The CFPB's fines, Final rules, Defining rural lenders, Updates on exam procedures...

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The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ), after an investigation that begin in early 2014, announced a joint action against Hudson City Savings Bank for discriminatory redlining practices that denied residents in majority-Black-and-Hispanic neighborhoods fair access to mortgage loans. The complaint filed by the CFPB and DOJ alleges that Hudson City illegally provided unequal access to credit to neighborhoods in New York, New Jersey, Connecticut, and Pennsylvania. The bank located branches and loan officers, selected mortgage brokers, and marketed products to avoid and thereby discourage prospective borrowers in predominantly Black and Hispanic communities. If the proposed consent order is approved by the court, Hudson City will pay $25 million in direct loan subsidies to qualified borrowers in the affected communities, $2.25 million in community programs and outreach, and a $5.5 million penalty. This represents the largest redlining settlement in history to provide such direct subsidies.

The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against applicants in credit transactions on the basis of characteristics such as race, color, and national origin. In the complaint, the CFPB and DOJ alleged that from at least 2009 to 2013, Hudson City violated the law when it engaged in illegal redlining by offering unequal access to credit based on the race and ethnicity of prospective borrowers' neighborhoods. Specifically, Hudson City structured its business to avoid and thereby discourage residents in majority-Black-and-Hispanic neighborhoods from accessing mortgages. The DOJ also alleges that Hudson violated the Fair Housing Act, which also prohibits discrimination in residential mortgage lending. 

Remember that last week the CFPB also took legal action against World Law Group. The lawsuit against World Law names individuals responsible for running a debt-relief scheme that charged consumers exorbitant illegal upfront fees. The CFPB alleges the debt-relief scheme falsely promised consumers a team of attorneys to help negotiate debt settlements with creditors, failed to provide legal representation, and rarely settled consumers' debts. 

No, the CFPB has not been sitting on its hands. Using enforcement actions to effectively run an entire industry is not a good way to run residential lending, and everyone is certainly waiting for "another head to be put on a stake on the castle wall" regarding MSAs. That being said, the CFPB issued a final rule amending threshold adjustments for 2016 HOEPA and QM loans, effective January 1st, 2016. The final rule regarding various annual adjustments is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank. The adjustments made by the final rule are effective January 1, 2016. The revised loan amount threshold for HOEPA loans is $20,350 and the adjusted statutory fee trigger is $1,017. 

HOEPA requires the CFPB to annually adjust the total loan amount thresholds that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount.  In the final rule, the CFPB decreased the current dollar thresholds from, respectively, $20,391 to $20,350 and $1,020 to $1,017.

And helping every borrower better shop their lender (I didn't say that!), "As part of our Know Before You Owe mortgage initiative there is now a Loan Estimate that makes shopping for a mortgage easier than ever. The Loan Estimate uses clear language and design to help you understand the key features, costs, and risks of a loan offer you've received from a lender. Starting October 3, lenders will give you the Loan Estimate for most mortgages you apply for. The new design also makes it easier to compare Loan Estimates. Shopping for the best deal on your mortgage could save you money over the years. You should get Loan Estimates from at least three lenders and compare them to find the loan that's best for you and your family."

The CFPB also issued a rule that will increase the number of financial institutions that are able to offer certain types of mortgages in rural and underserved areas. "The rule also gives small creditors time to adjust their business practices to comply with the new rules. We will update some of the Title XIV implementation materials on our website to reflect the changes, and will send an email to let you know when we have posted those updates." Yes, it issued a final rule that revises the definitions of "small creditor" and "rural areas" under Regulation Z of the Truth in Lending Act (TILA). The final rule is effective January 1, 2016 and creates special small creditor provisions with regard to certain Regulation Z requirements. Certain provisions apply to small creditors in general, while other provisions apply to small creditors that operate predominantly in rural or undeserved areas.

Additionally, the annual percentage rate ceiling for a first lien loan to be a non-higher priced mortgage loan that is eligible for the qualified mortgage safe harbor under the ATR rule is higher for small creditors than other creditors (i.e., less than 3.5 percentage points above a benchmark rate as opposed to less than 1.5 percentage points above the benchmark rate). To increase the number of financial institutions eligible for these special provisions under Regulation Z, the final rule revises the definition of "small creditor" by increasing the loan origination limit for determining eligibility for small-creditor status from 500 originations of covered transactions secured by a first lien to 2,000 originations. Significantly, originated loans held in portfolio by the creditor and its affiliates are excluded from the 2,000 loan cap. 

