Determining the Loan Purpose:  The New Challenges [Part 1]

By Cathy Brown, Wolters Kluwer

One of the common threads running across the new Uniform Residential Loan Application (“URLA”), the disclosure requirements of Regulations X and Z (“TRID”), and the reporting requirements of Regulation C (“HMDA”) is the requirement that the lender identifies the loan purpose.[1]  It is possible for the loan purpose to be the same for the new URLA and under TRID and HMDA.  This blog examines the need to recognize that the loan purpose may be different for each and what lenders can do to prepare for that eventuality.

Can there be more than one loan purpose choice for a single-purpose loan?

Consider the following single-purpose loan.  A prospective borrower takes title to a dwelling with an existing loan as a successor-in-interest.  The loan is assumable with the lender’s approval but the prospective borrower only seeks approval after taking the title.  The prospective borrower selects “Purchase” for the loan purpose on the new URLA. But is that it—is the loan purpose “Purchase” for the URLA and under TRID and HMDA?

In order to answer the question with certainty, lenders may wish to start with a review of the possible choices.  Those choices vary.  The bare choices follow.

It is also helpful to recognize why the loan purpose choices are different between TRID and HMDA.  The choices under TRID are intended “to aid consumers’ understanding of their loan transactions.”  See Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z).
Notice that the new URLA no longer contains choices for Construction or Construction-Permanent.  Also, there are two new choices under HMDA; those new choices are “Cash-Out Refinancing”[2] and “Other.”

By contrast, the choices under HMDA are intended to aid regulatory agencies and the public when analyzing the mortgage market.  An obvious difference is that “Construction” is a loan purpose choice under TRID, but not under HMDA.  “Construction” is an important category from a customer perspective.  For covered loans under HMDA, “Construction” is primarily absorbed into the “Home Purchase” and “Home Improvement” choices.  Presumably, that approach aids analysis and it does avoid double-counting when there are separate construction and permanent loans.

Going back to our example, there is a prospective borrower seeking approval to assume an existing loan after taking title to the property, and that prospective borrower selects “Purchase” on the URLA.  See the following analysis showing how one single-purpose loan may have three different loan purposes.

Although the example transaction may not occur with great frequency, it is just one loan purpose question that lenders should be prepared to answer.

The first question above was whether there can be more than one loan purpose choice for one loan.  The answer is a qualified yes for the example given, but an unqualified yes for other loans because the available choices are different between the URLA, TRID, and HMDA.

In Part Two of this blog series, Wolters Kluwer discusses the HMDA Loan Purpose “waterfall” methodology and other requirements your credit union needs to know. They also share hidden requirements and next steps.

Wolters Kluwer LogoWolters Kluwer is the NAFCU Services Preferred Partner for Consumer and Member Business Lending & Deposit Services. More educational resources and partner contact information are available at www.nafcu.org/wolterskluwer/.

[1] For purposes of this article and for simplicity, use of the regulatory acronyms URLA, TRID, and HMDA include the full regulations when applicable. [2] References to a lender’s separate cash-out refinancing product includes those products that are intended to meet investor guidelines.

CFPB Shares Proposed TRID Amendments

By: Andy Dunn, Senior Attorney, Wolters Kluwer 

Recently the Consumer Financial Protection Bureau (CFPB) released its notice of proposed rulemaking for the Know Before You Owe rule, commonly referred to as TILA-RESPA Integrated Disclosures (TRID). In their press release, the CFPB emphasized four changes: 1) Tolerances for the total of payments; 2) Housing assistance lending; 3) Cooperatives; and 4) Privacy and sharing of information, along with minor corrections across several topic areas.

It’s great to have the CFPB working to formalize the nonbinding verbal guidance it has provided to industry stakeholders, including Wolters Kluwer. The proposed rule helps eliminate the risk, especially in a presidential election year, that nonbinding verbal guidance could lead to future compliance violations following a change in bureau leadership. Once the proposed rule changes are finalized and published, all industry participants will be working from the same playbook.

