Alston & Bird Consumer Finance Blog

Mortgage Loans

Nevada Adopts Regulations for Licensure by Endorsement

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A&B Abstract:

Nevada recently adopted new regulations allow a natural person to obtain a license by endorsement to engage in business as a mortgage broker or mortgage agent, mortgage loan servicer, or escrow agent or agency, so long as such person holds a corresponding valid and unrestricted license to engage in such business in another jurisdiction upon meeting certain conditions.

New Regulations:

On June 26, 2019, the Nevada Commissioner of Mortgage Lending (“Commissioner”) adopted new regulations R177-18, R178-18 and R180-18, which introduce standards that permit the issuance of licenses by endorsement for natural persons to engage in business as: (1) a mortgage broker or mortgage agent; (2) a mortgage servicer or a covered service provider (including a foreclosure and loan modification consultant); and (3) an escrow agent or agency, respectively.

Eligibility Criteria:

In order to be eligible for a license by endorsement, a natural person must:

  • hold a corresponding valid and unrestricted license to engage in the relevant occupation or profession in another jurisdiction;
  • submit proof to the Commissioner of his or her corresponding valid and unrestricted license in another jurisdiction; and
  • possess qualifications that are largely similar to the qualifications required for a Nevada license,

in addition to meeting other qualifications set forth in the new regulations.

Other Changes to Licensing Requirements:

The amendments also modify existing licensing requirements for mortgage brokers, mortgage bankers and mortgage agents by:

  • Authorizing the Commissioner to waive any monthly reporting requirements under Nevada law if substantially similar information is available from another source; and
  • Reducing the annual continuing education required to be completed by a mortgage broker or mortgage agent.

North Carolina Enacts Servicemember Protections

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A&B Abstract:

North Carolina is the latest state to extend the protections of the federal Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. §§ 3901 et seq., to active duty members of its National Guard.  What does the new law require?

North Carolina Servicemembers Civil Relief Act

On July 25, North Carolina Governor Roy Cooper signed into law the North Carolina Servicemembers Civil Relief Act, which extends the protections of the federal SCRA to North Carolina residents serving on active National Guard duty.  Although the statute generally mirrors federal law, a few distinctions are worth note.

Who is a Servicemember?

For purposes of the new law, a “servicemember” has the same meaning as under the federal SCRA.  The term also includes a member of the North Carolina National Guard (or a resident of North Carolina in another state’s National Guard) called to active duty by the governor for more than 30 consecutive days.  However, for the statute’s protections to apply, a member of the National Guard must provide the lender or servicer with a written or electronic copy of the order to military service no later than 30 days after the termination of such service.  As a result, some servicemembers must act affirmatively in order to receive the law’s protections.

The law also grants a dependent of a servicemember the same rights and protections as are provided to a servicemember under Subchapter II of the federal SCRA.  Thus, dependents are eligible for protection against default judgments, stays of proceedings, and restrictions on the maximum rate of interest an obligation may bear.

Who Can Enforce the Statute?

The new North Carolina law provides various enforcement mechanisms.  First, a violation of the federal SCRA is a violation of the North Carolina law.  Second, a violation of the North Carolina law is an unfair or deceptive trade practice for purposes of Chapter 75 of the North Carolina General Statutes.  Finally, either the North Carolina Attorney General or an aggrieved servicemember (through a private right of action) may bring an action to enforce the statute.

QM Patch Update: CFPB Proposes to Let Patch Expire

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A&B Abstract

The CFPB has issued an Advance Notice of Proposed Rulemaking regarding the fate of the “QM Patch,” indicating that it will not extend the “QM Patch” permanently.

Advanced Notice of Proposed Rulemaking

In a surprise development, on July 25, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch,” which is scheduled to expire no later than January 10, 2021.   The comment period is short, reflecting the urgency of promulgating a final rulemaking before the impeding “QM Patch” termination.  Comments must be received by the CFPB within 45 days after publication of the ANPR in the Federal Register.

