I know this seems rudimentary, but we are debating what causes any charge to become a finance charge. What is a finance charge? When are we supposed to include charges by third parties in the finance charge? And, what about finance charges associated with closing agents; that is, is there a rule for whether closing agent charges are included in the finance charge?

Simply put, the finance charge is the cost of consumer credit expressed as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as incidental to or a condition of the extension of credit. It is a matter of caution to consider the fact that the finance charge does not include any charge of a type payable in a comparable cash transaction. [12 CFR § 226.4(a)]Further, participants to residential mortgage transactions often have policies that vary as to whether a particular fee is or is not treated as a finance charge. So it is advisable to understand the relevant policies of the parties with whom they conduct business.

Regarding third parties, the finance charge includes third parties if the creditor requires the use of a third party as a condition of or incidental to the extension of credit, even if the consumer can choose the third party; additionally, third party charges are included in the finance charge if the creditor retains a portion of the third party charge, to the extent of the portion retained. [12 CFR § 226.4(a)(1)]Closing agent charges come under a ‘special rule,’ with respect to including them in the finance charge. Specifically, fees charged by closing agents are finance charges only if the creditor (1) requires the particular services for which the consumer is charged; (2) requires the imposition of the charge; or, (3) retains a portion of the third party charge, to the extent of the portion retained. [12 CFR § 226.4(a)(2)]Consider the fee charged by the closing agent to conduct or attend a closing. Such a fee is a finance charge, unless the charge is included in and incidental to a lump-sum fee excluded under Regulation Z, Section 226.4(c)(7), which exempts certain fees in real estate secured credit transactions from the finance charge. [12 CFR § Supp. I to part 226 – Official Staff Commentary §226.4(a)(2)-2]In any event, and notwithstanding the above-cited exclusion, under the policies of many participants in residential mortgage transactions a fee to conduct or attend the closing is treated as a finance charge.

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

Is it true that the new FHA Guidelines require Pre-Closing Quality Control reviews?

Yes. The U.S. Department of Housing and Urban Development issued a new handbook, FHA Single Family Housing Policy Handbook 4000.1, which is effective as of September 14, 2015 (“Handbook”). Under the Handbook, mortgagees must select FHA-insured mortgages for pre-closing quality control reviews on a monthly basis.

Mortgages selected must be reviewed after the mortgage is approved by an FHA Directed Endorsement Underwriter and prior to closing. [4000.1 – V.A.3.a.i.(A)]As with post-closing reviews, loans selected for pre-closing reviews must consist of both random and discretionary samplings. [4000.1 – V.A.3.a.iv]However, unlike post-closing reviews, pre-closing reviews do not require mortgagees to obtain a new credit report or re-verify income, employment, assets and housing expense information. Rather, for pre-closing reviews mortgagees must evaluate all documents supporting employment, income, assets and housing expense information to ensure original documents comply with FHA’s policy requirements and to resolve any discrepancies in the documentation prior to closing. [4000.1 – V.A.3.c]Mortgagees must also conduct a review of the property appraisal for all FHA-insured mortgages chosen for pre-closing quality control reviews.

At a minimum, the following areas must be reviewed:

  1. appraisal data,
  2. validity of the comparables,
  3. value conclusion (as required by FHA guidance),
  4. any changes made by the underwriter, and
  5. the overall quality of the appraisal. Field reviews are not required for pre-closing reviews. [4000.1 – V.A.3.c]

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

We are a lender that originated a HOEPA loan. We were asked if we could make a payment to a contractor under a home improvement contract from HOEPA proceeds. Is that permissible?

