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CUSO DEVELOPMENT COMPANY, LLC - PREDATORY LENDING POLICY
Predatory "loan" generally refers to a loan that takes financial advantage of an unsophisticated borrower who has accumulated equity in his or her home, but who may be unable to repay the obligation. CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC has identified the following items are indicators of Predatory Lending.
a) Excessive points and fees
b) Excessive interest rates or annual percentage rates (APRs)
c) Prepayment penalties
d) "Packing" of fees or other charges, such as single-premium credit life insurance, into the principal amount of the loan
e) Mandatory arbitration clauses that require the borrower to assert claims or defenses in a non-judicial forum
f) Balloon payments, which are payments, usually payable at maturity, that can be more than twice as large as the average amount of the previously scheduled regular payments
g) Negative amortization, which occurs when the amount of the borrower's minimum payment is insufficient to cover the full amount of interest due. The accrued but unpaid interest is added to the outstanding principal balance of the loan
h) Loan "flipping," or the frequent refinancing of a loan without a tangible net benefit to the borrower
i) Asset-based lending (i.e., making loans to borrowers without regard to their ability to repay the loans and with the expectation of foreclosing on the property securing the loans)
We are proud of our standards towards making credit accessible to the underserved markets, helping members gain a fresh financial start, realize a dream and make homeownership a reality.
We have mandated that our income from any given loan does not exceed the 3% guideline that has been suggested by HOEPA. This limit of points will include origination, discount points and yield spread. The only exception to this mandate is that (at the borrower's request), closing costs can be paid from the use of yield spread, origination and/or discount points. This is to assist the member in decreasing the up-front cost that they may require to close their loan. The member will sign a disclosure to this payment arrangement. CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC believes in full disclosure to the member and that our company is delivering the best service/price to the member.
Providing members with a copy of their credit report in their Early Disclosure Package along with a brochure explaining credit scores and how members can ensure their credit information is accurate.
CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC provides clear and timely disclosure of loan terms and conditions. We will not tolerate misrepresentation of the terms and conditions of a loan and strives to ensure that our members are fully informed about the transaction they are considering. To achieve this goal, our Early Disclosure Package is automated to avoid manual processing errors, and centrally generated to ensure the package is sent to the applicants within three business days from when their loan application is received.
In addition, CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC voluntarily provides members with disclosures not required under any federal or state law. Below is a list of these disclosures.
- Understanding Your Options Regarding Interest Rates and Discount Points. Illustrates the relationship between interest rate and discount points and explains to members their options regarding interest rate and discount points.
- Consumer Caution and Home Ownership Counseling Notice. Explains the risks of borrowing against one's home; advises members that better terms may be available and encourages them to shop for a loan with other lenders before completing a loan transaction with us; encourages members to consult a third-party, HUD-certified credit counselor and provides a toll-free number to locate such a counselor.
APPLICABLE FEDERAL AND STATE ANTI-PREDATORY LENDING LAWS WITH ASSIGNEE LIABILITY AND VALIDITY OF LOAN CONSEQUENCES
The Truth-in-Lending Act
The Truth-in-Lending Act (2) (TILA) is a federal consumer protection statute intended to ensure that creditors accurately disclose the costs and terms of credit transactions to enable consumers to make informed decisions regarding the credit that they obtain. TILA is a potent law, because a violation of the statute by an originator may result in civil liability for assignees and/or a continuing right of the borrower to rescind the transaction, even after the loan has been purchased in the secondary market. This liability and/or exposure to the borrower's extended right of rescission usually arises from the originator's failure to provide certain "material" TILA disclosures to the borrower that were accurate beyond the permitted tolerances. These material disclosures include the required disclosures of the APR, the finance charge, the amount financed, the total number of payments, and the payment schedule. (3)
Civil liability
A violation of TILA may subject the originator of the loan to civil liability of $2,000, in the case of an individual transaction, or the lesser of: a) $500,000; or b) one percent of the creditor's net worth in the case of a class action, as well as actual damages, (4) court costs, and attorneys' fees. An assignee of the loan will also be liable where the assignment is voluntary (5) and the violation "is apparent on the face of the disclosure statement." (6) A violation is apparent on the face of the document if:
a) the disclosure can be determined to be incomplete or in accurate from a comparison of the TILA disclosure statement, any itemization of the amount financed, the promissory note, or the HUD-1 settlement statement; or
b) The TILA disclosure statement does not use the terms or format required by the statute.
Under TILA, the statute of limitations for bringing a civil action against a creditor or assignee is one year from the date the violation occurred. However, private plaintiffs are not precluded under this provision from asserting a TILA violation in a creditor/assignee action to collect a debt that was brought more than one year from the date the violation occurred as a matter of defense by recoupment or set-off in such action, except as otherwise provided under state law. (7) Some state laws, however, limit the use of TILA claims as defenses or counterclaims.
