Financial Services Update
July 30, 2014
HIGHLIGHTS
Federal Regulatory Developments
CFPB, FTC, and States Announce Enforcement Sweep against Foreclosure Relief
“Scammers”
FAQ of the Week: Establishing an Exclusive Address for Receiving Notices of Error and
Requests for Information
CFPB Proposes Sweeping Revisions to HMDA’S Regulation C
State Regulatory Developments
Connecticut Enacts Mortgage Servicer Licensing Requirements and Amends Mortgage
Lender Provisions
WBK NEWS
Jim Milano will speak at the Lenders One Annual Conference on August 5 in Nashville,
TN. Jim will address the CFPB's recent policy guidance on mini-correspondent
programs, the use of marketing services agreements, and on-going challenges with
loan originator compensation issues. For more information contact Jim at
[email protected].
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intake process must be in addition to, and not in lieu of, the process for receiving
notices of error and requests for information by mail.
CFPB Proposes Sweeping Revisions to HMDA’S Regulation C
On July 25, 2014, the CFPB issued a proposed rule with request for comment (the
Proposed Rule) concerning potential revisions to Regulation C, which implements the
Home Mortgage Disclosure Act (HMDA). The Proposed Rule touches on every aspect
of Regulation C, and would potentially expand the number of mortgage lenders who
must report HMDA data (particularly nondepository mortgage lenders), the types of
transactions for which HMDA data must be reported, the types of data that must be
reported, and how such data must be reported. These potential revisions are
summarized below. Comments on the Proposed Rule are due by October 22, 2014.
Increased Institutional Coverage
In the Proposed Rule, the CFPB expressed concern that some mortgage lenders (in
particular nondepository institutions) may be escaping HMDA reporting requirements
due to the current Regulation C test that determines whether a nondepository institution
must report HMDA data. Under the current test, a nondepository institution must report
HMDA data if: (a) in the preceding calendar year, the nondepository institution
originated home purchase loans (including refinances of home purchase loans) that
equaled or exceeded at least 10%of its loan-origination volume, measured in dollars, or
at least $25 million; (b) on the preceding December 31, it had a home or branch office in
a Metropolitan Statistical Area (MSA); and (c) on the preceding December 31 it had total
assets of more than $10 million (including the assets of an parent corporation), or in the
preceding calendar year, originated at least 100 home purchase loans (including
refinances of home purchase loans).
Under the Proposed Rule, a nondepository for-profit mortgage-lending institution
instead would be required to report HMDA data if it had a home or branch office in an
MSA on December 31 of the preceding year and it originated at least 25 “covered loans”
(discussed further below), excluding open-end lines of credit, in that preceding calendar
year. The CFPB estimates that this new test will increase the number of nondepository
institutions required to report HMDA data by as much as 40% and the number of
originations and applications reported by those institutions by as much as 6%, and the
CFPB further speculates that this increased reporting will assist the CFPB in its
supervisory efforts over nondepository institutions.
By contrast, the Proposed Rule does not replace the current test for whether depository
institutions must report HMDA data; if anything, the Proposed Rule would appear to
reduce the number of depository institutions who would be required to report HMDA
data pursuant to Regulation C. The Proposed Rule would keep the current criteria for
determining whether a depository institution must report HDMA data, and would add the
further criterion described above: the depository institution must have originated at
least 25 covered loans, excluding open-end lines of credit, in the preceding calendar
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year. The CFPB states that loans originated by depository institutions that originate
less than 25 covered loans in a given year constitute a very small percentage of HMDAreportable loans, and therefore reducing reporting requirements for such institutions
reduces burden while not affecting HMDA’s ability to provide relevant data.
Increased Transaction Coverage
The Proposed Rule would also expand the kinds of loans for which HMDA data must be
reported. Instead of relying upon the current eligibility regime under Regulation C,
pursuant to which loans are reportable if (among other things) they are for purposes of
home purchase, home improvement, or refinancing, the Proposed Rule would instead
tie loan reportability to whether the loan is a “covered loan.” For these purposes, a
“covered loan” would be defined as any of the following:
 A closed-end mortgage – Any debt obligation secured by a lien on a dwelling
(without regard for loan purpose) that is not an open-end line of credit, a reverse
mortgage, or otherwise excluded from coverage.