In working closely with our customers to help them comply with the Know Before You Owe rule, especially around areas where nonbinding verbal guidance from the CFPB was required, we’ve found the most recurring trouble spots came from financial calculations. From the CFPB’s proposed changes it appears many of these areas, including calculating cash to close table; principal reduction/curtailment; summary of transactions table; and escrow account disclosures will be addressed. This is great news for our customers and partners, as many of these calculations are complicated to produce under the current rule.

Wolters Kluwer kicked off its 2016 User Summits and workshops with their ComplianceOne mortgage customers in Bloomington, Minnesota on August 9. The events are being held in 18 U.S. cities, ending in San Antonio, Texas on December 8, 2016. The Summits will provide a great opportunity for ComplianceOne mortgage customers to discuss the proposed rule changes with peers and to share their feedback if they think additional guidance is needed beyond what has been proposed.

Wolters Kluwer is looking forward to responding to the CFPB’s proposal and sharing their customers’ feedback with the bureau. The comment period closes October 18, 2016.

Wolters Kluwer is the NAFCU Services Preferred Partner for Consumer and Member Business Lending & Deposit Services. Learn more at www.nafcu.org/wolterskluwer.

6 Compliance Tips For Loan Estimate Revisions

By Sue Burt, Senior Compliance Consulting Specialist, Wolters Kluwer Financial Services

wk7When it comes to issuing a Loan Estimate under the TILA-RESPA Integrated Disclosure (TRID) rule, revisions are not permitted due to mistakes, miscalculations, and underestimation of charges caught after the fact.  However, the law does recognize that some situations can arise beyond lender errors that cause the original loan estimate to become inaccurate.

The Justifying Events

The law sets out six events that justify a revised Loan Estimate for purposes of re-setting fees and performing one’s good-faith analysis.  Those six events include:

  1. Changed circumstances that cause an increase to settlement charges
  2. Changed circumstances that affect the consumer’s eligibility for the loan or affect the value of the property securing the loan
  3. Consumer-requested changes
  4. Interest rate locks
  5. Expiration of the original Loan Estimate
  6. Construction loan settlement delays

Before considering each of these, it is important to review the definition of “changed circumstance” as this term impacts the first two triggering events.  Download the full whitepaper to explore specific case examples of the six justifying events, the timing for providing such revisions, and a review of the following few compliance tips.

Compliance Tips

wk1Collect all application information before issuing a Loan Estimate.  Revised Loan Estimates are not permitted simply because the lender failed to collect all six pieces of information required in the application prior to issuing the Loan Estimate.  For example, the failure to obtain the property address prior to issuing the Loan Estimate cannot be used as a reason to issue a revision if that address is later collected and impacts fees.

Collect complete, accurate application information.  Lenders should consider sequencing the application information requests to have sufficient information to issue an accurate Loan wk2Estimate the first time around.  In fact, they may request information above and beyond the six items that make up the definition of an “application.” For example, they may want to collect the consumer’s mailing address or the product the consumer is interested in prior to collecting the six pieces of required regulatory application information.  However, keep in mind, once the lender receives those six items, a Loan Estimate is triggered.

Also, recognize that it is important to collect as much information as possible from the consumer during the application stage so that the Loan Estimate disclosures are accurate.  Remember, lender errors and oversights will not justify a revised loan.  Put another way, a “bad” application is not a change in circumstances.

wk3Only fees affected by a triggering event can be re-set.  For good-faith purposes, only those fees impacted by the triggering event can be re-set.  The triggering events are not a license to issue a completely revised Loan Estimate and address other changes not affected by the event being relied upon.

wk4Courtesy loan estimate revisions.  The law does not prohibit issuing updates to a Loan Estimate to reflect changes not based on one of the six triggering events.  Many refer to these revisions as “‘courtesy” revised Loan Estimates.  The purpose of such revisions is more customer service oriented in nature and intended to keep the consumer updated on fee changes to avoid surprises at consummation.  However, courtesy Loan Estimate revisions cannot be used for purposes of re-setting fees to establish good faith.

wk5Record retention.  The TRID rule recordkeeping provisions require that documentation be maintained to support the reason for issuing a revised Loan Estimate.  Presumably, examiners will look for this supporting documentation when they review loan files and see revised Loan Estimates.  Lenders should keep records documenting the reason for revision, the original Loan Estimate, and the revised Loan Estimate.  This evidence of compliance should be retained for three years.

wk6Manage Revisions.  Lenders should implement some type of system to track and mange revised Loan Estimates.  This will be important for purposes of conducting one’s good-faith analyses.  It’s also important for purposes of tracking multiple revisions and determining at what point fee increases exceed the 10% cumulative tolerance threshold.

