What significant amendments are being made to the Qualified Written Request (“QWR”) rules under RESPA effective January 10, 2014?

Section 1463 (c) of the Dodd-Frank Act modifies RESPA by significantly reducing the time period mortgage servicers have to respond to a QWR from a borrower. Section 1463 (c) contains the following modifications:

The period of time for a servicer to acknowledge receipt of a borrower’s QWR is reduced from 20 days (current requirement) to 5 business days.

The period of time for a servicer to respond to a borrower’s QWR is reduced from 60 days (current requirement) to 30 business days. A servicer has a right to a 15 day extension to the 30 business day response period by notifying the borrower of the need for the extension and the reason(s) the extension is needed.

In addition, statutory damages available to a borrower have been increased. Statutory damages have been increased from $1,000 to $2,000. Lastly, statutory damages in class action lawsuits have been increased from $500,000 to $1,000,000.

Given these changes and the increased exposure to mortgage servicers resulting therefrom, mortgage servicers need to make sure that their policies and procedures are updated to avoid running afoul of the new time lines concerning responding to a QWR.

Written by Michael Barone, Partner-in-Charge of Mortgage Compliance Practice at AGMB and Director of Legal and Regulatory Compliance at Lenders Compliance Group

We are getting ready to complete our HMDA filing report and we have many prequalification requests. Are prequalifications considered “applications” under HMDA, and, therefore, must be included in our HMDA-LAR?

In general, an “application” is an oral or written request for an extension of credit through a purchase money, refinance, or home improvement in a loan transaction that is originated pursuant to a financial institution’s loan origination procedures.

A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify.

The Home Mortgage Disclosure Act (HMDA), and Regulation C, its implementing regulation, use the Official Staff Commentary to Regulation B, the implementing regulation of the Equal Credit Opportunity Act, to define an “application,” except HMDA does not include prequalification requests.

The ECOA does include prequalification requests as applications, such as where these requests may constitute applications under Regulation B for purposes of adverse action notices, under certain circumstances. Therefore, even if prequalifications may constitute an application under Regulation B (ECOA), they are not reported on the HMDA Loan Application Register under Regulation C (HMDA).

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

What is the definition of an “affiliate,” with respect to the QM 3% Points and Fees cap under the Ability-to-Repay and Qualified Mortgage rule?


The CFPB’s Ability-to-Repay/Qualified Mortgage’s (QM) rule contains a cap or limit on points and fees to qualify as a QM loan. The calculation of points and fees includes certain charges paid to affiliates of creditors. To qualify as a QM, a loan over $100,000 is limited to points and fees up to 3% of the loan amount. The 3% limit is increased on a sliding scale for loans under $100,000.

In the Small Entity Compliance Guide, the CFPB defines “affiliate” as “any company that controls, is controlled by, or is under common control with, your company” (Ability to Repay and QM Rule, Small Entity Compliance Guide, p. 34). The CFPB also issued “unofficial staff guidance” in a webinar on October 17, 2013, in which it was stated that the definition of an affiliate is any company that controls, is controlled by, or is under common control with, another company as set forth in the Bank Holding Act of 1956 (the “Act”).

The Act states that any company has control over a bank or over any company if:

(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company;

(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or

(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. Although (A) and (B) are straightforward, (C) is vague and the “unofficial staff guidance” (hopefully “official guidance” will be available down the line) is just as vague as terms such as “controlling influence” are not specifically defined and are subjective in nature.

It is noteworthy that the CFPB has not made any indication that the definition of “affiliate” will mirror the definition as set forth in RESPA. The RESPA definition is far broader in nature.

To determine whether there is an affiliate relationship under QM, the management and ownership interests of the creditor and the affiliate need to be analyzed in great detail. Only then can the specific facts be applied to the definition set forth in the Act and an answer to the question above determined. It is suggested that you spend the time required to perform an analysis, document your findings and reasoning for the determination. Most importantly, be aware of investor overlays as they may very well exceed the “unofficial guidance” provided by the CFPB.

Written by Michael Barone, Esq., the Partner-in-Charge of AGMB’s Mortgage Compliance Practice and a Director of Legal and Regulatory Compliance at Lenders Compliance Group

As a servicer, we issue a payment shock notice. I have always thought that this notice was a requirement. But I am being told that issuing a payment shock notice is optional and not a requirement. Are we required to issue a payment shock notice?


