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Wall Street Reform

Dodd-Frank Wall Street Reform and Consumer Protection Act (Wall Street Reform Act) was enacted into law July 21, 2010. Among other provisions, Title XIV of the Wall Street Reform Act amends TILA to establish mortgage loan origination standards. (HR4173, 2009) Included is a provision termed Restoring American Financial Stability Act of 2010.

After the mortgage industry’s secondary market crash in 2007, it was obvious there was a major problem with the flow of mortgages into Wall Street’s securities market. The government agencies that were in place for market integrity failed.

This legislation amends TILA with Title XIV of the Wall Street Reform Act. It establishes certain mortgage loan origination standards. Section 1403 of the Wall Street Reform Act creates new TILA Section 129B(c), which imposes restrictions on loan originator compensation and on steering by MLOs. This section was open for commentary, but has seen little change or clarification for the mortgage industry advocates. Although this legislation is similar to FRB’s rules, this provision further codifies and expands some aspects of TILA reform.

Wall Street Reform Act added key points or clarifications to TILA legislation:

Prohibits acts or practices that are unfair to the consumer
Prohibits abusive refinancing practices not in the borrower’s best interest (such as churning)
Prohibits MLO from receiving compensation on the loan from both the YSP and the consumer
Compensation from the consumer includes no upfront payment to the lender for points or fees on the loan other than true third party fees such as the credit report.
Apply to residential mortgage loans, which includes closed-end (like TILA Reform), but exclude open-ended credit such as HELOCs.
With this definition, it does not apply to real estate transactions that do not include a dwelling. Such as commercial property lending.
Excludes certain persons and entities that originate loans. Creditors that provide seller financing for properties that the originator owns.
Apply to Originators who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or gain.

Safe Harbor Provision

In an attempt to clarify the steering provision, the Board established a Safe Harbor Provision. This requires the MLO to give the consumer three choices for the transaction. Allowing the consumer a choice:

The lowest interest rate
The second lowest interest rate (possibly using discount points)
The lowest settlement costs (using YSP to offset upfront closing costs)

With the current MLO compensation plans being rolled out over the last weeks, the use of YSP flexibility will be minimal to meet this Safe Harbor Provision. It seems that MLOs will be given a rate with little or no ability to change. Will the underwriter or secondary market staff take over the actual locking of the loans? How will MLOs meet the Safe Harbor provisions without flexibility in loan pricing?

The MLO is considered to have met the anti-steering provision if the MLO has presented the consumer with loan options that provide:

The lowest interest rate
No risky features, such as a prepayment penalty, negative amortization, or a balloon payment in the first 7 years; and
The lowest total dollar amount for origination points or fees and discount points

A surprise to this legislation was in the definition of loan originator. It included correspondent mortgage brokers who lost their ‘table fund’ protection. Wholesale lenders that offered mortgage brokers the opportunity to fund loans in their own name, allowed them to not disclose the back-side pricing. The check (or wire) on the table was often the wholesale lender’s as the loan was purchased on the closing table.

Normal secondary market transactions purchases the loan after the loan was funded and recorded. To keep the secondary market definition, the loan may need to be funded and recorded prior to the sale of the Note.

Works Cited

Board, B. o. (2009, Aug 26). 74 FR 43232.

Board, B. o. (2010). Final rule;official staff commentary. In R. Z, & D. N. R-1366.

HR4173. (2009). Retrieved from Thomas Library.

By Linda Mae Williams
Mortgage Industry Expert Witness
ABOUT THE AUTHOR: Linda M Williams
Author of The Secret of Mortgage Lending Success, the Mortgage Lending Series, and Mortgage Loan Basics. Self-published reference and information books for Introduction to Mortgage Lending and Processing Manual covering government and conventional mortgage loan processing. Books are used in college courses offered by Community College of So. NV and previously by Arizona School of Real Estate and Business.

Copyright Linda Mae Williams

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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