I. INTRODUCTION
The Consumer Financial Protection Bureau (CFPB) has issued a final rule to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (Dodd-Frank Act) amendments to the Truth in Lending Act and the Real Estate Settlement Procedures Act. The final rule amends Regulation Z (Truth in Lending) by expanding the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 (HOEPA), revising and expanding the tests for coverage under HOEPA, and imposing additional restrictions on mortgages that are covered by HOEPA, including a pre-loan counseling requirement. The final rule also amends Regulation Z and Regulation X (Real Estate Settlement Procedures Act) by imposing certain other requirements related to homeownership counseling, including a requirement that consumers receive information about homeownership counseling providers.
The rule became effective on January 10, 2014, and applies to transactions for which an application is received on or after January 10, 2014.
II. SCOPE OF COVERAGE
A. Expanded Coverage of Loans
Under the final rule, the scope of HOEPA coverage for loans secured by a consumer’s principal dwelling is expanded to include:
B. Expanded Exemptions
In addition to reverse mortgages that continue to be excluded, the rule also exempts the following from HOEPA coverage:
The exemption for construction loans applies only to loans that finance the initial construction of a new dwelling. It does not extend to loans that finance home improvements or home remodels.
When a creditor makes a construction-to-permanent loan as two separate transactions, the construction loan transaction is exempt, but the permanent financing transaction is not. For a construction-to-permanent loan originated as a single transaction, coverage must be determined in accordance with Appendix D to Regulation Z. The exclusions for HFA and USDA loans apply only to loans that these agencies directly finance, not loans they guarantee or insure.
III. REVISED HOEPA COVERAGE TESTS
The final rule implements the Dodd-Frank Act’s revisions to HOEPA’s coverage tests by providing that a transaction is a “high-cost mortgage” if any of the following tests is met:
The final rule also provides guidance on how to apply the various coverage tests, such as how to determine the applicable average prime offer rate and how to calculate points and fees.
A. How to Determine Rates
B. Points and Fees
The rule defines specific categories of items that creditors must include in the calculation of points and fees. The following fees or charges known at or before closing must be included:
1. For Closed End Loans:
a) All items required to be disclosed as a finance charge, except for “Excluded Fees” listed below;
b) All compensation paid directly or indirectly by a consumer or creditor to a loan originator, that can be attributed to that transaction at the time the interest rate is set;
c) All “real estate related” charges in 1026.4(c)(7) (listing of charges excluded from the finance charge definition or examples), other than amounts held for future payment of taxes, unless the charge:
d) If one or more of those three conditions is not satisfied, you must include these charges in points and fees even if they would be excluded from the finance charge:
e) Premiums or other charges payable at or before consummation for any (1) credit life, credit disability, credit unemployment, or credit property insurance; (2) any other life, accident, health, or loss-of-income insurance for which the creditor is a beneficiary; or (3) any payments directly or indirectly for any debt cancellation or suspension agreement or contract (premiums for life, accident, health, or loss-of-income insurance are not included if the consumer [or another person designated by the consumer] is the sole beneficiary of the insurance);
f) The maximum prepayment penalty that may be charged or collected under the terms of the mortgage loan; and
g) The total prepayment penalty, incurred by the consumer if the consumer refinances the existing mortgage loan with the current holder of the existing loan, a servicer acting on behalf of the current holder, or an affiliate of either.
2. For Open-End Loans:
a) All closed end fees listed above; plus
b) Any fees charged for participation in an open-end credit plan, payable at or before account opening (whether assessed annually or periodically); and
c) Any transaction fee, including any minimum fee or per transaction fee, that will be charged for a draw on the credit line, where the creditor must assume that the consumer will make at least one draw during the term of the plan.
3. Excluded Fees:
The following fees are excluded from the calculation of points and fees:
a) Interest or the time-price differential;
b) Any premium or other charge imposed in connection with any Federal or State agency program for any guaranty or insurance that protects the creditor against the consumer’s default or other credit loss (mortgage insurance premiums);
c) For any guaranty or insurance that protects the creditor against the consumer’s default or other credit loss and that is not in connection with any Federal or State agency program (private mortgage insurance):
d) Any bona fide third-party charge not retained by the creditor, loan originator, or an affiliate of either, unless the charge is otherwise required to be included in points and fees; and
e) Up to two bona fide discount points (bona fide discount points means an amount equal to one percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate or time-price differential appropriate for the amount of discount points paid by the consumer) paid by the consumer in connection with the transaction, if the interest rate without any discount does not exceed the APOR, by more than one percentage point; or for transactions that are secured by personal property, exclude up to one or two bona fide discount points as set forth above, except compare the interest rate before the discount to the average rate for a loan insured under Title I of the National Housing Act (12 U.S.C. 1702 et seq.) not to the APOR.