The payment shock notice is optional. Issuing the payment shock notice is not a regulatory requirement. As such, it has been viewed by HUD as a “best practices” action. The payment shock notice is usually issued when there is an adjustment in escrow that causes a higher monthly payment, such higher payment usually attributable to an increase in property taxes.

HUD outlined its reasoning for not requiring the Payment Shock Notice back in 1998, when it amended Regulation X’s section on Escrow Account Procedures in a Final Rule.

As HUD stated in the Final Rule:

“With regard to the ‘payment shock’ problem, the Department determined…that extensive additional regulatory changes are not required and could prove detrimental to consumers. Instead, the Department determined that this problem would be better resolved by identifying and sharing best practices of servicers.” (Emphasis added.)

In part, HUD stated there was a problem involving “…disbursements for items such as property taxes will increase substantially in the second year of the escrow account and where ‘payment shock’ — the consumer’s experiencing of a substantial rise in escrow payments will result. The Department has chosen to address this matter by recommending (but not mandating) a best practice for servicers: a voluntary agreement to accept overpayments.” (Emphasis added.)

Thus, HUD had identified a problem with respect to applying an escrow account procedure under Regulation X, and sought to remedy it in the Final Rule.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

We are lenders and our Loan Origination System caused an error in the APR of a residential mortgage loan transaction. Given that this was not our error, but the error of the system itself, are we protected from liability?

Just because there is an error in an APR or a finance charge in a loan transaction does not constitute a violation per se. But this condition would only apply if (1) the error results from a correlative error in calculation of the Loan Origination System (LOS) used in good faith, and (2) when the error is discovered, the lender promptly discontinues use of the system for disclosure purposes. The lender should notify its Regulator in writing regarding the cause of the error.

The dispositive feature of acting in “good faith” can be challenging to prove; therefore, the lender should demonstrate that it took steps to reasonably ensure that the LOS was functioning accurately before it was used to generate the disclosures containing APR or finance charge calculations.

Protection from liability is only available on the basis of being able to unarguably prove that the LOS, or any system used for disclosure calculations, caused the error. No protection from liability is available in instances where there is a misapplication of the law, or the lender manually causes this type of error, for instance through incorrect data entry.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

What is RESPA’s fee splitting prohibition? Also, what is the definition of a “referral fee” and which referral fees are permitted?

The provisions on prohibition of fee splitting and the definition of a referral fee are set forth in Section 8 of the Real Estate Settlement Procedures Act (RESPA).

RESPA prohibits fee splitting. Specifically, the applicable section states that “no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.”

This prohibition has been clarified by the Department of Housing and Urban Development (HUD) a number of times over the years, and it has been the subject of considerable litigation. Essentially, HUD maintains that a fee for which no (or a nominal) service is conducted, or is duplicative of any other fee charged, is an unearned fee, which would therefore violate RESPA’s fee splitting provision.

Intrinsically, a “referral fee” is the giving or accepting of “any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” The litigation involving this subject is extensive.
Any referral of a settlement service, except for certain exemptions, between one settlement service provider and another, is not a compensable service.

The permitted exemptions are :

  1. A payment to an attorney at law for services actually rendered.
  2. A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.
  3. A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan.
  4. A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.
  5. A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (Only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.)
  6. Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.
  7. An employer’s payment to its own employees for any referral activities.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

What are the additional disclosure requirements for originating a reverse mortgage loan?

Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), sets forth the disclosures that are required for reverse mortgage loan transactions. Indeed, Regulation Z requires additional disclosures reflective of the model form provided in its Appendix K, paragraph (d).

These additional disclosure requirements are:

  1. A disclosure that the applicant is not obligated to complete the reverse mortgage transaction, even if the applicant received specific reverse mortgage disclosures, and even if the applicant has signed an application for a reverse mortgage loan.
  2. A Good Faith Estimate that provides the total cost of the credit extended, and expressed as a table of “total annual loan cost rates.”
  3. An itemization containing the loan terms, charges, age of the youngest borrower, and the appraised value of the property.
  4. An explanation of the table of the “total annual loan cost rates” that are provided in the model form found in Regulation Z.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

The borrower is not available to attend the closing. Besides state law, what are other requirements to consider if the borrower wants to use a Power of Attorney to permit an agent to sign the closing documents?

