Title 10--BANKS AND BANKING DEPARTMENT OF BANKING [ 10 PA. CODE CH. 46 ] Proper Conduct of Lending and Brokering in the Mortgage Loan Business [38 Pa.B. 6902]
[Saturday, December 20, 2008]The Department of Banking (Department), under its authority under 7 Pa.C.S. § 6138(a)(4) (relating to authority of department) and section 12 of the Consumer Discount Company Act (CDCA) (7 P. S. § 6212), adopts Chapter 46 (relating to the proper conduct of lending and brokering in the mortgage loan business) to read as set forth in Annex A.
Purpose of Final-Form Rulemaking
The Department is adopting these regulations because in the past decade the mortgage loan business has significantly increased in complexity and competitiveness, resulting in a drastically changed borrowing landscape. Unfortunately, because of this complexity and competitiveness, borrowers may not understand the loan products offered to them or the process of obtaining a loan. The Department also believes that there are individuals and entities in the mortgage loan business who take advantage of borrowers by placing them in loan products they are not reasonably capable of repaying. Therefore, the Department has adopted these regulations to govern the proper conduct of lending and brokering to persons and entities operating in the mortgage loan business under 7 Pa.C.S. Chapter 61 (relating to mortgage loan industry licensing and consumer protection) (Mortgage Act) and the Consumer Discount Company Act (7 P. S. §§ 6201--6219) (jointly referenced hereafter as the ''acts'').
Explanation of Final Regulatory Requirements
This final-form rulemaking provides rules for the proper conduct of lending and brokering in the mortgage loan business for licensee brokers and lenders under the Mortgage Act and all licensees under the CDCA.
Section 46.2(a) (relating to proper conduct of lending and brokering in the mortgage loan business) addresses licensee conduct when advertising by specifically prohibiting false or misleading advertising.
Section 46.2(b)--(f) requires licensees to issue a one-page disclosure form prescribed by the Department within 3 business days after the application is received or prepared by the licensee. The form will disclose: (1) if the lender providing the loan will escrow the applicable taxes and hazard insurance; (2) if the licensee is a lender with the ability to directly lock-in a loan interest rate; (3) whether the loan contains a variable interest rate or balloon payment feature; (4) whether the loan includes a prepayment penalty; and (5) whether the loan has a negative amortization feature. Licensees are also required to have applicants sign and date the disclosure form, retain the disclosure form for their records and reissue the disclosure form if the licensee knows or reasonably should know the initial disclosure form is inaccurate.
Section 46.2(g) requires licensees to perform an ability to repay analysis when offering a loan to applicants. Licensees must reasonably determine, based upon the documents and information provided, that an applicant will have the ability to repay the offered loan in accordance with the loan terms and conditions by final maturity at the fully indexed rate, assuming a fully amortized repayment schedule. Additionally, licensees: (1) are required to verify and document the income and the fixed expenses of the applicants; (2) are not permitted to primarily rely upon the sale or refinancing of the applicants' loan collateral to repay the loan; and (3) may not ignore facts or circumstances that it knows or reasonably should know would indicate that the applicant does not have the ability to repay the offered loan. Licensees are permitted to consider other factors in addition to income and fixed expenses when performing the ability to repay analysis and licensees are only required to verify and document the income that the applicant intends to rely upon in repaying the loan. Lastly, the subsection sets forth a presumption of ability to repay for certain loans and provides a framework for an analysis of loans with balloon payment features.
Section 46.2(h) exempts reverse mortgage products from certain regulation subsections that are inconsistent with the features of a reverse mortgage loan.
Section 46.2(i) addresses the continuing responsibility of licensees in performing the ability to repay analysis when there is a material change in facts or circumstances that a licensee knows or reasonably should know would substantially affect the applicant's ability to repay the offered loan.
Section 46.2(j) sets forth a series of loan transaction prohibitions addressing specific conduct of licensees that is prohibited.
Section 46.2(k) requires licensee lenders to fund closed loans and prohibits licensees from delaying or failing to fund a loan based upon postclosing underwriting or quality control. A licensee lender may refuse to fund a closed loan only if there is fraud committed by the applicant. In any administrative action brought by the Department under this subsection, a licensee may raise applicant fraud as an affirmative defense; however, the subsection does not relieve or limit the liability of a licensee against any claims of borrowers based upon a refusal or failure to fund a loan based upon an allegation of fraud.
