1. National 8 Hour SAFE
Comprehensive - 2012 Originator
Essentials

2. Welcome
The course consists of three primary sections:
• Understanding Dodd-Frank Act (3 hours)
• Ethics, Fraud and Fair Lending Laws that Affect the Mortgage Industry (2 hours)
• VA Program(2 hours)
• Understanding the SAFE Act (1 hour)
2

3. Welcome
• This course is designed to guide Mortgage Loan Originators in the
development, adoption, and implementation of specific regulatory and fair
housing procedures and strategies. In addition, attendees will gain an
understanding of VA programs that may not have been previously considered a
viable option.
• The comprehensive curriculum will prepare MLOs to deal efficiently and
effectively with compliance regulations.
• Participants develop a better understanding of the laws governing mortgage
banking, how to remain in compliance, and how to anticipate and prevent
violations. MLOs will also gain insight into valuable VA loan programs.
3

4. About this Course
Approval of this course by state agencies does not constitute an endorsement of
the views or opinions which are expressed by the course sponsor, instructor,
authors or lecturers. While this publication is designed to be accurate information
about the subject matter it covers, it is sold with the understanding that the
distributor, author, and publisher are not engaged in rendering legal, accounting
or other professional advice. If such advice or other expert assistance is required,
the services of a competent professional should be sought. The recipient is
cautioned to check with their managing supervisor before acting on any
suggestion or recommendation, or before using any sample form contained
herein.
4

5. Class Participation
• Case Studies
• Group Discussion
• Encourage Interaction
5

6. Classroom Behavior
• No tape recorders will be permitted at any time.
• All cell phones and pagers are to be turned off at the beginning of each class.
(At the very least we ask that they be placed on “silent” mode.)
• Students are not allowed to send texts or emails during the course.
• Students are not allowed to read material other than course material while in
class (for example newspapers, emails, texts, etc. )
• No “photo” cell phones will be allowed in the classroom.
• Students are expected to conduct themselves in a professional manner.
• Students are required to provide identification upon arrival.
• Time for meals and intermittent breaks may be provided.
6

7. Steps to Receive NMLS CE Credit
• Sign in
• Verify Identification and provide valid NMLS Number and Name
• Sign out at lunch /Sign in after lunch
• Must be in attendance and participate for entire class
• Cannot be out of classroom, outside of scheduled breaks and/or lunch for
more than 5 minutes
• Cannot be more than 5 minutes late either at beginning of course or after
scheduled breaks and lunch
• Sign out at completion of course
7

8. Test
• Test is given at end of class
• Written test
• 30 questions
• Passing score is 70% or higher to receive NMLS Credit
• Will only communicate failures
• If you fail you can take test second time
• The test will be administered via an online link at OnlineEd
• You will need to verify identification when re-taking the test
8

9. NMLS CE Credit
• Online Ed will Upload Your Information into
NMLS.
• 8 Hours of NMLS Continuing Education Credit.
9

10. Module One – Session One
The Dodd-Frank Act

11. The Dodd-Frank Act – HR 4173
• Provide a better understanding of the Dodd-
Frank Act.
• How these changes impact the mortgage
industry.
• How the Dodd-Frank Act can help protect
consumers.
11

12. Objectives
1.Identify changes made as a result of the Dodd-
Frank Act.
2.List various Titles of the Dodd-Frank Act and how
they relate to the mortgage industry.
3.Define the compliance standards regarding the
newly appointed Consumer Finance Protection
Bureau (CFPB).
12

13. The Dodd-Frank Act
• H. R. 4173, the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
• Enacted in July 2010.
• End “Too Big to Fail”.
• Protect consumers from abusive financial
services practices.
13

14. Objective of Dodd-Frank Act
• Impost stricter standards.
• Restore responsibility and accountability in the
financial system.
• Prevent future financial collapse.
• Promote consumer education, protection and
transparency.
14

15. Titles in the Law Impacting Industry
• Title IX (Title 9) - Investor Protections and
Improvements to the Regulations of Securities
Provides provisions which include authorizing stricter
regulation of investors and credit rating agencies.
15

16. Titles in the Law Impacting Industry
• Title X (Title 10) - The Consumer Financial
Protection Act of 2010
Authorizes the creation of the Consumer Financial
Protection Board (CFPB), provides for the transition of
regulatory authority from other agencies to the CFPB,
and outlines the Bureau’s regulatory and enforcement
responsibilities.
16

17. Titles in the Law Impacting Industry
• Title XIV (Title 14) - The Mortgage Reform and
Anti-Predatory Lending Act
Includes provisions which apply directly to mortgage
loan originators, servicers, and appraisers.
17

18. About this Course
• Cite the provisions of the Dodd-Frank Act.
• Where they are located within the Act.
• Which provisions of the Dodd-Frank Act are
amendments to existing laws.
• Reference various sources to assist in explaining
this complex law.
18

19. Title IX (Title 9)
• Title IX, sections 901 to 991 - “Investor
Protections and Improvements to the Regulation
of Securities.”
• Revises the powers and structure of the
Securities and Exchange Commission, (SEC),
credit rating organizations.
19

20. Title IX (Title 9)
•Greater transparency for investors.
•Measures to mitigate conflicts of interest at credit
ratings agencies.
•Credit risk retention requirements in Section 941.
20

21. Subtitle C
“In the recent financial crisis, the ratings on structured
financial products have proven to be inaccurate. This
inaccuracy contributed significantly to the
mismanagement of risks by financial institutions and
investors, which in turn adversely impacted the health of
the economy in the United States and around the world.
Such inaccuracy necessitates increased accountability on
the part of credit rating agencies.”
(H.R. 4173 Section 931(5))
21

22. Subtitle C
• The Dodd-Frank Act assigns the responsibilities
of oversight to the Securities and Exchange
Commission (SEC).
• Regulatory control will come from the newly
established Office of Credit Ratings and the
credit rating entities that this office will oversee
are Nationally Recognized Statistical Rating
Organizations (NRSROs) including Standard &
Poors, Fitch, and Moodys.
22

23. Subtitle C
• Does not limit the SEC’s ability to bring forth a
fraud action.
• Imposes requirements for NRSROs to submit an
annual report to the SEC.
23

24. Subtitle C - Reforms
• Risk retention requirements.
• Credit rating agency reform and conflicts of
interest.
• Improved transparency and issuer due diligence.
• Consumer protection.
• Improved monitoring of systemic risks
throughout the financial system.
24

25. Subtitle D
• Reduce the risks associated with securities such
as Mortgage Backed Securities (MBSs).
• Establishes an incentive for issuers of these
securities to perform research and due
diligence.
• Risk retention requirements may reduce risks to
financial stability arising from earlier
securitization participants.
(H.R. 4173 Section 941, adding SEA Section 15G(3))
25

26. Law Applies to Originators
• “originators,” defined as a person that “...through
the extension of credit or otherwise, creates a
financial asset that collateralizes an asset-backed
security; and sells an asset…to a securitizer.”
• Includes banks, thrifts, subsidiaries of bank or
thrift holding companies, independent finance
companies.
(SEA Section 15 G(4))
26

27. Law Applies to Originators
• Instructs drafting regulations that will “…require
any securitizer to retain an economic interest in a
portion of the credit risk for any asset that the
securitizer, through the issuance of an asset-
backed security, transfers, sells, or conveys to a
third party.”
(SEA Section 15G(b))
27

28. QRM and QM
• Retention of a 5% credit risk in securitized assets.
• The only exception under the rule is the
exception for what is referred to as “Qualified
Residential Mortgages.”
28

29. QRM and QM
• The task of defining a “Qualified Residential
Mortgage” (QRM) has been left to the agencies.
• “…be no broader than the definition ‘qualified
mortgage’ (QM) as the term is defined in section
129(c)(2)….”
(SEA Section 15 G (4) (C))
29

30. Why the Change?
• When the originator and the securitizer of Alt-A
mortgage-backed securities were affiliated, they
were less likely to experience losses.
• The originator of the loan is less likely to sell
poorly underwritten loans to its own affiliate for
securitization.
30

31. Risk Retention
• May help to avoid deterioration in underwriting
standards.
• Prevent a recurrence of credit expansion that led
to the mortgage meltdown.
• Could stifle a renewed real estate market.
• Could eliminate all but the best qualified
borrowers.
31

