RegWatch - CUNA Lending Council

CUNA Regulatory Affairs (edited by the Lending Council Regulatory Committee)
April 15, 2008 | COMMENTS

Regulatory Issues of Interest to CUNA Lending Council Members

In This Issue:

• CUNA Comments on Fed’s Extensive Proposal to Change the Reg Z Mortgage Rules
• Freddie Mac and Fannie Mae Seek Comment on New Appraisal Code
• OFHEO Issues Guidance on Conforming Loan Limits
• MasterCard and TJX Reach Settlement Agreement

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CUNA COMMENTS ON FED's EXTENSIVE PROPOSAL TO CHANGE THE REG Z MORTGAGE RULES

CUNA recently submitted a comment letter in response to the Federal Reserve Board's proposal that would significantly change the Regulation Z mortgage loan rules. These changes are intended to establish new protections for consumers from unfair or deceptive home mortgage lending and advertising practices.

The proposal would establish a new category of “higher-priced mortgages,” which would include those with annual percentage rates that exceed the yield on Treasury securities of comparable maturity by at least three percentage points for first-lien loans, or five percentage points for subordinate-lien loans. For these loans, the proposal will require lenders to consider the borrower's ability to repay the loan, require verification of income and assets, impose limits on prepayment penalties, and require escrow accounts for taxes and insurance.

For most other mortgage loans, including the above-mentioned “higher-priced mortgage loans,” the proposal will restrict yield spread premiums, prohibit certain servicing practices, prohibit lenders from coercing appraisers, prohibit certain misleading and deceptive advertising, and require Truth in Lending Act disclosures within three days after the mortgage application is submitted and before fees are charged, excluding a credit report fee.

In the comment letter, CUNA questioned the threshold used to determine if a loan is “higher-priced.” Although the Fed intended for this threshold to cover most of the subprime market, it appears it would also cover certain segments of the prime mortgage lending market. CUNA suggested an alternative threshold that has been incorporated into the North Carolina predatory lending law that was enacted several years ago and is included in a pending California predatory lending bill.

In the letter, CUNA agrees that lenders should consider the borrower's ability to repay the loan, while having some flexibility, as contemplated in the proposal. CUNA also supports the use of escrow accounts and suggests further restrictions on the use of prepayment penalties, as well as supports a number of other provisions that address appraisers, servicing abuses, and advertising practices.

Under pressure from some in Congress and consumer groups, the Fed issued the proposal to help curtail future subprime lending problems. The Fed is not acting in a vacuum. The House of Representatives has recently passed legislation to address these concerns, and legislation has recently been introduced in the Senate. The Fed also conducted hearings this past June that focused on many of the issues being addressed in this proposed rule.

Click here for a copy of the comment letter.

- Jeff Bloch, Senior Assistant General Counsel

FREDDIE MAC AND FANNIE MAE SEEK COMMENT ON NEW APPRAISAL CODE

As reported in the previous edition of RegWatch , New York Attorney General Andrew Cuomo and the Office of Federal Housing Enterprise Oversight (OFHEO) recently announced that Freddie Mac and Fannie Mae have agreed to buy and guarantee mortgage loans only from lenders that follow new appraisal standards. Freddie Mac and Fannie Mae have also agreed to fund the Independent Valuation Protection Institute, which will be a newly-formed independent entity that will operate a consumer complaint telephone hotline to address appraisal problems. The Institute will also monitor and implement a code of conduct, called the New Home Valuation Protection Code (Code), which incorporates these new appraisal standards.

As required under the agreement with the New York Attorney General and OFHEO, both Freddie Mac and Fannie Mae are now requesting comments on the implementation of the new Code, which will apply to loans originated after January 1, 2009. Here are the key provisions that are outlined in the Code:

• Lenders and brokers will be prohibited from influencing appraisals through coercion, inducements, or otherwise, including the threat to withhold future business.
• Lenders, and not brokers, will be responsible for selecting and paying for the appraisals.
• Lenders will not be permitted to use “in-house” appraisals or use an appraiser who is affiliated with the lender or with an entity that is owned by or which owns the lender. Freddie Mac and Fannie Mae will be permitted to provide exceptions for financial institutions with assets of $250 million or less.

Although this agreement will only apply to loans purchased by Freddie Mac and Fannie Mae, it is expected that the provisions in the Code will become standard throughout the mortgage lending industry.

Comments are due by April 30, 2008. Please click here for CUNA's Regulatory Comment Call for more information on these new standards.