Section 46.2(l) requires licensees, upon request, to provide an applicant or an authorized representative of the applicant with copies or originals of documents associated with the loan transaction, so long as the licensee is permitted to under State and Federal law and has the documents in its possession.
Section 46.2(m) requires a licensee that holds or services a loan to provide a borrower with pay-off statements or statements of mortgage reinstatement, as applicable, within 7 business days of a request by a borrower or authorized representative of the borrower.
Section 46.3 (relating to enforcement) provides that violations of the regulations are considered violations of the acts. The section also provides that if a loan is made in good faith in conformity with an interpretation of this chapter by the Department or the courts of the Commonwealth, no penalty for a violation shall apply, notwithstanding the relied upon interpretation may subsequently change.
Summary of Major Comments and Responses on the Proposed Rulemaking
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on July 5, 2007, the Department submitted a copy of the proposed rulemaking and a copy of the Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and the Chairperson of the House Commerce Committee and the Senate Committee on Banking and Insurance. A copy of this material is available to the public upon request. Notice of proposed rulemaking was published at 27 Pa.B. 3416 (July 21, 2007).
The Department received over 50 comments to the proposed regulations. The Department prepared a Comment and Response Document, a copy of which is available on the Department's web site at www.banking. state.pa.us. The following is a discussion of the major comments received during the public comment period.
Coverage of the Regulation Regarding Ssubsidiaries of Federal and State-chartered Banking Institutions.
Under the Mortgage Act, subsidiaries of Federal and State-chartered banks are statutorily exempted from coverage and, accordingly, from the regulation also. Under the CDCA, although the plain language does not exempt subsidiaries of Federal and State-chartered banks, the Department recognizes Federal preemption as a result of cases such as Watters v. Wachovia Bank, N.A., 550 U.S. 1, 127 S.Ct. 1559, 167 L.Ed.2d 389, 75 USLW 4167 (2007). Therefore, the Department will not enforce or administer the CDCA against entities that set forth a valid claim of Federal preemption. The Department also will not enforce or administer the CDCA against subsidiaries of State-chartered banks that have availed themselves of similar treatment through the parity provisions of section 201(c) of the Banking Code of 1965 (7 P. S. § 201(c)). The Department took the same position under precursors to the Mortgage Act, Chapter 3 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (63 P. S. §§ 456.101--456.524), and 7 Pa. Code Chapter 61 (relating to mortgage loan industry licensing and consumer protection).
As to affiliates of Federal and State-chartered banks, the Mortgage Act and the CDCA do not provide exemptions for the entities and the Department is not aware of any assertion or ruling of preemption regarding these entities. Therefore, the regulation will apply to the affiliates. The Department believes that the exclusion of these entities would seriously hinder the Department's efforts to address improper lending practices in this Commonwealth by creating a significant regulatory vacuum, which would lead to risk and exposure to borrowers in this Commonwealth. The Department is also concerned that by exempting affiliates, a relatively easy method for evasion of the regulation would be created and large lending entities which provide a great deal of borrowing services in this Commonwealth would become affiliates of banks to avoid the regulation. This would also create a competitive imbalance with licensees that would not be able to affiliate themselves with banks. Lastly, since all affiliates of Federal and State chartered banks are covered by the regulations, the Department does not believe that State affiliates are at any substantial disadvantage compared with Federal affiliates based on the regulation.
Necessity of the Ability to Repay Provisions of the Regulations.
Many commentators have asserted the ability to repay provisions are not needed because market conditions in the mortgage industry are correcting the deficiencies that the Department is primarily seeking to address, specifically, the practice of lenders and brokers providing mortgage loans to borrowers who did not have the ability to repay the loans they were given. The Department agrees that current mortgage market conditions have seriously restricted mortgage lending in the United States and, specifically, the use of stated income or no documentation loan products. The current market constrictions regarding these loan products are based in large part upon the dangerous lending and brokering practices that evolved over the last 10 years, in particular, the practice of ignoring whether borrowers have any reasonable ability to repay the loans they were offered. Indeed, the comments that market conditions are correcting for these unsound practices tacitly acknowledge that there were a great deal of imprudent decisions and improper conduct on the part of lenders, brokers and consumers in the mortgage loan arena. The past several months since the public comment period ended clearly highlight, in the most dramatic fashion, the excess and unsound practices in the mortgage industry that contributed to the current distress in the housing market and the economy as a whole.
