charge though? There are arguments for and against considering it a finance charge.

Arguments for:

A finance charge is the cost of consumer credit. The regulation says finance charges “includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit.” It also does not include any “charge of a type payable in a comparable cash transaction.” Or, in other words, if it was being bought with cash instead of through a loan, what charges would still need to be paid? Things like taxes, recording fees, etc.

Mandatory third-party fees also count towards finance charges, even if the consumer can choose the third party.

Discharge tracking fees are mandatory third-party fees that would not be incurred in a comparable cash transaction. In addition, a bankruptcy case in Massachusetts, In re Acevedo, 476 B.R. 360 (2012) assumes that a discharge tracking fee is a finance charge, but does not go into a substantive discussion about whether it truly is a finance charge.

Arguments Against:

On the other hand, 12 CFR § 1026.4(c)(7) excludes from finance charges (i) “Fees for title examination, abstract of title, title insurance, property survey, and similar purposes,” and (ii) “Fees for preparing loan-related documents, such as deeds, mortgages, and reconveyance or settlement documents.” An unrecorded discharge can certainly have an effect on the title to property, so option (i) is plausible as a “similar purpose.” More convincing, in my opinion, is that a fee to “obtain, track, and record” discharges is a “fee for preparing loan related documents” as a discharge indicated the termination of a loan obligation.

Really, either argument can be made in good faith, and not all fees are created equal. In my humble opinion though, the safe approach if you have the choice is to include the discharge tracking fee as a finance charge.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Getting Priorities Straight

Solar panels are hot right now (pun intended), and they are likely to get even hotter as costs go down and financing options become more readily available to homeowners looking to reduce their energy bills. In fact, thanks to Fannie Mae’s new HomeStyle Energy program the installation of solar panels may be getting even easier and cheaper. You can read more about the program here.

Currently though banks are giving loans, and installers are giving leases, to homeowners looking to upgrade their homes with solar panels. And in order to protect themselves and their loans they are filing UCC Financing Statements, otherwise known as UCC-1s or simply Financing Statements. While there is generally nothing wrong with doing so, it rightly has some Register of Deeds’ concerned because the filing of a UCC-1 can lead to some complicated results that can affect both buyers and mortgage lenders.

A comprehensive analysis of those results and the many situations that could lead to them are a bit too complicated for me to get into here though. For now, let’s stick to the basics.

What is a UCC-1?

A UCC-1 is a simple form which is filed with a state to inform the “world” (that is, inform other potential creditors) about another creditor having a security interest in a particular item. There are many items that can be covered by a UCC-1, such as consumer goods in a home, inventory in a store, equipment in a factory, fixtures in (or on) a home, and even timber and other resources on land, to name just a few. A UCC-1 is a way of making sure a creditor who takes a security interest in a particular item get priority over a competing creditor’s interest in that property. The general rule is the first to file the UCC-1 is the first in line to be paid back, though that general rule comes with many exceptions.

They are very basic forms though. They generally only require 3 things to be valid:

  1. Debtor’s name and address
  2. Creditor’s name and address
  3. A description of the collateral

That’s it. The forms can be found online, and completed online, and filling them out should be quick and easy. For example, in Massachusetts they can be found here: http://www.sec.state.ma.us/cor/corpdf/ucc1.pdf.

What does this have to do with solar panels, and what’s the problem?

I snuck it in above in the middle of a list, but remember I said it covers fixtures in or on a home? While it’s very difficult to say what is and is not a fixture until a court rules that something is a fixture, there is a very strong argument that solar panels would be fixtures. After all, they are literally affixed to a home. This also likely increases the value of the property, which means that potentially a bank holding a mortgage to the real property is now competing with a creditor holding a security interest in the solar panels that are attached to the real property. Generally, the mortgage wins this battle of priority.

But not always!

If a bank gives a loan to a borrower for the purpose of installing solar panels, the bank will likely be deemed to have a special kind of interest called a purchase-money security interest. If that bank also properly files a UCC-1 fixture filing (which just requires an addendum to the UCC-1), then the bank can take priority even over a mortgage. This is called a super-priority purchase-money security interest.

This can be a problem for the bank holding the mortgage, and for the homeowner when it comes time to sell or refinance the home, because now there is a senior lien on the property. Unfortunately, whether it is even a problem is something that is determined on a case-by-case basis, which is especially true when it’s an installer with a lease on the panels.

