The 2008 economic depression was triggered in part by the real estate bubble bursting. Mortgages became extremely easy to obtain, and many of those mortgages had predatory provisions that made it difficult for borrowers to pay off the mortgages in the event that their real estate value decreased.
Subtitle A – Residential Mortgage Loan Origination Standards
Title XIV amends the Truth in Lending Act (15 U.S.C. 1631) to establish a duty of care for all mortgage originators, which would require them to be properly qualified, registered and licensed as needed, and to comply with any regulations designed by the Federal Reserve Board to monitor their operations. See 15 U.S.C. § 1639(a), 15 U.S.C. § 1639(b) (Dodd-Frank § 1402). Mortgage originators are prohibited from receiving compensation that is correlated to the face amount of the loan, which should diminish incentives for such originators to steer borrowers towards residential mortgage loans that the borrower cannot repay. See 15 U.S.C. § 1639(b) (Dodd-Frank Act § 1403). Further authority to prohibit deceptive, unfair or predatory loan terms is given to the Federal Reserve Board, which can regulate all residential mortgages to ensure that terms are in the interest of consumers and the public. See id. (Dodd Frank Act § 1405).
Subtitle B: Minimum Standards for Mortgages
Title XIV establishes minimum standards for all mortgage products. Creditors may not make a home mortgage loan unless they reasonably determine that the borrower can repay the loan based on the borrower’s credit history, current income, expected income and other factors. See 15 U.S.C. § 1639(c) (Dodd-Frank Act § 1411). For certain types of mortgages as enumerated in this Title and as will be determined by the Federal Reserve Board, there is a presumption of ability to repay. See id. (Dodd-Frank Act § 1412). There are certain types of prepayment penalties that are prohibited as well. See id. (Dodd-Frank Act § 1414). This Title also establishes that a violation of these minimum standards by a creditor can be used as a defense by a borrower to set off or recoup damages. See 15 U.S.C. 1640 (Dodd-Frank Act § 1413). Of course, if a borrower commits fraud in obtaining the mortgage, the creditor will not be held liable. See id. (Dodd Frank Act § 1417).
In addition, there must be additional disclosures given to any borrowers for home mortgages, both at the time that the mortgage is made, as well as in the monthly loan statements. See 15 U.S.C. § 1638(a) (Dodd-Frank Act § 1419–20). The Comptroller General of the United States (the “Comptroller”) is to conduct a study on the effects of these provisions on the home mortgage market. See Dodd-Frank Act at § 1421.
Subtitle C: High Cost Mortgages
High cost mortgages include first mortgages with an interest rate that is more than 6.5% higher than the average prime offer rate, or a second mortgage with an interest rate more than 8.5% higher than the average prime offer rate, as well as other enumerated definitions. See 15 U.S.C. § 1602 (Dodd-Frank Act § 1431). Additionally, to keep payments on high-cost mortgages lower, this Title prohibits “balloon payments” that rapidly increase so that scheduled payments are eventually twice as large as the average of earlier payments. See 15 U.S.C. § 1639 (Dodd-Frank Act § 1432). Additionally, creditors may not recommend or encourage default on prior loans, impose large late fees, accelerate debt, finance prepayment fees or penalties, points, or fees or structure a loan to avoid such requirements. See id. (Dodd Frank Act § 1433).
Subtitle D: Office of Housing Counseling
Title XIV establishes the Office of Housing Counseling to conduct research and public outreach, and to establish, coordinate and administer all regulations relating to housing and mortgage counseling. See 42 U.S.C. § 3533 (Dodd Frank Act § 1442). This office is responsible for providing information, educational programs, and assistance to borrowers during the mortgage application process. See id. (Dodd Frank § 1443). The Department of Housing and Urban Development, of which the Office of Housing Counseling is a part, is also responsible for conducting a study of defaults and foreclosures and maintaining a database of all foreclosures and defaults for all one-to-four unit residential properties. See id. at §§ 1446–47. In addition, the Secretary of Housing and Urban Development is also responsible for informing potential homebuyers about home inspection counseling services and warning them about foreclosure rescue scams. See 12 U.S.C. § 1701p-2 (Dodd-Frank Act §§ 1451–52).