The Department does not believe that the response to this crisis, and the harm caused, should be that of inaction. Instead, the Department believes that unless the practices of lending and brokering without regard to an applicant's ability to repay are addressed now, through responsible regulation, these practices will only return when market conditions permit. To ignore what has led up to the current crisis in the mortgage industry and hope that ''market corrections'' will instill in mortgage professionals a degree of prudence and responsibility in mortgage loan transactions would be unwise. In fact, it is the Department's belief that the regulations' ability to repay provisions will provide a future stabilizing force in the market by providing a degree of assurance to investors and lenders in the secondary market that licensees in this Commonwealth gave due consideration to an applicant's ability to repay the offered loan.
Effect of the Regulation on Stated Income and No Documentation Loan Products.
Many commentators have asserted that the requirement to verify income and fixed income expenses in the regulations will eliminate loan products such as stated income and no documentation loans, which are asserted to be useful and appropriate products. These commentators are correct that the verification requirements of the ability to repay provisions of the regulations will prohibit licensees from offering a loan without verifying the income and fixed expenses of applicants. The policy goal of the ability to repay provisions of the regulations is to ensure that licensees conduct a reasonable analysis of the borrower's financial situation to determine if the borrower has the ability to repay the offered loan. In drafting the provisions, two factors stood out as having the most direct impact on an applicant's ability to repay: income and fixed expenses. Because of the importance of these two factors, the regulations require their verification. As a result, a licensee's loan product that currently does not require a licensee to verify income and fixed expenses will be effectively prohibited. Therefore, although there may still be true ''no-doc'' and ''stated income'' product loans offered in this Commonwealth by entities not covered by the regulations, licensees will still be required to perform the verification requirements of the regulation which effectively eliminates the purpose of these loans. The Department believes that the convenience of these types of loans, even for those individuals who use the products appropriately, is far outweighed by the larger potential for abuse and the catastrophic harm caused to families who end up in homes they cannot afford and face serious credit risk as well as foreclosure when they are unable to make their loan payments.
On a related note, commentators have also in various comments mentioned ''low-documentation'' loans, a broad type of loan product that is purported to require minimal documentation. Under the regulations, these loans will also be affected to the extent that the minimal documentation loans do not include verification of income and fixed expenses. It should also be noted that if other information in addition to income and fixed expenses is considered as part of a licensee's analysis, under § 46.2(g)(4) of the final-form regulations, the other information must be documented by the licensee in the loan file. Therefore, it is possible that the documentation of additional information other than income and fixed expenses may require more documentation than certain lenders currently require for their loan products.
Stated Income and No Documentation Products and the Reasons for Foreclosures.
Commentators also have asserted that the main reasons for foreclosures continue to be traditional reasons such as the loss of a job, medical emergencies and divorce and that stated income or no documentation loans are not a problem or that there is no certainty that stated income or no documentation loan products are responsible for increased foreclosures. The Department recognizes that much has changed in the past several months since the time of the submission of these comments. It is now clear that the proliferation of loan products that were offered without any consideration of the borrowers' ability to repay was, and is, a substantial reason for foreclosures in the United States and the single most cited factor when discussing the collapse of the subprime mortgage market, which has had a cascading effect throughout the economy. The practice of providing loans without prudent underwriting was driven by the use of products such as stated income and no documentation loans. Borrowers, lenders, brokers and investors were able to manipulate and abuse stated income and no documentation products to the detriment of the entire country. While in limited circumstances these products may have been useful for certain borrowers, the Department believes that the potential for abuse outweighs any convenience the products offer. As discussed as follows, the Department does not believe the verification of the required factors presents a significant hurdle to borrowers or licensees.
Other Factors to Consider when Performing the Ability to Repay Analysis.
One commentator has questioned what other factors licensees may consider when performing an ability to repay analysis, other than income and fixed expenses. Section 46.2(g)(4) was drafted to give licensees flexibility in considering factors other than income and fixed expenses when performing an ability to repay analysis. This provision is intended to permit licensees to document information in addition to income and fixed expenses such as: payment history, family gifts, noncollateral assets, seasonal business considerations, business history with lender/broker, new job start date, job relocations, and the like. So long as the other considerations are reasonably related to an applicant's ability to repay and documented by the licensee, so that the Department can review the analysis, licensees may consider the additional information.
As a corollary to this comment, many commentators have stated that under the ability to repay provision, certain factors now considered when offering a loan will no longer be able to be utilized, such as payment history, seasonal income and the averaging of income for seasonal or commissioned workers. To the contrary, all of those factors may be considered when assessing the applicant's reasonable ability to repay the loan being offered by the licensee. Initially, it should be noted that the new definition of ''income'' includes virtually any income that an applicant may receive, whether or not it is seasonal, commissioned, rent payments, and the like. The Department believes that in analyzing the income that an applicant receives, a licensee is entirely justified in also considering additional factors such as the seasonal nature of the income, debt payment history, commission history, and if used prudently, census and wage information by profession to anticipate reasonable increases of income over time. However, licensees must be able to articulate the reasoning and basis for the use of the other information to the Department and how it was used when considering the applicant's ability to repay.
Summary of Major Changes from the Proposed Rulemaking
Authority:
The regulations are being promulgated under the Department's authority under 7 Pa.C.S. § 6138(a)(4)) and section 12 of the CDCA. The regulations began the promulgation process under the Department's authority under section 310(a) of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (63 P. S. § 456.310(a)) (MBBCEPA), section 16(1) of the Secondary Mortgage Loan Act (7 P. S. § 6616(1)) (SMLA) and section 12 of the CDCA. However, with the passage of the Mortgage Act, the provisions of Chapter 3 of the MBBCEPA were combined with the provisions of the SMLA, creating a single consolidated act that regulates the mortgage loan business in this Commonwealth. The Mortgage Act became effective on November 5, 2008, at which time Chapter 3 of the MBBCEPA and the SMLA were repealed by operation of law.
§ 46.1:
Section 46.1 was revised to include the following definitions: ''balloon payment,'' ''debt obligation,'' ''fixed expenses,'' ''fully amortized payment schedule,'' ''fully indexed rate,'' ''hazard insurance,'' ''index rate,'' ''material change,'' ''Mortgage Act,'' ''mortgage loan,'' ''margin,'' ''property taxes,'' ''reverse mortgage and variable rate loan.'' The definitions for ''first mortgage loan,'' ''MBBCEPA,'' ''secondary mortgage loan'' and ''SMLA'' were deleted as a result of the passage of the Mortgage Act.
§ 46.2(b)--(d):
Section 46.2(b)--(d) sets forth the requirements for issuing a one-page disclosure form provided by the Department. These sections were revised and are now § 46.2(b)--(f) in the final-form regulation. The final-form regulation clarifies who must deliver the disclosure statement, the timing of the issuance of the disclosure by the licensee and the requirements relating to the applicant's signature. The revised scheme also clarifies that a licensee broker, who would otherwise be required to issue the disclosure form, may defer the issuance of the form to a lender, provided that the lender issues the form in accordance with the regulation.
§ 46.2(e):
The proposed regulation's ability to repay analysis requirements were revised and are now § 46.2(g)--(i) in the final-form regulation. Revisions include the following:
(1) Definitions were drafted for ''balloon payment,'' ''debt obligation,'' ''fixed expenses,'' ''fully amortized payment schedule,'' ''fully indexed rate,'' ''hazard insurance,'' ''index rate,'' ''material change,'' ''margin,'' ''property taxes,'' ''reverse mortgage'' and ''variable rate loan.'' See § 46.1.
(2) Licensees are only required to verify the income that the applicant is going to rely upon to pay back the loan. See § 46.2(g)(3).
(3) A presumption of ability to repay was included for loans that are insured by the Federal Housing Authority, guaranteed by the United States Department of Veterans Affairs, originated or approved for purchase by the Housing Finance Agency or subject to a written finding by a United States Department of Housing and Urban Development approved counseling agency that there is a reasonable expectation of the ability to repay. See § 46.2(g)(8).