32. Defining Qualified Mortgages
• Reasonable
• Good Faith Determinations
32

33. Defining a Qualified Mortgage
• January 2013 Final Rule Deadline
• Impacts Basic Underwriting Standards
• Building Block for other Dodd-Frank Act
Rulemakings
33

34. Final Rules
• Origination and Servicing Practices
• Loan Originator Compensation
• Anti-Steering Rules
• Restrictions on High-cost Loans
• Escrow Accounts
• Appraisals
• Final Rules – January 21, 2013
34

35. Title X – CFPB
• Creates the Bureau of Consumer Financial Protection
(the “CFPB”).
• The CFPB is an independent regulatory agency
empowered with broad authority to issue new
regulations, supervise depository and non-depository
institutions, enforce consumer financial protection laws,
and prevent “unfair,” “deceptive,” and “abusive” acts by
financial service firms.
35

36. Establishing the CFPB
•The Consumer Financial Protection Bureau (CFPB)
36

37. Independent Director
• Rich Cordray
37

38. CFPB Structure
38

39. Independent Budget
• Federal Reserve System
39

40. Independent Rule Writing
• Write Rules for Consumer Protections
• Consumer Financial Services or Products
40

41. Protection for Consumers
• CFPB is a compilation of the consumer financial
protection functions of a number of federal
agencies, including the Federal Reserve and FDIC.
• Designed to prevent unfair, deceptive, and
abusive practices.
41

42. Who Does the CFPB Regulate?
• Extending consumer credit and servicing loans.
• Extending or brokering leases of property that are the
functional equivalent of purchase finance arrangements.
• Providing real estate settlement services (other than
appraisal of real or personal property).
• Providing payments or other financial data processing
products or services to a consumer by any technological
means.
42

43. Examination and Enforcement
•Authority to Examine and Enforce Regulations
43

44. Consumer Protection
Consumer Protection
44

45. Ability to Act Quickly
Bad Deals and Schemes
45

46. Educate
Office of Financial Literacy
46

47. Enumerated Consumer Laws
1. Alternative Mortgage Transaction Parity Act of 1982
2. Consumer Leasing Act of 1976
3. Electronic Fund Transfer Act
4. Equal Credit Opportunity Act
5. Fair Credit Billing Act
6. Fair Credit Reporting Act (FCRA)
7. Homeowners Protection Act of 1998
47

48. Enumerated Consumer Laws
1.Fair Debt Collection Practices Act
2.§43(b)-(f) of the Federal Deposit Insurance Act
(FDIA) – governing disclosures by depository
institutions that lack federal deposit insurance
3.Gramm-Leach-Bliley Act (GLBA)
4.Home Mortgage Disclosure Act of 1975
5.Home Ownership and Equity Protection Act of
1994
48

49. Enumerated Consumer Laws
1.Real Estate Settlement Procedures Act of 1974
2.Secure and Fair Enforcement for Mortgage
Licensing Act of 2008 (SAFE Act)
3.Truth in Lending Act
4.Truth in Savings Act
49

50. Enumerated Consumer Laws
1.§626 of the Omnibus Appropriations Act of 2009
– allows states to bring TILA actions and actions
under certain FTC regulations regarding mortgage
loans
2.Interstate Land Sales Full Disclosure Act
(H.R. 4173 Section 1002(12))
50

51. Definition of Dodd-Frank Act Terms
• The stated purpose of establishing the CFPB is to
implement and enforce “federal consumer
financial laws” to ensure that all consumers have
access to “consumer financial products and
services” and that that these products and
services are “fair, transparent, and competitive.”
(H.R. 4173 Section 1021(a))
51

52. Definition of Dodd-Frank Act Terms
Consumer Financial Products and Services
These are financial products and services offered
for use by consumers primarily for personal, family,
or household use.
(H.R. 4173 Section 1002(5))
52

53. Definition of Dodd-Frank Act Terms
Covered Persons
This includes individuals and entities that offer
consumer products or services and their affiliates.
(H.R. 4173 Section 1002(6))
53

54. Definition of Dodd-Frank Act Terms
Federal Consumer Financial Laws
These include the provisions of the Consumer
Financial Protection Act of 2010 and the
“enumerated consumer laws.”
(H.R. 4173 Section 1002(12))
54

55. Definition of Dodd-Frank Act Terms
Financial Products and Services
The definition of this term includes, but is not
limited to extending credit, servicing loans,
providing real estate settlement services (except
for performing appraisals), modifying the terms of
credit, and forestalling foreclosure.
(H.R. 4173 Section 1002(15))
55

56. Module One – Session Two

57. How will the CFPB Enforce Laws?
• Has the authority to enforce UDAAP and promulgate
rules identifying unfair, deceptive and abusive practices.
• Will likely follow established guidelines for what
constitutes “unfair” and “deceptive” practices.
• Can pursue both administrative and judicial remedies
for violations of such laws, which include civil penalties
(ranging from $5,000 - $250,000 - $1 million per day of
the violation.)
57

58. Primary Functions of CFPB
•Conducting financial education programs
•Investigating and responding to consumer
complaints
•Identifying risks to consumers in the market for
consumer financial products and services
•Supervising the compliance of “covered persons”
with federal consumer financial laws
58

59. Primary Functions of CFPB
•Bringing enforcement actions for violations of the
law
•Writing rules and guidance documents pursuant
to federal consumer financial laws
•Monitoring for risks to consumers from consumer
financial products and services
59

60. Combined Mortgage Loan Disclosure
• The law authorizes the CFPB to “…ensure that
the features of any consumer financial product
or service are….fully, accurately, and effectively
disclosed to consumers in a manner that permits
consumers to understand the costs, benefits and
risks associated with the product or service….”
www.Knowbeforeyouowe.com
(H.R. 4173 Section 1302(a))
60

61. Consumer Hotline
National Consumer Complaint Hotline
• Single Toll-free Number
61

62. Accountability
Consumer Protection
62

63. Works with Bank Regulators
• Prevent Undue Regulatory Burden
• Consults with Regulators before a Proposal is
Issued
• Appeal Regulations
63

64. Clearly Defines Oversight
Protects Small Business
64

65. The CFPB
65

66. CFPB Examination Procedures
• Released Supervision and Examination Manual
Oct. 2011.
• Guide to how the CFPB will supervise and
examine.
• Three parts
66

67. The CFPB Manual
• Module 1 Company Business Model
• Module 2 Advertising and Marketing
• Module 3 Loan Disclosures and Terms
• Module 4 Underwriting, Appraisals, and Originator
Compensation
• Module 5 Closing
• Module 6 Fair Lending
• Module 7 Privacy
67

68. Examiners May Obtain and Review
• Organizational charts and • Loan applications
process flowcharts • Loan account documentation
• Board minutes • Notes
• Annual reports, or the • Disclosures
equivalent to the extent • Other contents of loan
available underwriting and closing files
• Relevant management • Operating checklists
reporting
• Worksheets
• Policies and procedures
• Review documents
• Rate sheets
68

69. Examiners May Obtain and Review
• Relevant computer program • Historical examination
and system details information
• Wholesale and correspondent • Audit and compliance reports
lending agreements • Management’s responses to
• Due diligence and monitoring findings
procedures • Training programs and
• Lending procedures materials
• Underwriting guidelines • Third-party contracts
• Compensation policies • Advertisements
• Consumer complaints
69

70. Transaction Testing
• Use of a judgmental or statistical sampling.
• Conduct interviews to determine understanding
and consistently to follow policies, procedures,
and regulatory requirements; manage changes
appropriately; and implement effective controls.
• Observing customer interactions.
70

71. Management System
• The goal is to maintain legal compliance.
• Must develop and maintain a sound compliance
management system that is integrated into the overall
framework for product design, delivery, and
administration.
• Supervised entities are also expected to manage
relationships with third-party service providers to
ensure that these providers effectively manage
compliance with Federal consumer financial laws
applicable to the product or service being provided.
71

72. Compliance Management System
• The CFPB expects every regulated entity under
its supervision and enforcement authority to
have an effective compliance management
system adapted to its business strategy and
operations.
• Each CFPB examination will include review and
testing of components of the supervised entity’s
compliance management system.
72

73. Compliance Management System
• Compliance may be managed on a firm or an
enterprise-wide basis.
• Supervised entities may engage outside firms to
assist with compliance management.
• The CFPB expects that compliance management
activities will be organized within a firm, legal
entity, division, or business unit in the way that is
most effective for the supervised entity.
73