A creditor may not pay a contractor under a home improvement contract from the proceeds of a HOEPA loan, other than:

  1. By an instrument payable to the consumer or jointly to the consumer and the contractor (and if there are multiple consumers who are primarily liable each must be named as payee); or
  2. At the election of the consumer, through a third-party escrow agent in accordance with the terms established in a written agreement signed by the consumer, the creditor, and the contractor prior to disbursement. [12 CFR § 226.34(a)(I); 12 CFR Supp. I to part 226 – Official Staff Commentary §226.34(a)(I)(i)-I]

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

We are currently establishing system protocols for recording confirmation of receipt of disclosure delivery when not provided in person. We are concerned about receiving actual confirmation of receipt of disclosures from the borrower more than 3 days after they are placed in the mail. Are we still able to rely on the “mailbox” rule and delivery 3 days after being placed in the mail or do we need to work off the date the consumer provides an actual, albeit unsolicited confirmation?

TRID relies on the mailbox rule for purposes of determining when disclosures delivered by mail or electronically are considered received by the consumer. Disclosures placed in the mail or delivered electronically are considered received 3 business days after delivery.

The Commentary to section 12 CFR 1026.19(1)(iv) regarding mail delivery provides that if any disclosures required under § 1026.19(e)(1)(i) are not provided to the consumer in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail. The creditor may, alternatively, rely on evidence that the consumer received the disclosures earlier than three business days. For example, if the creditor sends the disclosures via overnight mail and the consumer signs for receipt of the overnight delivery, the creditor could demonstrate that the disclosures were received on the day of signature. Additional commentary addresses electronic delivery and is similar to the above Comment.

The Commentary suggests the mailbox rule would supersede confirmations received more than 3 business days after disclosures were mailed or delivered electronically. It is important to ensure that your policies and procedures state whether you employ the mailbox rule or actual consumer confirmation as your method for determining when disclosures are received by the consumer. Also, make sure your system of record accurately reflects the date disclosures are placed in the mail or delivered electronically. And if for some reason you also retain consumer confirmations received after the mailbox rule expiration period, document for purposes of disclosure timing that you relied on the mailbox rule and not the date of the confirmation.

By Michael Goldhirsh, Executive Director at Vendors Compliance Group and a Director of Legal and Regulatory Compliance at Lenders Compliance Group

We have some questions about rescission that seem to come up all the time. First, on which transactions are rescissions permitted? Second, when there are multiple borrowers, does each one have a right to rescind? And, third, do all the borrowers on a transaction have to exercise the right to rescind for the rescission to be valid?

These questions do seem to come up often. With certain exceptions, rescission does not affect a “residential mortgage transaction,” which is a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract or equivalent consensual security interest is created or retained in a consumer’s principal dwelling to finance the acquisition or construction of the dwelling. [12 CFR § 226.2(a)(24)]The “residential mortgage transaction” is exempt from the right to rescind. Also exempt are refinancings or consolidations by the same creditor of an extension of credit already secured by the consumer’s principal dwelling – except to the extent that the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and any amounts attributed solely to the costs of the refinancing or consolidation. In other words, this means that the right to rescind, in such situations, applies only to the extent by which the new amount financed exceeds the sum of the items noted.) [12 CFR §§ 226.23(a)(1), (f), (l)]If there are multiple consumers to a transaction, each consumer whose ownership interest in the property is or will be subject to the security interest has the fight to rescind. But, when more than one consumer has the right to rescind, any one of them may exercise that right and cancel the transaction, which is effective for all the consumers. [12 CFR § 226.23(a)(4)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

What are the potential consequences if I fail to comply with TRID?

The penalties for closing even a single loan in violation of the TILA-RESPA Integrated Disclosure (TRID) regulations can far outweigh any costs incurred in ensuring compliance with the new requirements. By delaying or skimping on effective implementation of policies, processes, and training of personnel in the specifics of the new requirements, you may be inviting a “bet the bank” disaster.

Enforcement Authority Given to the CFPB

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Act) gave the Consumer Financial Protection Bureau (CFPB) broad authority to enforce compliance with nearly all federal consumer finance statutes. (12 U.S. Code § 5581). As a result, the Act arms the CFPB with a number of tools to ensure protection from violations of TRID by anyone engaged in the provision or offering of consumer financial products or services.