My goal here though was to spread awareness about some potential pitfalls to watch out for when lending to install solar panels. And of course I’m not trying to discourage the making of the loans or installation of solar panels, but in compliance we are in the business of making sure it’s done right. My inkling is that new programs and products like the Fannie Mae one will emerge that will make these concerns a relic of the past, but for now I just want everyone to make sure they have their priorities in line (again, pun intended).

Bryan T. Noonan, Esq.
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)

Reporting Gross Annual Revenue for CRA Purposes

This is going to start off looking like my post about reporting income on the HMDA/LAR. That’s because the standard for what gross annual revenue institutions rely on when reporting for CRA purposes is similar to reporting gross annual income for HMDA. That is, in making its determination of whether a business meets the $1 million or less standard, “an institution should rely on the revenues that it considered in making its credit decision.” (See A Guide to CRA Data Collection and Reporting, page 13.) But that’s about the extent of the similarity, and there are some wrinkles that can make GAR reporting tricky.

Before starting though, it should be noted that institutions are not required to consider or gather revenue information when making a loan. If revenue information is not collected or considered when making a loan, then GAR information should be coded for “revenues not known” when reporting.

If, however, revenue information is gathered and/or relied upon, then the calculation for reporting goes as follows, regardless of how it was regarded internally.

Definition of Gross Annual Revenue

“Gross annual revenue” is the total yearly income from all sources before deductions, exemptions, costs, reductions, or other adjustments. It’s typically listed on the Profit & Loss Statement on the first or second line, with a name like Gross Revenue, Total Revenue, Gross Sales, Total Sales, Gross Income, Total Income, etc. Only the actual revenue counts for CRA purposes; projected, pro forma, or other expected income should not be used for determining the $1 million threshold. This means that a start-up business with no annual sales yet would have gross annual revenues of $0, which is completely allowed.

GAR does not need to be verified, and institutions can rely on the borrower’s reporting of GAR.

GAR Used in Making the Credit Decision

The CRA reporting guide says that only the revenues that an institution considered when making its credit decision should be used to determine whether a small business or farm had gross annual revenues of $1 million or less. Practically speaking, this means that the revenues of the entities the institution considered in making its credit decision.

This most commonly comes up in loans to subsidiaries. If the institution relies solely on the subsidiary to make a credit decision on the loan, then only the subsidiary’s GAR is used for reporting. If, however, the credit decision is based on the parent company’s revenues also, then the two combined companies’ revenue is what’s considered.

Say ABC, Inc., with gross annual revenues of $15 million, creates a subsidiary, X Corp, with gross annual revenues of $0. A bank making a loan to X Corp, knowing X Corp’s ability to repay it is based on ABC, Inc.’s revenue, can’t claim that loan was made to a small business and must report revenues over $1 million. But if X Corp’s revenue is high enough (or not considered) so that the bank makes its credit decision based on X Corp’s performance alone, then only X Corp’s GAR information is considered when reporting.

Exceptions

First, the easy exception, personal income isn’t reported as GAR. If a business applies for a loan that is guaranteed or cosigned by an individual personally, and the decision to make the loan considers the individual’s salary (maybe from another job), that salary is not considered as GAR. If John, a salaried employee, decides to start a side business, J Corp, and J Corp then applies for a loan which John personally cosigns or guarantees, then John’s salary is not included in the GAR calculation even if the bank considers this income when making the credit decision.

The second exception is with unaffiliated cosigners or guarantors. Unaffiliated cosigners or guarantors do not count towards the GAR calculation. “Affiliated” businesses are generally ones which have a direct or indirect ownership interest or control. So if John’s brother-in-law’s business, M Corp, is a guarantor on J Corp’s loan but has no ownership interest or control of J Corp, then M Corp’s revenue is not included in the GAR calculation because M Corp is unaffiliated.

The analysis is very fact-driving, and can vary on a case-by-case basis. It’s important to know the rules, just as it’s important to know your customers.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Reporting Income on the HMDA/LAR

There can be a lot of confusion about what income or revenue to report on the HMDA/LAR. Most of this confusion can be because the income to be reported on the LAR is not always what was used to underwrite the loan. So how do you determine what to report for income on the LAR?

