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Insurance Corporation

Each depositor insured to at least $250,000 per insured bank

Financial Institution Letters

FIL-9-2014
February 25, 2014

Interagency Consumer Compliance Examination Procedures for Mortgage Rules Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)

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Summary:

The FDIC has released revised interagency consumer compliance examination procedures for the mortgage rules issued pursuant to the Dodd-Frank Act. The release of these examination procedures is part of the FDIC's ongoing efforts to inform supervised institutions about important bank regulatory developments in order to promote transparency in the FDIC's supervisory program. The examination procedures should be helpful to financial institutions seeking to better understand the areas the FDIC will focus on as part of the examination process.

Statement of Applicability to Institutions Under $1 Billion in Total Assets: This Financial Institution Letter applies to all FDIC-supervised institutions.

Highlights:

FDIC examiners will use the revised interagency procedures to evaluate institutions' compliance with the following residential mortgage loan rules issued pursuant to the Dodd-Frank Act:

During initial examinations for compliance with the new regulations, FDIC examiners will expect institutions to be familiar with the mortgage rules' requirements and have a plan for implementing the requirements. Implementation plans should contain clear timeframes and benchmarks for making necessary changes to compliance management systems and relevant programs. FDIC examiners will consider the overall compliance efforts of an institution and take into account progress the institution has made in implementing its plan.

Additional resources on the new rules can be found on the Consumer Financial Protection Bureau's (CFPB) Web site at http://www.consumerfinance.gov/regulatory-implementation/.

Continuation of FIL-9-2014

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FDIC Financial Institution Letters (FILs) may be accessed from the FDIC's Web site at http://www.fdic.gov/news/news/financial/2014/.

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html.

Paper copies may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (877-275-3342 or 703-562-2200).

Financial Institution Letters
FIL-9-2014
February 25, 2014

Interagency Consumer Compliance Examination Procedures for Mortgage Rules Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)

The FDIC's Division of Depositor and Consumer Protection (DCP) has released revised interagency consumer compliance examination procedures applicable to the mortgage rules issued pursuant to the Dodd-Frank Act. The procedures were developed in coordination with member agencies of the Federal Financial Institutions Examination Council. The interagency procedures can be accessed at http://www.fdic.gov/regulations/compliance/manual/index.html

The release of these examination procedures is part of the FDIC's ongoing efforts to inform supervised institutions of important bank regulatory developments and promote transparency in the FDIC's supervisory program. The examination procedures should be helpful to financial institutions seeking to better understand the areas the FDIC will focus on as part of the examination process. For more information on the FDIC's efforts to enhance communication and make the FDIC supervisory process more efficient, consistent, and transparent, see the following:

The Consumer Financial Protection Bureau's (CFPB) Web site also provides resources on the mortgage-related rulemakings. Information can be obtained at http://www.consumerfinance.gov/regulatory-implementation/.

Background and Summary

In 2013, the CFPB issued several mortgage-related final rules to implement various provisions of the Dodd-Frank Act. In addition, the FDIC, pursuant to the Dodd-Frank Act and jointly with the other federal regulatory agencies, issued regulations on appraisals for higher-priced mortgage loans (HPMLs). Most of the rules issued in 2013 became effective in January 2014.1

The following is a brief summary of the mortgage rules covered in the interagency examination procedures. FDIC examiners will use the procedures to review institutions for compliance with the mortgage-related regulations.

Ability-to-Repay/Qualified Mortgage Rule (ATR Rule) – promulgated under Regulation Z, implements the requirement in the Dodd-Frank Act that creditors make a reasonable and good faith determination that the consumer has a reasonable ability to repay a mortgage loan according to its terms. The ATR Rule applies to all closed-end residential mortgages, regardless of the price of the loan, with some specified exemptions. The rule establishes the requirements by which creditors can demonstrate compliance with the ATR Rule. Additionally, the rule defines several categories of "qualified mortgages" (QMs). QM status entitles a loan to a presumption of compliance with the ATR rule. This ATR rule supersedes the ability-to-repay rules previously applicable only to higher-priced mortgage loans and to high-cost mortgage loans subject to the Home Ownership and Equity Protection Act of 1994 (HOEPA).

In addition, the ATR Rule implements Dodd-Frank Act provisions that (1) prohibit prepayment penalties on many closed-end residential mortgages, and restrict the duration and amount of prepayment penalties where they are permitted, and (2) prohibit evasion of the ATR and prepayment penalty requirements by attempting to structure a closed-end loan as an open-end loan.

Loan Originator Compensation Rule (LO Compensation Rule) – promulgated under Regulation Z, implements requirements and limits required by the Dodd-Frank Act concerning (1) loan originator compensation restrictions (including restrictions on compensation based on profits and other proxies for loan terms), dual compensation, and steering; (2) loan originator compensation policies and procedures for depository institutions; (3) loan originator qualifications, training, registration or licensing, and identification requirements; and (4) the prohibition on mandatory arbitration clauses and financing of credit insurance.

The LO Compensation Rule's loan originator identification requirements and prohibition on financing credit insurance took effect January 10, 2014; all other provisions took effect January 1, 2014. The rule's prohibition on mandatory arbitration clauses and waivers of consumer rights became effective on June 1, 2013.