 An open-end line of credit – An open-end credit plan as defined by §
1026.2(a)(20) of Regulation Z that is secured by a dwelling, without regard to
whether the loan is for a personal, family, or household purpose, without regard
to whether the person receiving credit is a consumer as defined under Regulation
Z, and without regard as to whether the person extending credit is a creditor as
defined under Regulation Z. Reverse mortgages and loans otherwise excluded
from coverage would not qualify as open-end lines of credit.
 Reverse mortgage – A transaction that is a reverse mortgage transaction as
defined by § 1026.33(a) of Regulation Z, and that is not otherwise excluded from
coverage.
This potentially would result in the inclusion of certain kinds of loans not currently
required to be reported under Regulation C. For example, the new definition of a
“closed-end mortgage” would appear to apply to a commercial-purpose loan that is
secured by a lien on a dwelling, even if the commercial-purpose loan was not for home
purchase, home improvement, or refinancing purposes.
The Proposed Rule would implement certain other definitional changes and
clarifications to Regulation C as well. For example, it would clarify that mobile homes,
recreational vehicles, and boats are excluded from the definition of “dwelling,” even if
they are occupied as residences.
Additional Reportable Data
In order to reduce burdens associated with Regulation C compliance and data
submission, the Proposed Rule would align the HMDA data collection and reporting
requirements (to the extent practicable) with the residential mortgage standards
developed by the Mortgage Industry Standards Maintenance Organization (MISMO),
including the Uniform Loan Delivery Dataset (ULDD) that is used when loans are
delivered to Fannie Mae and Freddie Mac.
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Accordingly, the Proposed Rule would modify and expand the information that must be
collected and reported for HMDA purposes as follows:
 Instead of an identifying number for each loan or application reported as
currently required by Regulation C, each financial institution would provide a
universal loan identifier for each covered loan or application, consisting of the
entity’s Legal Entity Identifier followed by up to 25 characters that must meet
certain criteria.
 Financial institutions would report whether the covered loan or application is for
a home purchase loan, a home improvement loan, a refinancing, or for some
other purpose (despite the fact that loan purpose would no longer be used to
determine whether a loan is reportable under Regulation C). The CFPB is
soliciting feedback as to whether financial institutions should not be required to
identify covered loans for purposes of home improvement, and whether rateand-term refinancings should be identified separately from cash-out
refinancings.
 The requirement to report property type would be replaced with a requirement to
report the construction method for the dwelling. Modular housing would be
reported as site-built.
 Financial institutions would report whether a property will be used as a principle
residence, a secondary residence (such as a vacation home), or an investment
property.
 For open-end lines of credit (including purchased and assumed lines of credit),
the amount of credit available to the borrower under the terms of the plan would
be reported.
 For a reverse mortgage, the amount of the covered loan that would be reported
would be the initial principal limit, as determined pursuant to § 1715z-20 of the
National Housing Act and implementing regulations and mortgagee letters from
HUD.
 For a rescinded loan, the Proposed Rule would require financial institutions to
report it as an application approved but not accepted if the borrower rescinds the
transaction after closing and before the institution is required to submit its LAR.
 For a conditional approval, the Proposed Rule would expand the examples of
conditions that are considered customary commitment or closing conditions and
those that are considered underwriting or creditworthiness conditions.
 Financial institutions would have to report the postal address of the property
securing the covered loan (or proposed to secure the covered loan in the case of
an application). Separate guidance would apply to covered loans relating to
multiple properties.
 The age of the applicant or borrower would be reported, as of the date of
application, in number of years as derived from the date of birth as shown on the
application form.
 The gross income requirement would be expanded to require reporting of gross
annual income relied on in making the credit decision requiring consideration of
income or, if such a credit decision was not made, the gross annual income
collected during the application process.
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The Proposed Rule would remove the exemption that financial institutions need
not report in quarterly updates the type of entity purchasing a loan that the
financial institution originated or purchased and then sold within the same
calendar year.
The difference between a covered loan’s annual percentage rate (APR) and the
average prime offer rate for a comparable transaction as of the date the interest
rate is set would have to be reported, but only for covered loans subject to
Regulation Z. This would be a significant expansion from the current
requirement under Regulation C, which only requires reporting of such rate
spreads for higher-priced and high-cost mortgage loans.