Definition of Income and Revenue

First thing to keep in mind: there is no set, standard definition of “income” for HMDA. The FFIEC glossary definition of “gross annual income” is “[t]he income reported is the total gross annual income an institution relied upon in making the credit decision.” (The government has no problem with using a word in the definition of the word.) This is consistent with the regulatory comments on income reporting, which says “[a]n institution reports the gross annual income relied on in evaluating the creditworthiness of applicants.” (12 CFR § 1003.4(a)(10)- Comment 6.) This includes cosigners, co-applicants, and co-borrowers, if their income is used to make the credit decision (i.e., qualify for the loan).

Primary vs. Secondary Liability Test

This isn’t stated clearly in the regulations, but it should be: income is only reported on those primarily liable under the loan, if their income is used to make the credit decision.

Cosigners, co-applicants, and co-borrowers are generally presumed to be primarily liable on the loan, meaning they have the primary obligation to repay the loan. Guarantors are often secondarily liable, meaning they only become liable for the debt after those primarily liable fail to repay the loan. It’s not always as simple as that in practice, but for our purposes guarantors = secondarily liable.

An institution may make a credit decision on a borrower’s application based on the commitment of a guarantor. They may consider the income of a guarantor, and based on that income combined with the borrower’s income, agree to make the loan.

In this case, the credit decision is being made based on the income of the borrower and the guarantor. But only the borrower’s income should be reported on the LAR. That is because “an institution does not include the income of a guarantor who is only secondarily liable.” (See Comment 6, above; see also HMDA Guide to Reporting, Appendix D-10, Paragraph 6.)

So the second part of the reporting test looks at who is primarily liable on the loan.

Example

Here’s a concrete example taken right from the Fannie Mae HomeReady Non-Borrower Household Income Flexibility worksheet:

“A single woman with children is looking to buy a larger home, so her father can move in with her. Her father has monthly income and, although he will not pay rent to his daughter, he may contribute to household expenses periodically. The father’s income is not considered as qualifying income; therefore, there is no change to the borrower’s DTI ratio of 47%. The existence of the father’s income, however, is considered the compensating factor that allows the borrower to have a DTI ratio greater than 45%.”

The father’s income in this case is not reported on the LAR, because the father (presumably) will not be primarily liable on the loan. This is despite the fact that if you are an institution underwriting to the HomeReady standards, the credit decision is made based on his income.

Note though that if the father is a cosigner on the loan, meaning he shares primary liability, then both the woman and the father’s income would both be reported together.

 

Bryan T. Noonan, Esq.
Regulatory Compliance Consultant
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA  02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Rounding and Decimal Places

When should a values be rounded on the LE or CD? And what decimal place should it be rounded to?

On the LE, 12 C.F.R. § 1026.37(o)(4) is the rule on rounding. The general rule is “any amount required to be disclosed by § 1026.37 [the LE] is not permitted to be rounded and is disclosed using decimal places where applicable, unless otherwise provided.” In other words, the default is actually to not round, and you can only round where specifically told you can.

This might be surprising on the LE, where it seems most of the figures are rounded. But that’s because the list of rounded figures the LE “otherwise provides” is rather long. On the LE, here are the figures that should be rounded:

  1. Amounts in the “Loan Terms” table on the right hand side, under the “Can this amount increase after closing?” and “Does the loan have these features” sections;
  2. The minimum and maximum monthly payment ranges for adjustable rate mortgages;
  3. Mortgage insurance premiums on page 1 in the “Projected Payments” table;
  4. The Estimated Escrow on page 1 in the “Projected Payments” table;
  5. The Total Monthly Payment on page 1 in the “Projected Payments” table;
  6. Estimated Taxes, Insurance & Assessments on page 1;
  7. The Loan Costs table on page 2;
  8. The Other Costs table on page 2;
  9. The Calculating Cash to Close table on page 2;
  10. The Adjustable Payment table on page 2;
  11. The In 5 Years calculation on page 3.

The CD keeps the same general rule, but has a lot fewer amounts that are permitted to be rounded. They are though:

  1. Amounts in the “Loan Terms” table on the right hand side, under the “Can this amount increase after closing?” and “Does the loan have these features” sections;
  2. The minimum and maximum monthly payment range for adjustable rate mortgages;
  3. When comparing amounts on the CD with those on the LE in the “Calculating Cash to Close” table;
  4. The amounts in the Adjustable Payment table;

This probably isn’t an issue for 99% of you, because systems are pretty good at identifying which figures should be rounded. The real takeaway, and something to keep in mind, is that the default rule is to not round.