IV. RESTRICTION ON LOAN TERMS
The final rule continues to require creditors to provide a disclosure to consumers at least three business days prior to consummation or account opening of a high-cost mortgage. The disclosure must be in writing and in a form the consumer may keep, and must:
The final rule also implements new Dodd-Frank Act restrictions and requirements concerning loan terms and origination practices for mortgages that fall within HOEPA’s coverage test. For example:
V. SPECIAL DISCLOSURES
The final rule requires various consumer disclosures for high-cost mortgages, to be made within three business days before consummating a closed-end high cost mortgage or opening the account for an open-end high cost mortgage.
A. Closed-End Loans
The creditor must disclose the amount of the regular monthly (or other periodic) payment and the amount of any balloon payment provided in the contract. The creditor must disclose the total amount the consumer will borrow, as reflected by the face amount of the note, and if such amount includes finance charges not otherwise prohibited.
B. Open-End Loans
The creditor must provide an example, based on certain assumptions described in the rule, showing the first minimum periodic payment for the draw period, the first minimum periodic payment for any repayment period, and the balance outstanding at the beginning of any repayment period. If the contract provides for a balloon payment, the creditor must disclose that fact along with an example showing the amount of the balloon payment. The creditor must also provide statements regarding the elements included in the example payments.
C. Variable-Rate Transactions
The disclosure must state that the interest rate and monthly payment may increase and show the amount of the single maximum monthly payment based on the maximum interest rate.
VI. HOMEOWNERSHIP COUNSELING REQUIREMENTS
Prior to making a high-cost mortgage, a creditor must receive written certification that the consumer has received homeownership counseling on the advisability of the mortgage from a HUD-approved counselor or a state housing finance authority, if permitted by HUD. The final rule implements two additional Dodd-Frank Act homeownership counseling-related provisions that are not amendments to HOEPA. (These requirements are for all loans, not just high-cost loans.)
The creditor may pay the fee for the cost of counseling, but may not condition the payment of such fees on the consummation or account-opening of a mortgage transaction.
In order to ensure that a consumer would receive useful counseling on the advisability of the particular loan offered, Regulation Z requires that the counseling occur after the consumer receives the initial disclosure under RESPA (currently the GFE or the TILA disclosures for open-end credit under Regulation Z). However, the rule inadvertently failed to address a very narrow category of closed-end transactions that are neither covered by RESPA nor subject to the disclosures for open-end credit under Regulation Z. These other high-cost loans are typically secured by manufactured housing but do not involve residential real property, and therefore are not federally related mortgage loans subject to RESPA. Such loans also are not covered by Regulation Z. Consequently, such closed-end, non- RESPA transactions could be rendered impossible, or could be interpreted to require a RESPA or open-end disclosure for transactions that would otherwise not require such disclosures and for which such disclosures would be unduly burdensome and unsuitable for consumers.
To address these concerns, Regulation Z has been amended to require that counseling for high-cost loans that are not covered by either RESPA or Regulation Z (§ 1026.40) must occur after the consumer receives the HOEPA disclosure required under § 1026.32(c). The final rule clarifies that RESPA or open-end disclosures are not required for these transactions.
The CFPB notes that the HOEPA disclosures are not required to be provided until three business days before consummation of the loan, which may cause some difficulties in obtaining the counseling and in ensuring that consummation is not unnecessarily or unduly delayed. Therefore, comments to the interim final rule state that creditors are encouraged but not required to provide the disclosure earlier than three business days before consummation in order to facilitate the counseling and timely consummation of covered transactions.
The final rule also implements a new requirement under the Truth in Lending Act requiring creditors to obtain confirmation that a first-time borrower has received homeownership counseling from a federally certified or approved homeownership counselor or counseling organization before making a loan that provides for or permits negative amortization to the borrower. The counseling must be provided by a federally certified or approved homeownership counselor; counseling must include information regarding the risks and consequences of negative amortization; the creditor must obtain documentation that the consumer underwent such counseling before extending credit; and the creditor may not steer a consumer to choose a particular counselor.