The Act also prohibits actions by any “related person” violating consumer products, including:

  1. any director, officer, or employee charged with managerial responsibility for, or controlling shareholder of, or agent for, such covered person;
  2. any shareholder, consultant, joint venture partner, or other person, as determined by the Bureau (by rule or on a case-by-case basis) who materially participates in the conduct of the affairs of such covered person; and
  3. any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in any –
    1. violation of any provision of law or regulation; or
    2. breach of a fiduciary duty.

These tools include civil penalties, actions for damages, restitution, injunctive relief, and, more recently, the provision of a private right of action by consumers directly against violators. [12 U.S. Code § 5565. Enforcement of TRID includes private right of action provisions granted under TILA (Regulation Z)]Penalties

The Act mandates that any person that violates, through any act or omission, any provision of Federal consumer financial law penalties set out in three separate tiers:

  • First tier
    For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues.
  • Second tier
    For any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues.
  • Third tier
    For any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues. [12 U.S.C. § 5565(c)(2)]

Mitigating Factors

Perhaps some comfort for smaller institutions may be found in a number of mitigating factors that the CFPB must take into account in determining the appropriateness of the penalty, including:

  • the size of financial resources and good faith of the person charged;
  • the gravity of the violation or failure to pay;
  • the severity of the risks to or losses of the consumer, which may take into account the number of products or services sold or provided;
  • the history of previous violations; and
  • such other matters as justice may require. [12 U.S.C. § 5565(c)(3)]

However, these factors should not be relied upon as protection from the extremely punitive enforcement potential for failure to comply with TRID and other federal financial consumer protection laws and regulations. Only through complete preparation and flawless implementation and performance of the TRID requirements may lenders, brokers and others related to the provision of consumer financial products and services ensure such penalties will not be levied.

By Brennan Holland, Director of Legal and Regulatory Compliance at Lenders Compliance Group

We have a Down Payment Assistance Loan Program for low to moderate income borrowers in the form of a purchase money second mortgage. This second mortgage loan can be in an amount up to 20% of the purchase price. Are loans under this Program exempt from TRID compliance requirements? Also, does the down payment assistance loan need to be included on the Loan Estimate and Closing Disclosure for the first mortgage transaction?

Provided the down payment assistance program meets certain requirements as set forth below, the creditor does not have to provide a Loan Estimate, Closing Disclosure or Special Information Booklet with respect to that loan. [12 CFR 1026.3(h)]With respect to the primary credit transaction, the down payment assistance should be included in the “Calculating Cash to Close” section on page 2 of the Loan Estimate under “Adjustments and Other Credits”.

Proceeds from subordinate financing or other source. Funds that are provided to the consumer from the proceeds of subordinate financing, local or State housing assistance grants, or other similar sources are included in the amount disclosed under § 1026.37(h)(1)(vii).” [Official Comment 37(h)(1)(vii)- 5]On the Closing Disclosure, the amount should be included in the “Calculating Cash to Close” section under “Adjustments and Other Credits” and then detailed in Section L “Paid already by or on behalf of Borrower”.

Subordinate financing proceeds. Any financing arrangements or other new loans not otherwise disclosed pursuant to § 1026.38(j)(2)(iii) or (iv) must also be disclosed pursuant to § 1026.38(j)(2)(vi). For example, if the consumer is using a second mortgage or note to finance part of the purchase price, whether from the same creditor, another creditor, or the seller, the principal amount of the loan must be disclosed with a brief explanation. If the net proceeds of a second loan are less than the principal amount of the second loan, the net proceeds may be listed on the same line as the principal amount of the second loan. For an example, see form H–25(C) of appendix H to this part.” [Official Comment 38(j)(2)(vi)]In order to qualify for the partial exemption from TRID disclosure requirements, the down payment assistance program must meet the following criteria [12 CFR 1026.3(h)]:

  1. The transaction is secured by a subordinate lien;
  2. The transaction is for the purpose of:
    1. Downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies;
    2. Property rehabilitation assistance;
    3. Energy efficiency assistance; or
    4. Foreclosure avoidance or prevention;
  3. The credit contract does not require the payment of interest;
  4. The credit contract provides that repayment of the amount of credit extended is:
    1. Forgiven either incrementally or in whole, at a date certain, and subject only to specified ownership and occupancy conditions, such as a requirement that the consumer maintain the property as the consumer’s principal dwelling for five years;
    2. Deferred for a minimum of 20 years after consummation of the transaction;
    3. Deferred until sale of the property securing the transaction; or
    4. Deferred until the property securing the transaction is no longer the principal dwelling of the consumer;
  5. The total of costs payable by the consumer in connection with the transaction at consummation is less than one percent of the amount of credit extended and includes no charges other than:
    1. Fees for recordation of security instruments, deeds, and similar documents;
    2. A bona fide and reasonable application fee; and
    3. A bona fide and reasonable fee for housing counseling services; and
  6. The creditor complies with all other applicable requirements of this part in connection with the transaction, including without limitation the disclosures required by § 1026.18.

By Joyce Wilkins Pollison, Director of Legal and Regulatory Compliance at Lenders Compliance Group

Are Marketing Services Agreements legal or are they no longer permitted?

There has been no specific ruling or order that prohibits Marketing Services Agreements (“MSAs”). However, in recent months there has been much discussion over the legality of MSAs. This is primarily due to recent enforcement actions by the Consumer Finance Protection Bureau (“CFPB”) involving MSAs and alleged illegal kickbacks. In particular, in the 2014 Lighthouse Title, Inc. (“Lighthouse”) Consent Order, the CFPB indicated that Lighthouse violated the Real Estate Settlement Procedures Act (RESPA) when it entered into MSAs with the “agreement or understanding” that, in return, the counterparties would refer closings and title insurance business to them.

Further, the Consent Order indicated that the parties did not determine a fair market value for the marketing services received, did not document how they valued the marketing services, and that Lighthouse did not monitor their counterparties to ensure the marketing services were actually being performed. [In the Matter of Lighthouse Title, Inc., Administrative Proceeding File No. 2014-CFPB-0015]More recently, the CFPB announced actions against Wells Fargo and JPMorgan Chase for engaging in illegal marketing services with a title company. The proposed Consent Order indicated the title company gave the banks’ loan officers cash, marketing materials, and consumer information in exchange for business referrals. [CFPB and State of Maryland, Office of the Attorney General v. Wells Fargo Bank, N/A, JPMorgan Chase Bank, N.A., et al, Case No. 1:15-cv-00179-RDB]Despite these and other actions, the CFPB has not indicated that MSAs are illegal. In fact, the CFPB has not provided any guidance regarding MSAs and continues to regulate through Consent Orders. Further, there has not been any blanket regulation or court decision banning MSAs. Although some lenders recently announced decisions to discontinue such arrangements with real estate brokers, MSAs can still serve as a viable marketing tool.

Mortgage and real estate professionals interested in entering into or continuing MSA relationships must act prudently and maintain a compliant MSA program that monitors all aspects of the MSA relationship. MSAs should only be entered into after careful evaluation of the structure of the relationship. MSAs cannot be a proxy for illegal referral or kickback payments, nor can the arrangement require exclusivity. Further, the services to be performed under an MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.

The CFPB could have chosen to state or infer that MSAs are not permitted in the above Consent Orders or in other industry guidance. While it has not done so, any party to a MSA must ensure that they have policies and procedures in place which adhere to the factors set forth above and in the Consent Orders.

By Neil Garfinkel, Esq., Partner-in-Charge of AGMB’s Real Estate & Banking Practices, Executive Director of Realty & Title Services Compliance Group, affiliates of Lenders Compliance Group, and a Director of Legal and Regulatory Compliance at Lenders Compliance Group

It is our understanding that TILA exempts extensions of credit primarily for a business, commercial or agricultural purpose. What is a business or commercial purpose loan? Are there any factors that we can use to determine if the loan is for a business or commercial purpose?

