TILA / RESPA

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The CFPB recently issued revised TILA/RESPA Integrated Disclosure (TRID) rule guides to reflect the adoption of an amendment to the rule to fix the so-called “black hole” issue.  As we reported previously, the amendment will permit the use of an initial or revised Closing Disclosure to reset tolerances without regard to the timing of when before consummation the creditor learns of a change that causes one or more fees to increase.  The amendment will apply to transactions in process as of June 1, 2018 regardless of when the loan application was received, but the amendment may not be applied retroactively.

The CFPB updated both versions of the Small Entity Compliance Guide and the Guide to Forms.  The reason there are two versions of each guide is to account for the TRID rule amendments adopted last summer that became effective on October 10, 2017, but have a mandatory compliance date of October 1, 2018.  While both versions of each guide now reflect the 2018 TRID rule amendment, one version of each guide does not reflect the 2017 amendments and one version of each guide reflects the 2017 amendments.

As we reported previously, the CFPB recently adopted a long-awaited amendment to the TILA/RESPA Integrated Disclosure (TRID) rule that fixes the so-called black hole issue.

The amendment was published in the May 2, 2018 Federal Register and will become effective on June 1, 2018.  The CFPB notes in the supplementary information to the amendment that “[o]nce the final rule becomes effective, the ability to reset tolerances prior to consummation for a given transaction will not be limited by when the application was received.”  Thus, as of June 1, 2018 the flexibility created by the amendment regarding the use of a Closing Disclosure to reset tolerances will be available for both loan applications that are in process at the time, as well as loan applications made on and after such date.  However, the CFPB also made clear that the amendment may not be applied retroactively.

The CFPB, which is now referring to itself as the “Bureau of Consumer Financial Protection,” published the long-awaited final rule to address the so-called “black hole” issue under the TILA/RESPA Integrated Disclosure (TRID) rule.  The CFPB also issued an Executive Summary of the final rule.  The final rule will become effective 30 days after publication in the Federal Register.

Under the TRID rule, a Loan Estimate is the disclosure primarily used to reset tolerances. Because the final revised Loan Estimate must be received by the consumer no later than four business days before consummation, the Commentary to the TRID rule includes a provision under which a creditor may use a Closing Disclosure to reset tolerances if “there are less than four business days between the time” a revised Loan Estimate would need to be provided and consummation.  Because of the four-business-day timing element, in various cases when a creditor learns of a change, the creditor is not able to use a Closing Disclosure to reset tolerances.  This situation is what the industry termed the “black hole.”  The industry repeatedly asked the CFPB to address the black hole issue.  As previously reported in our Mortgage Banking Update, when the CFPB finalized various amendments to the TRID rule last summer, it punted on a prior proposal to address the black hole issue and proposed another rule to address the issue.  The CFPB has now finalized the second proposal.

In the final rule the CFPB removes the four business day timing element, and makes clear that either an initial or a revised Closing Disclosure can be used to reset tolerances.  Consistent with the requirements for the Loan Estimate, when the TRID rule permits a creditor to use a Closing Disclosure to revise expenses, the creditor must provide the Closing Disclosure within three business days of receiving information sufficient to establish that a changed circumstance or other event triggering a change has occurred.

When proposing the amendment last summer, the CFPB requested comments on whether it should impose additional limits on the ability of a creditor to reset tolerances with a Closing Disclosure, such as allowing a reset of tolerances only in certain of the circumstances currently permitted by the TRID rule.  The CFPB decided not to impose additional limits.

A federal district court in Kentucky recently handed the CFPB its second defeat in the agency’s lawsuit against Borders & Borders PLC and the law firm’s principals by denying the CFPB’s motion for reconsideration. Significantly, the court based its decision on grounds that are completely different than the basis for its original decision to grant the defendants’ motion for summary judgment.

As previously reported, the CFPB filed suit against the law firm and its principals in October 2013, claiming that they violated the referral fee prohibition under the Real Estate Settlement Procedures Act (RESPA) in connection with the establishment and operation of joint venture title insurance agencies (Joint Ventures) with the principals of real estate and mortgage brokerage companies. The CFPB asserted that Borders paid kickbacks to the principals of the real estate and mortgage brokerage companies that were disguised as profit distributions from the Joint Ventures, and that the kickbacks were for the referrals by the real estate and mortgage broker companies to Borders of consumers needing loan closing services.

