CFPB Rules Update - The HPML Appraisal Rule and The Concept of Layering

Current Customers can Download HPML Appraisal Policy Here - New Customers, see the site for a copy here.  

After all of the warnings, hyperbole and worry surrounding the CFPB's massive regulation initiative, surprisingly little has changed in the day-to-day of our business.  2014 regulations did not completely re-imagine our process in the way that 2010's GFE reform did. Originator Compensation proved that we will always find a way to create incentives within the system.  But, as always, the devil resides in the details. The CFPB has shown itself to be haphazard in its interpretation AND implementation.

You can download the ABA's entire letter here

One clear example of this can be seen in its regulation of HOEPA. Section 32 loans have always been at the margin of the mainstream mortgage business.

The Counseling Rule - Ubiquitous Requirement Hidden in Margins

Very few lenders breach the High Cost triggers, especially now that QM sets the bar so low.  Combine that with the decrease in business levels, generally, and we can acknowledge that very few HOEPA loans are being made.  But tucked into this very specific, narrow regulation, lurks a very general requirement FOR ALL BORROWERS ON FEDERALLY RELATED MORTGAGES (essentially ALL BORROWERS) to receive a notice of housing counseling.

What happened to simplification? Shouldn't this just be an addendum to the GFE?  That's where it goes from a rational perspective. So that is where we put it in our process flow.

"Where should this go?" the mantra we have continue to repeat at each new rule.  Regulations are sent at us in a "shotgun pellet" manner, ending up all over the place.  If we try and follow the regulator's approach we will have hundreds of different policies isolated from each other - we are bound to fail in that environment. We cannot build our businesses to satisfy a regulator. Rather, understanding that the regulator's lack of appreciation for how their rules must get implemented, should drive us to map our process better. We have to integrate regulations into our overall process flow.

The HPML Appraisal Rule - The Department of Redundancy Department

A perfect example of the overlapping of regulations appears in the HPML appraisal rule.  From a regulatory perspective the rule actually overlaps with the ECOA Appraisal Rule. The CFPB grants this in its small entity compliance guide. You can, in fact, use the same disclosure to satisfy both rules.

In addition, if you are originating Qualified Mortgages, or the HPML loan you are originating qualifies as a Qualified Mortgage, the HPML appraisal rule doesn't apply.  Technically, your HPML Appraisal Policy could be an addendum to your Ability to Repay Policy

The HPML policy itself actually overlaps with secondary marketing, because the loan pricing policy drives whether a loan is classified as HPML.  In fact, movements in the market throughout the day or over a week could change the profile of an entire pipeline from non-HPML to HPML loans.  

Once a loan earns the distinction of HPML, the lender must maintain tax and insurance escrows for five years.  More minutely, however, we note that for HPML loans, appraisers must a.) be licensed and b.) perform an interior inspection and c.) the borrower must receive a copy of the appraisal report 3 days prior to closing. The contents of that appraisal mirror standard requirements, but this should be part of your audit process.

The Devil in the Details - The "Flip" Rule

The pitfall of this process surrounds the purchase transaction where the subject property, unbeknownst to anyone except the seller, is a flip. Our best practices require that the appraiser indicate the date of last transfer, and that we conduct additional due diligence if the property was transferred within the last 12 months.  However, the Flip Rule takes it to a new level.

There are exemptions to the Flip Rule, primarily circumstantial, so that if you encounter a flip in your regular retail business, the rule probably applies.

Rules, Rules, Rules - It looked good on paper... That's why they put it on paper

The ABA provided a nice roundup of all of the changes and if you review their list you will see that you probably have already implemented most of these, or found that they do not apply to you.

If you are a customer of ours, you will recognize some of the major updates: We have been at the forefront of updating operating policies and procedures, so you should be alright if you have been following our alerts.