Happy New Year for Mortgages?

S&P has posted How Will Mortgage Loan Originators, Borrowers, And RMBS Securitization Trusts Fare Under The New Ability-To-Repay Rules?  This research report finds that

  • The ATR [Ability to Repay] and QM [Qualified Mortgages] standards under TILA [the Truth in Lending Act] will require loan originators to make a reasonable, good faith determination of a borrower’s ability to repay a loan using reliable, third-party written records.
  • If violated, originators and assignees can face liabilities and litigation brought on by borrowers during foreclosure proceedings and even outside of foreclosure proceedings. However, they can be protected from some of these liabilities if a loan meets the QM standards.
  • Depending on the loan’s status, increased loss expectations resulting from additional assignee liability, longer liquidation timelines resulting from borrower defenses in foreclosure proceedings, and additional loan modification experience can affect securitization trust performance.
  • Sensitivity testing using the damages outlined in the rule suggests that additional loss experience will generally be mild for prime jumbo backed securitizations even under conservative assumptions for litigation risks. Trusts backed by loans with higher credit risk, lower balances, and originated by unfamiliar or below-average originators will be at risk of higher losses than prior to the rule.
  • We expect that while the rule will prevent underwriting standards from loosening towards the more risky mortgages originated during the 2006 and 2007 financial crisis, it may also limit credit access to borrowers and make it more difficult to obtain a mortgage loan. (1)

I think that only the last two points are really newsworthy, particularly the last one. Whether the credit markets tighten too much from the new rules is the $64,000 question.

S&P appears to be arguing that the rules will constrain good credit too much. Time will tell if that is the case, as lenders fill the QM sector and the non-QM sector. The non-QM sector provides, for example, interest-only mortgages. There was a lot of bad lending involving interest-only mortgages, so it will be interesting to see what that market sector looks like as it matures over the next few years.

Making Sense of Finance Charges

The Consumer Financial Protection Bureau has a very helpful Finance Charge Chart (page 13) in its Truth In Lending Act examination procedure manual.  The manual is “intended for use by CFPB examiners in examining the mortgage companies and other financial institutions subject to the new regulations.

Figuring out the finance charge for the purposes of calculating the Annual Percentage Rate (APR) can be very difficult. The manual states that the finance charge

initially includes any charge that is, or will be, connected with a specific loan. Charges imposed by third parties are finance charges if the creditor requires use of the third party. Charges imposed on the consumer by a settlement agent are finance charges only if the creditor requires the particular services for which the settlement agent is charging the borrower and the charge is not otherwise excluded from the finance charge. (14)

The chart makes clear which charges are always included, which are included unless certain conditions are met, which are typically not included and which are never included.

The guide also has a useful history of TILA and overview of Regulation Z (which implements TILA).  It also includes (on page 9) a flowchart that explains what kind of credit is covered by Regulation Z.

 

Oregon District Court Dismisses Borrower’s Suit to Invalidate Foreclosure in Favor of BOA and MERS, Stating Lack of Merit

In Moreno v. Bank of America., N.A., 3:11-CV-1265-HZ, (D. Or. Apr. 27, 2012) the U.S. District Court of Oregon, granted the defendant’s motion to dismiss for failure to state a claim. Plaintiff had alleged violations under several federal and state Acts, each of which the Judge rejected based on lack of merit.

The plaintiff brought action to invalidate a foreclosure sale, which, although dated earlier than the filed complaint, had not yet occurred. On March 29th, 2007, Moreno borrowed $220,000 from Aegis Wholesale Corporation. A promissory note in favor of Aegis was secured by a Deed of Trust (DOT) against the plaintiff’s real property and identified Fidelity National Title Insurance Company of Oregon (Fidelity) as trustee, and Mortgage Electronic Registration Systems, Inc. (MERS) as the “beneficiary under this Security Instrument.” MERS later assigned the DOT to BAC Home Loans Servicing (BACHLS) in June of 2010. On the same day, BACHLS appointed ReconTrust Co. as successor trustee to Fidelity. Fidelity filed a Notice of Default and Election to Sell (NODES), initiating foreclosure proceedings against Moreno, who had been in default since July, 2009.