Central to the CFPB’s position was its assertion that the Joint Ventures were not entitled to the affiliated business arrangement safe harbor under RESPA section 8(c)(4), which permits referrals and payments of ownership distributions among affiliated parties if the three statutory conditions of the safe harbor are met. The CFPB claimed that the Joint Ventures were not entitled to the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA.  Being a bona fide provider of settlement services is not one of the three statutory conditions.  It is a concept developed by the US Department of Housing and Urban Development, which had the responsibility for RESPA before the CFPB.

In its original decision, the court determined that a violation of the RESPA section 8(a) referral fee prohibition was established by the CFPB because the Joint Ventures referred loan closing business to the law firm, and the firm provided a thing of value to the Joint Ventures in connection with the assignment of title work to the companies. However, the court also determined that the three statutory conditions of the affiliated business arrangement safe harbor were met, so there was a safe harbor from the violation.  The court, apparently following the decision of the US Circuit Court of Appeals for the Sixth Circuit in Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th 2013), refused to impose a bona fide settlement service provider condition on the ability to qualify for the affiliated business arrangement safe harbor.

The CFPB asked for reconsideration in August of 2017. In denying the CFPB’s motion for reconsideration, the court found that there was no underlying violation of the RESPA section 8(a) referral fee prohibition.  The CFPB had alleged that the nominal assignment of title work by the law firm to the Joint Ventures was a thing of value.  According to the CFPB, the law firm did most of the actual title work for the matters nominally assigned to the Joint Ventures.  The court determined that the nominal assignments of title work did not constitute a thing of value based on the following reasoning:

“The court continues to believe that this “nominal assignment” is insufficient to constitute a ‘thing of value’ because consumers were not obligated to follow the suggestion of Borders & Borders. Indeed, consumers had thirty days after the closing to decide whether to use the Title LLC suggested by Borders & Borders, or to use a different title insurance underwriter. If the consumer chose to purchase insurance from another underwriter, the JVP involved with the case received nothing. This potential benefit is insufficient to constitute a ‘thing of value’ because it is entirely conditioned on the third-party consumer’s choice.”

The court also concluded that even if the law firm provided a thing of value to the Joint Ventures when nominally assigning the title work, the safe harbor of RESPA section 8(c)(2) applied. RESPA section 8(c)(2) permits the payment of a bona fide salary or compensation for goods or facilities actually furnished or for services actually performed.  In this part of the opinion, the court discussed the PHH case against the CFPB and found it to be analogous.  In determining that the section 8(c)(2) safe harbor applied, the court reasoned as follows:

“Here, consumers made payments to the Title LLCs, which subsequently distributed profits to the JVPs in accordance with their ownership interest. However, these payments were not made in exchange for referrals, but in exchange for title insurance, which the consumers actually received. These payments are presumed to be bona fide because there is no evidence that the consumers paid above market value for the title insurance.”

In determining that the law firm did not provide a thing of value to the Joint Ventures, it appears that the court focused on the referral of title business itself as the alleged thing of value, and not the related CFPB assertion that the law firm actually performed most of the title work for the Joint Ventures. In determining that, even if there was a thing of value, the section 8(c)(2) safe harbor applied, it appears that the court focused on the title insurance received by consumers for the payment of premiums, and not the CFPB assertion that the Joint Ventures did not actually perform the title work.

While the CFPB can still pursue the case, we will have to wait and see if under the leadership of Acting Director Mulvaney the CFPB elects to continue its challenge to the Joint Venture arrangements.

On February 14, 2018, the United States House of Representatives passed the TRID Improvement Act of 2017, H.R. 3978, by a vote of 245 to 171.  The bill would amend the manner in which title insurance premiums are disclosed under the TILA/RESPA Integrated Disclosure (TRID) rule.

Under title insurance price structures in many states, when a consumer purchases both an owner’s title insurance policy and lender’s title insurance policy at the same time, a discount is offered on the price of the lender’s title insurance policy.  Nevertheless, when the consumer will purchase both an owner’s title insurance policy and lender’s title insurance policy, the TRID rule requires that the amounts disclosed for the owner’s title insurance policy premium and lender’s title insurance policy premium be determined as follows:

Lender’s Title Insurance Premium:  The premium for the lender’s policy based on the full premium rate (i.e., without regard to any discount offered by the title insurer).

