More of Mortgage Reform in 2014
The Consumer Financial Protection Bureau (CFPB) issued new rules as a part of the Truth in Lending Act (TILA) and the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE). The rules became effective in January and impact loans on real property with residential dwellings of one to four units. The rules are not limited to first liens or primary residences, but do not extend to time-shares and some of the provisions do not apply to home equity open credit loans (HELOCs).
A “Loan Originator” is an individual or organization that, for compensation or other monetary gain, performs services in connection with a loan, including: taking an application, assisting a consumer in applying, offering or negotiating terms, extending credit, advertising such services to the public or even referring a consumer to a lender. Licensed real estate brokers are not considered Loan Originators for providing real estate brokerage services, as long as they are not compensated by a Loan Originator or lender (except for the payment of the real estate commissions on behalf of the consumer). However, real estate brokers must ensure they do not cross the line into providing services in connection with a loan. Independent advisory services such as accountants, attorneys, financial advisors and HUD- approved house counselors are also generally excluded, as well as those involved with renegotiating or modifying an existing mortgage.
Loan Originators must comply with state laws for qualification and must ensure their employees are fully screened, qualified and trained. Loan Originators must properly identify themselves in loan documents and are prohibited from financial incentives that historically were used to steer consumers to less advantageous loans. Compensation cannot be based on the interest rate or such terms as whether the loan has a prepayment penalty or the consumer uses the lender’s affiliate for title insurance. However, the compensation can vary based on the amount of the loan. Even though a lender may change terms or pricing to compete for a loan, if a Loan Originator similarly reduces his or her compensation, it may trigger the requirements and penalties for high-priced mortgages. For audit and enforcement purposes, Loan Originators must maintain all agreements for and records of compensation for three years. Lenders also must maintain agreements for and records of compensation to Loan Originators for three years.
Thanks to the lobbying efforts of the National Association of Realtors to save seller financing, there are two exceptions to the onerous new requirements for using Loan Originators: (1) Sellers financing one property in 12 months and (2) Sellers financing three or fewer properties in 12 months.
The One-Property in 12 months exclusion is available only to sellers who are natural persons, estates or trusts – no limited liability companies (LLC) or corporations – which eliminates many investors from this exclusion. The seller must have owned the property being financed and not have constructed it in the ordinary course of business, which eliminates spec houses. Finally, the loans must be fixed rates or an adjustable rate that is “reasonable” and won’t reset for at least five years and cannot include negative amortization. Balloon payment loans currently are permitted.
The Three-Property in 12 months exclusion is available to any seller, including an LLC or corporation, who owned the properties being financed and not have constructed it in the ordinary course of business. These loans must be fixed rates or an adjustable rate that is “reasonable” and won’t reset for at least five years and must be fully amortized. However, those taking advantage of this exclusion from using a qualified Loan Originator must comply with the Ability to Repay rules, evaluating the eight factors for a good faith determination that the consumer has a reasonable ability to repay the loan. (See February’s Newsletter.)
The penalties for violation of the Loan Originator regulations can be quite severe. In a suit filed by the CFPB against a mortgage company in July 2013, before the more stringent new rules became effective, the relief sought included restitution for consumers who were upsold on loans and monetary penalties for each bonus paid to a Loan Originator. The Dodd-Frank Act permits civil penalties of up to $5,000.00 for each violation; and for class actions, up to $1,000,000.00 or 1% of the lender’s net worth. Consumers can sue violators directly for damages, including all fees and finance charges paid.
Thus, while the exclusions to Loan Originator regulations facilitate seller carrybacks, real estate brokers will need to be familiar with these regulations to guide their sellers away from unlawful transactions without unwittingly coming within the definition of a Loan Originator themselves.