Compliance Matters: Mortgage Origination Standards

A Federal Reserve Board proposal offers four options to comply with ability-to-repay requirement.

June 1, 2011

Mortgage Origination Standards

The Federal Reserve Board has requested input on a proposed rule under Regulation Z (Truth in Lending) that would require creditors to determine a consumer’s ability to repay a mortgage before making the loan. The rule also would establish minimum mortgage underwriting standards. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the revisions.

The proposed requirements would apply to all consumer mortgages (except home equity lines of credit, time-share plans, reverse mortgages, or temporary loans), and would provide four options to comply with the ability-to-repay requirement:

1. A creditor can meet the general ability-to-repay standard by considering and verifying specified underwriting factors, such as the consumer’s income or assets.

2. A creditor can make a “qualified mortgage,” which provides the creditor with special protection from liability provided the loan does not have certain features, such as negative amortization; the fees are within specified limits; and the creditor underwrites the mortgage payment using the maximum interest rate in the first five years. The Fed is soliciting comment on two alternative approaches for defining a “qualified mortgage.”

3. A creditor operating predominantly in rural or underserved areas can make a balloon payment qualified mortgage. This option is meant to preserve access to credit for consumers located in rural or underserved areas where creditors originate balloon loans to hedge against interest-rate risk for loans held in portfolio.

4. Acreditor can refinance a “nonstandard mortgage” with risky features into a more stable “standard mortgage” with a lower monthly payment. This option is meant to preserve access to streamlined refinancings.

The proposal would also implement the Dodd-Frank Act’s limits on prepayment penalties. The Fed is soliciting comment on the proposed rule until July 22, 2011. General rule-making authority for the Truth in Lending Act is scheduled to transfer to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011. So, the final rule will come from the CFPB rather than the Fed. 

Register MLOs By July 29

On Jan. 31, 2011, NCUA and the federal banking agencies announced that the Nationwide Mortgage Licensing System & Registry (NMLS) would begin accepting federal registrations from credit unions and banks that offer residential mortgage loans as required by the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).

Credit unions and their residential mortgage loan originators (MLOs) have until July 29, 2011, to complete initial registration on the new system. Remember that a mortgage loan originator under the SAFE Act is any employee who:

* Takes a residential mortgage loan application; and

* Offers or negotiates terms of a residential mortgage loan for compensation or gain.

After July 29, any MLO who hasn’t yet registered on the NMLS will be prohibited from originating residential mortgage loans without first meeting these requirements.

The NMLS website has a number of resources to help institutions and their MLOs with the registration process, including:

* Guides for financial institutions and MLOs to get started;

* Frequently asked questions; and

* Training workshops and online webinars.

Find all of these materials on the NMLS resource page at

ATM Signage Must Comply With Reg E

There have been several reports of attorneys examining ATMs around the country to see if the signage required by Regulation E is properly affixed to the machines. Improper or missing signage results in lawsuits filed against the ATM operator for violations of the regulation.

The Electronic Fund Transfers Act and Reg E require ATM operators that impose fees on consumers to provide notice that a fee will (or may) be imposed for providing electronic fund transfer (EFT) services or for a balance inquiry, and what the amount of the fee will be. The word “may” can only be used if there are circumstances when a fee won’t be imposed for these services.

ATM operators must post this notice in a prominent and conspicuous location on or at the ATM, and display the notice on the ATM screen or provide it on paper before the consumer is committed to paying it. 

The credit union may only impose a fee if the ATM user is provided the required notice and elects to continue the transaction or inquiry after receiving the notice (Regulation E, Section 205.16: Disclosures at automated teller machines).

Compliance Q&A

Q Can a credit union charge a fee for costs related to garnishment orders involving federal benefit payments?

A It depends. The interim final rule on the garnishment of federal payments prohibits a credit union from charging a garnishment fee against protected funds in an account. Protected payments under the rule include Social Security benefits, Supplemental Security Income benefits, Veterans Administration benefits, Federal Railroad Retirement benefits, and Federal Employee Retirement System benefits. The credit union cannot charge a fee for garnishment processing if the only funds available in an account are from protected payments. But the rule doesn’t prohibit the credit union from processing a fee against the unprotected funds that are in the account at the time. (CU Mag5/11, p. 52, “Garnishment rules and protections”).

Q Can a credit union designate a third-party service provider to act as the credit union’s account administrator on the Nationwide Mortgage Licensing System & Registry (NMLS)?

A No. Only a credit union employee can serve as an account administrator for purposes of compliance with the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). When creating an NMLS institution account, the credit union must identify two individuals as “NMLS Account Administrators.” These account administrators will have primary responsibility for the credit union’s account on NMLS, are authorized to speak to the NMLS Call Center on behalf of the credit union, and can set up additional sub-users for the institution’s account.

Q Does the credit union have to provide a negative information notice each time a member is late with a payment on the same loan account?

A No. The credit union doesn’t have to provide the notice each time a member is late with a payment on the same loan account. The Fair Credit Reporting Actonly requires that the credit union provide the negative information notice to the member prior to, or no later than, 30 days after furnishing the negative information to a nationwide consumer reporting agency. After providing the notice, the credit union may submit additional derogatory information to the credit bureau with respect to the same transaction, extension of credit, account, or individual without providing additional notice to the member.

Credit unions that provide the notice to members before furnishing the negative information to credit bureaus would disclose: “We may report information about your account to credit bureaus. Late payments, missed payments, or other defaults on your account may be reflected in your credit report.” Credit unions that provide the notice to members after furnishing the negative information to credit bureaus would disclose: “We have told a credit bureau about a late payment, missed payment, or other default on your account. This information may be reflected in your credit report.”

For more information, visit CUNA’s e-Guide to Federal Laws and Regulations at (select “regulations & compliance”).