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.

As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

A federal district court in Kentucky recently ruled against the CFPB in a long-standing case under the Real Estate Settlement Procedures Act (RESPA) involving a Louisville, Kentucky law firm Borders & Borders, PLC (Borders).  In the case, CFPB v. Borders & Borders, PLC, the court granted the summary judgment motion of Borders, finding that joint ventures related to Borders satisfied the statutory conditions of the RESPA section 8(c)(4) affiliated business arrangement exemption.  The court referred to the exemption as a “safe harbor”.  The CFPB had alleged that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services.

Borders is a law firm that performs residential real estate closings, and also is an agent authorized to issue title insurance policies for a number of title insurers.  In 2006, the principals of Borders established nine joint venture title agencies with the principals of real estate and mortgage brokerage companies.  In February 2011, the Department of Housing and Urban Development (HUD) notified Borders that it was investigating the firm for potential violations of the RESPA referral fee prohibitions based on the joint ventures.  (HUD was the federal agency responsible for interpreting and enforcing RESPA before such authority was transferred to the CFPB.)  Upon receipt of the notice, Borders ceased operating all of the joint ventures.

In October 2013 the CFPB filed a complaint against Borders asserting that the firm violated the RESPA referral fee prohibition through the establishment and operation of the joint ventures.  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 referral of customers to Borders by the principals.

The CFPB claimed that the joint ventures were not subject 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 conditions of the safe harbor are met.  The conditions are that (1) when a person is referred to a settlement servicer provider that is a party to an affiliated business arrangement, a disclosure is made to the person being referred of the existence of the affiliated business arrangement, along with a written estimate of the charge or range of charges generally made by the provider to which the person is being referred, (2) the person is not required to use any particular provider of settlement services (subject to certain exceptions), and (3) the only thing of value that is received from the arrangement, other than payments otherwise permitted under RESPA section 8(c), is a return on the ownership interest or franchise relationship.

As noted above, the CFPB argued that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA.  The statutory safe harbor for affiliated business arrangements contains no such condition.  The position that a joint venture must be a bona fide provider of settlement services to qualify for the safe harbor previously was asserted by HUD in statement of policy 1996-2 (the “Statement of Policy”).  HUD set forth factors that it would examine in assessing whether or not a particular joint venture is a bona fide provider of settlement services.

Although the CFPB did not expressly reference the Statement of Policy in its complaint against Borders, it addressed many of the same factors that HUD identified in the Statement of Policy.  The CFPB asserted that:

  • In most instances Borders provided the initial capitalization for the joint ventures, and the capital was comprised of only enough funds to cover a joint venture’s errors and omissions insurance.
  • Each joint venture had a single staff member, who was an independent contractor shared by all of the joint ventures and concurrently employed by Borders.
  • Borders’ principals, employees and agents managed the affairs of the joint ventures.
  • The joint ventures did not have their own office spaces, email addresses or phone numbers, and could not operate independent of Borders.
  • The joint ventures did not advertise themselves to the public
  • All of the business of the joint ventures was referred by Borders.
  • The joint ventures did not perform substantive title work—such work was performed by Borders.

With regard to the disclosure condition of the affiliated business arrangement safe harbor, the CFPB asserted that when Borders referred a customer to a joint venture, Borders “sometimes used a disclosure form intended to notify customers of a business affiliation between the owners of the law firm and  [the joint venture].”  The CFPB also asserted that the notice did not contain the ownership interest percentages in the joint venture or include a customer acknowledgment section, which are elements of the form of notice in Appendix D to Regulation X, the regulation under RESPA.