- Jeff Bloch, Senior Assistant General Counsel

OFHEO ISSUES GUIDANCE ON CONFORMING LOAN LIMITS

The Office of Federal Housing Enterprise Oversight (OFHEO) last month issued guidance regarding the conforming loan limit for mortgage loans purchased by Freddie Mac and Fannie Mae. The current limit is $417,000, although the limit for this year can be as high as $729,750 in certain high-priced areas, as permitted under the economic stimulus law passed by Congress in February.

In the past, the conforming limit has increased to reflect rising home prices. In recent years, however, prices have decreased and the issue has been whether the conforming loan limit should also decrease to reflect these lower values.

OFHEO has addressed this issue in the guidance by maintaining the loan limit at $417,000 and will not lower this limit, regardless of the extent that housing prices decline, either now or in the future. However, the limit will not rise above the current $417,000 until the cumulative home prices in the future exceed the decreases in prices that have occurred since the limit reached $417,000 in 2006. Again, this will not affect the temporary increase in the limit of up to $729,750 in certain high-priced areas, as outlined under the recent economic stimulus law.

Click here for more information about the guidance.

- Jeff Bloch, Senior Assistant General Counsel

MASTERCARD AND TJX REACH SETTLEMENT AGREEMENT

MasterCard Worldwide and TJX Companies Inc. (TJX) reached an agreement in which TJX will support an Alternative Recovery Program to settle claims made by principal MasterCard issuers, including credit unions, to recover certain costs and losses they incurred in connection with the TJX data breach.

CUNA held a conference call, which included MasterCard representatives, to review the Alternative Recovery Offer (ARO) in an effort to provide the necessary information so that credit unions can decide what is appropriate for them regarding the agreement.

As agreed on in the settlement, MasterCard will provide to each eligible MasterCard principal issuer a specific offer as an alternative to any recovery available under MasterCard's Operating Rules. To be eligible, an issuer (or the parent/sponsoring issuer) would had to have made a claim during the open claims process, which was between November 2, 2007 and January 2, 2008. As mentioned, the amount of the ARO will be specific to each issuer.

Each credit union that is an eligible MasterCard issuer and filed a claim during the claims process should have received a copy of its ARO and acceptance forms by hard copy and PDF format via email.

Eligible MasterCard issuers, including credit unions, wishing to accept their AROs, must accurately complete the “Acceptance of Alternative Recovery Offer” form on or before May 2, 2008.

Due to the fact that incorrectly completed forms will be considered non-acceptance of the ARO, CUNA asked MasterCard to review the forms for accuracy and communicate any oversights or errors to the affected credit union so that the forms could be revised and resubmitted before the deadline.

MasterCard has asked that the forms be submitted by April 29 or as soon as possible so that MasterCard has sufficient time to examine the forms, determine if the threshold is met, and prepare its reports by the May 2 deadline.

The agreement is contingent on the acceptance of issuing financial institutions representing at least 90% of the “claimed-on MasterCard accounts.” This means that only issuers that made a claim or filed a compliance case as required through the security alert process would be eligible for this ARO.

Credit union issuers that accept the offer should expect to receive their settlement around late May or June.

Some credit unions expressed concern regarding the requirement that issuers must have filed a claim in order to be eligible for the ARO. There are situations in which credit unions were not notified by MasterCard of breached accounts and received no communications from either MasterCard directly or their principal institutions. Additionally, some credit unions have a policy to simply re-issue breached cards and not file claims for fraud. This may put them at a disadvantage since they will not be eligible under the ARO.

MasterCard encouraged credit unions that were affected by the TJX breach but are not direct MasterCard customers to contact their principal financial institutions. Credit unions whose relationship with MasterCard is through a principal financial institution were offered an opportunity to add their names to MasterCard's list of “affiliated institutions.” This would enable MasterCard to directly communicate with those credit unions in addition to corresponding with them through their principal financial institutions. Credit unions wishing to do so should email MasterCard at datasecurity@mastercard.com.

Credit unions can email datasecurity@mastercard.com or LThomas@cuna.com with any questions they have about the agreement.

Meanwhile, CUNA is working with MasterCard to offer credit unions training on its Operating Rules, so that credit unions will be more familiar with the procedural requirements regarding MasterCard's Security Alert Process. We will be providing more information to credit unions and leagues about this very soon.

- Mary Dunn, SVP and Deputy General Counsel & Lilly Thomas, Assistant General Counsel