Recently, Fannie Mae announced changes to its Sellers Guide regarding the use of a Power of Attorney (POA). These new requirements are only applicable to loans sold to Fannie Mae, however it’s advisable to keep these rules in mind on all loans because many investors will adopt Fannie Mae’s rules as overlays on all transactions. In addition, the lender and title company must approve both the use of a POA and the actual POA to be used in the transaction. The most noteworthy changes enacted by Fannie Mae are as follows:

  1. The name on the POA must match the name on the loan documents; it must reference the address of the subject property, it must be dated so it’s effective when the agent signs the document and it must be notarized. In addition, if the agent named in the POA executes the original 1003, the borrower must be actively serving in the US armed forced outside the US or the POA must expressly state an intention to secure a loan on a specific property.
  2. Except as otherwise required by applicable law or unless the agent is the borrower’s relative, the following individuals may not sign the note or mortgage as an agent of the borrower pursuant to a POA: the lender, loan originator, title insurance company, or financially interested real estate agent. Additionally prohibited from acting as an agent are any of these entities’ employees, employers, relatives, or affiliates.
  3. Except as required by applicable law, a POA may not be utilized to sign a note or mortgage if: i) no other borrower executes the note or mortgage in person in front of a notary public (this restriction does not apply if the designated agent is either the borrower’s attorney or relative); or (ii) it’s a cash-out transaction.

It is suggested that all lenders develop a policy regarding the use of POAs which incorporates agency guidelines, investor overlays, applicable law and its own Best Practices considerations.

The Consumer Financial Protection Bureau recently issued guidebooks to help the public better handle the responsibilities of acting as a financial caregiver. These guidebooks are posted to its website. One of these guidebooks addresses the use of a POA and a lender may find it advantageous to review this booklet when formulating its policy. Mortgage brokers also need to be aware of the policies of each of the lenders to which they place loans.

Most importantly, all parties to the loan transaction must make sure they are aware of the use of a POA as early as possible so its use does not suspend or abort a loan transaction.

Written by Michael Barone, Partner-in-Charge of Mortgage Compliance Practice at AGMB and Director of Legal and Regulatory Compliance at Lenders Compliance Group

If the origination fee is a percent of the loan amount, and the loan amount INCREASES due to a higher appraised value than originally used on the GFE, is the origination fee charged at settlement allowed to increase under the COC, with proper re-disclosure?


Bottom Line Up Front: “Yes, but only if issuance of a revised GFE is permissible under 24 CFR § 3500.7(f). In particular, if the loan amount changes and all or a portion of Block 1 is calculated as a percentage of the loan amount, then that portion in Block 1 may be recalculated.” (HUD RESPA FAQs, April 2, 2010)

In the answer quoted above, HUD was responding to the following: “If all or a portion of the charge in Block 1 is calculated as a percentage of the loan amount, and the loan amount changes, can the loan originator issue a revised GFE with an updated charge in Block 1?”

Your question differs from the question HUD answered in one significant way. Your question premises the increased origination fee on the increased loan amount, and the increased loan amount on the increased appraisal value. HUD points out that “yes”, the origination fee may increase if charged as a percentage of the increased loan amount, and if permissible under RESPA. It does not address your implied, underlying question of whether the higher appraised value may be the causal justification for higher origination fees.

The analysis is important because the loan originator bears the burden of demonstrating compliance when a GFE is revised for purported “Changed Circumstances”, and documentation of that reason must be maintained with the loan records for examination by your regulator. Revisions to the GFE charges are allowed if permissible under 24 CFR § 3500.7(f), (which points to 24 CFR (§3500.2(b); §3500.7(f)(1) and (f)(2)), in other words, “Changed Circumstances”. Your increased origination fee is not permissible if based merely on “a higher appraised value than originally used on the GFE”.

A higher appraisal value may be an alluring opportunity to increase the loan amount as a proxy in justification of higher origination fees. It is well established that a consumer is not obliged to increase the requested loan amount on the basis of improved valuation of over GFE. In fact, the consumer could choose to reduce the requested loan amount. As long as the loan amount remains unchanged, or lowered, there would be no permissible reason to increase origination charges. A loan originator engages in the prohibited conduct of steering if he or she persuades a consumer to obtain a higher loan amount for the purpose of generating higher origination fees.

Increased appraisal valuations may justify compliant GFE revisions, including consumer requested increase in the loan amount, resulting in organic, permissible increase in origination charges. Another permissible change occurs when a higher appraised value decreases the LTV and eliminates the need for previously estimated PMI charges. Conversely, a lower appraised value could increase settlement charges and trigger PMI costs. It is important to have thoroughly documented information supporting any “Changed Circumstances”, and the verifiable and compliant reasons for such change. Under RESPA a loan originator must provide the revised GFE within three business days of the borrower’s requested change.