The Court dismissed each of the plaintiff’s complaints in turn, starting with his first two claims of relief based on violations of the Oregon Trust Deed Act (OTDA). The plaintiff claimed that under the DOT, MERS lacked authority to assign beneficial interests to BACHLS, who in turn, lacked power to appoint ReconTrust as successor trustee. The Judge, Marco A. Hernandez, stated that he had previously held that “naming MERS as a beneficiary in a DOT does not violate the OTDA,” and while other judges in the district have found otherwise, he would continue to uphold this ruling. The plaintiff alleged that a 3-year gap between the execution of the DOT and MERS’s assignment to BACHLS  showed there “must have” been unrecorded assignments (in violation of ORS 86.735(1)). The Court found that allegation was both speculative and based on an erroneous assertion of fact (the Complaint mistakenly names Bank of America as the original lender, whereas the DOT names Aegis, and subsequent documents state Bank of America was assigned interest only in 2010). The second OTDA based claim was that the defective notice was invalid for failure to include a correct statement of the amount in default. The Court dismissed it because the plaintiff had not “plead his ability to cure the default, that his damages resulted from the lost opportunity to cure the default, and that he requested information from the trustee under O.R.S. § 86.757 and O.R.S. § 86.759.”

care because

Next, the Court dismissed the plaintiff’s claim brought under the Truth in Lending Act (TILA) for both the failure to meet the 1-year statute of limitations and for having incorrectly brought the action against Bank of America rather than Aegis, the original lender. Under TILA a claim may only be brought against the Creditor, who is the person who “regularly extends… consumer credit” and “to whom the debt arising from the consumer credit transaction is initially payable.” 15 U.S.C. Sect. 1602(g). The plaintiff further argued that he is Hispanic and “as a result” did not understand the nature of the loan documents. He therefore requested equitable tolling, which suspends the “limitation period until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosure that form the basis of the TILA action,” which he stated was in 2011 after having spoken to a translator who explained his loan audit. The Court found this unconvincing on several accounts. First, since the complaint brought no allegations in support of equitable tolling, it failed to state a TILA violation. Second, the plaintiff never alleged he did not speak English. Third, equitable tolling is applied when the 1-year period would be “unjust” or “frustrate the purpose” of the TILA. Fourth,  the plaintiff must bring allegations “that the defendant had fraudulently concealed information that would have allowed plaintiff to discover his claim,” engaged in action to prevent plaintiff from discovering a claim, or encountered “some other extraordinary circumstance would have made it reasonable for Plaintiff not to discover his claim within the limitations period.” Garcia v Wachovia Mortg. Corp. 676 F. Supp.2d 895, 905 (C.D. Cal. 2009).

The Court dismissed the plaintiff’s claim under the Real Estate Settlement Procedures Act (RESPA) for failure to meet the statute of limitations since his claim arose out of the origination of the loan in 2007, and his arguments for equitable tolling “are unavailing.”  Plaintiff also failed to allege that a RESPA violation resulted in actual damage, a requirement of a RESPA claim.

The plaintiff’s claim under Oregon’s Unfair Trade Practices Act (UTPA) was dismissed because at the time of the loan, in 2007, UTPA had not yet been amended to include “loans and extensions of credit,” O.R.S. 646.605(6) (2010), therefore plaintiff’s loan was not covered by the Act. Additionally, UTPA claims must be brought within a year from the discovery of the “unlawful method, act or practice,” but the plaintiff failed to assert that the discovery of a UTPA violation could not have been made at the time of the loan

CFPB Issues Fair Lending Report That Highlights Data Collection

The Fair Lending Report of the Consumer Financial Protection Bureau provides an overview of the Bureau’s actions over the last year.  Some of the most interesting elements of the report relate to future HMDA and TILA rulemaking:

Section 1094 of the Dodd-Frank Act amends HMDA to require the collection and submission of additional data fields related to mortgage loans, including certain applicant, loan, and property characteristics, as well as “such other information as the Bureau may require.” The CFPB is examining what changes it may propose to Regulation C. . . .

Finally, section 1403 of the Dodd-Frank Act requires that the CFPB prescribe regulations under TILA to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age. The CFPB has begun preliminary planning with regard to this rule. (26) (emphasis added)

Data collection about borrower and mortgage characteristics is very fraught.  Lenders have typically fought against efforts to increase such data collection as it could only hurt them if others knew their business so well.  Academics and consumer advocates have complained that data about the mortgage market is very hard to come by unless one had massive financial resources to pay private providers for it.

This was especially true, given the rapid rate of change in that market.  Working with data that is twelve months old was the same as working with outdated information during the Boom years of the early 2000s.  If the CFPB collects and analyzes data in something approximating real-time, it will be far more nimble than previous regulators.  If it shares its data with outside researchers, it is likely to become even more sophisticated in its approach to the dynamic housing finance sector.