Are You Ready for the Next (Yes, Another) Avalanche of Consumer Credit Regulation?

Never in memory have so many consumer credit regulatory changes been promulgated or expected imminently. The increased burden on financial organization compliance departments is extraordinary. Due to the rapid pace with which Congress and the federal regulators have issued these new rules, it was probably inevitable that compliance with and implementation of these numerous new obligations would often be difficult if not impossible without major changes to business operations and even business models.

The revised RESPA GFE, Truth in Lending disclosure timing requirements, appraiser restrictions, and SAFE Act testing, licensing and registration rules came into play within the past year or so. Then the Regulation Z loan officer/manager compensation and additional appraisal management restrictions, which go into effect April 1, 2011, and which have grabbed so much industry attention, hit. Now, see the following timeline of other federal developments expected through the end of this year that will impact mortgage and other consumer product lenders:


1) April 1, 2011:
Escrows – Final regulations published in the Federal Register on March 2, 2011, implement a separate and higher percentage trigger for determining whether a closed end, first lien, higher priced mortgage loan secured by the consumer’s principal dwelling must have an escrow account when it is a “jumbo” loan. Note: The higher percentage trigger (2.5 or more percentage points above the average prime offer rate) only applies to the escrow account requirement in Regulation Z, § 226.35(b)(3). For all other purposes of 226.35, the 1.5 percentage point trigger still applies.

Also on March 2, 2011, the Fed proposed rules that would implement the remaining escrow provisions in Dodd Frank.

2) April 21, 2011:
Risk Retention – The federal banking agencies have until April 21, which is 270 days from the July 21, 2010, Dodd Frank enactment, to prescribe regulations addressing the securitization risk retention (“skin in the game”) requirement, including what constitutes a “qualified residential mortgage” that would enjoy exemption from the risk retention requirement. The regulations will be come effective one year after they are published in final form in the Federal Register.

3) July 21, 2011:
Combined RESPA-TILA Disclosures – The new federal Consumer Financial Protection Bureau must propose for public comment rules and model disclosures that will combine the often confusing and in some ways conflicting TILA and RESPA disclosures. The rules and model form must be issued for comment no later than July 21, 2012. Dodd Frank also requires the Bureau to publish a revised Special Information Booklet that covers both RESPA and TILA requirements; however, the deadline for that new disclosure document has not yet been established.

Consumer Inquiries – Dodd Frank requires any “covered person” to make available to a consumer, upon request, information in its control about the financial product or service that the consumer obtained from the covered person, with some exceptions. This provision requires the Bureau to prescribe regulations, but there is no specific timing requirement. This apparently very broad obligation will be of concern to both loan originators and servicers.

UDAP Expansion – The prohibition on engaging in unfair, deceptive or abusive practices goes into effect on July 21, 2011, as well as the prohibition on any person knowingly or recklessly providing substantial assistance to a covered person or service provider that is engaging in an unfair, deceptive or abusive practice. The Bureau may prescribe rules in this area, but even if it does not, this goes into effect July 21 without benefit of regulatory clarification. This exceptionally broad prohibition will likely trigger new litigation against financial services providers.

Parity Act – The preemption language in the Alternative Mortgage Transactions Parity Act has been amended to narrow the preemption scope to only those state laws that specifically address alternative mortgage transactions and not to laws that generally cover mortgage loans. This section also narrows the scope of loans that can be considered alternative mortgage transactions to those in which “the interest rate or finance charge may be adjusted or renegotiated.” Absent these preemptions, lenders will need to adhere to traditionally inapplicable state laws. Originators will need to refamiliarize themselves with multiple states’ laws from which lenders have enjoyed preemption for three decades.

Credit Reporting – The Bureau must prescribe a brief model notice that can be used to comply with the “negative information” disclosure requirement under the Fair Credit Reporting Act, and must also prescribe guidelines for the accuracy and integrity of information reported to consumer reporting agencies. This information has already been published by federal regulators, but whether the Bureau will adopt the existing model disclosures/guidelines remains unknown.

HMDA Expansion – Dodd Frank imposes additional Home Mortgage Disclosure Act data collection requirements; however, the new elements do not need to be reported before the first January 1 that occurs after the end of the nine month period beginning on the date on which final regulations are issued by the Bureau.

