Client Advisory
By: Jennifer M. Monty, Esq.
After months of speculation and questions, President Obama released his proposed plan to stop rising foreclosures. Announced on Tuesday, February 18-President Obama’s plan calls for widespread changes to the lending and servicing industries.
Over the past several years, servicers have routinely engaged in loss mitigation, including loan modifications. Under President Obama’s new plan, the government will provide $75 billion in government funding to further support loan modifications for qualifying mortgages. Additional incentives may be given for refinancing existing mortgages.
President Obama’s plan calls for two major changes for existing mortgages: refinancing and modification. Traditionally, a refinancing involves satisfying the old Note and Mortgage and replacing it with a new Note and Mortgage, usually for a different amount or at a lower interest rate. Modifications keep the existing Note and Mortgage in place, but change some of the terms- i.e. payment amounts and interest rates.
Before the announcement of the plan, there were questions regarding the need to provide new disclosures for refinancings and modifications. With the announcement of the new plan, refinancings and modifications will soar, and these questions need to be answered. No details have been provided regarding when and how disclosures must be given under the President’s new plan. Until there is an announcement of any changes, the Truth in Lending Act will govern what disclosures need to be given to homeowners.
The federal Truth-In-Lending Act (TILA) is a disclosure statute that imposes obligations on creditors when they extend credit to consumers. TILA was originally drafted as a consumer protection act. Its purpose is to promote informed use of credit by requiring creditors to provide meaningful disclosures of credit terms to consumers. If a loan is given to a homeowner, with a mortgage placed on the home property, TILA requires additional disclosures, and the right to rescind (cancel) the transaction for three days after the disclosures are provided.
The general rule is that TILA disclosures need to be provided for refinancings, but not modifications. “Refinancing” is a defined term under TILA (12 CFR 226.20(a)). A refinance only occurs when the existing Note and Mortgage are satisfied and replaced. However, if the existing Note and Mortgage are satisfied and replaced, TILA provides five specific exemptions that do not require new disclosures:
- A renewal of a single payment with no change in the original terms;
- A reduction in the annual percentage rate with corresponding change in the payment schedule;
- An agreement involving a court proceeding;
- A change in the payment schedule or a change in collateral requirements as a result of the consumer’s default or delinquency, unless the rate is increased or the new amount financed exceeds the unpaid balance plus the earned finance charge and premiums for continuation of insurance; and
- The renewal of option insurance purchased by the consumer and added to an existing transaction, if disclosures relating to the initial purchase were provided as required.
Many of these new “refinancings” will likely result in a reduction in the APR, removing the need to provide for new disclosures. However, servicers must be cautious when there are changes to the underlying balance of the loan.
Although changes in payment or collateral do not require new disclosures, if the new amount financed exceeds the original unpaid balance and earned finance charge, a disclosure must be provided. Under TILA, if a borrower had a Note and Mortgage for $100,000, new disclosures should be provided if the “Refinanced” Note and Mortgage is over $100,000. Often servicers will add in attorney’s fees or loan modification fees. If it is a true refinancing, with the old Note and Mortgage being replaced and satisfied, new disclosures would be required if any amount is added to the loan balance for a loan modification fee, attorney’s fee, refinance charge, pre-payment penalty, or closing costs.
Until additional guidance is provided for refinancings under President Obama’s plan, follow the requirements under TILA. When in doubt as to whether a TILA disclosure should be provided, the safe route is to provide the disclosure.
If you have any questions on this information, please contact Jennifer M. Monty, Esq. an associate focused on litigation & defense within the Real Estate Default Group located in the Cleveland office of Weltman, Weinberg & Reis Co., L.P.A. Jennifer can be reached at (216) 685-1136 or via e-mail at jmonty@weltman.com.
Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A. , an organization providing comprehensive creditor representation. The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship. Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. ©2009
The following is an article reprinted with permission from the upcoming Winter 2009 edition of The WWR Letter:
An Overview of the Licensing and Registration Requirements of the S.A.F.E. Mortgage Licensing Act
By: Michael F. Schmitz, Associate
After the recent economic upheaval and questions regarding regulation of the mortgage industry, President Bush signed the Housing and Economic Recovery Act of 2008 (“HERA”) on July 30, 2008. As part of the Act, the Secure and Fair Enforcement (“S.A.F.E.”) Mortgage Licensing Act (Division A, Title V) was enacted.