(4) Additional guidance relating to an ability to repay analysis with loans that have a balloon payment feature and reverse mortgage loans. See § 46.2(g)(9) and (h).
(5) Clarification of the licensee's continuing obligation under the ability to repay provisions. See § 46.2(i).
§ 46.2(f):
The loan transition prohibitions contained in the proposed regulation under § 46.2(f) are now set forth in § 46.2(j) in the final-form regulation. Based upon comments received, the Department removed from the final-form regulation § 46.2(f)(10) and (12), regarding to charging fees for legally required notices and the rendering of legal advice.
§ 46.2(g):
Section 46.2(g) of the proposed regulation addressed loan funding by licensee lenders. Loan funding is now addressed in § 46.2(k) in the final-form regulation. Section 46.2(k) was revised to provide an exception to the funding requirement in cases when the applicant has committed fraud upon the licensee lender. However, any claim of fraud must be raised as an affirmative defense by the licensee in any administrative action brought by the Department and claiming fraud under this subsection does not relieve the licensee of any liability from borrower claims.
§ 46.2(h):
Section 46.2(h) of the proposed regulation is now § 46.2(l) in the final-form regulation. The subsection was revised to require licensee compliance when the applicant requests the documents and if the licensee has the requested documents in its possession.
§ 46.2(i):
Section 46.2(i) of the proposed regulation is now § 46.2(m) in the final-form regulation. This subsection was revised to only cover a licensee lender who holds or services the applicant's loan.
§ 46.3:
The final-form regulation adds an additional provision to § 46.3 relating to the interpretation of the chapter. The provision provides that if a loan is made in good faith in conformity with an interpretation of this chapter by the Department or the courts of this Commonwealth, no penalty for a violation of this chapter shall apply, notwithstanding the relied upon interpretation subsequently may change.
Entities Affected
Existing and future licensee brokers and lenders under the Mortgage Act and all licensees under the CDCA will be affected by the final-form rulemaking.
Costs and Paperwork Requirements
The final-form rulemaking will have no fiscal impact on the Department, the Commonwealth and its political subdivisions. The final-form rulemaking will fiscally impact licensees under the acts to the extent licensees may need to incur costs to alter or revise current business practices to comply with the regulations.
Effectiveness/Sunset Date
Section 46.2(b)--(i) of the final-form rulemaking will be effective March 20, 2009. All remaining provisions of the rulemaking will be effective immediately upon publication in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act, on July 5, 2007, the Department submitted a copy of the proposed rulemaking and a copy of the Regulatory Analysis Form to the Independent Regulatory Review Commission (IRRC) and the Chairpersons of the House Committee on Commerce and the Senate Committee on Banking and Insurance (Committees). A copy of this material is available to the public upon request.
Under section 5(c) of the Regulatory Review Act, IRRC and the Committees were provided with copies of the comments received by the Department during the public comment period. In preparing the final-form rulemaking, the Department has considered all comments from IRRC, the Committees and the public.
Under section 5.1(j.2) of the Regulatory Review Act (71 P. S. § 745.5a(j.2)), on November 5, 2008, the final-form rulemaking was deemed approved by the House and Senate Committees. Under section 5.1(e) of the Regulatory Review Act (71 P. S. § 745.5a(e)), IRRC met on November 6, 2008, and approved the final-form rulemaking.
Findings
The Department finds that:
(1) Public notice of proposed rulemaking was given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) A public comment period was provided as required by law, and all comments received during the public comment period were considered.
(3) The regulations do not enlarge the purpose of the proposed rulemaking published at 37 Pa.B. 3416.
(4) The final-form rulemaking is necessary and appropriate for the administration and enforcement of the acts.
Order
The Department, acting under the acts, orders that:
(a) The regulations of the Department, 10 Pa. Code, are amended by adding §§ 46.1--46.3 to read as set forth in Annex A.
(b) The Secretary of Banking shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for review and approval as to legality and form, as required by law.
(c) The Secretary of Banking shall submit this order and Annex A to IRRC and the Senate and House Committees as required by the Regulatory Review Act.