Background

The CFPB created the “QM Patch” as a temporary provision of the qualified mortgage (“QM”)/ability-to-repay (“ATR”) regulations adopted pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income (“DTI”) ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a QM and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

The CFPB’s Proposal

In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.  This shocking pronouncement has potentially profound ramifications for the residential mortgage lending markets.  A substantial proportion of the markets have relied extensively on the “QM Patch” in underwriting qualified mortgages, not to mention significantly reducing the role of the GSEs in these markets.  For years, GSE critics have complained about Fannie Mae’s and Freddie Mac’s dominance of the residential lending markets.  Yet the January 2021 “QM Patch” expiration would raise critical questions:  Will the private markets be able to absorb the GSE’s large share of qualified mortgage lending?  If not, what are the possible detrimental impacts on consumers, especially those in distressed communities?

Other QM Changes?

In the ANPR, the CFPB indicates that it may make other significant changes to the qualified mortgage regulations, based in part on the public comments it receives.  For example, the CFPB is considering whether the general QM definition should retain a direct measure of a consumer’s personal finances, such as DTI or residual income and how that measure should be structured. The CFPB is also seeking comment on whether the definition should: (1) include an alternative method for assessing financial capacity, or (2) be limited to the express statutory criteria.  Under one approach that seems to be attracting the CFPB’s interest, bright-line pricing delineation would replace the DTI criteria altogether.   Under such an approach, loans with APRs exceeding the average prime offer rate by certain thresholds would be deemed rebuttable presumption QM loans or non-QM loans, as the case may be.  Loans not exceeding certain thresholds would receive safe harbor QM status.   Under such a bright line pricing delineation method, the loans would have to comply with other statutory criteria in order to retain QM status.

Takeaway

The 45-day deadline for comments seems rushed, especially considering the dramatic effect that changes to the qualified mortgage rules could have on the residential mortgage finance and housing markets.  Further, in an ideal world, the CFPB should be considering amendments of the qualified mortgage/ability-to-repay rules in tandem with the federal high cost mortgage, the residential mortgage risk retention, and the loan originator compensation rules as a holistic approach rather than in isolation.

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.

The Fate of the QM Patch

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A&B Abstract:

With the January 2021 expiration of the so-called “QM Patch” looming, what courses of action are available to the CFPB?

Background

One of the most vexing issues currently facing the Consumer Financial Protection Bureau (“CFPB”) is the fate of the so-called “QM Patch”.  The CFPB’s ability-to-repay/qualified mortgage regulations promulgated pursuant to the Dodd-Frank Act require creditors to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms.  (The obligation applies to a consumer credit transaction secured by a dwelling.)

The regulations provide:

  • a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a qualified mortgage and are not higher-priced mortgage loans; and
  • a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.

A “higher-priced mortgage loan” has an APR exceeding the average prime offer rate by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.

What is the QM Patch?

In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q.  However, the CFPB regulations eliminate this particular requirement if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac.  Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs, and meets certain other QM criteria.  (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)

The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans.   The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs or January 10, 2021.  What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations.  With no conservatorship termination in sight, the January 2021 QM Patch expiration looms large.  Indeed, the CFPB must act soon to enable the market to adjust to any significant departures from the current arrangement.

How Might the CFPB Address the QM Patch’s Pending Expiration?

The CFPB has a number of options at its disposal.  First, it could opt to extend the current QM Patch.  Logistically, this may be the path of least resistance.  However, to GSE critics who want to shrink the government mortgage footprint, this option is unpalatable. These critics believe that the QM Patch impact is too substantial and that the GSE backstop crowds out the private sector.  The open question is whether the private sector could realistically absorb the market share currently held by the GSEs through the current QM Patch.

Second, the CFPB could eliminate both the QM Patch and Appendix Q and create a level playing field for the QM market.  This approach would retain most of the ATR/QM product eligibility features and a bright line delineation between Safe Harbor and Rebuttable Presumption QM loans based upon the APR.  This option would eliminate the current debt-to-income ratio requirements, but ensure that only the most low risk loans be accorded the Safe Harbor QM designation.

Third, the CFPB could eliminate the QM Patch and Appendix Q and permit lenders to underwrite loans to an established underwriting guide such as the FHA.  The challenge for this approach is identifying a benchmark that is acceptable to a wide range of the market.

Other options at the CFPB’s disposal include: (1) allowing the lender to underwrite using its own approved and validated underwriting model (while retaining the other components of the ATR/QM criteria, including the Safe Harbor/Rebuttable Presumption bright line tests; and (2)  appointing industry stakeholders to create a de novo AUS that everyone would ultimately use.

Takeaway

With the January 2021 deadline looming, the CFPB needs to act soon to enable markets to adjust to the QM Patch replacement.