Don’t Assume Your Bank Is Not Originating Any Higher Priced Mortgage Loans (HPMLs)

Even though the HPML provisions of Regulation Z (Truth in Lending Act (TILA)) became effective over six months ago, it seems like just yesterday that they went into effect. If a loan meets the criteria for a HPML, the Bank must abide by various additional provisions for Regulation Z. That is, the rules for higher-priced mortgage loans outlined in Section 226.35 of Regulation Z indicate that the Bank 1) shall not extend credit based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation; 2) must abide by certain restrictions regarding prepayment penalties, 3) must establish an escrow account (for at least the first year of the loan term) for taxes and applicable insurance premiums for loans secured by a first lien on a principal dwelling (Note: The escrow requirements became effective April 1, 2010; however, October 1, 2010 is the effective date for the escrow requirement for mobile homes); and 4) shall not structure a home-secured loan as an open-end plan to evade these HPML requirements.

What we have noticed since the HPML provisions became effective, is that in several cases and for a variety of reasons, some banks have originated an HPML, though the application/loan was not identified as such. If your bank originates residential mortgage loans, it should not be assumed that it does not have any loans that meet the HPML criteria. Unfortunately, if you do not identify a HPML and the loan is closed without escrows, not only has the bank violated Regulation Z, but it is likely that RESPA violations would also be cited as the customer should have been informed of the escrow amounts on the GFE and HUD-1, not to mention that the bank may miss the deadline for providing the initial escrow account statement (i.e., at settlement or within 45 days of settlement).

Therefore, for any residential loan application received that is covered by Regulation Z, we recommend the following:

  1. At the time the early TIL disclosure is generated, perform a test (which can be performed at http://www.ffiec.gov/ratespread/newcalc.aspx) to determine whether the application is subject to section 226.35 of Regulation Z (HPML provisions).
    1. If the application meets the criteria for an HPML, the bank should then:
      1. Maintain documentation that the application is subject to the HPML requirements;
      2. If the Bank escrows:
        1. Ensure that the related provisions of Sections 226.35 and 34 are met and sufficiently documented;
        2. Ensure that the Escrow Information Section on the GFE is properly completed.
      3. If the Bank does not intend to escrow:
        1. Revisit/reduce the rate or associated fees or, if the loan is an adjustable rate mortgage (ARM), the Bank may consider increasing the period for which the initial rate is fixed to ensure that the HPML provisions are not triggered;
        2. Deny the request as the bank does not offer this product. WARNING!!!! If scenario “1.a.iii.” above applies, ensure the bank is consistent in its actions (e.g., if the bank is inconsistent and denies some applications and reduces rates/fees on others, fair lending issues may ensue).
    2. If the application does not meet the criteria for an HPML:
      1. Maintain documentation to support that the application is not subject to the HPML requirements.
  2. At the time the final TIL disclosure is generated (e.g., to determine whether the early TIL provided was in tolerance), perform a test to determine whether the application is subject to the HPML provisions.  (Note:  The assumption for this example is that the final TIL is within tolerance and re-disclosure is not necessary; however, the rate was not locked (the Bank does not offer this feature or customer chose not to lock in the rate) and changes in the APOR resulted in the loan meeting the threshold for a HPML.)
    1. If the application meets the criteria for an HPML, the bank should then:
      1. Maintain documentation that the application is subject to the HPML requirements;
      2. If the Bank escrows:
        1. Ensure that the related provisions of Sections 226.35 and 226.34 are met and sufficiently documented;
        2. If at the time the early TIL was provided, the application was then considered an HPML, ensure that the HUD-1 Settlement Statement accurately reflects the applicable escrow information;
        3. If at the time the early TIL was provided, the loan did not meet the criteria for an HPML,
          1. Ensure that the related provisions of sections 226.35 and 226.34 are met and sufficiently documented;
          2. The bank may prepare a new GFE, as this constitutes a “changed circumstance.” NOTE:  If a new GFE is provided, the bank must provide the GFE within three business days of receiving information sufficient to establish changed circumstances and the bank may only change those charges and terms that are affected by the specific changed circumstance.
      3. If the Bank does not intend to escrow:
        1. Revisit/reduce the rate or associated fees to ensure that the HPML provisions are not triggered;
        2. Deny the request as the bank does not offer this product. WARNING!!!!  If scenario “2.a.iii.” above applies, ensure the bank is consistent in its actions (i.e., if the bank is inconsistent and denies some applications and reduces rates/fees on others, fair lending issues may ensue).  Also, denying the application this late may bring about some legal implications; be sure to consult with the Bank’s legal counsel for guidance.
    2. If the application does not meet the criteria for an HPML:
      1. Maintain documentation to support that the application is not subject to the HPML requirements.