(d) The Secretary of Banking shall certify this order and Annex A and deposit them with the Legislative Reference Bureau, as required by law.
(e) Section 46.2(b)--(i) will be effective March 20, 2009. The remaining provisions shall take effect immediately upon publication in the Pennsylvania Bulletin.
STEVEN KAPLAN,
Secretary(Editor's Note: For the text of the order of the Independent Regulatory Review Commission relating to this document, see 38 Pa.B. 6429 (November 22, 2008).)
Fiscal Note: Fiscal Note 3-43 remains valid for the final adoption of the subject regulations.
Annex A TITLE 10. BANKS AND BANKING PART IV. BUREAU OF CONSUMER CREDIT AGENCIES CHAPTER 46. PROPER CONDUCT OF LENDING AND BROKERING IN THE MORTGAGE LOAN BUSINESS Sec.
46.1. Definitions. 46.2. Proper conduct of lending and brokering in the mortgage loan business. 46.3. Enforcement. § 46.1. Definitions.
The following words and terms, when used in this chapter, have the following meanings, unless the context clearly indicates otherwise:
Advertising--As defined in 12 CFR 226.2(a)(2) (relating to definitions and rules of construction).
Applicant--A person who submits an application for a loan.
Application--As defined in 24 CFR 3500.2(b) (relating to definitions).
Balloon payment--A scheduled loan payment that is more than twice as large as the average of earlier scheduled monthly payments.
CDCA--The Consumer Discount Company Act (7 P. S. §§ 6201--6219).
Consummation--As defined in 12 CFR 226.2(a)(13).
Covered loan--A covered loan as defined in section 503 of the Mortgage Bankers and Brokers and Consumer Equity Protection Act (63 P. S. § 456.503).
Debt obligation--Any amount owed for funds borrowed including interest requirements.
Fixed expenses--Any debt obligations, revolving charge accounts, alimony payments, child support payments, payments under a separate maintenance agreement, housing association fees and property taxes and hazard insurance on the property to be mortgaged, whether or not the property taxes and hazard insurance are required to be escrowed.
Fully amortized payment schedule--An amortizing payment schedule based on the term of the loan.
Fully indexed rate--The index rate plus the margin for the offered loan.
Hazard insurance--Insurance that covers property damage caused by fire, wind, storms and other similar risks.
Income--Gross income as defined in 26 U.S.C. § 61 (relating to definitions).
Index rate--A published interest rate to which the interest rate on a variable rate loan is tied.
Licensee--A licensee broker or lender under the Mortgage Act or CDCA or a partially exempt entity under the Mortgage Act.
Loan--
(i) A mortgage loan or a loan involving a mortgage by a licensee under the CDCA, or both, as the context may require.
(ii) The term does not include a covered loan.
Material change--A change of fact or circumstance that the licensee knows or reasonably should know would substantially affect an applicant's ability to repay the offered loan, including an increase in the interest rate which would require a disclosure under 12 CFR 226.17(f)(2) (relating to general disclosure requirements).
Margin--The number of percentage points a lender adds to the index rate to calculate the interest rate at each adjustment period on variable rate loans.
Mortgage Act--7 Pa.C.S. §§ 6101--6153 (relating to mortgage loan industry licensing and consumer protection).
Mortgage loan--As defined in section 6102 of the Mortgage Act (relating to definitions).
Mortgage loan business--The mortgage loan business as defined in section 6102 of the Mortgage Act and any kind of mortgage lending or brokering activity conducted by a licensee under the CDCA.
Person--A person as defined in section 6102 of the Mortgage Act and section 2 of the CDCA (7 P. S. § 6202), as applicable.
Property taxes--The taxes assessed, or a reasonable estimate of the taxes to be assessed, on the property being mortgaged based upon the full value of the property and any improvements thereon.
Reverse mortgage--A loan that is a reverse mortgage transaction as defined in 12 CFR 226.33(a) (relating to requirements for reverse mortgages).
Variable rate loan--A loan where the interest rate varies over the term of the loan.
§ 46.2. Proper conduct of lending and brokering in the mortgage loan business.
(a) Advertising. A licensee may not engage in false or misleading advertising.
