What To Expect When You’re Expecting . . . Your First Dodd-Frank Mortgage

January 10, 2014 at 7:44 am 3 comments

Well, it’s the morning of the Blessed Event.

Any moment now your credit union is expecting the arrival of its first Dodd-Frank mortgage and frankly you are a little nervous. Sure you and a couple of your mates have gone through training classes, created new policies and procedures and even put aside space for increased record keeping and hired energetic staff to look after these new creations and still, you are nervous. Are you really ready for all of these acronyms to come to life, for all that documentation and the possibility that the mortgage holder won’t like you and may take you to court?

At times like these it’s good to remember the basics. You have been doing mortgage lending for a fair amount of time and you are good at it. There have been thousands of pages of regulations used to promulgate these new servicing/underwriting mandates. While there is no doubt you will have to change some of your old ways, if you take time to step back to look at the forest you will see you are more than prepared for these new mortgage arrivals.
When that mortgage applicant comes calling, the most basic thing you need to figure out is her Repayment ability. The regulation mandates that “A creditor shall not make a loan that is a covered transaction unless the creditor makes a reasonable and good faith determination at or before consummation that the consumer will have a reasonable ability to repay the loan according to its terms.”

Something tells me you already know this. If you document that you follow this rule and have always made solid loans then you can continue to make the same loans you always have. While the regulation specifies eight basic underwriting criteria – things like income and debt-to-income – that must be considered when determining a member’s Ability to Repay a mortgage loan, chances are you have always taken these criteria into account. So long as you are documenting what you are doing, you are complying with the law.

Weeks, months, and years are going to go by (they grow up so fast, don’t they) and our borrower will undoubtedly have questions about the mortgage as it matures. Do you have policies and procedures in place so that when a member calls you can provide accurate information and respond appropriately to investigate potential mistakes related to the mortgage? My guess is you do. After all, your credit union can’t survive without good customer service and helping people with questions about loans is good customer service.

Unfortunately, our mortgage may hit some growing pains along the way. Maybe its owner will get sick or lose a job and be unable to make the mortgage payments. Do you work with delinquent members by putting them on notice when their mortgages are in default? Do you make a good faith effort to modify these mortgages so that members can repay them if possible? Do you tell the member what information she has to provide for a loan modification to be considered or do you instead repeatedly ask your member to resubmit the same information after your staff misplaces pertinent files?

This is not a joke but precisely the type of stuff some of the nation’s largest servicers have been doing as they tried to protect the interest of investors in Mortgage Backed Securities. Credit unions work with their members because they know their members. It isn’t in our interest to see a neighbor lose a house or to be nonresponsive to basic requests. Again the policies documenting what we do are new, but the efforts most credit unions make to help their members already puts us in compliance with this new Dodd-Frank world.

Despite our best efforts, not all relationships work out and we have to foreclose on property and take it back under our care. There will undoubtedly be smiling mortgage applicants who come in today only looking to sue you tomorrow because you had the temerity to think to think that they could afford their house. People change.

Perhaps you are thinking the credit union should only make Qualified Mortgages. After all, with their Safe Harbors these are the closest thing to a prenuptial agreement between borrowers and lenders. But have you ever used anything but sound underwriting in the past? Do you work in good faith at settlement conferences if and when the delinquent member shows up? In short, do you have the procedures in place to demonstrate to a court that the credit union consistently applies sound criteria when deciding who gets a loan? If you do, then you should not let the threat of increased litigation keep you from doing what your credit union has always done: provide mortgage loans to people who repay them.

None of this is to minimize the scope and weight of the compliance burden being hoisted on credit unions today. Nor am I trying to suggest that issues won’t arise in interpreting thousands of pages of interacting and overlapping legalese. I’m simply pointing out that, at its core, Dodd-Frank is about implementing baseline underwriting and servicing practices with which most credit unions already comply. Keep the goals of the regulations in mind and you will find that your credit union’s mortgage practices don’t have to change as much as you think they do.

Entry filed under: Compliance, General, Legal Watch, Mortgage Lending, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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