Financial institutions would have to report whether a loan is a high-cost
mortgage under Regulation Z because its APR exceeds the HOEPA APR
threshold or because its points and fees exceed the HOEPA points and fees
threshold.
The current exclusion of reporting lien status on purchased loans would be
removed.
Except for purchased covered loans, financial institutions would have to report
the credit score or scores relied on in making the credit decision and the name
and version of the scoring model used to generate each credit score.
The Proposed Rule would modify the “reason for denial” instructions to clarify
that the financial institution must list the principal reason for denial. It would also
provide a free-form text field for denial reasons not otherwise provided in the
instructions, and would add a “Not Applicable” code for use if the action was not
a denial as defined in Regulation C (e.g., if the file was withdrawn before a credit
decision was made).
Points and fees data would be reported for each loan subject to either HOEPA or
Regulation Z’s ability to repay requirement.
For covered loans subject to disclosure requirements under § 1026.19(f) of
Regulation Z (i.e., the new Closing Disclosure effective August 1, 2015), both the
total of all itemized amounts designated as borrower-paid at or before closing
and the points designated as paid to the creditor to reduce the interest rate
would have to be disclosed, expressed in dollars.
Also for covered loans subject to disclosure requirements under § 1026.19(f) of
Regulation Z, other than purchased covered loans, financial institutions would
have to report the interest rate that the borrower would receive if the borrower
paid no bona fide discount points.
Financial institutions also would have to report the interest rate that is or would
be applicable to the covered loan at closing or account opening.
The term, in months, of any prepayment penalty as defined by Regulation Z
would have to be reported.
Financial institutions would have to report the applicant’s or borrower’s debt-toincome ratio, as well as the ratio of the total amount of debt secured by the
property to the value of the property.
The term of the loan, expressed in months, would have to be reported for each
covered loan or application.
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Financial institutions would have to report the number of months until the first
date the interest rate may change after loan origination, if applicable; this would
apply regardless of how the interest rate adjustment would be characterized.
Financial institutions would have to report balloon payments, interest-only
payments, any contractual term that would cause negative amortization, or any
other contractual term that would allow for payments other than fully amortizing
payments, all as defined under Regulation Z.
The value of the property securing the covered loan (or proposed to secure the
covered loan, for an application) would have to be reported.
Financial institutions would have to report whether a manufactured home is
legally classified as real property or as personal property under applicable State
law, and would further have to report whether the applicant or borrower owns the
land on which the manufactured home would be located through a direct or
indirect ownership interest, or whether such land would be leased through a paid
or unpaid leasehold interest.
The number of individual dwelling units related to the property securing a
covered loan (or proposed to secure a covered loan for an application) would
have to be reported.
For multifamily dwellings, the number of individual dwelling units that are
income-restricted pursuant to Federal, State, or local affordable housing
programs would have to be reported.
Certain information related to the application channel of each reported
origination or application would have to be reported, except with respect to
purchased covered loans. Specifically, the financial institution would have to
report whether the applicant or borrower submitted the application for the
covered loan directly to the financial institution, and whether the obligation
arising from the covered loan was (or would be, for an application) initially
payable to the financial institution.
Financial institutions would have to report the unique identifier assigned by
NMLSR for the mortgage loan originator.
Except for purchased covered loans, each financial institution would have to
report the name of the automated underwriting system (AUS) it used to evaluate
the application and the recommendation generated by that AUS.
Financial institutions would have to report whether each covered loan is (or each
application is for) a reverse mortgage, and whether that reverse mortgage is
open-end or closed-end.
Financial institutions would have to separately identify reported transactions that
are home equity lines of credit (HELOCs).
The qualified mortgage status of a covered loan (as defined under Regulation Z)
would have to be reported.
For HELOCs and open-end reverse mortgages, the amount of draw on the
covered loan (if any) made at account opening would have to be reported.
The Proposed Rule would also provide additional commentary on a number of subjects.
For example, with respect to repurchased loans, the Proposed Rule would amend the
commentary to Regulation C to state that when a financial institution repurchases a
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covered loan that it had initially originated and sold to another financial institution or
secondary market participant within the same calendar year as the repurchase, the
originating financial institution should not report the loan as sold, and the purchasing
institution should not report it as purchased.
