HVCC, SAFE Act, Red Flags, Oh My! by George H. Marentis

by 17 Dec 2009

More hazardous than the Yellow Brick road.

Although new lending regulations become effective each year, the new regulations and rules that became effective this year and those scheduled to become effective on January 1, 2010 are the most dramatic changes the industry has seen in years.
This year an appraisal code of conduct became effective on May 1, 2009 along with major changes that impacted lending practices and disclosures that became effective at different times in 2009. Additional HUD regulations requiring the use of a standardized good faith estimate form and HUD-1 settlement will become law effective January 1, 2010.
Lastly, loan originator licensing requirements under the SAFE Act were passed by all the states that will become effective in 2010. 
Below is only a brief overview of some of the key changes for 2009 and 2010. Additional changes have occurred at the federal and state level. For a more detail review of these changes, contact us at CMS or your current compliance vendor.
For loans that are being sold to Fannie Mae and Freddie Mac the HVCC requires a lenders production staff to be independent from the ordering or the selecting of appraisers, or having any influence over the appraisal process. Brokers cannot select, retain, or compensate an appraiser. The code also requires a lender to have written policies and procedures to comply with the HVCC and to report any violators. Borrowers must receive a copy of their appraisals when complete; but no later than three business days prior to closing.  Additional rules apply to in-house appraisers and their independence.
  1. Truth in Lending Act / Mortgage Disclosure Improvement Act of 2008  (MDIA) (Early TIL and Timing) - Effective July 30, 2009
This amendment requires an early Truth in Lending Notice on all closed end real estate purchases and refinances within three (3) business days of application and outlines a new definition of “application”.  No fees can be collected from the borrower other than a reasonable fee credit report prior to giving early TIL.  You can not close the loan until seven (7) business days after delivery of the required TIL and requires a redisclosure if the APR changes by more than 1/8 of 1 percentage point in a “regular” transaction, or more than 1/4 of 1 percentage point in an “irregular” transaction. The redisclosure must be RECEIVED by the borrower no later than three (3) business days before the date of the closing. Receipt is defined as three business days after mailing or when delivered in person. Additionally, the amendment requires that the borrower be provided a copy of the appraisal at least three (3) business days before close.
  1. Truth in Lending Act / closed end credit and advertising open/closed end credit. - Effective October 1, 2009 and April 1, 2010 for escrows on higher priced loans
This amendment of the Truth in Lending Act creates a new category of loans that is defined as a higher priced mortgage loan. The amendment prohibits the influence of appraisers and unfair or deceptive servicing standards on closed end loans secured by the borrowers dwelling, establishes additional advertising rules for open and closed end credit, and changes certain criteria on HOEPA loans.
Regulation X (RESPA) – Effective January 1, 2010
Substantial changes are being made to the Good Faith Estimate and the HUD 1 Settlement Statement, which in part includes limits on the amount a fee can vary between the GFE and Settlement based on type of fee.  These changes lock creditors into fees disclosed for 10 business days from disclosure unless a change of circumstances occurs and new disclosures are sent within three business days of change in circumstances.
The SAFE Act mandates that ALL states enact a licensing system for individual mortgage loan originators (“MLO(s)”) by July 30, 2009. The Act requires all MLO’s seeking state-licensure, or currently holding a state license, to pass the NMLS-developed S.A.F.E. Mortgage Loan Originator Test, including both national and state components, with a score of 75% or better on each component. Sufficient information must be provided for a background check and running of a credit report to determine the loan originators credit score. Note that each state will set a minimum credit score the loan originator must have in order to be eligible for licensure in that state. 
FHA – Effective January 1, 2010
The major changes in the FHA Title II loan program includes a new annual requirement of Audited Financial Statements, changes to the Streamline Refinance Program, and amendments to the appraiser and appraisal requirements. A summary of the FHA appraisal changes includes: 
  • Modification of Procedures for Streamline Refinance Transactions
  • Adoption of Home Valuation Code of Conduct Guidelines (some not all)
  • Updated Appraisal Validity Period
  • New Appraisal Portability Regs
In addition to the changes effective on January 1, 2010, HUD has also announced a proposed rule change for FHA originators approval and net worth requirements. The proposal states Loan Correspondents (mortgage brokers) will continue to be able to originate FHA insured loans through their relationships with approved mortgagees; however, they will no longer receive independent FHA approval for origination eligibility. Additionally, the proposal seeks to increase the Net Worth Requirement from $250,000 to $1,000,000. 
RED FLAGS – Delayed again: New Effective date June 1, 2010
The Red Flag Rules of the Fair and Accurate Credit Transactions Act (FACTA) requires financial institutions and creditors to implement a written identity theft prevention program (Policy & Procedure). The purpose of this policy is to detect identity theft and detect it before damage and loss occurs to the borrower and financial institution.
Enforcement of the “Red Flags” Rule has been delayed until June 1, 2010, for financial institutions and creditors subject to enforcement by the FTC. However, it does not affect other federal agencies’ ongoing enforcement for financial institutions and creditors subject to their oversight.
The policy and procedure should:
1. Identify relevant patterns, practices and specific forms of activity that are “red flags” signaling possible identity theft, and incorporate those red flags into the program;
2. Detect red flags when they occur;
3. Respond appropriately to any red flags detected to prevent and mitigate identity theft;
4. Ensure the program is updated periodically to reflect changes in risks from identity theft as your business model evolves; and
5. The program must be managed by your Board of Directors or senior employees and must include appropriate staff training and oversight.
The contents of this article is for informational purposes only and is not intended to be legal advice. 
George H. Marentis is President/CEO of Compliance Made Simple, LLC, a company that provides licensing services and other compliance related services to the mortgage lending industry nationwide. For more information see www.compliancemadesimple.org or call 303.859.8550. Mr. Marentis has a Juris Doctorate and over 15 years of mortgage lending experience ranging from frontline operations, origination to regulatory and legislative compliance. Information provided in this article is not intended to be legal advice and is informational only.

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