Subtitle E: Mortgage Servicing
Subtitle E first requires creditors to establish five-year escrow or impound accounts to pay taxes, hazard insurance and any other necessary insurances in most situations. See 15 U.S.C. § 1638 (Dodd Frank Act § 1461). For consumers that waive escrow services, the creditor must provide the consumer with disclosures that clearly explain the consumers’ responsibilities. See id. (Dodd-Frank Act § 1462). Mortgage servicers are also prohibited from obtaining force-placed insurance without reasonable basis to believe the borrower has not maintained property insurance, charging fees for responding to valid written requests, failing to promptly respond to requests about errors in payment allocation, failing to respond within 10 business days to a request to provide information about the loan owner or failing to comply with any other obligations. See 12 U.S.C. § 2605 (Dodd-Frank Act § 1463).
Subtitle F: Appraisal Activities
Subtitle F requires creditors to get a written appraisal of the property before extending a higher-risk mortgage to a borrower. See 12 U.S.C. § 1639h (Dodd-Frank Act § 1471). The appraisal must be done at the expense of the creditor, and cannot violate appraisal independence by inappropriate influence or compensation between the creditor and appraiser. See id. (Dodd-Frank Act §§ 1471–72). Subtitle F also provides for annual reports from the Appraisal Subcommittee of the Bureau of Consumer Financial Protection, and regulations to supervise the quality of appraisals, qualifications of appraisal companies, fees, and reporting. See 12 U.S.C. § 3341 (Dodd-Frank Act § 1473). In addition, the Government Accountability Office (“GAO”) is to conduct a study on various appraisal methods, valuation models and the impact on the home valuation code of conduct and the appraisal subcommittee. See Dodd-Frank Act at § 1476.
Subtitle G: Mortgage Resolution and Modification
Subtitle G creates a program to help protect current and future residential tenants by making sure the property owner has sustainable financing, funds for rehabilitation of the property and an easy way to transfer the property to responsible new owners, if necessary. See 12 U.S.C. § 5220b (Dodd-Frank Act § 1481). Additionally, the Home Affordable Modification Program established under the Emergency Economic Stabilization Act of 2008 will be modified to give more information to the public as well as borrowers whose requests for a mortgage modification are denied. See 12 U.S.C. § 5219a (Dodd-Frank Act §§ 1482–83). Additionally, the Subtitle extends the Protecting Tenants at Foreclosure Act through 2014. See 12 U.S.C. § 5220 (Dodd-Frank Act § 1484).
Subtitle H: Miscellaneous Provisions
Congress first states that the effort to reform residential mortgage credit practices and protections should include meaningful structural reforms of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). See Dodd-Frank Act at § 1491. Additionally, the Subtitle commissions a GAO study on government efforts to catch mortgage foreclosure rescue scams and loan modification fraud, and a Housing and Urban Development study on drywall presence in foreclosures. See id. at § 1492, 1494. The Emergency Homeowners’ Relief Fund is made available beginning October 1, 2010, as is additional funding for neighborhood stabilization programs. See 12 U.S.C. § 2703, 42 U.S.C. § 5301 (Dodd-Frank Act § 1496–97). Finally, this Subtitle establishes a program to provide foreclosure legal assistance to low- and moderate-income homeowners and tenants. See 12 U.S.C. § 1701x-2 (Dodd-Frank Act § 1498).
Title XIV was implemented in order to provide standards for the level of disclosure required for borrowers, so that individuals getting a mortgage would be aware of the obligations and the risks. The Title prohibits certain predatory lending tactics that were used frequently during the real estate bubble, and also establishes certain provisions for loan modifications which will help to change and reduce mortgages that are completely out of the borrower’s ability to repay.