TILA / RESPA

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The CFPB has published its 2019 final lists of Rural and Rural or Underserved Counties on its website. The CFPB has previously posted lists of such counties for calendar years 2011-2018. The CFPB has also updated the rural and underserved areas website tool for 2019.

The lists and tool are relevant to exemptions from certain regulatory requirements of the Truth in Lending Act, including the following CFPB mortgage rules:

  • Escrows Rule, which requires a creditor to establish an escrow account for certain first-lien higher-priced mortgage loans (HPMLs), but exempts HPMLs consummated during a calendar year (or next-to-last calendar year for loans where the application was received before April 1 of the current calendar year) if the creditor extended a first-lien covered transaction in the preceding calendar year secured by a property located in a rural-or-underserved area, and meets certain additional conditions.
  • Ability to Repay and Qualified Mortgage Standards Rule, which treats certain balloon-payment mortgages as qualified mortgages if they are originated and held in portfolio by small creditors that meet the rural-or-underserved test above and certain additional conditions
  • Home Ownership and Equity Protections Act of 1994 (HOEPA) rule, which generally bans balloon payments for mortgages that fall within HOEPA’s high-cost mortgage coverage test, unless they meet the rural-or-underserved test and certain additional conditions
  • Appraisals for HPMLs rule, which exempts HPMLs made in “rural” counties from its additional appraisal requirement

Note that if a creditor makes a first-lien mortgage loan secured by a property located in a rural or underserved area during 2019, the creditor will satisfy the rural and underserved test for the rules noted above during all of 2020 and for loan applications received before April 1, 2021.

For years, the mortgage industry has urged the CFPB to issue informal written guidance on the TILA/RESPA Integrated Disclosure (TRID) Rule, as well as other rules.  The CFPB resisted, providing most guidance in the form of actual rules, webinars or oral statements.  The industry believed that it would be a cold day in Hades if the CFPB ever issued guidance similar to the FAQs that the Department of Housing and Urban Development issued to provide guidance on the 2010 Good Faith Estimate rule.  It may be more than a coincidence that the CFPB has issued the first four FAQs ever addressing TRID Rule issues on the heels of a severe cold wave.

Three of the four FAQs relate to corrected Closing Disclosures and the three business-day waiting period before consummation, topics that have proven a source of much confusion for creditors. The first FAQ provides that, in the event that there is a change to the disclosed terms after a creditor provides the initial Closing Disclosure, the creditor is required to ensure that the consumer receives a corrected Closing Disclosure at least 3 business days before consummation if:

  1. the change results in the APR becoming inaccurate;
  2. if the loan product information required to be disclosed under the TRID Rule has become inaccurate; or
  3. if a prepayment penalty has been added to the loan.

For other types of changes, the creditor can consummate the loan without waiting three business days after the consumer receives the corrected Closing Disclosure.

The FAQs also address how to handle a situation where an APR decreases (i.e., the previously disclosed APR is overstated). The FAQs state that if the overstated APR is accurate under Regulation Z (i.e., the difference between the disclosed APR and the actual APR for the loan is within an applicable tolerance in Regulation Z), the creditor must provide a corrected Closing Disclosure at or before consummation but a new three-business day waiting period is not required. An inaccurate APR, on the other hand, will trigger a new three-business day waiting period. The FAQ provides additional information related to APR accuracy, including a reference to the Federal Reserve’s Consumer Compliance Outlook. Please note that while the FAQs indicate that there is an APR overstatement tolerance that is tied to an overstated finance charge, various loan investors may not permit correspondent lenders to rely on the tolerance. It is advisable to check with your investor regarding their policy on this issue.

The CFPB’s FAQ clarifies that Section 109(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”) does not affect the requirement for providing a revised Closing Disclosure with another three-business day waiting period in cases in which the APR in the prior Closing Disclosure becomes inaccurate based on a decrease in the APR. This section provides that if a creditor extends a second offer of credit to a consumer with an APR that is lower than the APR disclosed in the prior Closing Disclosure, the transaction may be consummated without regard to the 3-day waiting period with respect to the second offer. However, as previously reported, and as noted by the CFPB, Section 109(a) did not create an exception to the TRID rule waiting period because Section 109(a) amends TILA Section 129(b), which only applies to high cost mortgage disclosures. The CFPB adds that TILA Section 128 sets forth a waiting period requirement for other credit transactions, and that such section was not amended by the Act. Clearly, Congress intended to modify the waiting period under the TRID rule, and simply made a technical error. The CFPB should act immediately to reflect the intent of Congress by proposing a rule to eliminate the need for a second three-business day waiting period when the APR in the prior Closing Disclosure becomes inaccurate because of a new offer of credit with a lower APR.

The last of the CFPB’s FAQs states that a creditor’s use of a model form will provide a safe harbor even if the model form does not reflect the changes to the regulatory text and commentary that were finalized in 2017. An appropriate model form must be properly completed with accurate content in order to meet the safe harbor for TRID Rule compliance. In July 2016 the CFPB had proposed to amend the TRID rule to indicate that the industry could not rely on various sample forms included in Appendix H to Regulation Z, but did not adopt the proposal based on significant opposition from the industry, as well as Fannie Mae and Freddie Mac.

For more information on these FAQs, stay tuned for an upcoming episode of the Consumer Finance Monitor Podcast.

The CFPB filed its first new lawsuit under acting Director Mulvaney yesterday, alleging that a pension advance company and its president made predatory loans to consumers that were falsely marketed as asset purchases.  While it’s noteworthy as the Bureau’s first new case under current leadership, the action continues the CFPB’s focus on companies that offer settlement and pension advances, which began under Director Cordray and has continued under acting Director Mulvaney.

The defendants, under a pseudonym, unsuccessfully challenged the Bureau’s CID in federal court several months ago.  The investigation presumably continued, resulting in yesterday’s complaint filed in California federal court.  Similar to the Bureau’s earlier lawsuits against two pension advance companies and RD Legal, the complaint against Future Income Payments, its president Scott Kohn, and affiliated companies alleges that they made loans disguised as asset purchases that violated state usury and licensing laws.  More specifically, Future Income Payments and the other defendants allegedly committed deceptive acts in violation of the Consumer Financial Protection Act and failed to make disclosures required by the Truth in Lending Act by:

  • Falsely marketing that the alleged loans (1) are asset purchases rather than loans, (2) do not have interest rates, and (3) are comparable or cheaper than credit-card debt; and
  • Failing to provide the disclosures required by TILA explaining the cost of the credit.

The complaint, however, is missing a critical element.  It does not explain why the transactions are in fact extensions of credit.  Instead, the complaint concludes, without supporting allegations, that the funds provided to consumers are loans subject to the CFPA and TILA.  This failure to grapple with the elements of a loan under state law also exists in the CFPB’s pending action against RD Legal, which we highlighted in a blog.  In both cases, the Bureau fails to address the well-established, state-law factors for distinguishing asset purchases from loans, such as an absolute obligation by consumers to repay the funding company.

These lawsuits against pension and settlement advance companies are striking exceptions to acting Director Mulvaney’s public statements that the Bureau will neither push the envelope nor regulate by litigation/consent order.  We will, therefore, continue to monitor the Future Income Payments case as we have with the RD Legal lawsuit.

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.