Owner’s Title Insurance Premium:  The result of adding the full owner’s title insurance premium and discounted premium for the lender’s policy, and subtracting the premium for the lender’s policy based on the full premium rate.

Industry members have objected to the required disclosure approach because it deviates from the manner in which the actual premium amounts are charged.

The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of “all actual charges” and not just the itemization of “all charges.”  The bill also would amend RESPA to require that ‘‘Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.’’. Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Forty-three Democrats joined Republications in passing the bill.

On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas.  The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015.  According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate.  According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate.  Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers.  Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.

Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.”  Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points.  This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.

The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.”  But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment.  This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.

Last week, members of the Senate Banking Committee announced that they had reached bipartisan agreement on “legislative proposals to improve our nation’s financial regulatory framework and promote economic growth.”  Following the announcement, Committee members released a draft of a bill (S. 2155), the “Economic Growth, Regulatory Relief, and Consumer Protection Act.”  A markup of the bill is scheduled for December 5, 2017.  Many observers believe that due to its bipartisan support, there is a strong likelihood that the bill will be enacted as part of a regulatory relief package.

Provisions of the bill relevant to providers of consumer financial services include the following:

Small Depository Qualified Mortgage (Section 101). For an insured depository institution or insured credit union, the bill would create a qualified mortgage loan entitled to the safe harbor under the ability to repay rule.  In general, the depository institution or credit union would need to hold the loan in portfolio, and the loan could not have an interest-only or negative amortization feature and would need to comply with limits on prepayment penalties.  While the creditor would need to consider and document the debt, income and financial resources of the consumer, it would not have to follow Appendix Q to the ability to repay rule.

Appraisal Exemption for Rural Areas (Section 103). The bill would provide an exemption from any appraisal requirement for a federally related transaction involving real property if (1) the property is located in a rural area, (2) the loan is less than $400,000, (3) the originator is subject to oversight by a federal financial institution regulator, and (4) no later than three days after the Closing Disclosure under the TRID rule is given to the consumer, the originator has contacted at least three state certified or licensed appraisers, as applicable, and has documented that no state certified or licensed appraiser, as applicable, is available within a reasonable period of time.  The applicable federal financial institution regulator would determine what constitutes a reasonable period of time.  The exemption would not apply to high-cost loans under the Truth in Lending Act (TILA), or when the applicable federal financial institution regulator requires the financial institution to obtain an appraisal to address safety and soundness concerns.

Home Mortgage Disclosure Act Triggers (Section 104). The bill would increase the loan volume trigger to be a reporting company under the revised Home Mortgage Disclosure Act (HMDA) rule from 25 closed-end mortgage loan originations in each of the preceding two calendar years to 500 such loans in each of the two preceding calendar years.  The 25 closed-end loan trigger went into effect in 2017 for depository institutions, and goes into effect on January 1, 2018 for non-depository institutions.

The bill also would make permanent under the revised HMDA rule a trigger of 500 open-end mortgage loan originations in each of the preceding two calendar years.  As reported previously, the revised HMDA rule provided for a trigger effective January 1, 2018 of 100 open-end mortgage loan originators in each of the preceding two calendar years, and in August 2017 the CFPB temporarily raised the trigger for 2018 and 2019 to 500 open-end mortgage loans in each of the preceding two calendar years.  The bill includes a requirement for the Comptroller General of the United States to conduct a study after two years to evaluate the impact of the amendments on the amount of data available under HMDA, and submit a report to Congress within three years.

Loan Originator Transition Authority (Section 106). Subject to various conditions, the bill would establish temporary transition authority for an individual loan originator to conduct origination activity for up to 120 days from when the individual submits an application to be licensed in a state in cases in which the individual is (1) registered and then becomes employed by a state-licensed mortgage company or (2) licensed in a state and then seeks to conduct loan origination activity in another state.