74. The Compliance Manual
74

75. Supervision and Examination Cycle
http://www.consumerfinance.gov/guidance/superv
ision/manual/supervision-examination-process-
overview/ 75

76. Pre-Examination/Scoping
• Review and Analyze
• Request and Review Documents
• Make the Initial Plan
76

77. Examination
• Conduct Interviews
• Observation
• Comparisons
77

78. Conclusions and Required Actions
• Communicated
• Corrective Actions Delivered
• Corrective Actions
78

79. Monitoring
• Nonbanks - Product and/or Market Analysis
• Banks - Periodic Checks
• Both - Additional Risk Assessments, Review and
Status
• Next Exam
79

80. Three Principles
1. Focus on Consumers
2. Data Driven
3. Consistency
80

81. Compliance Management System is
How a Company…
• Establishes its compliance responsibilities.
• Communicates those responsibilities to employees.
• Ensures that responsibilities for meeting legal
requirements and internal policies are incorporated into
business processes.
• Reviews operations to ensure responsibilities are carried
out and legal requirements are met.
• Takes corrective action and updates tools, systems, and
materials as necessary.
81

82. Compliance Management System
Will Provide
•Board and management oversight.
•Compliance program.
•Response to consumer complaints.
•Compliance audit.
82

83. Compliance Program
• The CFPB advises in its Manual that “A sound
compliance program is essential to the efficient
and successful operation of the supervised
entity, much as business plan.”
83

84. Compliance Program
A compliance program includes the following
components:
•Policies and procedures
•Training
•Monitoring and corrective action
84

85. Compliance Program
• The CFPB outlines that a supervised entity should
establish a formal, written compliance program.
• Program should be a planned and organized
effort to guide the entity’s compliance activities.
• Should be a written program that represents an
essential source document that may serve as a
training and reference tool for employees.
85

86. Compliance Policy and Procedures
P&P should be documented and in sufficient detail to implement
the board-approved policy documents. Examiners will seek to
determine whether compliance policies and procedures:
1.Are consistent with board-approved policies.
2.Address compliance with applicable Federal consumer financial
laws in a manner designed to prevent violations and to detect
and prevent associated risks of harm to consumers.
3.Cover product or service lifecycles.
4.Are maintained and modified to remain current and to serve as
a reference for employees in their day-to-day activities.
86

87. Policy & Procedures
Examiners will also request and review compliance
policies and procedures. Examiners will look for the
following:
1. Request and review policies and procedures
related to consumer compliance, including
Federal consumer financial laws and policies
and procedures related to offering consumer
financial products and services.
87

88. Policy & Procedures
2. Review policies and procedures for changes
management committed to make following recent
monitoring, audit, and examination findings and
recommendations.
88

89. Policy & Procedures
3. Review policies and procedures to determine
whether and how they address new or amended
Federal consumer financial laws and regulations
since the preceding examination or since the most
recent consumer compliance examination by a
state or prudential regulator, if applicable, if this is
CFPB’s first examination.
89

90. Policy & Procedures
4. Request and review policies and procedures to
determine whether they cover consumer financial
products or services introduced since the
preceding examination or since the most recent
consumer compliance examination by a state or
prudential regulator, if applicable, if this is CFPB’s
first examination.
90

91. Policy & Procedures
5. Review policies and procedures relating to
compliance with specific regulatory requirements
(such as the privacy of consumer financial information)
and their implementing procedures.
6. Review for outdated content, the names of
unaffiliated entities, or other indicators that policies
are overly general or not tailored to the needs and
actual practices of the supervised entity being
examined.
91

92. Policy & Procedures
7. Review policies and procedures for products
with features that may inhibit consumer
understanding or otherwise pose heightened risks
of unfair, deceptive, or abusive practices.
8. Review policies and procedures for products in
which employee compensation structures, pricing
or underwriting discretion, or other features may
pose heightened risk of unlawful discrimination.
92

93. Policy & Procedures
9. Review policies and procedures designed to ensure
that the entity’s third-party service providers comply
with legal obligations applicable to the product or
service of the examined entity and the provider.2
10. Review policies and procedures maintained by
different regional, business unit, or legal entities
subject to the same corporate or board-level policies
for consistency.
93

94. Policy & Procedures
11. Review policies and procedures for record
retention and destruction timeframes to ensure
compliance with legal requirements.
94

95. Policy & Procedures
12. If compliance procedures are embedded in
automated tools or business unit procedures,
determine that a qualified compliance officer or
contractor reviewed these tools for consistency
with policies and procedures and compliance with
applicable Federal consumer laws and approved
them for the purpose for which they are utilized.
95

96. Policy & Procedures
13. Draw preliminary conclusions regarding the
strength, adequacy, or weakness of policies and
procedures, and identify business units, delivery
channels, or offices for transaction testing. Test to
confirm that actual practices are consistent with
strong or adequate written policies and
procedures. Test to determine the impact of
apparently weak procedures.
96

97. Basic Monitoring Activities
• New Products/Services
• Events
• Questions
97

98. Basic Monitoring Activities
• Prudential and State Regulator Examination Reports
• Community Reinvestment Act (CRA) Performance
Evaluations
• Current Enforcement Actions
• Call Report Data
• Complaint Data
98

99. Basic Monitoring Activities
• Home Mortgage Disclosure Act
• Home Affordable Modification Program Data
• SEC Filings
• Licensing or Registration Information
• Reports from the Entity to Prudential or State
Regulators
• CFPB Research Analyst Reports
• Institution Website
99

100. Compliance Training for EVERYONE!
1.Compliance training is current, complete, directed to
appropriate individuals based on their roles.
2.Training is consistent with policies and procedures and
designed to reinforce those policies and procedures.
3.Compliance professionals have access to training that is
necessary to administer a compliance program that is
appropriate for that supervised entity and its business
strategy and operations.
100

101. What Will Examiners be Looking for in a
Companies Training Program?
• Request and review the schedule, record of
completion, and materials for recent compliance
training of board members and executive
officers.
• Determine the involvement of compliance
officer(s) in selecting, reviewing, or delivering
training content.
101

102. What Will Examiners be Looking for in a
Companies Training Program?
• Request and review policies, standards,
schedules, and records of completion for
compliance-specific training of compliance
professionals, managers, and staff, and
documents demonstrating that third-party
service providers who have consumer contact or
compliance responsibilities are appropriately
trained.
102

103. What Will Examiners be Looking for in a
Companies Training Program?
• Request and review samples of the content of training
materials and comprehension tests, including training
related to new regulatory requirements, new products
or channels of distribution, and marketing (including
scripts).
• Request and review training developed as a result of
management commitments to address monitoring,
audit, or examination findings and recommendations or
issues raised in consumer complaints and inquiries.
103

104. What Will Examiners be Looking for in a
Companies Training Program?
• Request and review training developed as a result of
management commitments to address monitoring,
audit, or examination findings and recommendations or
issues raised in consumer complaints and inquiries.
• Determine whether the program is designed to provide
training about the specific regulatory requirements
relevant to the functions of particular positions, such as
the Truth in Lending Act for loan officers.
104

105. What Will Examiners be Looking for in a
Companies Training Program?
1.Review records of follow-up, escalation, and
enforcement for units with training completion rates that
do not meet the supervised entity’s standards or
deadlines.
2.Request and review the supervised entity’s plans for
additions, deletions, or modifications to compliance
training over the next 12 months and any plans for
changes to the overall training resources and compare
actual training activities to prior plans.
105

106. What Will Examiners be Looking for in a
Companies Training Program?
1.Draw preliminary conclusions about the strength,
adequacy, or weakness of the training element of the
compliance program, and select lines of business,
organizational units, or other areas for more detailed
review and testing.
This means that companies will need to have a complete
and comprehensive training program in place that not only
delivers training but also provides for the accountability to
show Examiners content delivered in training programs,
who attended and how often training is received.
106

107. Monitoring and Corrective Action
• Provide elements that offer an organized risk-
focused way to identify procedural or training
weaknesses.
• Provide a high level of compliance by promptly
identifying and correcting weaknesses that may
exist within an organization.
107

108. What is the CFPB Looking For?
1.Monitoring is scheduled and completed and leads to timely
corrective actions where appropriate.
2.Determining that transactions and other consumer
contacts are handled according to the entity’s policies and
procedures.
3.Monitoring and testing consider the results of risk
assessments.
4.Monitoring addresses deficiencies
5.Findings are escalated to management and to the board of
directors if appropriate.
108

109. Examiners Will Be Looking For
• Determine the chief • Request and review the risk
compliance officer’s role. assessments or other
• Request and review the documents that led to the
monitoring and testing monitoring and testing
schedule for the current year program plan.
or next 12 months, and • Discuss with the compliance
review the currency of officer or monitoring manager
reviews in process against the the coverage of third-party
current schedule. service providers that have
contact with consumers.
109

110. Examiners Will Be Looking For
• Determine whether and to • Review reports for indications
what extent monitoring of systemic weaknesses,
includes calculation tools, the repeat violations of law and
content of consumer resulting risks or harms to
disclosures and notices, consumers.
marketing materials, and • Review a sample of reports
scripts or guides for employee and supporting documents
contacts with consumers. covering potential unfair,
• Request and review all deceptive, or discriminatory
compliance monitoring, practices or related matters
testing and corrective action that pose heightened risks to
reports completed. consumers.
110

111. Examiners Will Be Looking For
1.Determine whether monitoring results in corrective action that is
timely and appropriate in size and scope.
2.Draw a preliminary conclusion regarding the strength, adequacy,
or weakness of the monitoring and corrective action element of
the compliance program, and select areas for further review
either because of lack of coverage by the monitoring program or
to confirm monitoring or corrective action findings.
111

112. Consumer Complaint Response
• System should ensure responsiveness and
responsibility in handling consumer complaints
and inquiries.
112

113. Consumer Complaints
•Weaknesses
– Compliance Management System
– Training
– Internal Controls
– Monitoring
113

114. Red Flags
• Numerous Complaints
• Omission
• Act
• Deceptive Practice
114

115. Complaints
• Subsidiaries
• Affiliates
• Third Parties
115

116. Analysis
• Potential Unfair, Deceptive or Abusive Practices
• Charge-Backs
• Refunds
116

117. Focus on Consumers
• The CFPB will focus on the risks to consumers
when it evaluates the policies and practices of
financial institutions.
• Expected that companies will maintain effective
systems and controls to manage their compliance
responsibilities.
117

118. Module One – Session Three

119. Title XIV
• Title XIV of the Act was drafted for the purpose
of assuring “that consumers are offered and
receive residential mortgage loans on terms that
reasonably reflect their ability to repay the loans
and that are understandable and not unfair,
deceptive or abusive.”
119

120. Minimum Standards for Borrowers’
Ability to Pay
• Will require that lenders make a “reasonable and
good faith determination based on verified and
documented information that, at the time the
loan is consummated, the consumer has a
reasonable ability to repay the loan, according to
its terms, and all applicable taxes, insurance …
and assessments.”
120

121. Internal Revenue Transcripts
• In order to “safeguard against fraudulent
reporting,” lenders are now required to use
Internal Revenue transcripts of tax returns or
another method that “quickly and effectively
verifies income” by a third party who is also
subject to the rules promulgated as a result of
this legislation.
121

122. Title XIV - Eight Subtitles:
• Subtitle A: Residential • Subtitle E: Mortgage
Mortgage Loan Servicing
Origination Standards • Subtitle F: Appraisal
• Subtitle B: Minimum Activities
Standards for Mortgages • Subtitle G: Mortgage
• Subtitle C: High-Cost Resolution and
Mortgages Modification
• Subtitle D: Office of • Subtitle H: Miscellaneous
Housing Counseling Provisions
122

123. Definition of Consumer Transactions
•Transactions that are secured by a mortgage
•Transactions that are secured by a deed of trust
•Transactions that are secured by other consensual
security interest on a dwelling or on residential
real estate that includes a dwelling
123

124. Application of Title XIV
• Mortgage Loan Originators
• “Entities or individuals earning or expecting to earn
compensation by taking residential mortgage loan
applications, assisting or offering to assist consumers in
negotiating the terms of a mortgage loan, or advertising
their services as mortgage loan originators to the
public.”
(H.R. 4173 Section 1401, adding TILA Section 103(cc)(2)(A))
124

125. Table Funding
• The term includes those entities and individuals
who table fund residential mortgage loans.
(TILA Section 103(cc)(2)(F))
125

126. Exclusions
• Those who perform purely clerical or
administrative tasks.
• Creditors who provide loan funding
(TILA Section 103 (cc)(2)(C-G))
126

127. Exclusions
• Licensed real estate brokers who are not
compensated by a lender, mortgage broker,
mortgage loan originator or the agent of any of
these entities or individuals.
(TILA Section 103 (cc)(2)(C-G))
127

128. Exclusions
• A person, estate or trust that provides mortgage
financing for the sale of no more than three
properties within a 12-month period.
(TILA Section 103 (cc)(2)(C-G))
128

129. Exclusions
• Loan servicers and their employees, including
those who renegotiate or modify loan for
borrowers who are in default or likely to default
on their mortgages.
(TILA Section 103 (cc)(2)(C-G))
129

130. Does NOT Include
•Consumer credit transactions under an open end
credit plan
•Extensions of credit for timeshare plans
(TILA Section 103(cc)(5))
130

131. Subtitle A
• The stated purpose of Subtitle A, “Residential
Mortgage Loan Origination Standards,” is “…to
assure that consumers are offered and receive
residential mortgage loans on terms that
reasonably reflect their ability to repay the loans
and that are understandable and not unfair,
deceptive or abusive.”
(H.R. 4173 Section 1403, adding TILA Section 129B(a)(2))
131

132. Subtitle A
This section of the law also creates a duty of care
for mortgage loan originators to:
•Complete applicable licensing requirements under
state and federal law.
•Include their NMLS unique identifier on all loan
documents.
(TILA Section 129 (b)(1)(A-B)
132

133. Subtitle A and Mortgage Loan
Originator Comp
1.A prohibition against incentives for loan
originators to earn additional compensation by
steering consumers towards particular loans or
loans with particular lending terms.
2.Limitations on loan originator compensation.
3.FRB issued a “Compliance Guide”.
133

134. Anti-Steering
• TILA prohibits certain practices relating to
payments made to compensate mortgage
brokers and other mortgage loan originators.
• The primary goal of the amendments is to
protect consumers in the mortgage market from
unfair practices involving compensation paid to
loan originators.
134

135. Rule Does Not Apply to
•Open-end home equity lines of credit (HELOCs).
•Time-share transactions loans secured by real
property if the property does not include a
dwelling.
Section 226.36
135

136. Prohibited Acts with Credit Secured
by a Dwelling
• Applies to both mortgage loan originators and
companies or mortgage brokers. This includes
companies that close loans in their own names
but use table-funding from a third party. The
term “loan originator” also includes employees
of creditors and employees of mortgage brokers
that originate loans.
Section 226.36
136

137. Title XIV and the SAFE Act
• Title XIV expands upon the definition of a “loan originator” in the
SAFE Act.
• The SAFE Act definition is limited.
• Most of the state laws that implement the SAFE Act define the
term to include persons who perform the services in previous
slide.
• Title XIV, will cover more individuals than are covered by the SAFE
Act.
• Some individuals will be subject to the new TILA restrictions
relating to mortgage loan originators but who will not be required
to be licensed or registered in accordance with the SAFE Act.
137

138. Exclusions
• Creditors are excluded from the definition of a
“loan originator” when they do not use table
funding, whether they are a depository
institution or a non-depository mortgage
company, but employees of such entities are
considered “loan originators.” What this means is
that a table-funding lender will be treated as a
“loan originator” for purposes of the new TILA
restrictions on mortgage loan originators.
138

139. Exclusions
• The definition of “loan originator” excludes a person who
performs purely administrative or clerical tasks for a mortgage
loan originator, or an employee of a retailer of manufactured
homes, so long as he/she does not advise a consumer on loan
terms and a person who performs only real estate brokerage
activities and is licensed/registered under state law to do so, so
long as he/she is not compensated by a lender, mortgage broker,
mortgage originator, or their agents. These exclusions are similar
to those contained in the SAFE Act.
139

140. Exclusions
• Exclusions include loan servicers and their
employees and agents. This exclusion is directed
toward those who offer or negotiate terms in
connection with renegotiating, modifying,
replacing and subordinating principal of existing
loans for borrowers who are delinquent, in
default, or have a reasonable likelihood of
defaulting.
140

141. Mortgage Transactions Terms or
Conditions
• Prohibits a creditor or any other person from paying,
directly or indirectly, compensation to a mortgage
broker or any other mortgage loan originator that is
based on a mortgage transaction's terms or conditions,
except the amount of credit extended.
• Prohibits any person from paying compensation to a
mortgage loan originator for a particular transaction if
the consumer pays the mortgage loan originator's
compensation directly.
141

142. Steering
• Steering rule prohibits a mortgage loan originator from
steering a consumer to consummate (fund) a loan that
provides the mortgage loan originator with greater
compensation, as compared to other transactions the
mortgage loan originator offered or could have offered
to the consumer, unless the loan is in the consumer's
best interest.
• Provides a safe harbor to facilitate compliance with the
prohibition on steering.
142

143. Record Retention
• Creditors who compensate mortgage loan
originators must retain records to evidence
compliance with Regulation Z for at least two
years after a mortgage transaction is
consummated.
Section 226.25
143

144. Understanding the Rule
• Section 1403 of the Dodd-Frank Act adds a new
section (§ 129B(c)) to TILA and is designed to
prohibit the payment of yield spread premiums
“YSPs” and other steering incentives.
• Compensation cannot be increased or decreased.
144

145. Compensation
• Amount of compensation is not subject to
change.
• Does not specify that compensation may be
subject to a minimum or maximum dollar
amount.
145

146. Case Study
• Read page____
• Break into groups and discuss the advantages
and disadvantages of the loan originator
compensation changes that you have
experienced in the past year.
146

147. Third-Party Closing Costs
• Thus, the rule does not prohibit creditors or
mortgage loan originators from using the
interest rate to cover upfront closing costs, as
long as any creditor-paid compensation retained
by the mortgage loan originator does not vary
based on the transaction's terms or conditions.
147

148. Payment by Person Other than
Consumer
• If a mortgage loan originator receives
compensation directly from a consumer in a
transaction, no other person may provide
compensation to a mortgage loan originator,
directly or indirectly, in connection with that
particular credit transaction.
148

149. Prohibition on Steering
• Title XIV prohibits a mortgage loan originator
from "steering" a consumer to a lender offering
less favorable terms in order to increase the loan
originator's compensation.
149

150. Loan Options Must Include
a. The loan with the lowest interest rate for which the consumer qualifies;
b. The loan with the lowest total dollar amount for origination points or fees,
and discount points, and
c. The loan with the lowest rate for which the consumer qualifies for a loan
without negative amortization, a prepayment penalty, interest-only
payments, a balloon payment in the first 7 years of the life of the loan, a
demand feature, shared equity, or shared appreciation; or, in the case of a
reverse mortgage, a loan without a prepayment penalty, or shared equity
or shared appreciation.
150

151. Safe Harbor
• Mortgage loan originators must obtain loan
options from a number of creditors with which
they regularly do business.
• The mortgage loan originator may present fewer
than three loan options and satisfy the safe
harbor rule as long as the loan options presented
to the consumer otherwise meet the criteria in
the rule.
151

152. Civil Liability Provisions
Section 1404 of the Dodd-Frank Act adds a new § 129B(d) to TILA, to
extend the civil liability provisions of TILA to mortgage originators.
• New § 129B(d) of TILA applies the civil liability provisions of TILA to
mortgage loan originators by substituting the term “mortgage originator”
for “creditor” wherever the latter term appears in § 130 of TILA.
• Imposes civil liability for actual damages, statutory damages equal to
twice the finance charge (with a minimum of $400 and a maximum of
$4,000 in an individual action for a credit transaction not under an open-
end credit plan that is secured by real property or a dwelling, and a
maximum of the lesser of $1,000,000 or 1% of the creditor’s net worth in
a class action), costs and reasonable attorneys’ fees.
152

153. Steering
Subtitle A includes directive to draft rules that prohibit
mortgage loan originators from steering consumers to
residential mortgage loans that have any of the following
characteristics:
• Loans that consumers cannot reasonably repay.
• Loans that have “predatory characteristics.”
• Steering consumers away from “qualified mortgages.”
• Loans with terms based on irrelevant factors such as race,
ethnicity, gender, or age.
153

154. Prohibitions
• Mischaracterizing of a consumer’s credit history.
• Mischaracterizing of the appraised value of property used
to secure a loan.
• If unable to offer a consumer a mortgage loan, discouraging
the consumer from seeking a loan from another loan
originator.
(TILA Section 129(b)(3))
154

155. Subtitle B and Repayment Ability
• Subtitle B, covers the Minimum Standards for
Mortgages
• Also addresses loan suitability and the
assessment of a borrowers’ ability to repay.
(TILA Section 129C(a)(1))
155

156. Determination of Repayment Must
Meet
•Verified income
•Credit history
•Existing obligations
•Debt-to-income ratio
•Employment status
•Must be based on a repayment schedule that fully
amortizes the loan
(TILA Section 129C(a)(3-4))
156

157. Non-Traditional Mortgage
• Negative Amortization Loans
• Certain Variable Rate Loans
• Interest-Only Loans
(TILA Section 129C(a)(6))
157

158. Qualified Mortgage Standards
• Section 1412 establishes a “safe harbor” for
compliance with the ability to repay
requirements of § 129C(a). A creditor and its
assignees may “presume” that a loan meets the
ability to repay requirements if the loan is a
“qualified mortgage.”
158

159. Qualified Mortgage Standards
• The periodic payments will not • The underwriting is based on a
result in an increase in the payment schedule that fully
principal balance. amortizes the loan over the loan
• The borrower cannot defer term.
payment of the principal. • The underwriting is based on the
• There are no balloon payments. maximum interest rate permitted
• The verification and during the first five years of the
documentation of the income and loan term and on a payment
financial resources of those who schedule that fully amortizes the
are obligated to repay the loan is loan over the loan term.
complete.
159

160. Qualified Mortgage Standards
• The term of the loan does not • The loan complies with
exceed 30 years.(some guidelines, established by the
exceptions allowed.) Board, for debt to income
• If a residential mortgage loan ratios or with other measures
meets these characteristics, it of ability to pay that the Board
is considered as a qualified establishes.
mortgage, and the creditor • The total points and fees for
can assume that the borrower the loan do not exceed three
has the ability to repay the percent of the total loan
loan. amount.
(H.R. 4173, adding TILA Section
129C(b)(2)(A))
160

161. Authority
• The Dodd-Frank Act provides regulators (the
Federal Reserve Board and the CFPB) with the
authority to revise the criteria for a “qualified
mortgage.”
(TILA Section 129C(b)(3)(B))
161

162. Standards
• Standards for lenders to comply with its
prohibitions against steering and double
compensation and its requirement to assess
repayment ability by providing that the violation
of any of these provisions is a defense in
foreclosure actions.
(H.R. 4173 Section 1413, adding TILA Section 120(k))
162

163. General Ability-to-Repay Standards
• Income and assets • Monthly payments on
• Employment status mortgage-related
• Monthly mortgage obligations, such as
payment taxes and insurance
• Monthly payment on a • Debt obligations
simultaneous mortgage • Monthly debt-to-
• Credit history income ratios
• Credit history
163

164. Ability to Repay
• Consumer-Purposed Closed-end Mortgage
(H.R. 4173, adding TILA Section 129C(b)(2)(A))
167

165. Does not apply to
• HELOCs
• Loan Modifications
• Timeshare Plans
• Reverse Mortgages
• Temporary Loans
(H.R. 4173, adding TILA Section 129C(b)(2)(A))
168

166. General Ability-to-Repay
• No limits on risky features, loan term, and points
and fees.
(H.R. 4173 Section 1414, adding TILA Section 129C)
169

167. General Ability-to-Repay
• Fully indexed rate or introductory rate,
whichever is greater
• Monthly, substantially equal payments that
amortize the loan amount over the loan term
• Special calculations for loans with negative
amortization, interest only payments, or balloon
payments
(H.R. 4173 Section 1414, adding TILA Section 129C)
170

168. General Ability-to-Repay
• Higher-priced balloon loan – use balloon
payment
• Balloon loan that is not higher-priced – use the
maximum payment scheduled during the first 5
years after consummation
(H.R. 4173 Section 1414, adding TILA Section 129C)
171

169. Consider and Verify
• Income or Assets (other than the home)
• Employment Status
• Mortgage Payment
• Simultaneous Loan
• Mortgage-related Obligations
• Current Debt Obligations
• Monthly Debt-to-Income ratio (DTI) or Residual Income
• Credit History
(H.R. 4173 Section 1414, adding TILA Section 129C)
172

170. Additional Protections
•Restricting onerous lending terms and practices
•Creating new disclosure requirements
•Broadening the enforcement ability of state
attorney generals
•Increasing penalties for TILA violations
173

171. Prohibitions on Prepayment
Penalties
• 3% of the outstanding loan balance during the first year of the
loan.
• 2% of the outstanding loan balance during the second year of the
loan.
• 1% of the outstanding loan balance during the third year of the
loan.
• Prepayment penalties are prohibited for any prepayments made
after the third year of the loan term. Creditors cannot offer a
loan that includes a prepayment penalty provision without also
offering a loan that does not include this provision.
(H.R. 4173 Section 1414, adding TILA Section 129C(c))
174

172. Defining Qualified Mortgages
• Reasonable
• Good Faith Determinations
175

173. Defining a Qualified Mortgage
• January 2013 Final Rule Deadline
• Impacts Basic Underwriting Standards
• Building Block for other Dodd-Frank Act
Rulemakings
176

174. Final Rules
• Origination and Servicing Practices
• Loan Originator Compensation
• Anti-Steering Rules
• Restrictions on High-cost Loans
• Escrow Accounts
• Appraisals
• Final Rules – January 21, 2013
177

175. Additional Prohibitions
• Single Premium Insurance
• Arbitration Agreements
• Negative Amortization
178

176. New Disclosure Requirements
• Notice of Reset of • Three business days
Hybrid ARM • Information on the
• Truth-in-Lending aggregate cost of
Disclosures settlement charges
• Periodic Statement • Amounts paid to the
Form creditor
• Total amount of
interest paid during
the loan terms. 179

177. Broader Enforcement Capacity
• The law expands the enforcement authority of
state attorneys general to enforce more
provisions of TILA.
(H.R. 4173, amending TILA Section 130(e))
180

178. Subtitle C: High-Cost Mortgages
• Title XIV, Subtitle C of the Dodd-Frank Act
amends HOEPA by extending its coverage.
• Creates new restrictions for high-cost home
loans. The law today applies to a broader range
of loans secured by the borrower’s principal
dwelling. These include:
1.Purchase money mortgages
2.Open-end home equity lines of credit
• At this time the law does not apply to reverse mortgages.
181

179. Revised HOEPA Provisions
• Interest Rate Threshold
• Points and Fees Threshold
– $20,000 or more
– $20,000 or less
• Loans with Prepayment Penalties
182

180. High-Cost Mortgage Counseling
• Creditors cannot offer a borrower a high-cost mortgage until
receiving certification from a HUD-approved counselor.
• The certification must state that the borrower has received
counseling on the advisability of accepting the mortgage.
• The counselor must be an independent counselor who is not
employed by the creditor or by an affiliate of the counselor.
• HOEPA continues to require the disclosures that alert
consumers to the risks of accepting a high-cost home loan.
183

181. Prohibited Terms and Practices
• Prepayment Penalties
• Balloon Payments
• Recommending Default
• Limitation on Late Fees
• No Acceleration after Default
• No Financing of Points and Fees
• No Fees for Loan Modification or Deferral
• Evading Provisions of the Law
(H.R. 4173 Section 1432, amending TILA Section 129(e))
184

182. Interest Rate Threshold
• The interest rate threshold used to be calculated
by determining whether a loan’s interest rate
exceeded a set number of points above Treasury
securities with a comparable rate. However
recent revisions to HOEPA changed that. Now
the interest rate threshold is calculated using a
new index.
• This new index is the average prime offer rate.
185

183. Average Prime Offer Rate
• The law defines “average prime offer rate” as
the following:
• “…the average prime offer rate for a comparable
transaction as of the date on which the interest
rate for the transaction is set, as published by the
Board.”
(H.R. 4173 Section 1412, adding TILA Section 129C(b)(2)(B))
186

184. New FFIEC Rate Spread Calculator
• FFIEC “New FFIEC Rate Spread Calculator”
http://www.ffiec.gov/ratespread/newcalc.aspx
187

185. Definition of Points and Fees
• Mortgage loan originator • All prepayment fees and penalties
compensation, paid directly or that the borrower must pay if the
indirectly to the originator. loan refinances a loan made or held
• Premiums paid at or before closing by the same creditor or one of its
for any optional insurance products affiliates.
or debt cancellation coverage, other • The recent revisions also include
than those fees that are paid in full guidelines on excluding from the
on a monthly basis. calculation of points and fees and
• The maximum prepayment fees and any bona fide discount points that a
penalties that the creditor may borrower knowingly pays in order to
collect under the terms of the reduce the interest rate.
transaction.
188

186. Open-End Transactions
• Revisions to the law also provide that HOEPA will
now apply to open-end transactions.
(TILA Section 103(c)(2))
189

187. Subtitle D: Office of Housing
Counseling
• Subtitle D is also known as the “Expand and
Preserve Homeownership through Counseling
Act.” It establishes a new Office of Housing
Counseling within the Department of Housing
and Urban Development (HUD).
190

188. Office of Housing Counseling
• Computer software programs for • A mortgage information booklet,
consumers. which will provide more information
• A multimedia campaign that will than is contained in the current HUD
encourage vulnerable consumers to Information Booklet.
seek unbiased and reliable • Education materials for vulnerable
homeownership counseling if they consumers, including immigrants,
are facing default or foreclosure or it minorities, and the elderly.
they are considering a subprime • HUD is also directed to establish and
loan. maintain, along with the CFPB, a
• Foreclosure rescue education database on defaults and
programs for geographic areas that foreclosures.
have high foreclosure rates.
191

189. Subtitle E: Mortgage Servicing
• Mandatory Escrow or Impound Accounts for Certain
Mortgages
• Applies to all first-lien mortgages on a consumer’s
principal residence (other than a reverse mortgage).
The provisions outline the circumstances in which an
escrow account is required, establish that mandatory
escrow accounts must continue for five years, and
develop the standards for a mandatory escrow account.
192

190. Subtitle E: Mortgage Servicing
• Escrow Waiver Disclosure
• Addresses circumstances in which an escrow account is
not mandatory and those in which consumers may elect
to close an escrow account. Requires loan servicers to
provide a disclosure that states the responsibility of the
consumer for non-escrowed expenses, such as taxes and
insurance, and the consequences of failing to pay these
expenses.
193

191. Subtitle E: Mortgage Servicing
• RESPA Amendments
• Revisions include new requirements that servicers must
meet prior to arranging for force-placed insurance and
new penalty provisions. Also shortens the time a loan
servicer has to respond to a written request or dispute
from a borrower. Servicers must now acknowledge the
receipt of letters from consumers within five days of
receipt and provide a response to issues raised by
consumers within 30 days.
194

192. Subtitle E: Mortgage Servicing
• TILA Amendments
• Relates to crediting payments on the date of receipt and
providing an accurate payoff balance within seven
business days of a written request for the information.
195

193. Subtitle E: Mortgage Servicing
• Including Escrow Amounts in TILA Disclosures
• This is applicable to all first-lien mortgages and to
subordinate mortgages secured by a consumer’s
principal residence. The provisions require payment
schedule disclosures to include escrow amounts.
196

194. Subtitle F: Appraisal Activities
• The Dodd-Frank Act addresses the following
concerns regarding appraisals:
• Poor appraisal practices which are associated with
higher-risk mortgages, such as high-cost or subprime
home loans.
• Interference with the independent and professional
judgment of appraisers.
197

195. Higher-Risk Mortgages
• First lien mortgages with principal amounts that do not exceed the
Freddie Mac conventional loan limits, the threshold is 1.5
percentage points above the average prime offer rate for a
comparable transaction.
• First lien mortgages with principal amounts that exceed the
Freddie Mac conventional loan limits, the threshold is 2.5
percentage points above the average prime offer rate for a
comparable transaction.
(H.R. 4173 Section 1471, amending TILA Section 129H(f))
198

196. Higher-Risk Mortgage Appraisal
Requirements
• The appraisal is based on a physical visit that includes examination of the
interior of the dwelling.
• A second appraisal must be conducted, at no cost to the borrower, if the
transaction involves the resell of a property that the seller purchased within 180
days of the current transaction, and it the current sale price exceeds the amount
paid by the seller. The second appraisal must consider factors that have
contributed to a cost increase. These may include market changes and property
improvements. The purpose of this provision is to discourage property flipping.
• The appraisal must be performed by a certified appraiser in accordance with the
requirements the requirements of the Uniform Standards of Professional
Appraisal Practice and Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act.
(TILA Section 129H(b)(1-3))
199

197. Provide Free Copy of Appraisal
Consumer Rights
• The law also requires creditors to provide loan
applicants with the following:
•One free copy of the appraisal.
•Notification that the appraisal is for the creditor’s
benefit and that the loan applicant can obtain a
separate appraisal.
(TILA Section 129H(b)(4)(c-d))
200

198. Special Remedies for Violations to
HOEPA
• A consumer who brings a timely action against a creditor for a
violation of rules issued under TILA may be able to recover special
statutory damages equal to the sum of all finance charges and
fees paid by the consumer this is often referred to as “HOEPA
damages”, unless the creditor demonstrates that the failure to
comply is not material. This recovery is in addition to actual
damages; statutory damages in an individual action or class
action, up to a prescribed threshold; and court costs and attorney
fees that would be available for violations of other TILA
provisions.
201

199. Special Remedies for Violations to
HOEPA
• Third, a consumer has a right to rescind a transaction for
up to three years after consummation when the
mortgage contains a provision prohibited by a rule
adopted under the authority of TILA. Any consumer who
has the right to rescind a transaction may rescind the
transaction as against any assignee. The right of
rescission does not extend, however, to home purchase
loans, construction loans, or certain refinancings with
the same creditor.
202

200. Special Remedies for Violations to
HOEPA
• If a creditor assigns a high-cost mortgage
to another person, the consumer may be
able to obtain from the assignee all of the
foregoing damages.
• Consumer may assert a violation of TILA
Section 129C(a) as a defense to
foreclosure by recoupment or set off.
• There is no time limit on the use of this
defense.
203

201. Compliance
• Creditors who willfully fail to comply with these
requirements are liable to the loan applicant or
the borrower in the amount of $2,000.
(TILA Section 129H(b)(4)(e))
204

202. Appraisal Independence
1.Coercing, bribing, extorting, instructing, or
intimidating an appraiser or appraisal firm.
2.Mischaracterizing the value of property.
3.Encouraging an appraiser to deliver a target
value.
4.Threatening to withhold payment for an
appraisal.
(TILA Section 120E(b)(1-4))
205

203. Prohibitions to Protect Appraisal
Independence
The law includes additional prohibitions to protect
appraisal independence. These include:
• Appraisers and appraisal companies are prohibited from
having a financial or other interest in the property that is
subject to the appraisal.
• Creditors are prohibited from extending credit if the
creditor knows that the appraisal misstates the value of
the principal dwelling securing the loan.
(TILA Section 129E(d) and (f))
206

204. Setting Professional Standards
• Any mortgage or real estate professional who is involved
in a real estate transaction that involves a borrower’s
principal dwelling and who has a reasonable basis to
believe that an appraiser is failing meet or is violating
professional standards or the law is required, by law, to
“…refer the matter to the applicable State appraiser
certifying and licensing agency.”
(TILA Section 129E(e))
207

205. Subtitle G: Mortgage Resolution and
Modification
• The law defines a “multi-family property” as one with five or
more dwelling units.
• (H.R. 4173 Section 1481 (a))
• The law specifically directs HUD to create a program that will do
the following:
• Encourage “sustainable financing” of multi-family properties
• Preserve federal, state, and local subsidies
• Provide funds for rehabilitation
• Transfer multi-family properties to responsible new owners
• (H.R. 4173 Section 1481(c))
208

206. Mortgage Assistance Program
• Subtitle G also addresses issues related to mortgage
assistance programs such as the Making Home Affordable
Program and the Home Affordable Modification Program.
These programs were established under the Emergency
Economic Stabilization Act of 2008. The law prohibits
assistance to any individual under these programs who has
been convicted within the past ten years for felony, money
laundering, or tax evasion if these crimes relate to a real
estate or mortgage transaction.
(H.R 4173 Section 1481(d)(1))
209

207. Requirements Under Subtitle G
• Require mortgage servicers participating in the program to provide
the data that was used in performing a net present value analysis
to borrowers if their requests for loan modifications are denied.
• Make an NPV (Net Present Value) calculator available on the
Internet that homeowners can use to determine whether their
mortgages would be accepted or rejected for modification.
• Make reasonable efforts to provide a website that homeowners
can use to apply for mortgage modifications.
(H.R. 4173 Section 1482(b)(1-3))
210

208. Public Access to Information
• The Secretary of the Treasury must release the
information each month and must include the following:
• The number of requests of loan modifications.
• The number of these requests that were processed and
approved or denied.
• The Secretary must also write regulations regarding data
compilation and publication.
(H.R. 4173 Section 1483(b)(1-2))
211

209. Subtitle H: Miscellaneous
• Chronology
• Inter-agency Study
212

210. The Road Ahead
• Dodd-Frank Act is to impose stricter standards
• Provide consumer protection and education
213

211. Treat Customers Fairly
• Broadest power of new Bureau is its ability to
regulate “abusive practices”.
• This means ANYTHING YOUR CUSTOMER DOES
NOT UNDERSTAND!
214

212. Module Two – Session One
Ethics, Fraud and Fair Lending

213. Ethics, Fraud and Fair Lending
• Purpose of Ethics in Lending
• Red Flags of Fraud
• Appraisal Independence
216

214. Objectives
• Identify top red flags for mortgage fraud in the
mortgage industry.
• List various types of mortgage fraud.
• Define the new appraisal independence
regarding Dodd-Frank Act.
217

215. Ethics and Compliance
• Ethical framework
• Guidelines and reference to compliance
standards
• Goal is to protect the consumer
• Awareness of industry laws and regulations
218

216. Ethics
• Set of values
• Conduct and principles
• Deliver honest and fair services
• Required 2 hours of annual instruction on Fraud,
Ethics and Fair Lending
219

217. Focus of CFPB
• Provide transparency in lending
• Increased support of fair and honest lending
practices
• Result of greed and abuse of power
• Victims left defenseless
• Establish high level conduct in our industry
• Rebuild trust
220

218. Setting Ethical Standards
• Laws and regulation form solid basis
• Encourage and enforce ethical practices
• Compliance Approach to ethics
221

219. Committing to Professional Success
• Ethics play building block
• Effective communication
• Fair pricing
• Fair product representation
• Meaningful and compliant marketing
• Compliant team
222

220. Setting the Example
• Set the standards
• Reasons to practice good ethics
• Reputation of organization
• Reputation of partners, vendors and staff
• Everyone sets the example
223

221. Establishing a Code of Conduct
224

222. Honesty and Integrity
225

223. Professional Conduct
226

224. Honesty in Advertising
227

225. Confidentiality
228

226. Compliance with the Law
229

227. Disclosure of Financial Interest
230

228. Making a Change
• Unacceptable ethics leads to regulatory backlash
• Increased regulatory oversight
• 2008 to now experienced lawmakers passing
over-reaching laws
• Prevent the recurrence of the mortgage melt-
down and Protect consumers
• Fine line between proactive oversight and
protection and regulatory overload
231

229. Best Practice
• Build strong base of industry ethics
• Combined with make sense regulatory oversight
• Transparency is key
• Industry goal – build excellent business practices
• Support highest standards
• Restore faith in our industry
232

230. 2008 FBI Report on Fraud
“Mortgage fraud continues to be an escalating problem in the United States and a
contributing factor to the billions of dollars in losses in the mortgage industry.
Recent congressional economic stimulus legislation and the proliferation of FHA-
insured mortgages are providing funding streams for perpetrators to further
exploit this industry. Multiple fraud schemes are being conducted by industry
professionals who are in a position to exploit the current depressed housing
market. Market conditions are also fueling the use of traditional and emerging
schemes which have the potential to multiply across jurisdictions as foreclosures
increase, the market contracts, access to credit diminishes, and more
homeowners are unable to sell or refinance their homes. Properties affected by
these schemes negatively impact neighborhoods; federally insured loan programs;
the mortgage, banking, and securities industries; secondary market investors; tax
payers; homeowners; and the overall US economy.”
Source: http://www.fbi.gov/stats-services/publications/mortgage-fraud-2008/2008-mortgage-fraud-report 233