Credit Score Disclosure – Dodd Frank requires that a credit score be included on the standard risk-based pricing notice, the account review notice and in any FCRA adverse action notice. On March 1, 2011, the Fed and FTC issued proposed regulations to implement this provision and indicated they plan to have the rules finalized and effective by July 21, 2011.

4) July 22, 2011 (maybe):
The provisions of Title XIV of Dodd Frank (the mortgage reform and anti predatory lending provisions) have differing and in some cases uncertain effective dates owing to confusing language. Under Section 1400(c)(1), for those sections of Title XIV that expressly require implementing regulations, the regulations must be issued in final form no later than January 21, 2013, and must take effect no later than 12 months after being issued in final form. Thus, the effective date of those provisions for which regulations are expressly required will be governed by when implementing regulations are issued.

However, the effective date of provisions in Title XIV that do not expressly require regulations is less clear. Section 1400(c)(3) provides: “A section of this title for which regulations have not been issued on the date that is 18 months after the designated transfer date shall take effect on such date.” This provision can be read to mean that all provisions of Title XIV that do not expressly require regulations do not become effective until January 21, 2013 (i.e., 18 months after the designated transfer date). Alternatively, this provision can be read to be limited to those provisions of Title XIV that expressly require regulations and to act as a mandatory outside effective date in the event the regulators do not publish the required regulations by that date. Under that interpretation, some provisions in Title XIV may already be in effect as of July 22, 2010, under Section 4 of Dodd Frank. Congress may have a cleanup measure in the works that will clarify this issue, but nothing has been finalized as of this writing.

Your policies and procedures need to address and be sensitive to both Dodd Frank provisions that expressly require implementing regulations and those that are silent on the topic.

Mortgage Disclosure Improvement Act (MDIA)

Compliance with the additional tweaks the Fed made to the new rate/payment table becomes mandatory on October 1, 2011.

FHA Net Worth Requirements

The FHA net worth requirements increase effective May 20, 2011. There is also a “phase two” increase scheduled for May 20, 2013.

Anti-Money Laundering (AML) Programs for Mortgage Lenders and Brokers

On December 9, 2010, the Treasure Department’s FINCEN proposed regulations that would require non-bank mortgage lenders and brokers to establish anti-money laundering programs and file Suspicious Activity Reports both activities long required of banks and thrifts. The comment period closed on February 7, 2011. Final rules have not yet been issued but
non-bank lenders should at least be referring to rules already applicable to bank lenders for preliminary guidance.

Telephone Consumer Protection Act (TCPA) Regulation Amendments

In January, 2010, the Federal Communications Commission proposed amendments to its TCPA regulations that would, in part, establish explicit rules for obtaining a consumer’s “prior express written consent” before using automatic telephone dialing systems and/or artificial or prerecorded voices. These regulations have not yet been finalized.


HUD has solicited comment on warehouse lending and repurchase arrangements with an eye toward potentially addressing the secondary market exemption. This exemption permits lenders to avoid disclosure of loan sale income. The comment period closed on December 27, 2010, and no further action has been taken. For more information, see our December 8, 2010 Client Alert.

HUD also issued an Advanced Notice of Proposed Rulemaking on its definition of a “required use,” which will impact significantly lenders and builders marketing affiliated services. See 75 Fed. Reg. 31334 (June 3, 2010). The comment period closed on September 1, 2010, and no further action has been taken.

How Can We Help You?

Our attorneys have worked hard to stay abreast of these fast moving developments, often lecturing for industry groups and writing on how to prepare for these new compliance burdens. We have advised clients on:

  • Loan officer and manager compensation
  • Privacy
  • Sub/servicing standards, disclosures and procedures
  • Needed revisions to employment agreements and manuals
  • Anti money laundering procedures
  • New and revised TILA, Fair Credit and RESPA disclosures and their new timing requirements
  • Enhanced quality control
  • Underwriting procedures
  • Vendor due diligence, including contract review and amendment to reflect sensitivity to those new statutes and regulations
  • Correspondent and broker buy sell agreements
  • Staff training
  • Call center operations
  • Litigation avoidance

For More Information

For more information, please contact Paul H. Schieber at 610.205.6040 or the Stevens & Lee attorney with whom you usually work.

This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.