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Where Did the Year Go?

By: Chuck Lewis

When new banking regulations are proposed, most of them have at least six months before final implementation. And that’s why last fall, when all the talk was of new mortgage disclosures and other compliance requirements effective sometime in 2009, we all assumed the implementation period would be a long way off. Welcome to the world of adults — where time travels much more quickly and where holidays seem to come back to back to back. We’re nearly into the fourth quarter of 2009 and many of those proposed regulations are now final, or will be final soon.

The Mortgage Disclosure Improvement Act went into effect the last week of July. This act, which is now a part of Regulation Z (Truth-in-Lending Act), is applicable to all consumer-purpose, closed-end loans secured by a consumer dwelling. The main contentious provision of this act is the requirement that no effected loan can close any earlier than seven business days from the receipt of the estimated Truth-in-Lending disclosure.

Why this time period? Congress felt that applicants weren’t being given the proper time to review/read their regulatory disclosures. The feeling was that applicants were being rushed into signing, allowing little time for feedback or clarifying questions. Now they have at least seven days — try explaining this new change to the borrower that you’ve always taken care of within 24–48 hours of the request.

Following on the heels of this change are the new “higher-priced” mortgage rules that went into place Oct. 1. This piece of legislation is the direct result of Congress feeling that many mortgage applicants were forced into loans that had too high of rates and/or too difficult of repayment options, and with little focus on income or debt limits. So, while no definition of subprime lending was provided, the ceiling limits on loans that would qualify as higher-priced lending were drastically reduced.

Where higher-priced limits used to be at least 5 percent over certain government issues, now the ceiling is 1.5 percent above comparable transactions. Depending on the term offered, this could qualify a loan with an initial rate of around 5.5 APR as a higher-priced mortgage. And if it appears the loan will qualify as a higher-priced mortgage, extensive new repayment, income qualifications and debt calculations become effective and will be scrutinized by the examining agencies. To add a coup de grace to this new provision, if the loan qualifies as a higher-priced mortgage, the bank must provide for the inclusion of escrow provisions no later than April 2010.

But wait, there’s more. Beginning Jan. 1, 2010, the long-waited changes to the Real Estate Settlement & Procedure Act are here. The new good faith estimate form has gone from one page to at least three pages and the new settlement statements are now also three pages. To add some teeth to this act, effective in January most of the amounts that are furnished to the applicant on the good faith estimate (remember, this document is furnished within three days of receipt of the application) must be accurate and if changes occur by more than 10 percent by the time the loan closes, the customer will be reimbursed for the difference. While the form may still be titled as a good faith estimate, it’s far from being an estimate.

Now is the time to decide what your mortgage loan closing fees are going to be. Are you going to keep charging fees such as underwriting, document preparation, origination, processing, etc.? Beginning in January, all fees must be itemized, categorized and properly disclosed. The theory to HUD, the agency that made all these changes, is that the good faith estimate should be viewed just like a restaurant menu. Once you’ve picked your entrée, you should be able to determine what comes with it, how much the final bill will be and possibly any other choices you could have made. That, in a nutshell, is how the agency wants customers to shop for mortgages. Financial institutions will furnish a menu of choices, with all the sides and costs associated, and then the customer will go home to decide where they want to eat. And remember, because they now have at least seven days to digest the material, no one will be confused about mortgage lending ever again.

These quick examples don’t cover the gamut of all the new regulations and compliance issues coming to a financial institution near you. But it gives us an idea of the focus of the governmental agencies and rule-makers as it pertains to concerns within our industry. Now, more than ever, bank management must be prepared to focus more time, effort and expense toward the compliance function within their institutions. Failure to develop policies, procedures, training and internal monitoring toward these new regulatory provisions will lead the institution to a series of examiner actions, costly fixes and possibly monetary fines.

And just remember, if you still think you’ve got time this year to get to all these regulatory changes, as J. K. Rowling writes in one of her Harry Potter books — “It’s a strange thing, but when you are dreading something, and would give anything to slow down time, it has a disobliging habit of speeding up!”

Chuck Lewis is director — risk management at RSM McGladrey Inc., Kansas City. Contact him at 816-751-1813 or Chuck.lewis(at)

Copyright © October 2009 BankNews Publications