VII. HOMEOWNERSHIP COUNSELING ORGANIZATIONS LISTS
The CFPB has also issued a final rule describing data instructions for lenders to use in complying with the requirement under the high-cost mortgage and homeownership counseling amendments to the Truth in Lending Act (Regulation Z) and homeownership counseling amendments to the real estate settlement procedures act (Regulation X) final rule to provide a homeownership counseling list using data made available by the CFPB or Department of Housing and Urban Development (HUD). The final rule became effective on January 10, 2014.
In implementing the homeownership counseling requirement, lenders are required to provide the loan applicant with a written list of homeownership counseling organizations that provide relevant services in the loan applicant’s location. The CFPB specified two compliance methods for obtaining this list: (1) using a tool developed and maintained by the CFPB on its website, and (2) using data made available by the CFPB or HUD, provided that the data is used in accordance with instructions provided with the data. The CFPB noted the use of the data in accordance with these instructions would produce a list consistent with what would have been generated if the tool had been used.
A. List and Data Instructions
The final rule describes instructions for lenders to use in complying with the requirement to generate a list of homeownership counseling organizations by using data provided by the CFPB or HUD.
HUD currently provides this data. HUD maintains a free and publicly available application programming interface (API) containing data on HUD-approved housing counseling agencies (HUD API). Although it appears on this site that a token is required to utilize this data, credentials are not required to access and use the data. These data instructions are designed to be applied with publicly available homeownership counselor agency data from HUD. The CFPB will make a summary of the data instructions available on the CFPB’s website, along with a link to the publicly available housing counseling agency data.
1. Number of Homeownership Counselors to Appear on List
Lenders are required to provide a written list of homeownership counseling organizations. Lenders comply with this requirement when they provide a list of ten HUD-approved housing counseling agencies. The tool maintained by the CFPB will generate a list of ten HUD-approved housing counseling agencies. A list generated by the lender using data made available by the CFPB or HUD complies with the requirements when the same number of counseling agencies (ten) are provided.
2. Location by Zip Code
Lenders are required to provide a written list of homeownership counseling organizations in the loan applicant’s location. Lenders comply with this requirement when they use the borrower’s five-digit zip code to generate a list of the ten closest HUD approved housing counseling agencies to the centroid of the zip code of the borrower’s current address, in descending order of proximity to the centroid. The borrower’s current zip code satisfies the requirement that the homeownership counseling organizations be in the loan applicant’s location. The zip code of the borrower’s current address is the default to be entered for list generation. Lenders, should they choose, may offer borrowers the option of generating the list from a zip code different than their home address, or from a more precise geographic marker such as a street address, but lenders are not required to offer such an option. The CFPB’s tool will permit generating the list of HUD-approved housing counseling agencies through entry of zip code. A list generated by the lender in this fashion complies with the requirements when the lender generates the list through entry of zip code or from a more precise geographic marker such as a street address.
In circumstances where the applicant’s current address does not include a five-digit zip code, (e.g., the applicant currently lives overseas), making it impossible to generate a list based on the zip code of the applicant’s current address, the lender may use the five-digit zip code of the property securing the mortgage to generate the list.
Additionally, there may be circumstances where an applicant’s current and mailing addresses are different. For example, an applicant residing in a remote area may receive mail at a post office box. In the case in which an applicant’s current and mailing address are different, a lender using an applicant’s mailing address instead of the current address to generate the list would be consistent with the requirement that the list be generated based upon the loan applicant’s location. Consistent with the previous paragraph, a lender may also use an applicant’s mailing address to generate a list if the mailing address includes a zip code but the current address does not.
The CFPB’s tool, as discussed above, uses a third-party, commercially-available geolocation tool to match counseling organizations to a zip code. A lender is not required to use the same geolocator or geocoding system as the CFPB, so long as the results are generated in accordance with Regulation X and these instructions, thus ensuring general consistency.
3. Homeownership Counselor Contact Information
Lenders are required to provide a written list of homeownership counseling organizations that provide relevant services in the loan applicant’s location. Lenders comply with this requirement when they provide the following data fields for each housing counseling agency on the list to the extent that they are available through the HUD API: agency name, phone number, street address, street address continued, city, state, zip code, website URL, email address, counseling services provided, and languages spoken. Providing a street address is preferable to providing a mailing address, as available. The tool maintained by the CFPB will provide these data fields to the extent that they are available through the HUD API. A list generated by the lender in this fashion complies with the requirements when these data fields are provided to the extent that they are available through the HUD API. The table below describes how the HUD API data fields relate to the above required data fields:
HUD API DATA FIELDS
Data fields which are populated with codes that are not commonly understood by borrowers should be translated into their definitional meanings, according to the Data Dictionary, (http://data.hud.gov/data_sets.html), to ensure clarity. This will be relevant for the data fields entitled “Counseling services provided” and “Languages spoken.”