For more information, download “The Revised Loan Estimate: Changed Circumstances and Other Triggering Events.”  The whitepaper highlights when a Loan Estimate revision is permitted, the timing for providing such revisions, and a few compliance tips to consider regarding the revision process.

wolterskluwerlogoWolters Kluwer is NAFCU Services Preferred Partner for Consumer and Member Business Lending and Deposit Services for credit unions.  More education resources and contact information are available at nafcu.org/wolterskluwer.

 

Prepare Your Credit Union for Changes in HMDA Data Collection Rules (Part 2)

Prepare Your Credit Union for HMDA ChangesBy Edward Kramer, Executive Vice President of Regulatory Affairs, Wolters Kluwer Financial Services

In part I of this series, the new data fields that the Consumer Financial Protection Bureau (CFBP) seeks to collect for more HMDA reporting transparency and timeliness and concerns about potential misinterpretation of newly collected data was addressed.

To wrap-up, we will consider the known and unknown factors related to this regulatory change and conclude with a list of key tips you can use to prepare your credit union for these pending changes.

Imminent Compliance and Technology Challenges Are Clear

Although most industry observers expect issuance of the final regulation sometime in 2015, we don’t yet know which specific data fields will be included, nor the amount of time institutions will have to prepare before the requirements go into effect. We also do not know if or how much of any additional data collected will be made public by the regulators.

Protecting the privacy of personally identifiable financial information should be a priority. The inclusion of items such as credit scores, borrower age, and other personal data may raise legitimate privacy concerns, particularly if it becomes possible to identify a specific consumer by combining the new data with other publicly available data.

Despite the unknowns, one thing is certain:  the extent and breadth of the proposed new data collection fields will be considerable.  They will impose significant regulatory compliance and information technology challenges on mortgage lenders.

How Your Credit Union Can Prepare

Whatever requirements are ultimately adopted, lenders will need to evaluate their current data collection capabilities, identify gaps, and make needed investments to be compliant.  What impact will this have for your credit union’s staffing decisions, training, vendor support, and technology infrastructure—and how can you begin to prepare for these changes?

While the specifics have not yet been announced, you needn’t wait before initiating some preparatory action: 

  • Plan now for the increased data capture requirements and remember that data integrity is essential
    The changes coming will be sweeping and broad, impacting your organization in many ways. Minimally, these changes will include all new data fields outlined in the Dodd-Frank legislation—and likely, many if not all of the CFPB’s additional proposed data fields—so make sure your preparation is underway.
  • Identify all lines of business impacted by the HMDA changes
    Determine how you will organize these lines of business so that your efforts are coordinated. Ensure that all individuals responsible for implementation are connected and developing a plan of action so your organization is as ready as it can be once the final rules are announced.
  • Identify and prepare for any needed staff training
    Determine what your enterprise methodology and approach will be to manage the implementation. It’s never too early to start planning when it comes to staff training.
  • Strengthen and bolster your analytics capabilities
    The last thing you want is to submit data to the government that you haven’t already fully analyzed.  Given resource constraints, lenders might be best served in outsourcing their data analytics needs to a capable vendor.  But, whether you manage this function internally or through a third party, know the implications of that data for your organization—and how you plan to go about addressing any problems found in the analysis.  You don’t want others analyzing and interpreting your findings in advance of conducting your own comprehensive review.
  • Conduct a root cause analysis on questionable cases
    If your analyses uncover indicators of potential disparate treatment or impact of protected classes, conduct a root cause analysis to determine the extent of the problem and what is causing it. Then fix it.

Accept the fact that whatever implementation timeline is ultimately defined, the transition time for Tim Burniston EVP Wolters Kluwer Talks HMDAmanaging a regulatory change of this magnitude can never really be sufficient. But with some thoughtful and concerted advance preparation, you will be best positioned to ease some of the challenges in transitioning effectively to the new requirements.