By reading the above, it should be clear that a key component for helping to ensure compliance with the HPML provisions of Regulation Z is maintaining well documented loan files.  It seems like a lot now, but if/when questions come up down the line (e.g., from the customer his/herself, auditors, examiners, etc.), you will be happy you took the time and made the extra effort to document your actions!

At the time the early TIL disclosure is generated, perform a test (which can be performed at http://www.ffiec.gov/ratespread/newcalc.aspx) to determine whether the application is subject to section 226.35 of Regulation Z (HPML provisions).

If the application meets the criteria for an HPML, the bank should then:
Maintain documentation that the application is subject to the HPML requirements;

If the Bank escrows:
Ensure that the related provisions of Sections 226.35 and 34 are met and sufficiently documented;
Ensure that the Escrow Information Section on the GFE is properly completed.

If the Bank does not intend to escrow:
Revisit/reduce the rate or associated fees or, if the loan is an adjustable rate mortgage (ARM), the Bank may consider increasing the period for which the initial rate is fixed to ensure that the HPML provisions are not triggered;
Deny the request as the bank does not offer this product.

WARNING!!!!  If scenario “1.a.iii.” above applies, ensure the bank is consistent in its actions (e.g., if the bank is inconsistent and denies some applications and reduces rates/fees on others, fair lending issues may ensue).

If the application does not meet the criteria for an HPML:
Maintain documentation to support that the application is not subject to the HPML requirements.

At the time the final TIL disclosure is generated (e.g., to determine whether the early TIL provided was in tolerance), perform a test to determine whether the application is subject to the HPML provisions.  (Note:  The assumption for this example is that the final TIL is within tolerance and re-disclosure is not necessary; however, the rate was not locked (the Bank does not offer this feature or customer chose not to lock in the rate) and changes in the APOR resulted in the loan meeting the threshold for a HPML.)

If the application meets the criteria for an HPML, the bank should then:
Maintain documentation that the application is subject to the HPML requirements;

If the Bank escrows:
Ensure that the related provisions of Sections 226.35 and 226.34 are met and sufficiently documented;
If at the time the early TIL was provided, the application was then considered an HPML, ensure that the HUD-1 Settlement Statement accurately reflects the applicable escrow information;
If at the time the early TIL was provided, the loan did not meet the criteria for an HPML,
Ensure that the related provisions of sections 226.35 and 226.34 are met and sufficiently documented;
The bank may prepare a new GFE, as this constitutes a “changed circumstance.”
NOTE:  If a new GFE is provided, the bank must provide the GFE within three business days of receiving information sufficient to establish changed circumstances and the bank may only change those charges and terms that are affected by the specific changed circumstance.

If the Bank does not intend to escrow:
Revisit/reduce the rate or associated fees to ensure that the HPML provisions are not triggered;
Deny the request as the bank does not offer this product.
WARNING!!!!  If scenario “2.a.iii.” above applies, ensure the bank is consistent in its actions (i.e., if the bank is inconsistent and denies some applications and reduces rates/fees on others, fair lending issues may ensue).  Also, denying the application this late may bring about some legal implications; be sure to consult with the Bank’s legal counsel for guidance.

If the application does not meet the criteria for an HPML:
Maintain documentation to support that the application is not subject to the HPML requirements.

By reading the above, it should be clear that a key component for helping to ensure compliance with the HPML provisions of Regulation Z is maintaining well documented loan files.  It seems like a lot now, but if/when questions come up down the line (e.g., from the customer his/herself, auditors, examiners, etc.), you will be happy you took the time and made the extra effort to document your actions!

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