4. Accompanying Information
Lenders comply with the requirements when the following language is included: “The counseling agencies on this list are approved by the U.S. Department of Housing and Urban Development (HUD), and they can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost to you. This list shows you several approved agencies in your area. You can find other approved counseling agencies at the Consumer Financial Protection Bureau’s (CFPB) website: consumerfinance.gov/mortgagehelp or by calling 1-855-411-CFPB (2372). You can also access a list of nationwide HUD-approved counseling intermediaries at https://www.hudexchange.info/programs/housing-counseling/.”
Including information about where loan applicants can gain additional information is consistent with the CFPB’s preamble discussion of how it envisioned implementing the list requirement in the RESPA Homeownership Counseling Amendments. Giving loan applicants the link to HUD-approved national counseling intermediaries offers loan applicants additional housing counseling options, as national intermediaries offer phone counseling and online counseling services, which are particularly useful to borrowers in remote areas or areas less-dense with counseling agencies. The CFPB’s tool will generate lists that include the text referenced above. By including this information, lenders generating lists with comply with the requirements of the rule.
VIII. COMBINING THE LIST WITH OTHER DISCLOSURES
Section 5(c) of RESPA does not specify whether the written list may be combined with other disclosures. The CFPB combined disclosure allowance provides that the “list of homeownership counseling organizations provided under this section may be combined and provided with other mortgage loan disclosures required pursuant to Regulation Z, 12 CFR part 1026, or this part [1024] unless prohibited by Regulation Z or this part.”
Although only disclosures pursuant to Regulations X and Z are specifically referenced in the rule, the CFPB does not consider combining the list of organizations with other mortgage loan disclosures to be a violation of Regulation X, unless otherwise prohibited. As long as the other requirements of Regulation X are met, and if not otherwise prohibited, combining the list with another disclosure does not violate the rule.
IX. HIGH-COST MORTGAGE COUNSELING
The final rule clarifies the qualifications necessary to provide high-cost mortgage counseling and to provide guidance on the issue of lender participation in the counseling.
A. Counseling Qualifications
Regulation Z provides that a creditor “shall not extend a high-cost mortgage to a consumer unless the creditor receives written certification that the consumer has obtained counseling on the advisability of the mortgage from a counselor that is approved to provide such counseling by the Secretary of the U.S. Department of Housing and Urban Development or, if permitted by the Secretary, by a State housing finance authority.”
Regulation Z describes what is necessary for a consumer to have received counseling on the advisability of the high-cost mortgage. The counseling must cover: “key terms of the mortgage transaction” as set out in the relevant disclosure (usually the Good Faith Estimate or, after August 1, 2015, the Loan Estimate); “the consumer's budget, including the consumer’s income, assets, financial obligations, and expenses; . . . and the affordability of the mortgage transaction for the consumer.”
The CFPB understands that these topics are currently covered by counseling agencies approved by HUD in providing counseling to prospective borrowers. Unless and until HUD limits the current scope of counseling in some way that would not include elements of the comment, counseling agencies that are already approved by HUD to offer homeownership counseling are also qualified to provide the counseling required for high-cost mortgages, provided such counseling does indeed cover the topics prescribed by comment 34(a)(5)(iv)-1.
B. Lender Participation
The CFPB final rule clarifies that a creditor may be steering, that is directing, if the creditor insists on participating or listening in to a counseling call or session if such behavior results in a consumer’s selection of a particular counselor. Under these circumstances, creditors comply with the anti-steering provision if a counselor is allowed to request that the creditor not participate or listen on the call. A counselor also is allowed to request that a creditor participate in a call or a portion of a call. For example, a counselor may request that a creditor participate in part of the counseling session to provide additional information related to the loan.
Counselor independence and impartiality, which the antisteering provision seeks to preserve, may be adversely affected by a concern that another counselor may be selected or the content of the counseling influenced if the counselor requests that the creditor not listen to the counseling and the creditor does not agree. Counselor independence and impartiality may also be compromised by the knowledge that the creditor is listening-in to the advice given. Moreover, creditor participation in such conversations may influence loan applicants away from a full and frank conversation with an independent and impartial counselor, thus undermining the purpose of the rule.
X. HIGH COST MORTGAGE LOAN “CURE”
The final rule also creates procedures for the cure of unintentional violations within a specified period of time, and if certain conditions are made. Under the final rule, a creditor or assignee, when acting in good faith, that has failed to comply with the HOEPA rules is not in violation if: