In past months, there has been a flurry of Congressional and other legislative activity related to the subprime mortgage crisis. One of the broadest pieces of proposed federal legislation is "The Mortgage Reform and Anti-Predatory Lending Act of 2007"1(the Act). If enacted, the Act would amend various provisions of the Truth in Lending Act (TILA), as amended by the Home Ownership Equity Protection Act of 1994 (HOEPA).
Title I of the Act - entitled "Mortgage Origination" - amends TILA, but liability for violations under Title I are the same as liability under TILA. The Act defines a "mortgage originator" broadly to include not only mortgage lenders that might not be subject to state or federal regulation, but also mortgage brokers and depository institutions. Most importantly, the Act imposes a federal duty of care that requires any mortgage originator to be qualified, licensed and registered. Mortgage originators must present each consumer seeking a loan with a range of products for which the consumer qualifies and which are appropriate to such consumer's individual circumstances, and fully and timely disclose to the consumer: (a) the relative costs and benefits of each product discussed; (b) the nature of the relationship between the mortgage originator and consumer; and (c) any conflicts of interest that may arise. All loan documents related to the loan arising from this transaction will include the unique identifier of the related mortgage originator.
Title I also prohibits mortgage originators from receiving incentive compensation based on the terms of any mortgage loan, a process commonly referred to as "steering." Further, various regulatory agencies are directed to pass regulations that promote the interest of the borrower in obtaining the best loan, based upon full disclosure with respect to the terms of the loan and the relationship between the borrower and the mortgage originator.
Perhaps the most significant provisions of Title I are the provisions creating more uniform licensing and registration standards for mortgage originators. After a two-year safe harbor period following enactment of the Act, no mortgage originator may originate a mortgage loan unless that mortgage originator is licensed under a "qualifying State licensing program" and is registered with a "qualified nationwide registration regime." A "qualifying State licensing program" is one that meets certain minimum requirements under the Act, including, but not limited to, a program that sets minimum capital requirements for mortgage originators, establishes a state agency with oversight authority for mortgage originators and requires background checks and minimum training for mortgage originators that are not members of a regulated depository institution. If states do not create a "qualifying State licensing program," the Secretary of HUD is authorized to pass regulations requiring mortgage originators in such states to act in the best interests of the borrower.
A "qualified nationwide registration regime" is a comprehensive national licensing and supervisory database that has been approved by the Secretary of HUD. While the Act provides an 18-month period in which mortgage originators may self-impose a qualified nationwide registration regime, the Secretary of HUD is authorized to create and impose such a regime if an acceptable regime is not otherwise created during such 18-month period.2
Title II of the Act sets minimum standards for all residential mortgage loans. Title II provides that no creditor may make a residential mortgage loan unless the creditor makes a verifiable, reasonable good faith determination that, at the time the loan is consummated, the borrower can repay the loan (including applicable taxes, insurance and assessments). The creditor must consider the borrower's credit history, current income, reasonably expected future income, current obligations, ratio of debt to income, employment status and other sources of funds other than equity in the real estate that will secure the loan. Title II further prescribes specific requirements for making a determination of a borrower's ability to repay non-standard adjustable rate loans, such as deferred payment loans, interest-only loans or loans that carry a negative amortization. To calculate the related monthly payments, the creditor must assume that the loan is fully disbursed at closing, will be repaid in "substantially equal monthly amortizing payments," and bear interest at a fixed, fully indexed interest rate. Finally, refinancing costs must not exceed any newly advanced principal received by the borrower.
A creditor or an assignee may presume that the loan has met the requirements described in Title II if the loan is a "qualified mortgage" or a "qualified safe harbor mortgage." This presumption is rebuttable only against creditors (not assignees) of the related mortgage loans. A "qualified mortgage" is a residential mortgage loan that has an annual percentage rate within the rates established in the Act. A "qualified safe harbor mortgage" is a qualified mortgage for which: (a) the consumer's income and ability to repay have been documented; (b) underwriting is based on a fully-indexed rate; (c) the consumer's debt-to-gross income ratio, after giving effect to the loan, does not exceed 50 percent; and (d) the repayment schedule does not result in negative amortization.
As noted above, the Act creates limited liability for securitizers and other assignees of residential mortgage loans. The sole recourse against an assignee, including securitizers, is for rescission of the loan under TILA and for costs and counsel fees incurred by the borrower in connection with obtaining rescission. Further, any assignee, including a securitizer, is permitted to "cure" a violation of the Act by modifying a loan within 90 days after receiving notice from the borrower of such violation. An assignee also will be exempt if the assignee has a policy against buying loans that do not comply with the Act and performs reasonable due diligence using consistently applied sampling procedures when purchasing loans. The assignee must also receive representations from the seller of the loans that such loans comply with the Act. Mortgage pass-through trusts or purchasers of mortgage-backed securities are also excluded from the scope of the Act.
Title II prohibits prepayment penalties on any mortgage loan that is not a "qualified mortgage," and provides that upon foreclosure, the foreclosing party will recover the property subject to any bona fide lease with a bona fide tenant. Title II also includes specific provisions regarding the extension of negative amortization loans to first-time borrowers.
Title III of the Act expands the scope of HOEPA to cover purchase money and open-end loans, and codifies the existing Federal Reserve Board standard regarding the annual percentage rate for "high-cost mortgages." The Act reduces the fees and points trigger from eight percent to five percent, imposes a trigger related to prepayment terms and expands the definition of "points and fees" to include all compensation paid directly or indirectly to a mortgage broker as well as certain insurance premiums and prepayment fees and premiums. Finally, the Act clarifies that "points and fees" does not include discount points knowingly paid by the borrower for the purpose of reducing the interest rate and that actually reduce the interest rate.
HOEPA is further amended to prohibit balloon payments on high-cost mortgages and prepayment penalties on HOEPA-covered loans that exceed certain statutory maximum principal obligation limitations.The Act prohibits lending without regard to the particular borrower's ability to repay the loan in accordance with its terms, which prohibition would extend to the making of so-called "lite-doc" or "no-doc" loans. The Act establishes a rebuttable presumption that a borrower can repay the loan if, at the time of closing, the borrower's monthly financial obligations do not exceed 50 percent of such borrower's verifiable monthly income.
Under the Act, lenders cannot: (a) recommend that a borrower default on an existing loan in order to refinance such loan with a high-cost mortgage; (b) charge multiple late fees or late fees exceeding four percent on any mortgage loan; (c) unilaterally accelerate the loan, except in connection with a default; (d) finance points or fees by including them in the principal amount of the related loan; (e) structure loans so as to avoid the protections afforded under HOEPA; or (f) provide a high-cost loan to any borrower unless the borrower certifies that it has received pre-loan counseling from a HUD-approved credit counselor.
As of the writing of this article, the Act has not been enacted. The bill was directed to the Senate Committee on Banking, Housing and Urban Affairs on December 3, 2007. Notably, the White House issued its statement regarding the Act, coming out in support of certain provisions but against others. The White House fears that provisions regarding "specific underwriting standards, assignee liabilityand the subjective obligations for mortgage originatorscould lead to greater uncertainty and increased litigation."3 Given that many lawmakers are in the midst of the Presidential election (if not their own re-election), it will be interesting to see whether - and in what form - the Act becomes law in 2008.
1 H.R. 3915, 110th Cong. (as passed by the House of Representatives, Nov. 15, 2007).
2 In the first week of 2008, several states launched the Nationwide Mortgage Licensing System.This system was created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, with a goal of creating more conformity in regulatory requirements among the states.It allows registrants to register in their home states; once the information is in the system, it can be used to apply in other states as well.While it is not clear whether the Nationwide Mortgage Licensing System is compliant with the Mortgage Reform Act, it should become more significant if the Mortgage Reform Act becomes law.For more information, see State Regulators State Mortgage License Registry, American Banker , Jan. 4, 2008, at 3.
3 Statement of Administration Policy, Executive Office of the President, Office of Management and Budget, H.R. 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007 (Nov. 14, 2007) (on file with author).
Christopher W. Rosenbleeth is an Associate in Stradley Ronon's Business Practice Group focusing on representing both lenders and borrowers in commercial finance transactions, commercial real estate finance transactions and securitization and structured finance transactions.