About a month after the CFPB filed its complaint, the US Court of Appeals for the Sixth Circuit issued a decision in Carter v. Wells Bowen Realty, Inc., 736 F.3d 722 (6th 2013).  It appears the opinion of the court presented a hurdle that the CFPB could not clear in its case against Borders.  In the Carter case, private plaintiffs asserted that certain joint ventures did not qualify for the affiliated business arrangement safe harbor based on the bona fide settlement service provider requirement that HUD set forth in the Statement of Policy.  The court determined that the defendants satisfied the three statutory conditions of the affiliated business arrangement safe harbor, and based on this determination the court ruled in favor of the defendants.  The court refused to apply what it considered a fourth condition to the safe harbor asserted by HUD—that the entity receiving referrals must be a bona fide provider of settlement services.  The court stated that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”

The court in the Borders case stated that the joint ventures each had an operating agreement, were authorized to conduct business in Kentucky, were approved by a title insurer to issue title insurance policies, were subject to audit, had a separate operating bank account, had a separate escrow bank account, maintained an errors and omission insurance policy, issued lender’s and owner’s title insurance policies, had operating expenses, generated revenue, made profit distributions, filed tax returns, issued IRS K-1 forms and were solvent.  The court also stated that each of the joint ventures were staffed by the same individual, who worked from her home office and was categorized as an independent contractor.

Citing the Carter case, the court set forth the three statutory conditions of the affiliated business arrangement safe harbor.  The court determined that the joint ventures satisfied the three conditions.  With regard to the disclosure condition, the court determined that the provision of the disclosure by Borders to its customers at the closing of a real estate transaction was sufficient, because it was the first contact that Borders had with the customers, and that the customer then decided at the closing whether to accept the referral of title insurance to one of the joint ventures.  (The court had earlier noted in its opinion that customers had 30 days from the date of closing to decide whether to purchase owner’s title insurance from the joint venture.)  With regard to the deviation of the notice from the form notice in Regulation X, the court found the content of the Borders’ notice to be sufficient to meet the statutory notice condition.

The decision of the court that the delivery of the notice at closing was sufficient is raising more than a few eyebrows in the industry.  In any event, based on the determination that the three statutory conditions of the affiliated business arrangement were satisfied, the court granted Borders’ motion for summary judgment.  The court did not impose the fourth condition asserted by the CFPB that the joint ventures had to be bona fide settlement service providers.  It interesting that the court nonetheless decided to note various aspects of the joint ventures in an apparent attempt to demonstrate their legitimacy.

The CFPB can appeal the decision to the Sixth Circuit, but if it does so the CFPB will have to face the hurdle of the Carter decision.  So the CFPB would need to assert one or more theories supporting why the Carter decision does not preclude a finding of a RESPA violation in the Borders case.

The CFPB finalized the long-awaited initial round of amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, also known as the Know Before Your Owe rule.  However, instead of addressing the so-called “black hole” issue, which refers to situations in which a lender may not be able to use a Closing Disclosure to reset fee tolerances, the CFPB punted by releasing a proposed rule on the issue.

The proposed amendments were posted on the CFPB’s website at the end of July 2016.  Although the CFPB planned to finalize amendments in March, the final amendments, along with the related proposal, were not issued until the beginning of July.  While the amendments will become effective 60 days after publication in the Federal Register, mandatory compliance with the amendments will not be required until October 1, 2018.  The CFPB has been urged to take this approach to implementing regulations by industry members, as it allows for the testing of changes on a pilot basis before going live across a company’s entire platform.

In its press release announcing the amendments, the CFPB notes that it adopted (1) tolerances for the Total of Payments disclosure that are based on the existing finance charge tolerances, (2) a change to the partial exemption for certain down-payment and related assistance loans by excluding recording fees and transfer taxes from the fee limitation that applies to the exemption, (3) a change in the scope of the rule to cover loans on cooperative units, whether or not the cooperative is considered real property under applicable state law, and (4) clarifications on how to provide separate Closing Disclosures to the consumer and the seller.

The final rule is 560 pages in length and the proposal is 41 pages in length.  We will be analyzing the final rule and proposal and will provide a more detailed analysis in a future edition of our Mortgage Banking Update.  (To subscribe to the Mortgage Banking Update, please click here.)

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”