TRID Rule Provisions (Section 110). The bill includes a provision that apparently is intended to eliminate the need for a second three business day waiting period under the TILA/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule in cases in which the annual percentage rate decreases and becomes inaccurate after the initial Closing Disclosure is provided, thus triggering the need for a revised Closing Disclosure.  Currently, the TRID rule requires both a revised Closing Disclosure and a new three business day waiting period before consummation may occur.  As drafted, however, the bill would amend the TILA timing requirements for high-cost mortgages under the Home Ownership and Equity Protection Act.  The TRID rule timing requirements are set forth in Regulation Z and not TILA.  Thus, revisions to the bill are necessary to achieve the intended goal.

The bill also includes a sense of Congress provision with regard to the TRID rule, which provides that the CFPB should endeavor to provide clearer, authoritative guidance on (1) the applicability of the rule to mortgage assumptions, (2) the applicability of the rule to construction-to-permanent home loans, and the conditions under which such loans can be properly originated, and (3) the extent to which lenders can, without liability, rely on the model disclosures published by the CFPB under the rule if recent changes to the rule are not reflected in sample TRID rule forms published by the CFPB.

Credit Report Alerts (Section 301). The bill would amend the Fair Credit Reporting Act (FCRA) to require consumer reporting agencies to keep a fraud alert requested by a consumer in the consumer’s file for at least one year and allow a consumer to have one free freeze alert placed on his or her file every year and remove that alert free of charge.  Consumer reporting agencies would also have to provide free freeze alerts requested on behalf of a minor and remove such alerts free of charge.

Credit Reports of Military Veterans (Section 302). The bill would amend the FCRA to require consumer reporting agencies to exclude from credit reports certain information relating to medical debts of veterans and would establish a dispute process for veterans seeking to dispute medical debt information with a consumer reporting agency.

Protection of Seniors (Section 303). The bill would, subject to certain conditions, provide immunity from civil or administrative liability to individuals and financial institutions for disclosing the suspected exploitation of a senior citizen to various government agencies, including state or federal financial regulators, the SEC, or a law enforcement agency.

Cyber Threats (Section 501). The bill would require the Secretary of the Treasury to submit a report to Congress on the risks of cyber threats to financial institutions and U.S. capital markets that includes an analysis of how the appropriate federal banking agencies and the SEC are addressing such risks.  The report must also include Treasury’s recommendation on whether any federal banking agency or the SEC “needs additional legal authorities or resources to adequately assess and address material risks of cyber threats.”  (We note that for several years, the FTC has been calling for such additional authority, specifically in the form of rulemaking authority.  Due to the limitations of the Banking Committee’s jurisdiction, the bill’s provision focuses exclusively on the federal banking agencies, and gives no recognition to the important role of the FTC—which is under the Senate Commerce Committee’s jurisdiction–in addressing cyber threats.

We will be publishing another blog post in the near future about other provisions of the bill that may be of interest to our blog readers.

A bill to provide a “Madden fix” and three other bills relevant to mortgage lenders were included among the more than 20 bills approved by the House Financial Services Committee on November 15, 2017.   With the exception of H.R. 3221, “Securing Access to Affordable Mortgages Act,” the bills received strong bipartisan support.

The “Madden fix” bill is H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017.”  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”

The bill would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal and state savings associations, federal credit unions, and state-chartered banks.  The bill was approved by a vote of 42-17.  (A bill with identical language was introduced in July 2017 by Democratic Senator Mark Warner.)

Adoption of a “Madden fix” would eliminate the uncertainties created by the Second Circuit’s Madden decision.  However, it would not address a second source of uncertainty for banks that lend with assistance from third parties—the argument that the bank is not the “true lender” and accordingly cannot exercise the usury authority provided to banks by federal law.  As we have previously urged, the OCC and its sister agencies should adopt rules providing that loans funded by their supervised financial institutions in their own names as creditor are fully subject to federal banking laws (and not state usury laws).  The OCC and FDIC have previously emphasized that their supervised entities must manage and supervise the lending process in accordance with regulatory guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.

