Happy New Year from the Mortgage Banking Group

The mortgage banking industry saw a whirlwind of regulatory activity in 2013, and the new year is ushering in new rules that will change how our clients do business. The Consumer Financial Protection Bureau's ability-to-repay and qualified mortgage rules, as well as its mortgage servicing rules, are taking effect this month. Ballard Spahr's Mortgage Banking Group and our Mortgage Banking Update have been there every step of the way to help make sense of these rules and analyze many other developments, including significant mortgage banking litigation rulings.

With change constantly on the horizon, we remain dedicated to keeping you informed of the latest industry news in the coming year. We wish you a happy and prosperous 2014.

- Richard J. Andreano Jr. and John D. Socknat

NY Issues Shared Appreciation Mortgage Proposal for Underwater Borrowers

New York's Department of Financial Services (DFS) has issued proposed regulations that authorize shared appreciation mortgages (SAMs) to be made to borrowers who are "underwater" on their mortgages. Under a SAM, the mortgage holder agrees to modify the mortgage loan to reduce the mortgage principal in exchange for a share of the home's future appreciation. The proposal would allow a servicer to enter into a SAM on behalf of the mortgage holder.

Under the proposal, to be eligible for modification to a SAM, a mortgage loan would have to:

  • Be secured by a first lien on real property located in New York that is improved by a one-to-four-family residence or a residential unit in a building that is used or intended to be used as a home or residence
  • Have a principal balance that exceeds the property's appraised value
  • Be 90 or more days past due or the subject of an active foreclosure action
  • Be owed by a mortgagor who is ineligible for various mortgage modification programs (such as the federal Home Affordable Modification Program) or a refinance under the Home Affordable Refinance Program or FHA refinance program

The proposal would limit a mortgage holder's share of appreciation under a SAM to the lesser of the amount of the reduction in principal plus interest, or 50 percent of the appreciation. It would also limit the amount of the principal balance remaining on a mortgage that has been modified in connection with a SAM.

Various disclosure requirements are included as well. The proposal would require certain disclosures to be provided to the borrower at or before accepting an application for a SAM and a notice containing certain disclosures to be provided to the borrower before entering into a SAM agreement. It would also require a SAM agreement to contain a specified legend stating that the borrower is "giving away some of any future appreciation in the value of" the borrower's home.

The proposal specifies the fees that a holder may charge at closing and contains various prohibitions. These prohibitions include that a holder may not enter into a SAM without written documentation that the terms were explained to the borrower by an attorney or HUD-certified counselor, and no prepayment penalty can be charged on prepayment of a mortgage modified in connection with a SAM.

The proposal was published in the New York Register on December 18, 2013, and comments will be received until 45 days thereafter (February 3, 2014).

- Barbara S. Mishkin

FTC Settles First FCRA Risk-Based Pricing Notice Enforcement Action

The Federal Trade Commission recently announced the settlement of its first enforcement action for alleged violations of the Fair Credit Reporting Act (FCRA) risk-based pricing rule (Rule). The settlement demonstrates that the FTC remains focused on FCRA enforcement even though it shares FCRA enforcement authority regarding nonbanks with the Consumer Financial Protection Bureau. In addition, the settlement serves as a reminder of the need for companies to review their policies and procedures for compliance with the Rule. 

Under the settlement, Time Warner Cable (TWC) agreed to pay a civil penalty of $1.9 million to settle charges that it failed to provide risk-based pricing notices to consumers who were required to submit a security deposit or advance payment of the first month's bill as a condition of receiving cable television, high-speed Internet, or other technology services. The FCRA requires a creditor to provide such a notice to a consumer when, based on a consumer report used in connection with a credit application, the creditor grants credit on terms materially less favorable than the most favorable terms obtained by a substantial portion of consumers. 

For purposes of the FCRA, "credit" means a "right granted by a creditor to an applicant to defer payment of a debt or to incur debt and defer its payment or to purchase property or services and defer payment therefor." TWC was considered to be a creditor receiving applications for "credit" from consumers because it permitted consumers to defer payment for the services purchased.