Mortgage Servicing Rules – promulgated under Regulations X (RESPA's implementing regulation) and Z (TILA's implementing regulation), implement provisions of the Dodd-Frank Act regarding mortgage loan servicing. The Servicing Rules provide an exemption from certain provisions for qualifying "small servicers."

Regulation X Servicing Rule – The Regulation X final Servicing Rule implements provisions of the Dodd-Frank Act addressing servicers' obligations to:

The Regulation X Servicing Rule also modifies and streamlines certain existing servicing-related provisions of Regulation X.

Regulation Z Servicing Rule – The Regulation Z final Servicing Rule implements provisions of the Dodd-Frank Act addressing:

The Regulation Z Servicing Rule also amends existing rules to provide notice to adjustable-rate mortgage borrowers of interest-rate adjustments resulting in corresponding payment changes.

High-Cost Mortgage (HOEPA) and Homeownership Counseling Amendments Rule – partially promulgated under Regulation Z, implements Dodd-Frank Act provisions amending consumer protections for high-cost mortgages under HOEPA. In addition, the rule includes requirements for homeownership counseling for borrowers under both Regulation Z and Regulation X.

Generally, the rule amends Regulation Z to (1) expand the types of mortgage loans that are subject to the HOEPA provisions of TILA when they meet specified triggers; (2) revise the coverage tests, or "triggers," that are used to determine what loans are subject to HOEPA's requirements; and (3) revise the ability-to-repay requirements and impose additional restrictions on mortgages that are covered by HOEPA, including a requirement that consumers receive homeownership counseling before obtaining a high-cost mortgage.

The rule also amends Regulation Z and Regulation X to impose other homeownership counseling requirements unrelated to HOEPA. Specifically, creditors must obtain certification that first-time borrowers receive homeownership counseling prior to obtaining a loan that negatively amortizes, and creditors must provide all applicants for mortgages with a written list of homeownership counseling organizations within three business days of submitting the application.

HPML Escrow Rule – promulgated under Regulation Z and took effect June 1, 2013. The rule:

HPML Appraisal Rule – promulgated under Regulation Z, issued jointly by the FDIC, CFPB, the FRB, the FHFA, the National NCUA, and the OCC, implements a new Dodd-Frank Act provision amending TILA and requiring appraisals for HPMLs. For mortgages with an annual percentage rate that exceeds the average prime offer rate by a specified percentage, the final HPML Appraisal Rule requires creditors to obtain an appraisal or appraisals meeting certain specified standards, provide applicants with a notification regarding the use of the appraisals, and give applicants a copy of the written appraisals used.

The final HPML Appraisal Rule contains the following exemptions from the entire rule:

The final HPML Appraisal Rule also requires creditors to obtain an additional appraisal that meets specified requirements in certain circumstances. However, an additional appraisal is not required if the consumer acquires the property from (1) a local, state, or federal government agency; (2) a person who acquired title (from the holder of a defaulted mortgage on the property) through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure through exercise of their rights as holder of the defaulted loan; (3) a nonprofit entity as part of a local, state, or federal government program that permits nonprofits to acquire title to single-family properties for resale from a seller who itself acquired title to the property through foreclosure, deed-in-lieu of foreclosure, or other similar judicial or non-judicial procedure; (4) a person who inherited the property or acquired it through a court-ordered dissolution of marriage, civil union, or domestic partnership, or through the partition of the seller's joint or marital assets; (5) an employer or relocation agency in connection with an employee relocation; or (6) a servicemember who received a deployment or permanent change of station order after purchasing the property. An additional appraisal is also not required if the property is located in a presidentially declared disaster area, or if the property is located in a rural county.

ECOA Appraisal Rule – promulgated under Regulation B, requires creditors to give a copy of an appraisal or other property valuation as a matter of course, rather than providing copies only upon an applicant's request.

In addition, the rule:

On September 13, 2013, the CFPB amended the official interpretations of Regulation B to clarify that when the rule refers to appraisals or other valuation models, it does not include speculative opinions not based on an appraisal or other valuation model. The rule became effective January 18, 2014.

FDIC Examinations

In their initial examinations for compliance with the new regulations, FDIC examiners will expect banks to be familiar with the mortgage rule requirements. In addition, they will expect banks to be operating under a plan with clear timeframes and benchmarks to implement necessary changes to their compliance management program and relevant systems.

If mortgages are part of the scope of an examination, FDIC examiners will consider the overall compliance efforts of an institution, including the specific steps taken to comply with the regulations in light of the institution's particular circumstances. For example, examiners may ask about an institution's compliance plan and actions taken by the institution to train its staff and adjust its systems, processes, policies, and procedures to ensure compliance with the mortgage rules. As examiners make conclusions at the end of an examination, they will take into account progress the institution has made in implementing its plan to ensure its compliance management system appropriately addresses the new mortgage rule requirements.

Mark Pearce
Director
Division of Depositor and Consumer Protection

1The issuing agencies include the FDIC, the CFPB, the Board of Governors of the Federal Reserve System (FRB), the Federal Housing Finance Agency (FHFA), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).