In addition it includes the assets of the creditor's affiliates that regularly extended covered transactions in the calculation of the $2 billion asset limit for small-creditor status. The CFPB took this step to prevent larger creditors from attempting to fit within the small creditor provisions through organizational changes. It also expands the definition of "rural area" to include either: (a) a county that meets the current definition of a rural county; or (b) a census block that is not in an urban area as defined by the U.S. Census Bureau. Additionally, the rule allows creditors to rely on a new automated tool provided on the CFPB website to determine whether properties are located in rural or underserved areas, or on the Census Bureau's website to assess whether a particular property is located in an urban area (based on the Census Bureau's definition). For more details definitely click on the link a few paragraphs up! 

The CFPB updated two regulatory examination procedures, the Real Estate Settlement Procedures Act (88 pages) and the Truth in Lending Act (323 pages). Yes, 323 pages of simplification.

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The Price of Messing up on TRID

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Back to school? The U.S. Census Bureau has come to the rescue with a lot of forgettable numbers - but those actuary and statistics majors have to do something, right? There are about 78 million children and adults enrolled in school throughout the country ranging from nursery school to college and comprised of 26% of the population age 3 and older. A quarter of elementary through high school students had at least one foreign-born parent in October 2013. About 74% of college graduates with a degree in science, technology, engineering or math (STEM) were not employed in STEM occupations. And underwriters could probably tell you that the average earnings for full-time workers with a bachelor's degree were $83k in 2012, compared to $41,248 for full time workers with a high school diploma.

Unlike the free magazine above, mistakes cost money. ComplianceEase recently released an analysis of compliance defects for closed loans and found that the cost of correcting errors is pushing the cost of origination up by $28 per loan. Their research also indicated that 17 percent of the 700,000 loans analyzed failed for TILA reasons and 6 percent failed for being outside of RESPA tolerances. For the 6 percent of loans that failed the RESPA tolerance test, the average cost for reimbursement was $328 and for 2 percent of loans that had an uncured RESPA violation the average reimbursement cost was $740. With the upcoming TRID regulations, lenders will have to be more cautious as penalties will range from $5,000 per day to $1 million per day for "knowing violations." Also one year after the effective date of the QM rule, Compliance Ease's research showed that 4.5 percent of QM loans failed Safe Harbor tests and 11 percent were mis-categorized as to their QM status.

With about 20 business days left until the TRID hammer comes down on the industry, I have received several questions about penalties if something goes wrong. Brennan Holland with Lenders Compliance Group writes, "The penalties for closing even a single loan in violation of the TILA-RESPA Integrated Disclosure (TRID) regulations can far outweigh any costs incurred in ensuring compliance with the new requirements.... For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues.... For any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues... For any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues..."

The Mortgage Action Alliance issued a Call to Action, urging its members to contact their members of Congress in support of legislation that would provide a temporary enforcement grace period and legal safe harbor to ensure smooth implementation of the new TILA-RESPA Integrated Disclosures rules for lenders that make a good-faith effort to comply.  

In the House, H.R. 3192, the Homebuyers Assistance Act, introduced by Rep. French Hill, R-Ark., would provide a legal safe harbor for lenders through February 1, 2016. The bill was approved by the House Financial Services Committee in late July.  In the Senate, S. 1711, introduced by Sen. Tim Scott, R-S.C., would provide a similar legal safe harbor through January 1, 2016. The bill was included in the regulatory relief package that was reported from the Senate Banking Committee earlier this year.

In these waning days of summer vacations the number of announced bank mergers have died down. In the last week there was only a handful. Northfield Bank ($3.1B, NY) will acquire Hopewell Valley Community Bank ($485mm, NJ) for $54.9mm in cash (25%) and stock (75%) or about 1.47x tangible book. In Alabama Avadian Credit Union ($607mm) will acquire American Bank of Huntsville ($127mm). And up north in Illinois Union Federal Savings and Loan Assn ($108mm) will acquire First Federal Savings and Loan Assn of Kewanee ($64mm).

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