(b) Disclosures to applicant. On a form prescribed by the Department, a licensee who takes an application shall disclose the following to the applicant:
(1) If the lender providing the loan will escrow the applicable property taxes and hazard insurance.
(2) If the licensee is a lender with the ability to directly lock-in a loan interest rate.
(3) Whether the loan contains a variable interest rate or balloon payment feature.
(4) Whether the loan includes a prepayment penalty.
(5) Whether the loan has a negative amortization feature.
(c) Timing and issuance of disclosure form. A licensee issuing the disclosure form required by subsection (b) shall sign and date the disclosure form and deliver or place in the mail the disclosure form within 3 business days after the application is received or prepared by the licensee.
(d) Required redisclosures. A licensee who has issued the disclosure form required by subsection (b) shall issue an updated disclosure form at the time the licensee knows or reasonably should know that the initial disclosure form is inaccurate.
(e) Applicant acknowledgment and retention of disclosure form. A licensee shall require an applicant to sign and date the disclosure form required by subsections (b) and (d) within 10 business days after delivery or mailing and retain the original executed disclosure form in the applicant's loan file.
(f) Duplication. A licensee broker taking an application is not required to provide the disclosure form required by subsections (b) and (d) if the lender making the loan elects to provide the required disclosure form in accordance with this section.
(g) Evaluation of applicant ability to repay.
(1) A licensee may not offer a loan without having reasonably determined, based on the documents and information provided under this subsection, that the applicant will have the ability to repay the loan in accordance with the loan terms and conditions by final maturity at the fully indexed rate, assuming a fully amortized repayment schedule.
(2) In performing an analysis to determine whether an applicant will have the ability to repay an offered loan, a licensee shall consider, verify and document:
(i) The income of the applicant.
(ii) The fixed expenses of the applicant.
(3) When performing the income verification required by paragraph (2), a licensee is only required to verify the income that the applicant chooses to rely upon to repay the offered loan.
(4) In performing an evaluation of an applicant's ability to repay, a licensee may consider and document supplemental information provided by the applicant in addition to income that demonstrates that the applicant has the ability to repay the offered loan, provided that the supplemental information is reasonably related to an applicant's ability to repay.
(5) A licensee may not primarily rely upon the sale or refinancing of an applicant's collateral in determining an applicant's ability to repay an offered loan.
(6) All records, worksheets and supporting documentation used in the licensee's ability to repay analysis shall be maintained in the applicant's loan file.
(7) In determining an applicant's ability to repay an offered loan under this subsection, a licensee may not ignore facts or circumstances that it knows or reasonably should know which would indicate that an applicant does not have the ability to repay the offered loan.
(8) An applicant may be presumed to have the ability to repay an offered loan if the offered loan has one of the following characteristics:
(i) Is insured by the Federal Housing Administration.
(ii) Is guaranteed by the United States Department of Veterans Affairs.
(iii) Is originated or approved for purchase by the Pennsylvania Housing Finance Agency.
(iv) Is the subject of a written finding by a United States Department of Housing and Urban Development approved counseling agency that there is a reasonable expectation that the borrower will be able to repay the offered loan.
(9) For an offered loan with a balloon payment, a licensee:
(i) May consider the sale or refinance of the applicant's collateral when evaluating an applicant's ability to make the balloon payment.
(ii) Shall base the fully amortized payment schedule on the full term the borrower chooses when calculating the amortization period for a loan containing a borrower option for an extended amortization period.
(iii) Shall consider the due date of the balloon payment and if there is a reasonable expectation the applicant will have sufficient equity in the property to make the balloon payment through a sale or refinance of the residence.
(h) Reverse mortgages. A licensee offering or making a reverse mortgage to an applicant is not required to comply with subsections (b), (g), (i) and (j)(3).
(i) Material changes and ability to repay. If there is a material change after a licensee has performed the ability to repay calculation required by subsection (g), a licensee shall immediately:
(1) Send a notice to the applicant disclosing the material change and that the material change may affect the applicant's ability to repay the offered loan, if the licensee is a broker.
(2) Perform another ability to repay analysis in accordance with subsection (g), if the licensee is a lender.
(j) Loan transaction prohibitions. A licensee may not:
(1) Advise or imply to an applicant that the applicant's income is not relevant to the loan transaction.