The S.A.F.E. Mortgage Licensing Act encourages all states, through the Conference of State Bank Supervisors (“CSBS”) and the American Association of Residential Mortgage Regulators (“AARMR”) to set forth standards for licensing and registration for residential loan originators. Among other things, the S.A.F.E. Mortgage Licensing Act is designed to enhance consumer protection and reduce fraud by establishing a uniform minimum standard for the licensing and registration of mortgage loan originators. The S.A.F.E. Mortgage Licensing Act:
• Encourages states to participate in the Nationwide Mortgage Licensing System and Registry (“NMLS”). The NMLS has been in existence since 2004, when it was formed in response to increased volume and variety of loans and regulations;
• Preclude individuals from engaging in the business of loan origination without obtaining and annually maintaining a state license or a federal registration with the NMLS;
• Applies the same minimum licensing and registration standards for all residential mortgage loan originators, whether mortgage brokers, loan officers, mortgage banker loan originators, financial services companies and agents, or depository institution loan officers; and
• Provides minimum standards for licensing and registration of loan originators
The S.A.F.E. Mortgage Licensing Act mandates that each state’s system of licensing must meet certain national definitions and minimum standards for loan originators, including:
• Criminal history and credit background checks;
• Pre-licensure education;
• Pre-licensure testing;
• Continuing education; and
• Net worth, surety bond or recovery fund.
Among the new requirements, the S.A.F.E. Mortgage Licensing Act attempts to put in place safeguards and prevent mortgage brokers who have been previously found guilty of mortgage fraud from doing business. Each state’s system of licensing must meet national definitions and minimum standards.
Some of the new requirements under the S.A.F.E. Mortgage Licensing Act include a prohibition on licensing originators who:
• Had a license previously revoked
• Pled guilty or been convicted of a felony during the seven year period prior to licensing
• Pled guilty or been convicted of a felony, during any time period, if it involved fraud, dishonesty, breach of trust or money laundering.
Additionally, originators must show that they have financial responsibility, meet a character and general fitness requirement, complete pre-licensing requirements, pass a written test, and either meet a set net worth or surety bond requirement or pay into a state Fund.
The S.A.F.E. Mortgage Licensing Act applies to all states, the District of Columbia, and any territory of the United States, including Puerto Rico, Guam, American Samoa, and the U.S. Virgin Islands. The S.A.F.E. Mortgage Licensing Act will cover all people who take residential mortgage loan applications and offer or negotiate mortgage terms, except those who are purely acting in a clerical or administrative capacity.
Although the S.A.F.E. Mortgage Licensing Act was signed in 2008, the deadlines for compliance are varied. States whose legislatures meet annually are required to have their licensing and registration systems in place by July 31, 2009. States whose legislatures meet biennially must have their system in place by July 31, 2010. The United States Department of Housing and Urban Development (“HUD”) may, at its discretion, extend these deadlines for 24 months, if it determines that a state is making a good faith effort to establish a state licensing law.
CSBS and AARMR have proposed a Model State Law to assist states in adopting legislation or regulations which meet the minimum requirements of the S.A.F.E. Act. This Model State Law can be found at http://www.hud.gov/offices/hsg/sfh/mps/modellaw.pdf. The Model State Law has been reviewed by HUD, which has determined that the model legislation meets the minimum requirements of the S.A.F.E. Mortgage Licensing Act.
The S.A.F.E. Mortgage Licensing Act and the Model State Law raise several issues and concerns. For example, the S.A.F.E. Mortgage Licensing Act and the Model State Law authorize the NMLS and the states’ commissioners to request a loan originator’s personal credit report.
Further, the NMLS will create a massive database of publicly accessible information about individual licensees, which may include fingerprints, credit reports, criminal background checks and personal financial statements. As such, system security and privacy will be an ongoing concern.
The S.A.F.E. Mortgage Licensing Act will likely provide further safeguards for consumers, but it will also add further requirements for mortgage originators. As the deadlines for compliance approach, WWR will keep you advised regarding legislation in our footprint states.
Michael F. Schmitz is an Associate in the Litigation & Defense department of the Cleveland office. He can be reached at (216) 685-1106 or mschmitz@weltman.com.