Written by Wendy Bernard, Director of Legal and Regulatory Compliance at Lenders Compliance Group

We have an advertisement on our website and we also send out an email advertisement that is the same as the website advertisement. Are these considered a single advertisement? If so, what are the obligations for each advertisement?

Multiple advertisements in any media, such as web page advertisements on a website corresponding to a newsletter blast or in a catalog, are considered a single advertisement if the following criteria apply: (1) a trigger term is used; (2) such term requires a table or schedule in order to provide information regarding a finance charge associated with the trigger term, or any other term is used that appears in the opening disclosures; (3) the advertisement clearly and conspicuously sets forth or is required to set forth the foregoing table or schedule; and (4) these advertisements are required to refer and/or provide access to such table or schedule.

Put otherwise, single advertisement guidelines apply for any advertisement where a statement of finance charge is required for a trigger term, or disclosure is required in opening disclosures for any other term, where the trigger term or other term appear in a catalog or advertisement, thereby requiring clear and conspicuous reference to the page or location where the mandated table or schedule begins.

For instance, in any advertisement where a trigger term necessitates a statement of finance charge – indeed, any other term that appears in opening disclosures pursuant to Regulation Z § 226.6 – the advertisement must clearly refer to the page, web page, or any media location where a table or schedule is found and begins.

Therefore, in each online, website advertisement and its corresponding newsletter advertisement, a hyperlink to the table or schedule containing required additional information should be provided for a trigger term requiring a statement of finance charge and/or any other term that appears in opening disclosures.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

 It is my understanding that unless there is a “changed circumstance”, a Good Faith Estimate (GFE) is binding on the lender. What constitutes a “changed circumstance” such that a revised GFE may be re-disclosed, and what is the time frame for re-disclosing?

As a general rule, the GFE is binding on the lender until its expiration. The exception to this rule is if there is a “changed circumstance”.

A “changed circumstance” includes:

  • Acts of God, War, Disaster or other emergencies.
  • New information obtained that was not relied upon when the initial GFE was provided.
  • Identification of inaccurate information provided by the Borrower used to prepare the GFE.
  • Borrower requested changes in loan terms.
  • Other changes particular to the Borrower or transaction, including without limitation, boundary disputes, need for flood insurance, or environmental problems.

Additionally, a GFE must be redisclosed if the rate is locked after the initial GFE was provided.

None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a “changed circumstance” upon which a loan originator may redisclose the GFE unless the loan originator can demonstrate that there was a change in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE.

The loan originator is presumed to have relied on the Borrower’s name, the Borrower’s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE.

Examples of situations where the reissuance of a GFE is warranted include, without limitation, the following:

  • Rate lock expiration or Borrower requests a rate lock extension at a cost to Borrower.
  • Loan amount changes due to Borrower request, change to payoff amount, change to obligations.
  • Borrower requests an escrow waiver or decides to no longer waive escrow.
  • Borrower estimated property value not supported by appraisal.
  • Credit quality change due to new information received such as FICO score, DTI, undisclosed debts, judgments, income change.
  • Occupancy change (i.e., property initially thought to be a primary residence becomes investment property).
      Some situations must be evaluated on a case-by-case basis to determine if a changed circumstance occurred. Such situations include, without limitation:
  • Borrower not proceeding quickly to closing.
  • Parties added or removed from title.
  • Signing documents using a power of attorney.
  • Vendor for a settlement service goes out of business.
  • Property type changes (i.e., single family residence is actually multi-family).
  • GSE, FHA, mortgage insurance program changes.

Situations which do not qualify as a changed circumstance include, without limitation, the following:

  • Lender does not accept broker issued GFE.
  • Market fluctuations on a locked loan.
  • Borrower’s name.
  • Information in a credit report generated before the issuance of the GFE.
  • Any change which is known or should have been known by the loan originator at the time the initial GFE was issued.

If a changed circumstance exists, a revised GFE must be provided to the Borrower within 3 business days of receipt of information sufficient to establish a changed circumstance.

It is important to bear in mind that information related to a changed circumstance may come from a party other than a borrower (i.e., an appraisal with a value other than expected which increases or decreases the loan amount).

The revised GFE can only reflect the changes which increased as a direct result of the changed circumstance. The changed circumstance should be documented and all documentation and information must be maintained for at least 3 years.

The above discussion reflects regulations in effect as of this date. The reader should bear in mind that the Consumer Financial Protection Bureau has proposed a rule integrating mortgage disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth-in-Lending Act (Regulation Z) which will alter the definition of “changed circumstance”. The proposed rule can be found at