231. FBI Mortgage Fraud SARs
234

232. Professional Conduct
• Foundation of ethics in lending is enforced with a
compliance approach
• Ethics is about fairness, honesty, communication,
transparency and full disclosure
• Actions must be right and look right
235

233. Laws and Regulations
• Build faith & trust
• Actions can bring about new laws & regulations
236

234. Compliance and Ethics
237

235. Equal Credit Opportunity Act (ECOA) –
Reg B
Race
Color
Religion
National Origin
Gender
Marital Status
Age
The fact that all or part of an applicant’s
income derives from a public assistance
program
The fact that the applicant has exercised any
right under a consumer credit protection act
238

236. Fair Housing Act
Lending decisions can
NEVER be based on…
Race
Color
Religion
National Origin
Handicap
Familial Status
Gender
The Fair Housing Act - sec. 800. 42 U.S.C. 3601 et seq
239

237. RESPA
• Real Estate Settlement Procedures Act RESPA Regulation X - 24
CFR §3500
• Now Reg X – 12 CFR 1024
• GFE within 3 business days
• HUD-1
• HUD’s Settlement Cost Booklet
• Prohibits kickbacks
• Disclosure of Affiliated Business Arrangements
• Transfer of servicing
240

238. TILA
• Truth in Lending Act/Regulation Z (§§ 226.15 and
226.23)
• Disclose APR within 3 business days
• Consumer Handbook on Adjustable Rate
Mortgages
• Triggering terms
• Right of rescission
241

239. Gramm-Leach-Bliley Act
• Financial Services Act of 1999 (P.L. 106-102)
• Allows financial companies to consolidate their
services
242

240. Gramm-Leach-Bliley Act
• Financial Privacy Rule (16 CFR Part 313)
• What information will be collected
• How the information will be used and shared
• What procedures the company has to protect the
information
• Opt-out option
243

241. Gramm-Leach-Bliley Act
• The Safeguards Rule (16 CFR Part 314)
• Identifying a specific employee who is in charge
of the security plan
• Having a program that protects consumer
information
• Updating and modifying the security system, as
necessary
244

242. Gramm-Leach-Bliley Act
• Pretexting Protection
• Impersonating an individual
• Hacking into file
• Develop procedures and training
245

243. Ethical Standards
• Consumer
• Appraiser
• Mortgage loan originator
• Lender
• Everyone associated with the transaction
246

244. What is Mortgage Fraud?
• Fraud for profit
• Involves groups of people
• Initiators receive percentage of profit
• Costs the industry, consumers and public
247

245. Damages Caused by Fraud
• 72% spike in loan repurchase requests in 1st
quarter 2011 – Fannie Mae Report
• Common fraud findings are income exaggerated
and credit not fully disclosed – William H.
Brewster – Fannie Mae – June 11, 2010
248

246. 2010 Mortgage Fraud Suspicious
Activity Reports (SARs)
• 5% increase in reported fraud from the previous year
• 72% involved losses of more than $1 million
• The Financial Crimes Enforcement Network (FinCEN) estimated
losses in 2010 at more than $1.5 billion
• Largest portion involves misrepresentation on loan applications
and verification of deposits, along with appraisal and valuation
issues
• Identity-theft, bankruptcy and income related fraud are on the
rise and have been directly associated with mortgage fraud
249

247. Mortgage Fraud 2010
Mortgage Asset Research Institute Report 25% of originated loans and
33% of post-funding investigations included some type of appraisal
fraud and/or misrepresentation.
250

248. Misrepresentation on the Application
251

249. February 2011 Fannie Mae Fraud
Findings
252

250. Mortgage Fraud Definition
Material misstatement, misrepresentation or
omission which are relied upon by an enterprise
to fund or purchase or not to fund or purchase
a mortgage.
253

251. Mortgage Fraud affects everyone
Starting with:
Consumers
Servicers
YOU!
254

252. Fraud for Housing Schemes
1. Perpetrators may include the borrower and/or
loan officer
2. Normally involves a single loan
3. Contains loan-level misrepresentations to
qualify
4. Borrower intends to repay – the loan usually
does not default
5. The appraised value is not typically inflated at
origination
255

253. Statistics
Pending Fraud Investigations in 2011
involve losses of more than $1
million dollars
256

254. Mortgage Fraud Statistics from the
FBI
http://www.fbi.gov/about-us/investigate/white_collar/mortgage-fraud/mortgage_fraud
257

255. Examples of Fraud for Housing
1. Counterfeit Paychecks
2. Invalid Employment
3. Unintended Co-Borrower
4. Falsifying Information
5. Straw buyer
6. Identity Theft
258

256. Fraud for Profit Schemes
• Multiple Industry Professionals
• Misrepresentations and Omissions
• Participants Well Compensated
• Straw Borrowers
259

257. Q2 2011 Mortgage Fraud Risk
http://www.interthinx.com/pdf/11_Q2MFRR_FNL.pdf
260

258. Q2 2011 Mortgage Fraud Risk
http://www.interthinx.com/pdf/11_Q2MFRR_FNL.pdf
261

259. Mortgage Fraud Red Flags
• Precautions to take
• Help identify various incidents make you
vulnerable to fraud
• Develop programs to help protect you and your
company from adverse activities
262

260. Possible Red Flags of Mortgage Fraud
• Inconsistencies in the loan file tips that file may
contain misrepresentations
263

261. Common Red Flags of Mortgage
Fraud
 Social Security number discrepancies
 No real estate agent reflected on sales contract
 Address discrepancies with the file
 Verifications (VOE, VOD, VOR, etc..) addressed to a specific party’s
attention. (Should always be addressed to the HR Dept.)
 Verifications completed the same day they were ordered
 Verifications completed on the weekends or holidays
264

262. Common Red Flags of Mortgage
Fraud
 Assets or wages are even dollar amounts
 NAL (Non-arm’s Length) transactions
 Occupancy on the appraisals is not consistent with the application
 Cash out transaction on a recently acquired property
 Different handwriting or font styles within a document
 Altered looking documents
265

263. Application Fraud
 The borrowers home address, phone number, employer
address and phone number cannot be validated
 Marital status and number of dependents are not
consistent with the borrowers Tax Returns or other
documentation
 Employers address is a PO Box and not a physical
address
266

264. Application Fraud
 Employers address is a PO Box and not a physical address
 Borrower’s education is not consistent with their employment.
Example, borrower states that they went to culinary school, but is
currently working as a bookkeeper
 High income borrowers have little or no personal assets
 Invalid Social Security Number
267

265. Straw Borrowers
For example, the actual borrower may NOT:
•Qualify for the mortgage
•Intend to occupy the property as a primary
residence
•Be eligible for a loan program
•Exist
•Individuals used to serve as a cover
268

266. Straw Borrower Red Flag Checklist
269

267. Builder Bailout Red Flag Checklist
270

268. Flip Red Flag Checklist
271

269. Resources
272

270. Case Study
• Read page 58 of student workbook.
• Break into groups
• Discuss why victims would trust individuals like
Nguyen and Eichenberger
• What can consumers do to protect themselves
against fraud?
273

271. Mortgage Fraud Red Flags Checklists
• Some mortgage loan originators end up
participating in mortgage fraud unknowingly
• Checklists help to locate possible fraud
• Finding one or more of these items does not
necessarily mean there is fraudulent intent
• Red flags may signal the need for a more
intensive file review and borrower interview
274

272. Application Red Flags
275

273. Credit Report Red Flags
276

274. Income Red Flags
277

275. W-2/1099 Red Flags
278

276. Case Study
• Read page 64 in student workbook.
• Break into groups
• Discuss if you feel the penalties were fair
• What can you do to protect against this type of
fraud?
279

277. Tax Returns Red Flags
280

278. Schedule A Red Flags
281

279. Schedule B Red Flags
282

280. Schedule C Red Flags
283

281. Schedule E Red Flags
284

282. Employment Fraud Red Flags
285