(2) Recommend or imply that an applicant default on any existing contract or financial obligation.
(3) Advise or induce an applicant to refinance an existing loan or otherwise enter into a new financial obligation without performing the ability to repay analysis required by subsection (g).
(4) Offer to the applicant a covered loan without advising the applicant that the applicant qualifies for a loan other than a covered loan, if an applicant qualifies for a loan offered by the licensee.
(5) Advise or imply that an applicant should ignore any required disclosures or suggest that a document or the execution of any document is unimportant or of no consequence.
(6) Direct, encourage, permit or otherwise be involved with the improper execution of any document, including:
(i) Requesting or allowing an applicant to sign documents that contain blank spaces where material information regarding the loan transaction is required.
(ii) Permitting the execution of documents where signatures are required to be witnessed without the witnesses being physically present.
(iii) Permitting someone other than the required signatory to execute a document unless otherwise authorized by law.
(7) Knowingly submit or permit or encourage an applicant or third party to submit, false or misleading information, or information that the licensee reasonably should know is false or misleading, to any party to a loan transaction.
(8) Improperly influence, or attempt to improperly influence:
(i) An appraiser by committing any act or omission that is intended to:
(A) Compromise the independent judgment of an appraiser.
(B) Ensure that an appraisal matches a requested or target value.
(ii) Any other entity related to the mortgage loan business, such as notaries, title companies, real estate agents, builders and sellers of properties.
(9) Obtain hazard insurance required for a loan for an applicant at loan consummation without providing the applicant with the opportunity to secure or provide evidence of the applicant's own hazard insurance.
(10) Pay compensation to or receive compensation from, contract with, or employ any person engaged in the mortgage loan business who is not licensed or otherwise exempt from licensure.
(k) Loan funding.
(1) A licensee lender may not refuse or fail to fund a consummated loan, other than when an applicant rescinds the loan in accordance with 12 CFR 226.15 or 226.23 (relating to the right of rescission), as applicable except as provided in paragraph (4).
(2) A licensee lender shall fund a consummated loan in a reasonable time period after consummation of the loan or in accordance with any commitment or agreement with the applicant; provided that, if an applicant has a right of rescission under 12 CFR 226.15 or 226.23, a licensee lender is not required to fund a consummated loan in accordance with this subsection until after the applicable rescission period has ended.
(3) A licensee shall disburse loan funds to third parties in accordance with any commitment or agreement with the applicant.
(4) Any postclosing underwriting or quality control review conducted by a licensee lender after the consummation of a loan may not delay the funding of a loan or result in a failure or refusal to fund the loan in accordance with this subsection unless the applicant has committed fraud against the licensee, which may be raised as an affirmative defense in any proceeding brought by the Department based upon a violation of this subsection.
(5) Nothing in this subsection relieves or limits the liability of a licensee against a claim of a borrower based upon a licensee's refusal or failure to fund a loan based upon an allegation of consumer fraud.
(l) Licensee responsibility to provide documents. Upon request, a licensee shall provide to an applicant or authorized representative of an applicant, unless prohibited by Federal or State law, copies or originals of the documents associated with a loan that an applicant has paid for or signed, such as loan applications, appraisals, surveys, loan documents, disclosures and any fee agreement executed by the applicant and the licensee, to the extent the documents are in the licensee's possession.
(m) Payoff statement or statement of mortgage reinstatement. A licensee lender that holds or services a loan shall provide a borrower with payoff statements or statements of mortgage reinstatement, as applicable, for the borrower's loan within 7 business days of receipt of a written request by a borrower or a person authorized by the borrower.
§ 46.3. Enforcement.
(a) Violations. Violations of this chapter shall be violations of the Mortgage Act and CDCA, as applicable.
(b) Interpretation of chapter. If a loan is made in good faith in conformity with an interpretation of this chapter by the Department or the courts of this Commonwealth, a penalty for a violation of this chapter will not apply, notwithstanding that after the loan is consummated, the interpretation, rule or regulation is amended, rescinded or determined by a judicial or other authority to be invalid for any reason.
[Pa.B. Doc. No. 08-2285. Filed for public inspection December 19, 2008, 9:00 a.m.]