Regulation Z does not expressly define what an extension of credit for a business or commercial purpose is, though applicable Commentary does offer some guidance with respect to what is credit for a business or commercial purpose that is exempt from TILA and what is consumer credit that is subject to TILA.

In order to be exempt from TILA, the primary purpose of a credit transaction must be for a business or commercial purpose. Generally, there are determinative factors. As it pertains to residential mortgage lenders, these factors bifurcate into two types of credit extensions and special rules, one applying to non-owner occupied rental property and the other applying to owner-occupied rental property.

Certain factors must be considered in determining whether a credit transaction is for a business purpose or a consumer purpose. These are:

  1. The relationship of the borrower’s primary occupation to the acquisition. That is, the more closely related, the more likely it is to be business purpose.
  2. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
  3. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
  4. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
  5. The borrower’s statement of purpose for the loan. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.i]

Examples of business purpose credit are:

  1. Loans to expand a business, even if it is secured by the borrower’s residence or personal property.
  2. A loan to improve a principal residence by building into it a business office.
  3. A business account used occasionally for consumer purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.i]

Examples of consumer purpose credit are:

  1. Credit extensions by a company to employees or agents if the loans are used for personal purposes.
  2. A loan secured by a mechanic’s tools to pay a child’s tuition.
  3. A personal account used occasionally for business purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.ii]

Consider also the special rules. Credit extended to acquire, improve, or maintain rental property that is not owner-occupied is deemed to be for a business purpose. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner occupied and the special rule would not apply. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-4]Furthermore, credit extended to acquire owner-occupied rental property is deemed to be for a business purpose if it contains more than two housing units; and credit extended to improve or maintain owner-occupied rental property is deemed to be for a business purpose if it contains more than four housing units. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-5]Finally, a credit transaction involving real property that includes a dwelling, such as a farm with a homestead, is exempt from TILA if the transaction is primarily for agricultural purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-8]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

When is a mortgage lender permitted to require a non-borrowing spouse to sign loan documents?

The Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, prohibits creditors from discriminating against applicants on a number of prohibited bases including marital status. [15 USC § 1691 et seq., 12 CFR § 202]Under Regulation B, unless a spouse is a joint applicant, a lender may not require the signature of an applicant’s spouse on any loan document, except any loan document that is reasonably believed to be necessary under applicable state law, if the applicant qualifies for the amount and terms of the credit requested under the mortgage lender’s credit standards. This is the case even if the subject property securing the credit is jointly owned by the applicant’s spouse. [12 CFR § 202.7(d)(1)]If the applicant does not qualify under the lender’s credit standards, which may not include a requirement for a spousal guarantee, then the lender may condition approval on the addition of a guarantor or cosigner. However, a lender is not permitted to require that this individual be the applicant’s spouse. [“Common Violations and Hot Topics,” Outlook Live Webinar, July 29, 2015, FRB]Generally, this rule applies to all open-end and closed-end, secured and unsecured extensions of consumer credit and business credit. However, there are exceptions.

Taking into account state property laws, a lender may be permitted to require the signature of a non-borrowing spouse on loan documents under three circumstances:

  1. With regard to secured credit transactions, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to secure the credit under applicable state law and protect the mortgage lender in the event of default. [12 CFR. § 202.7(d)(4)]
  2. With regard to unsecured credit transactions in community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to make the community property available under applicable state law to satisfy the debt in the event of default if
    1. applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested; and
    2. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property. [12 CFR § 202.7(d)(3)]
  3. Third, with regard to unsecured credit transactions in non-community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, under applicable state law to enable the lender to reach the property relied upon in the event of the applicant’s death or default. [12 CFR § 202.7(d)(2)]

By Michael Barone, Esq., the Partner-in-Charge of AGMB’s Mortgage Compliance Practice and Executive Director of Lenders Compliance Group

Our investor reviews the loan before closing. Please let us know whether we are supposed to report the loan as a brokered or correspondent loan on the HMDA-LAR?