Watch and share this short video of Tim Burniston, Executive VP at Wolters Kluwer, speaking about 4 key ideas to prepare for HMDA changes: New HMDA Fields Coming – Are You Ready?

Wolters Kluwer Financial ServicesWolters Kluwer Financial Services is NAFCU Services Preferred Partner for consumer and member business lending and deposit services. For more information on Wolters Kluwer’s products and services, visit http://www.nafcu.org/wolterskluwer/

Prepare Your Credit Union for Changes in HMDA Data Collection Rules (Part 1)

Mortgage-App-Approval-HMDA-Wolters-KluwerBy Edward Kramer, Executive Vice President of Regulatory Affairs, Wolters Kluwer Financial Services

In 2015, expectations loom large for lenders around finalization of rules for the new Home Mortgage Disclosure Act (HMDA) data collection requirements.

Created as part of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the regulation authorizes the Consumer Financial Protection Bureau (CFPB) to expand the current HMDA dataset in order to help “financial regulators and public officials keep a watchful eye on emerging trends and problem areas in the mortgage market.”

CFPB Seeks More Data Transparency and Timeliness

The proposed changes include required reporting of 37 new data fields, including 20 not currently required under Dodd-Frank. Those 20 fields represent additional information that the CFPB proposes to collect for analytical purposes, including:

  • Detailed property location information
  • Total points and fees
  • Rate spread for all loans
  • Information on loan features such as teasers and introductory rates, and
  • Applicant’s age and credit score

In addition, the CFPB proposes to collect data such as:

  • Borrower’s debt-to-income ratio
  • Combined loan-to-value ratio
  • Loan’s qualified mortgage status, and
  • Inclusion of manufactured housing in collateral

When the CFPB proposed the expanded HMDA data collection specifications in the summer of 2014, it argued for the need for greater transparency and timely access to regulate lending activity, citing concerns that “under the current regime, HMDA data may be reported as many as 14 months after final action is taken on an application or loan.”

Consequently, for financial institutions reporting at least 75,000 covered loans per year, which accounts for the vast majority of loan application registrations in the annual HMDA files, the new rules would require submission of HMDA data on a quarterly rather than annual basis. The CFPB estimates that this specific reporting provision would impact about 28 financial institutions that combined would report about 50% of all HMDA-reported transactions.

Potential for Data Misinterpretation Causes Concern for Many

The regulatory landscape changed dramatically with the 1975 enactment of HMDA and then again with the passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). The latest proposed regulatory changes may have an equal or greater impact on institutions affected by the proposal. This observation is borne out in the anxiety over the new data reporting requirements evident in the October 2014 Regulatory & Risk Management Indicator report, conducted by Wolters Kluwer Financial Services.

According to the report, U.S. credit unions and banks specifically point to the Dodd-Frank Act and the associated HMDA data collection requirements as among their chief concerns. The new data collected will unleash a flood of additional public scrutiny of mortgage lending. And that development, by extension, will likely generate a new level of criticism of the mortgage industry, including credit unions, from those interpreting the newly available data.

It is clear from its recent enforcement actions and guidance that the CFPB holds accurate HMDA data as central to fair lending compliance and its ability to enforce fair lending laws. Inaccurate HMDA data will only serve to mislead the public and will not be tolerated. That said, the additional data, however accurately reported, will be an insufficient basis on which to ground definitive conclusions about discrimination on a prohibited basis. But, the data will generate more room for error as it gets interpreted – or misinterpreted – by regulators, analysts, and the public.

Tim Burniston EVP Wolters Kluwer Talks HMDAStay tuned for part 2 of this series to get additional insights about HMDA compliance and technology challenges and a list of key tips you can use to help prepare your credit union for these changes. Get a sneak peak of the tips by watching Tim Burniston, Executive VP at Wolters Kluwer highlight the HMDA changes in the short video, New HMDA Fields Coming – Are You Ready?

Wolters Kluwer Financial ServicesWolters Kluwer Financial Services is NAFCU Services Preferred Partner for consumer and member business lending and deposit services. For more information on Wolters Kluwer’s products and services, visit http://www.nafcu.org/wolterskluwer/