New Costs, Forms Tip of CFPB Mortgage Rules Iceberg
Across the nation, credit unions have been preparing to comply with several new Consumer Financial Protection Bureau mortgage rules that will take effect on Jan. 10.
The ability-to-repay/qualified mortgage rule and mortgage servicing rules have posed the greatest challenges for credit unions, according to Jared Ihrig, associate general counsel at CUNA.
“We continue to worry about the compliance effective dates but we have no reason to believe that they will be postponed by the agency,” Ihrig said.
He added, “It's our belief that credit unions are going to continue making decisions about what they are going to do regarding their mortgage products and services up until the effective dates with respect to whether they are going to write only qualified mortgages or a mixture of non-qualified mortgages as well as qualified mortgage loans.”
Stacey Jorgensen, compliance specialist at the $863.9 million IH Mississippi Valley Credit Union in Moline, Ill., said her credit union began preparing for the January 2014 changes in the summer of 2013.
“In order to comply with the CFPB's regulations, we have had to make numerous procedure changes that affect our operation and frontline staff,” Jorgensen said. “With the procedure changes, we have had to train our staff on these changes as well. Lastly, we have been working on updating all of our lending policies and procedures.”
Jorgensen said to keep up, IH Mississippi Valley has decided to do quarterly monitoring on the new requirements to ensure that the credit union can justify its business decisions and to show proof that those choices are beneficial for the organization. In addition, Jorgensen said the credit union has paid significant third-party expenses in order to comply with the rules.
“There have been numerous vendor fees that we have had to pay in order to get the new upgrades and forms within our system,” she noted. “With the mortgage servicing requirements, we have made changes to our periodic statements, which have cost us as well.”
Bi-weekly meetings have taken place with IH Mississippi Valley's underwriting, loan administrators and mortgage managers to discuss the new rules, Jorgensen said. The credit union also partnered with PolicyWorks, an Iowa-based firm specializing in regulatory compliance, during the process.
“PolicyWorks has been on present via telephone at our bi-weekly meetings and they have helped us answer all of our questions. It has been nice to have PolicyWorks present because instead of us having to look up our questions, they are able to answer them for us,” said Jorgensen. “We decided to partner with them because of the overload of changes and because we wanted to have legal opinions about all of the requirements.”
The $1.4 billion Anheuser-Busch Employees’ Credit Union in St. Louis, has also worked with PolicyWorks, said Jennifer Hunsche, manager of R.E. quality control at the cooperative.
“We have been fortunate that we were about 95% compliant with the new regulations. Our biggest challenge has been the interpretation of the rules,” Hunsche said. “With the help of PolicyWorks, we have a peace of mind that we are working through those gray areas,” she told Credit Union Times. “We have worked with great third party vendors who have been diligently working on making the necessary software changes.” Hunsche said while she has not calculated the exact cost of implementing the new rules, the expenses associated with the implementation will include many hours of training and updating procedures, the creation of a few new disclosures, periodic statements, and consulting fees incurred to ensure the credit union is on track and compliant with the regulations. The ongoing monthly cost will include the printing, sorting and mailing of the first mortgage loans and closed-end home equity products, she added.
The CFPB rule requires all QMs to include points and fees less than or equal to 3% of the loan amount but higher percentage thresholds are allowed for loan amounts less than $100,000. The mortgages cannot contain so-called risky features such as negative amortization, interest-only or balloon loans. The maximum loan term must be less than or equal to 30 years. Any loan that meets these product feature requirements and has a debt-to-income ratio of 43% or less is considered a QM under the general definition category of QMs, according to the CFPB.
A loan that meets the feature requirements and is eligible for purchase, guarantee or insurance by a government-sponsored enterprise, the Federal Housing Administration, U.S. Department of Agriculture or the Department of Veteran Affairs is a QM in the GSE-eligible category, regardless of the debt-to-income ratio.
The small creditor category allows lenders with less than $2 billion in assets that originate 500 or fewer first mortgages to count each loan as a QM even if the borrower's debt-to-income ratio is greater than 43%, the CFPB has said. The financial institution must keep the mortgages on its books. The rule also includes a two-year transition period that gives small lenders the ability to make certain balloon loans that will count as QMs.
The mortgage servicing rules require servicers to attempt contact with borrowers each time they miss a payment to provide important information that could help get them on track. The CFPB clarified that this requirement may be met through contact that servicers have with delinquent borrowers, for example, when evaluating them for loss mitigation or during collection calls. The method used to contact the buyer may vary depending on the length of time that he or she has been delinquent or if the borrower has responded to past live contact attempts.
“Even if delinquent borrowers have instructed servicers to stop communicating with them pursuant to the FDCPA, certain notices and communications mandated by the CFPB servicing rules and the Dodd-Frank Wall Street Reform and Consumer Protection Act are still required,” according to a CFPB guidance letter issued in October.
Servicers must also communicate with the borrower about requests for information, loss mitigation, error resolution, force-placed insurance, and initial interest rate adjustment of adjustable-rate mortgages, the CFPB said.
Servicers will not be required to provide certain early intervention contacts or ongoing notices of rate adjustments to delinquent borrowers who have instructed the servicer to stop communicating with them. They are also not required to provide periodic statements to borrowers in bankruptcy.
Jorgensen said complying with both the ability-to-repay/QM rule and mortgage servicing rules was a difficult task.
“Ability to repay was challenging because there were numerous business decisions that we had to make, and we had to determine what underwriting criteria we wanted for our home equity and mortgage loans,” she said.
Mortgage servicing, and specifically, the periodic statement rule, was problematic because IH Mississippi Valley had to determine which payment due dates were affected, as well as what to do with existing and future loans, Jorgensen said, adding, the credit union now has complex processes in place for both of these rules.
Hunsche shared a different view.
“The QM/ATR rule implementation has not been a huge challenge for us. As a credit union, our daily practice has always been to ensure the member has a proven ability to repay and can document so,” Hunsche said. “We have been underwriting with those standards in place already.”
Meanwhile, the $26.8 billion State Employees’ Credit Union in Raleigh, N.C., has decided to only originate non-QM mortgages beginning in January, said its president, Jim Blaine.
The $55 billion Navy Federal Credit Union in Vienna, Va. said it plans to offer both QMs and non-QMs.
“Navy Federal's mission is to serve our members, and the CFPB's mission is for the consumer; our goals have always been in line,” said Katie Miller, vice president of mortgage products at Navy Federal, in a statement provided to Credit Union Times.
“We pride ourselves in maintaining a formal due diligence process, and have thoroughly reviewed all of our front and back-end practices to ensure that all QM rules have been implemented, however, Navy Federal will continue to provide products that serve the niche needs of our unique membership,” Miller pointed out.
Ihrig urged all credit unions to read the new rules carefully to ensure compliance.
Truth in Lending violations can carry significant costs and penalties, he said.