Loan rescission
In addition to civil liability, in a non-purchase money transaction in which a security interest is or will be retained or acquired in a consumer's principal dwelling, TILA gives each consumer whose ownership interest is or will be subject to the security interest the right to rescind the transaction. This right of rescission may be exercised against both the originator of the loan and any subsequent assignees, including trustees in securitizations.
The period within which the consumer may exercise the right to rescind runs for three business days from the last to occur of three events:
a) Consummation of the transaction
b) Delivery of all material disclosures
c) Delivery to the consumer of the required rescission notice
When the creditor has failed to take the action necessary to start the three-business-day rescission period running, or has made a material disclosure error such as understating the finance charges beyond the permitted tolerance, the right to rescind will automatically lapse on the occurrence of the earliest of the following three events:
a) The expiration of three years after consummation of the transaction
b) Transfer of all of the consumer's interest in the property
c) The sale of the consumer's interest in the property, including a transaction in which the consumer sells the dwelling and takes back a purchase money note and mortgage or retains legal title through a device such as an installment sale contract
HOEPA
The Home Ownership and Equity Protection Act of 1994 (8) (HOEPA) amended TILA in an effort to directly address predatory lending practices by regulating certain loan terms and disclosures in "high-cost" home loans. HOEPA is the primary federal anti-predatory lending law.
As a threshold matter, HOEPA defines a "high-cost home loan" as a closed-end loan secured by a consumer's principal dwelling in which either:
a) The APR at consummation will exceed by more than eight percentage points for first-lien loans or by more than ten percentage points for subordinate-lien loans, the yield on Treasury securities having comparable periods of maturity to the loan maturity as of the 15th day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or
b) The total points and fees (9) payable by the consumer at or before loan closing exceed the greater of 8% of the total loan amount (10) or $400. (11)
High-cost home loans do not include purchase money and construction mortgages; "open-end" transactions, such as home equity credit lines; and "reverse mortgages."
HOEPA provides that in addition to the other penalties available under TILA, a material failure to comply with requirements of the law exposes the originator to potential civil liability in an amount equal to all finance charges and fees paid by the consumer. Significantly, HOEPA makes an assignee of a high-cost mortgage subject to all claims and defenses to loan payment, whether under TILA or other law, that could be asserted by the borrower (whether or not arising out of the high-cost mortgage statute), unless the assignee did not know and could not, with reasonable diligence, have known that the loan was a high-cost mortgage.
Although the assignee liability is capped, the cap is the sum of:
a) All remaining indebtedness (including principal); and
b) The total amount paid by the borrower (including principal and interest), whether or not paid prior to the transfer of the loan to the assignee.
A violation of HOEPA itself is not a prerequisite for exposing the assignee to all of these possible other claims. Further, because by definition, HOEPA transactions are non-purchase money loans, any material violation of the statute could expose both the originator and assignee to the borrower's right to rescind the loan.
State, County, and Municipal Anti-Predatory Lending Statutes and Ordinances
HOEPA provides only a regulatory "floor" and does not preempt state laws that attempt to regulate predatory lending. Even after HOEPA was enacted in October 1995, lending abuses continued in the sub-prime market. Accordingly, an increasing number of states and local jurisdictions have decided to address the issue by enacting their own anti-predatory lending laws. These state and local laws may cover more types of loans than HOEPA, contain lower trigger thresholds, impose more restrictions on high-cost loans, and provide for more stringent penalties. North Carolina passed the first of these statutes in 1999.
Under the North Carolina law, a high-cost home loan is defined to include loans, other than reverse mortgage loans, that meet all of the following characteristics:
a) The principal amount does not exceed the lesser of the FNMA/Freddie Mac conforming loan size limit for a single-family dwelling or $417,000;
b) The borrower is a natural person and the debt is incurred primarily for personal, family, or household purposes;
c) The loan is secured by either a security interest in a manufactured home or a mortgage or deed of trust in real property upon which is located a structure designed principally for occupancy by one-to-four families, either of which must be occupied or will be occupied by the borrower as his or her principal dwelling;
d) The loan meets any one of the following three thresholds:
i) The APR exceeds by more than 8% for first lien loans and by more than 10% for junior liens, the yield on current Treasury securities which have an equivalent term as the mortgage loan; (13) or
ii) The total "points and fees" payable by the borrower at or before closing exceed:
A) 5% of the total loan amount for loans of $20,000 or more; or
B) The lesser of 8% of the total loan amount or $1,000 for loans of less than $20,000; or
iii) The loan documents permit the lender to charge or collect prepayment penalties more than 30 months after the loan closing; or the prepayment penalties exceed, in the aggregate, more than 2% of the amount prepaid. (14)
Note that unlike HOEPA, purchase money loans and open-end loans (15) are high-cost home loans if they meet the requisite definitional provisions.