A risk-based pricing notice must inform the consumer that the credit terms offered were based on information in a consumer report. It must include certain other information, such as a statement that such credit terms may be less favorable than the terms offered to consumers with better credit histories and, if the consumer's credit score was used in setting the material terms of credit, a credit score and related information. (A risk-based pricing notice containing similar information also is required when an account review results in an increase in the consumer's annual percentage rate (APR) based on information in a consumer report.)

Although the FTC and CFPB share FCRA enforcement authority regarding nonbanks, the Dodd-Frank Act transferred most FCRA rulemaking authority to the CFPB. Before the transfer, the FTC and Federal Reserve Board had jointly adopted risk-based pricing rules that first became effective on January 1, 2011, and were subsequently amended effective August 15, 2011, to add the disclosure of credit score information. Those rules were consolidated in the Rule, which is now part of the CFPB's Regulation V (12 CFR Part 1022) that incorporated the FCRA rules of the FTC and federal banking agencies. 

In addition to imposing the $1.9 million civil penalty, the settlement enjoins TWC from failing to comply with the Rule and, for 10 years, requires TWC to create various records, each of which must be retained for five years. Those records include accounting records showing revenues from all goods and services sold to consumers in transactions in which a credit report or credit score was considered, certain information for transactions in which a consumer report or credit score resulted in increased cost to the consumer (such as records showing the total dollar value of the increased costs), and personnel records for each person involved with risk-based pricing notices.

- Barbara S. Mishkin


Montana Amends Licensing Requirements under the Montana Mortgage Act

The Montana Department of Administration (the Department) has recently amended rules pertaining to pre-licensing education, the definition of "origination of a mortgage loan," the certification of bona fide not-for-profit entities, and the time frame in which an application is to be deemed abandoned under the Montana Mortgage Act (the Act).

Under the new rules, an individual seeking a mortgage loan originator's license must complete two hours of pre-licensing education specific to Montana residential mortgage statutes and rules. This time may be counted toward the completion of the 20 hours of pre-licensing education required by the Act. Note that on July 1, 2013, Montana adopted the Uniform State Test.

The new rules clarify the definition of "origination of a mortgage loan" to clearly exclude credit underwriting activities from licensing as long as the underwriter does not communicate directly with the borrower about specified credit terms.

In addition, the exemption section of the Act was amended to exempt entities that are bona fide not-for-profit entities from licensure. The amended rules direct that such an entity must certify that it meets the exemption by using the "Montana Bona Fide Not-For-Profit Certification" form both initially and annually.

The amended rules also state that a Mortgage Loan Originator License application is deemed abandoned if the applicant fails to provide the information requested by the Department within 60 days of notification of any deficiencies or December 31, whichever comes first.

New rules will become effective on March 1, 2014.

California Modifies Finance Lenders Law License Exemptions

The state of California recently modified provisions of the California Financial Code relating to mortgage lenders in Assembly Bill No. 1091. Existing law exempts California business and industrial development corporations, licensed pawnbrokers, and persons making no more than one commercial loan in a 12-month period from the California Finance Lenders Law.

The amended law will exempt from the Finance Lenders Law:

  • California business and industrial development corporations when acting under federal law or other state authority
  • Licensed pawnbrokers when acting under the authority of that license
  • Persons making five or fewer commercial loans in a 12-month period as long as the loans are incidental to the business of the persons relying on the exemption

The legislation becomes effective on January 1, 2014.

Utah Amends Mortgage Loan Originator License Renewal Requirements

The Utah Division of Real Estate has amended the Utah Residential Mortgage Practices and Licensing Act rules regarding Mortgage Loan Originator License renewal. Licensees are now required to submit a fingerprint background report and a credit report to renew a license in the renewal period beginning November 1, 2015, and every fifth year following that renewal period. The amendment is effective immediately.

- Marc D. Patterson

Copyright © 2013 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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