Mortgage Brokers, Lenders, and Servicers: Key Changes Caused by Dodd-Frank Wall Street Reform
This summer, a new federal law called the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Act") was signed into law by President Obama. This new federal law contains hundreds of new provisions that are intended to address some of the perceived abuses within the financial services industry that contributed to the economic crisis in recent years. Given the complexity of the Act, it will be some time before the implications of the new law and regulations are fully realized.
This advisory summarizes only certain key aspects of the Act that specifically affect mortgage brokers, lenders, and servicers. In addition, see the separate advisories that summarize key changes specifically affecting SEC-reporting companies and community banks.
Creation of Consumer Financial Protection Bureau
A new federal Consumer Financial Protection Bureau (the "Bureau") has been established. The Bureau has been charged with regulating the provision of consumer financial products and services, including mortgage loans. The Bureau will now be the governmental authority that enforces and has the power to issue new rules under federal laws such as the federal Truth in Lending Act ("TILA"), the Real Estate Settlement Procedures Act ("RESPA"), and the Equal Credit Opportunity Act ("ECOA"). In addition to being subject to any new rules issued by the Bureau, mortgage brokers, lenders, and services will be subject to direct examination by the Bureau.
Changes to Residential Mortgage Lending Rules
The Act includes the "Mortgage Reform and Anti-Predatory Lending Act." These provisions include a series of amendments to the TILA with respect to mortgage loan origination standards. The Act increases the government's power to investigate and enforce violations and also increases the ways in which brokers, lenders, and servicers might run afoul of the law. For example:
- Compensation paid to originators cannot vary based on the terms of the loan, other than the principal amount of the loan, which may significantly alter the relationship between lenders and loan originators and may create fewer rate and loan choices for consumers;
- A lender will be prohibited from making a residential mortgage loan unless it determines, based on verified and documented information of the consumer's financial resources, that the consumer has a reasonable ability to repay the loan (certain "qualified loans" are exempt);
- Certain prepayment penalties will be prohibited;
- A lender will be prohibited from requiring a prepayment penalty unless the lender also offers a loan without a prepayment penalty;
- The definition of a "high cost mortgage" is being expanded and new requirements with respect to high cost mortgages are being implemented;
- There will be new disclosure, reporting, and notice requirements for residential mortgage loans;
- There will be new requirements with respect to escrow and appraisal practices;
- Loan originators must retain 5% of any loan they sell or securitize, except for FHA, VA, Farmer Mac, and Rural Housing Service loans and mortgages that meet low-risk standards to be developed by regulators; and
- There will be increased monetary fines for TILA violations, and the statute of limitations has been extended from one year to three years.
These new rules generally take effect once regulations have been issued to implement the new requirements.
Please contact your Varnum attorney for more information, or contact one of our banking attorneys.
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