Disclosure and Reporting Revisions
In addition to the changes described above, the Proposed Rule would make several
revisions to how HMDA data is actually disclosed and reported. First, each financial
institution that reported at least 75,000 covered loans, applications, and purchased
covered loans, combined, for the preceding calendar year would have to submit its LAR
containing all data required to be recorded pursuant to § 1003.4(f) of Regulation C
within 60 calendar days after the end of each calendar quarter. The CFPB is
considering a one-year delay in the effective date of this provision once the final rule is
enacted.
Second, each LAR would be submitted in electronic format; the Proposed Rule would
eliminate the paper option currently applicable to entities that report 25 or fewer entries
on their LARs.
Third, the current HMDA Reporter’s Identification Number would be replaced with a
globally-accepted Legal Entity Identifier (LEI), a unique 20-digit alphanumeric identifier
associated with a single legal entity. The CFPB envisions that the LEI would serve as
the uniform international standard for identifying participants in financial transactions.
Fourth, each financial institution would have to identify its parent company, if applicable.
A parent company would be an entity that holds or controls an ownership interest in the
financial institution that is greater than 50%.
Fifth, with respect to disclosure statements that must be made under Regulation C,
such statements would be based on all data submitted by each financial institution for
the preceding calendar year, even if that financial institution must report quarterly as
described above. The CFPB anticipates that the FFIEC will develop tools that will
permit consumers to generate such reports with respect to each financial institution.
Once a financial institution receives notice that its disclosure statement is available, it
would have to make available a notice at its home office and in each branch office
located in an MSA that its disclosure statement may be obtained on the FFIEC website,
and include the FFIEC’s website address. Accordingly, the Proposed Rule would
eliminate the requirement that financial institutions make their HMDA data available for
inspection and copying.
Sixth, to take into account the increased amount of data that would be reportable and
protect consumer privacy, the Proposed Rule would clarify the Regulation C
requirement that financial institutions make their LARs available to the public in order to
state that the modified LAR that is released to the public may only show the data fields
that may be released on the modified LAR under the current version of Regulation C
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(which removes the application/loan number, application date, and action taken date
fields).
Conclusion
As this summary demonstrates, the Proposed Rule makes a number of substantial
changes to the reporting requirements under Regulation C. We encourage mortgage
lenders to review the Proposed Rule carefully, in order to fully appreciate the potential
impact it may have on their HMDA reporting obligations and in order to provide the
CFPB with informed comments.
State Regulatory Developments
Connecticut Enacts Mortgage Servicer Licensing Requirements and Amends
Mortgage Lender Provisions
Connecticut recently enacted Substitute House Bill No. 5353 (HB 5353) which will affect
the mortgage servicing industry in various ways, including the implementation of a new
licensure requirement for mortgage servicers in Connecticut. The law also amends
certain requirements applicable to Connecticut mortgage lenders and mortgage brokers.
The law generally becomes effective on October 1, 2014. However, the requirement to
obtain a mortgage servicer license becomes effective on or after January 1, 2015. In
addition, as identified below, a few substantive provisions of HB 5353 will not become
effective until January 1, 2015.
Note that HB 5353 amends numerous provisions of Connecticut laws, and this Alert
offers a summary of only some, but not all, of the changes enacted by HB 5353.
Definition of “Mortgage Servicer”
HB 5353 generally defines a “mortgage servicer” as an entity that, for itself or on behalf
of the holder of a residential mortgage loan, receives payments of principal and interest,
records such payments on the books, and performs other administrative functions, as
necessary. The term “mortgage servicer” also expressly includes entities that make
payments to borrowers under a home equity conversion mortgage or a reverse
mortgage. The law defines a residential mortgage loan as any loan primarily for
personal, family or household use that is secured by a mortgage, deed of trust or other
equivalent consensual security interest on a dwelling located in Connecticut, or real
property located in Connecticut upon which is constructed or intended to be constructed
a dwelling.
Mortgage Servicer Licensing and Exemption Provisions
Perhaps the most notable requirement of HB 5353 is that, on and after January 1, 2015,
an entity may not act as a mortgage servicer without first obtaining a license for its main
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