The other approved bills relevant to mortgage lenders are:

  • H.R. 3221, “Securing Access to Affordable Mortgages Act.” The bill would amend the Truth in Lending Act (TILA) and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to exempt a mortgage loan of $250,000 or less from the higher-priced mortgage loan and general property appraisal requirements if the loan appears on the creditor’s balance sheet for at least three years.  The bill would also exempt mortgage lenders and others involved in real estate transactions from incurring penalties for failing to report appraiser misconduct.  The bill was approved by a vote of 32-26.
  • H.R. 1153, “Mortgage Choice Act of 2017.” The bill would amend TILA by revising the definition of “points and fees” to exclude escrowed insurance and fees or premiums for title examination, title insurance, or similar purposes, whether or not the title-related charges are paid to an affiliate of the creditor.  The bill would direct the CFPB to issue implementing regulations within 90 days of the bill’s enactment. The bill was approved by a vote of 46-13.
  • H.R. 3978, “TRID Improvement Act of 2017.”  The bill would amend RESPA to require that the amount of title insurance premiums reflect discounts required by state law or title company rate filings. The amendment would override the TRID rule approach to the disclosure of the lender’s and the owner’s title insurance premiums if there is a discount offered on the lender’s policy when issued simultaneously with an owner’s policy.  In such cases, instead of requiring the disclosure of the actual owner’s policy premium and the actual discounted lender’s policy premium, the TRID rule currently requires the disclosure of the full, non-discounted amount of the premium for the lender’s policy, and an amount for the owner’s policy equal to the full amount of the owner’s policy premium, plus the amount for the discounted lender’s policy premium, less the full amount of the lender’s policy premium.  The bill was approved by a vote of 53-5.

The Consumer Financial Protection Bureau (CFPB) recently entered into a consent order with Meridian Title Corporation (Meridian) under the Real Estate Settlement Procedures Act (RESPA).

The CFPB found that Meridian is a title insurance agency that issues title insurance policies and provides loan settlement services in connection with residential mortgage transactions that are subject to RESPA. The CFPB also found that three of the eight owners of Meridian are the owners and executives of Arsenal Insurance Corporation (Arsenal), a title insurance underwriter.  As a result, the CFPB asserted that Meridian and Arsenal are in an affiliated business arrangement under RESPA.  The CFPB also asserted that because of the relationship between Meridian and Arsenal, in some cases when Meridian referred title insurance business to Arsenal as a title agent of Arsenal, Meridian was able to retain more than the standard commission provided for in its agency contract with Arsenal.

The CFPB concluded that Meridian violated the referral fee prohibition under RESPA section 8 when it “received things of value—money beyond Arsenal’s contractual commission allowance—pursuant to an agreement or understanding that it would refer business to Arsenal by recommending homebuyers to use its affiliated business Arsenal for title insurance.”

The CFPB also addresses an aspect of the affiliated business arrangement provisions of RESPA section 8 and Regulation X, the regulation under RESPA. Regulation X provides that an affiliated business arrangement does not violate RESPA section 8 when the three conditions of the affiliated business arrangement exemption are satisfied.  One of the conditions is that a written disclosure of the affiliated business arrangement be provided to a person being referred to a settlement service provider by the party making the referral.  The written disclosure commonly is referred to as an “affiliated business arrangement” disclosure or notice.  Generally, when the referral is made by a party other than a lender, the disclosure must be provided at or before the time of the referral.  The CFPB asserts that from 2014 to 2016, Meridian did not provide an affiliated business arrangement disclosure to consumers.  The CFPB did not expressly assert that the disclosure was not provided when Meridian referred consumers to Arsenal for title insurance business, but from the asserted facts that is the only context in which the disclosure would be required.

Meridian agreed to pay $1.25 million for the purpose of providing redress to affected consumers. Meridian also agreed to maintain and support a compliance oversight board committee to ensure that:

  • Meridian’s policies and procedures are reasonably designed to ensure compliance with RESPA, including affiliated business arrangement disclosure requirements;
  • All affiliated business arrangement disclosure forms are sent to consumers at or prior to the acceptance of any title or settlement order, where Arsenal is selected as the title insurance underwriter; and
  • All of Meridian’s executives and staff are trained in RESPA, including affiliated business arrangement disclosure form requirements and Meridian’s related compliance management system.

The consent order also addresses the responsibilities of Meridian’s board in connection with the order, and provides that the board “will have the ultimate responsibility for proper and sound management of [Meridian] and for ensuring [Meridian] complies with” the order.