The following is an article reprinted with permission from the upcoming Winter 2009 edition of The WWR Letter:
Code of Ethics for a Board of Directors: Why It Is Necessary and How to Create an Effective Code
By: Matthew G. Burg, Associate
As this new year brings various challenges to each and every organization, it also brings a heightened scrutiny of what organizations are doing and, more importantly, what their leaders are doing. Leaders are typically held to a higher standard, not just with business decisions but with business values; and not just with professional life, but in their personal life too. Just as a board guides, it must also be guided and held to standards in advancing the integrity of its organization. A critical tool for guiding a board of directors, as well as fostering a culture of honesty and accountability within the organization, is a code of ethics for the board of directors.
Generally, a code of ethics serves to provide guidance to directors to help them recognize and deal with ethical issues, provide mechanisms for reporting possible unethical conduct, and promote the values of the organization. Although a code of ethics ideally addresses issues that regularly arise, no code of ethics can anticipate every situation that may occur. Thus, as a matter of practice, any potential ethical issues not specifically addressed in the code of ethics should be addressed with your organization’s legal counsel.
The following steps provide a general framework for developing an effective code of ethics for your board of directors:
1. Development Team. Prior to drafting a code of ethics for your board of directors, assemble a development team. The team should not only include members of the board but also other members from all levels of your organization who can contribute different and valuable perspectives.
2. Statement of Values. With your newly formed development team, brainstorm and develop a statement of values. The values may be unique to your organization but should also reflect generally accepted values of every organization as well as your greater community. The values should communicate the standard for all aspects of your organization’s programs and operations. Before moving on to drafting the code of ethics, present the statement of values to your board of directors for approval.
3. Elements of a Code of Ethics. Once your statement of values is established, you are ready to draft a code of ethics, which should clearly set forth how the board will put the organization’s values into practice. In drafting the code, write simply and clearly, avoiding legal jargon and making the document as user-friendly as possible.
While the particular elements of your code of ethics may differ, the following standard elements should be included:
• Personal and professional integrity
• Exercise of loyalty, good faith, and fair dealing in all conduct
• Dedication to confidentiality of personal and/or financial information
• Avoidance of real or perceived conflicts of interest
• Adherence to governmental and industry rules and regulations, along with continued education and training to ensure knowledge of new topics
• Equal treatment of organization members, customers, and others to ensure respect, confidentiality, and fairness to all persons
• Full and fair disclosure of financial information in financial statements and public communications
• Confidence that noncompliance or violations of the code will not be tolerated and provide a process for handling such occurrences
Completing the code is only the beginning. The code of ethics will become the board’s guide going forward. It will be a living document that can be dispersed to customers, the media, and others, and may be displayed in your organization to promote the organization’s overall commitment to loyalty, obedience, due care and excellence.
Matthew G. Burg is an Associate in the Litigation & Defense department of the Cleveland office. He can be reached at (216) 685-1111 or mburg@weltman.com.
Resources consulted:
Current Issues in Credit Unions Podcast #29, August 26, 2008, http://ciicu.libsyn.com
CUNA
The Independent Sector
The Ethics Resource Center
Management Quarterly, Developing a code of ethics, by Boudreaux, Greg and Steiner, Tracey; March 22, 2005
Filed under: Current Issues in Credit Unions, Regulation Z, TARP, bankruptcy, bonds, contests, credit unions, mortgages, remote capture, security response program
–Data Breach Mania! Security response programs revisited. (This is getting crazy right now).
–Reg Z final rule
–TARP and bailout update.
–Contest considerations.
–Mortgage cram-downs in bankruptcy.
–Bond claim tips and traps.
–Remote capture update.
–Hunker down or get active?
The CIiCU hosts are:
Brian Witt
Member
Farleigh Wada Witt,
Attorneys at Law
121 SW Morrison Street, Suite 600
Portland, Oregon 97204
Telephone: 
503-228-6044
Fax: 503-228-1741
http://www.fwwlaw.com
Guy Messick
Member
Messick & Weber P.C.
The Madison Building, 108 Chesley Drive
Media, Pennsylvania 19063-1712
Telephone: 610-891-9000
Fax: 610-891-9008
http://www.cusolaw.com
Faith Anderson
American Airlines Credit Union
P.O. Box 619001
MD 2100
DFW Airport, TX
75261-9001
(800) 533-0035
https://www.aacreditunion.org/default.asp
Robert Rutkowski
Shareholder
Weltman, Weinberg & Reis Co., L.P.A.
323 W. Lakeside Avenue, Suite 200
Cleveland, Ohio 44113
Telephone: 216-739-5004
Fax: 216-739-5642
http://www.thatcreditunionblog.com
http://www.weltman.com
Subcribe to the show via iTunes Music Store: http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?id=151785964&s=143441