Other noteworthy amendments to GAFLA included the:
a) Elimination of the category of a "covered loan";
b) Exclusion of more fees from the points and fees calculation such as the exclusion of bona fide points paid to a federal or state governmental agency that insures some part of the loan
c) Conforming of the definition of "annual percentage rate" and "total loan amount" to the federal TILA
d) Clarification that insurance premiums paid on a monthly basis will not be considered financed
e) Addition of a "knowing and intentional" standard to GAFLA's anti-flipping provision
f) Provision that state-chartered financial institutions will enjoy preemption from GAFLA's provisions to the same extent as federally chartered institutions
g) Explicit authorization for the Department of Banking and Finance to promulgate rules and regulations under GAFLA
In addition to compliance with the various federal, state, and local laws, the loans should also be analyzed for indication of potential predatory lending issues. Our guidelines address such issues as:
a) Excessive points and fees
b) Excessive interest rates or APRs
c) Minimum acceptable borrower credit profiles
d) Prepayment penalties
e) Single-premium credit insurance
f) Fair loan terms, including negative amortization, reverse mortgage payments, mandatory arbitration clauses, or interest rate increases triggered by a borrower's default
g) High debt-to-income ratios (particularly for fixed-income borrowers)
h) Recent or frequent refinancing which can be an indication of loan "flipping"
i) Refinancing without any apparent benefit to the borrower
Corporate-Level Due Diligence
In addition to conducting loan-level due diligence, CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC conducts extensive "operational" reviews of originators from whom the company purchases loans, provides financing, and underwrites third-party securitizations in order to ensure that it does not transact business with predatory lenders. Such an operational review should feature, among other things, a comprehensive analysis of the originators (or seller's):
a) Company history and management experience
b) Financial information
c) Corporate records/minutes
d) Underwriting guidelines
e) Loan-origination process and system-underwriting process including any best-practices procedures
f) Identification and compliance, and corporate policies and procedures with respect to HOEPA and state and local anti-predatory lending requirements
g) Appraisal policies
h) Compliance staffing
i) Employee training procedures including the process of updating corporate policy
j) Loan products offered, and any possible indicia of predatory lending, focusing on
i) single-premium credit insurance policies;
ii) product offerings for loans that fall under HOEPA or any state or local predatory lending statutes, rules, or regulations, paying particular attention to stated income loans, loans without verification of income and of assets, and loans with negative amortization or balloon features;
iii) Products with unusual prepayment penalties;
iv) Products with unusually high debt-to-income ratios; and
v) Products with an unusual number of refinanced mortgage loans given the market environment and expected credit migrations.
k) Approval and management process for correspondent lenders and brokers
l) Correspondent lender and broker contracts and agreements
m) Quality-control procedures and controls (including any internal audit function)
n) Servicing procedures and controls, if applicable, including foreclosure and delinquency procedures, loss trends, and reporting
o) Material outstanding litigation
p) Logs of regulatory inquiries and consumer complaints
q) Results of state and federal examinations
r) Relations with material investors, including inquiries regarding repurchase requests from investors (amount, rationale, and outcome) and terminations
s) Corporate background research using third-party investigative databases, such as MARI-Inc.'s MIDEX database, Westlaw, and LEXIS
After the initial operational due diligence, the secondary-market purchaser should continue to monitor the entity and perform follow-up reviews at least every 12 to 24 months.
Servicer diligence, CUSO Development and its subsidiary Member Advantage Mortgage, LLC ensures that entities that service loans for the company also adopt policies and procedures to service loans in compliance with all applicable law and are sensitized to predatory lending/servicing practices. At the least, the entities that service loans for the purchaser must:
a) comply with all applicable residential mortgage servicing laws, including state licensing laws and the federal Real Estate Settlement Procedures Act (24) (RESPA);
b) Report credit files to credit repositories in a timely manner;
c) Offer loss mitigation counseling to borrowers in default and provide opportunities to enter into mutually acceptable reasonable repayment plans;
d) Respond to borrower inquiries, concerns, and complaints in a timely, fair, and consistent manner;
e) Grant payment extensions in a consistent manner to borrowers in similar circumstances;
f) Waive late fees consistently in similar types of instances (for example, if the first-incurred late charge is waived in some instances, it should be waived in all similar instances);
g) Accept delinquent payments equally given similar patterns/methods of tender;
h) Negotiate default remedies consistently under similar circumstances; and
i) Enter into forbearance agreements in a fair and equitable manner.
Vendor diligence. Finally, CUSO Development Company, LLC and its subsidiary Member Advantage Mortgage, LLC will also periodically conduct operational reviews on third-party vendors, including the third-party due diligence providers who perform loan-level diligence services for the company, to ensure that the compliance reviews that are performed on the company's behalf are reliable and comprehensive. This review should include a thorough analysis of the particular due diligence firm's compliance engine.
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