Percentages and Decimal Places

Some percentage amounts are also required to be capped at two or three decimal places. But again, the general rule is still to disclose the uncapped amount unless otherwise provided.

The percentage amounts that cannot be rounded and are capped at 2 or 3 decimal places are:

  1. The percentages contained in the “Loan Terms” table;
  2. Percentages on page 2, section A “Origination Charges”;
  3. Percentages in the Adjustable Interest Rate Table;
  4. The Total Interest Paid (TIP) disclosure on the last page;
  5. The APR disclosed on the last page (up to 3 decimal places, not 2).

All other percentages are not capped at 2 or 3 decimal places, which means they “must be disclosed as an exact numerical amount using decimal places where applicable.” This comes up in places like the prepaid interest disclosure: there is no cap on the decimal points for prepaid interest. If you calculate prepaid interest out into 4 decimal places, then it should be disclosed up to 4 decimals places.

 

Bryan T. Noonan, Esq.

SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Identifying the difference between high-cost mortgages, higher-priced mortgage loans, and higher-priced covered transactions.

High-cost mortgages, higher-priced mortgage loans, and higher-priced covered transactions; they all sound pretty similar, so what’s the difference? There are actually some important, if subtle, distinctions between the three when it comes to identifying them.

High-Cost Mortgages

High-cost mortgages are subject to special disclosure requirements (12 CFR § 1026.32(c)), limits on loan features and terms (12 CFR § 1026.32(d)), and has other prohibited acts or practices associated with it (12 CFR § 1026.34). There are 3 tests for determining whether a loan is a high-cost mortgage and any one of these features is enough by itself to make a loan a high-cost mortgage.

A high-cost mortgage is a consumer credit transaction secured by a consumer’s principal dwelling, that:

  1. (APR test) Has an APR above average prime offer rate (APOR) by:
    1. 6.5 percent for a first-lien transaction;
    2. 8.5 percent for a first-lien if the dwelling is secured by personal property and less than $50,000 (so intended for mobile or manufactured homes, boats, etc.); or
    3. 8.5 percent for a subordinate lien.
  2. (Points and Fees test) Has points and fees exceeding:
    1. 5 percent of the total loan amount for a loan of $20,000 and more; or
    2. For a loan under $20,000, 8 percent of the total loan amount or $1,000, whichever is less.
  3. (Prepayment Penalty test) Allows under the loan contract for the creditor to charge a prepayment penalty:
    1. More than 36 months after consummation, or
    2. Total prepayment penalties exceeding 2 percent of any amount prepaid.

Higher-Priced Mortgage Loan

Compare what makes a high-cost mortgage with what makes a higher-priced mortgage loan as defined in 12 CFR § 1026.35(a). A higher-priced mortgage loan is closed-end consumer credit transaction secured by the consumer’s principal dwelling with an APR that exceeds APOR by:

  1. 3.5 percent for subordinate liens;
  2. 2.5 percent for jumbo loans; or
  3. 1.5 percent for all other loans.

Higher-Priced Covered Transaction

Finally, higher-priced covered transactions at first glance look similar to higher-priced mortgage loans, but the “covered transactions” part refers to these loans’ status under the qualified mortgage rules of § 1026.43. The percentages are similar as higher-priced mortgage loans, which is part of what can make them tricky.

Higher-priced covered transactions are covered* consumer credit transactions secured by a dwelling where the APR exceeds APOR by:

  1. 3.5 percent for subordinate liens;
  2. 3.5 percent on first-liens that qualify for Small Creditor QM; or
  3. 1.5 percent for all other loans.

* “Covered transactions” are closed-end by definition under the QM rules.

Some Important Observations

So note there are some shared elements of each, with also some key differences. For example, high-cost and higher-priced mortgage loans only apply to principal dwellings, while higher-priced covered transactions can apply to any property that is a dwelling. High-cost mortgages can apply to either open- or closed-end loans, but higher-priced mortgage loans and higher-priced covered transactions only apply to closed-end loans.

Finally, the three types of loans are not exclusive! High-cost mortgages can also be higher-priced mortgage loans; higher-priced mortgage loans can be higher-priced covered transactions. When a loan meets the requirements though, all the accompanying restrictions and obligations also need to be met (which is a subject for another day). For example, if a high-cost mortgage is also a higher-priced mortgage loan, then the escrow requirements for higher-priced mortgage loans needs to be met along with all other restrictions and requirements. This is why it’s so important to be able to recognize each type and how they are identified and defined.

 

Bryan T. Noonan, Esq.

SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com

Sweating the Little Things

I had a karate instructor who liked to say “if you take care of the little things, the big things take care of themselves.” The internet tells me that’s a quote from Emily Dickinson, but it’s also an appropriate one for compliance because sometimes the little things become big themselves.

For example, let’s say you’re a banker who is looking to broker a loan you don’t normally handle, such as an FHA or reverse mortgage. An applicant has sent an application and—oops!—they forgot some basic but critical information that you know will get the application denied by the lender. What do you do with it?

Let’s look closer at the “little things” here.

    Rule for Mortgage Brokers in Massachusetts

Mortgage brokers know they can’t make credit decisions in Massachusetts. It’s a basic, simple rule well known in the industry. But where does this rule come from? Is there a rule out there that says “if you’re a broker in Massachusetts, you shall not make a credit decision”?

Apparently not. The rule comes from how “mortgage broker” and “mortgage lender” are defined and interpreted. Massachusetts law defines “mortgage lender” as someone in the business of making, funding, or committing to make a mortgage loan. So if a broker makes a commitment to make a loan on behalf of an investor, then the broker is acting as a lender under the Massachusetts definition of the term.

And brokers cannot issue the approval or denial notice to the applicant, even on behalf of the lender and even if the broker did not make the decision of whether or not to make the loan. So even if the broker is simply acting as the middle-man, they cannot tell the applicant of the lender’s credit decision. Why not? Well even a broker sending the notice on behalf of the lender is seen as potentially misleading to the consumer, because the consumer might get the impression that it is the broker, not the lender, who is funding their loan.

So that’s where it comes from, and leads to two easy rules: first, mortgage brokers can’t make credit decisions about a mortgage because that’s the lender’s job, and second, brokers can’t inform applicants about the lender’s decision, because that’s potentially misleading to the consumer.

    The Incomplete Application Problem

But a notice about an incomplete application isn’t necessarily a credit decision, right? Unfortunately, under ECOA, it is treated about the same. ECOA allows creditors usually 30 days to notify an applicant to a loan of a credit decision, whether it is approved, denied, or requires more information to make. As we just established, brokers can’t send these notices in Massachusetts; they need to let the lenders do it.

So what happens when a broker receives an application that is missing obvious information that would cause the lender to issue a Notice of Incomplete Application? You don’t want to forward an incomplete application which you know the lender will not accept, and the lender doesn’t want to waste its time and resources reaching out to applicants for missing information they should have provided the broker in the first place. Can the broker just send the applicant a Notice of Incomplete Application to avoid this problem from the beginning? Or does the broker need to send out the defective application for the lender to do all the dirty work?

There isn’t a clear answer to this question yet. The strictly compliant thing to do, it seems, is to let the lender make all the decisions and send all the notices. But the result is something both straightforward and silly if you look at it closely. The rules against brokers making credit decisions mean that brokers cannot send a Notice of Incomplete Application to an applicant when they spot an application with an obvious and critical missing piece. At the same time, the rule means that the broker can request the information initially, but cannot go back and request it again if the applicant doesn’t supply it the first time.

So you want an answer, what do you do? Here you go: send it to the lender and let them send the notice. It might be counter-intuitive and against common sense, but until there is some guidance to the contrary it is the right thing to do.

But I think we’ll be looking into this problem more fully in the next few weeks. For now though, the “little things” don’t seem to be so little when looked at closely.

By the way, it’s been a while since this blog has been updated, but I’m taking over the mantle of it. I hope you find it helpful, maybe thought provoking, funny or interesting. I’ll be aiming to post here more regularly in the future, but in the meantime if you have any questions, comments, concerns, criticisms, or would like to contact me for whatever reason, I’d be more than happy to talk with you. Contact me at:

Bryan T. Noonan, Esq.
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184
781-356-2772
781-356-2837 (fax)
www.scapartnering.com