Under Regulation C, the implementing regulation of the Home Mortgage Disclosure Act, a special broker rule applies to the reporting of loans on the Loan Application Register (“HMDA-LAR”) made by a broker and sold to an investor, where the investor reviews the loan before closing. Before determining who has the responsibility to report, it is necessary to define the terms “broker” and “investor” as they are used in Regulation C.

For purposes of the special broker rule, a “broker” is an institution that takes and processes a loan application and arranges for another institution to acquire the loan at or after closing; and an “investor” is an institution that acquires a loan from a broker at or after closing. [12 CFR, Part 203, Supplement I § 203.1(c)-2]A broker that makes a credit decision in connection with a loan application reports that decision, and a broker that does not make a credit decision in connection with a loan application does not report the application. [12 CFR, Part 203, Supplement I § 203.1(c)-2]Where an investor reviews a loan application and makes a credit decision regarding the application before closing, the investor reports that decision.

Thus, if the investor reviews an application before closing and acquires the loan following closing from the broker, the investor reports the loan as an originated loan and not as a purchased loan, regardless of whether the loan closes in the broker’s name or the investor’s name. In such instances, the broker would not report that it originated the loan.

In the subject scenario, the investor, and not the broker, is deemed to have made the credit decision, even if the broker also reviewed the loan application. The origination of a loan is reported by only one institution. [12 CFR, Part 203, Supplement I §§ 203.1(c)-2, 203.4(a)-1(iii), (iv)]However, if the investor does not review a loan application from a broker before closing, the investor reports only the closed loans that it purchases from the broker as purchased loans. In this situation, the investor does not report closed loans that it elects not to purchase from the broker. [12 CFR, Part 203, Supplement I § 203.1(c)-2]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

As a federally regulated bank, we always consider preemption of state laws and exemption from state laws. Where we usually get confused is the difference between the two. What is preemption and is it different from exemption? Also, what kinds of laws are preempted?

Preemption refers to a doctrine enshrined in the Supremacy Clause of the U.S. Constitution. This clause provides that certain matters are subject to national laws, rather than controlled by state or local laws. The former takes precedence over the latter. This is what is meant by the term “preemption.” Federal law provides some measure of preemption of certain state laws for federally chartered banks (national banks), federal savings and loan institutions, and federal credit unions. [12 USC § 85, 12 USC § 371, 12 CFR § 34.4, 12 CFR §§ 7.4008 & 7.4009; 12 USC § 1463, 12 USC 1464.12, 12 CFR part 560; 12 USC § 1757(5), 12 CFR § 701.21]Unlike preemption, which is based on federal law, an exemption is based on state law that provides an express exception from a particular state provision.

Federal law preempts state law when state law is in conflict with federal law (or when Congress has indicated an intention to “occupy the field”).

Generally, if there is a conflict between state law and federal law, state law is preempted or displaced.

The National Bank Act, which is the governing framework for the banking system, sets forth a number of preemptions of state laws relating to mortgage lending. [12 USC §§ 85, 371; 12 CFR §§ 7.4008, 7.4009, 34.4]State laws that are preempted include:

  1. Licensing, registration (except for purposes of service of process), filings, or reports by creditors.
  2. The ability of a creditor to require or obtain private mortgage insurance, insurance for other collateral, or other credit enhancements or risk mitigation, in furtherance of safe and sound banking practices.
  3. Loan-to-Value ratios.
  4. Terms of credit (i.e., schedules for repayment of principal and interest, amortization of loans, balance, payments due, minimum payments, or term to maturity of the loan, including the circumstances under which a loan may be called due and payable upon the passage of time or a specified event external to the loan).
  5. Aggregate amount of funds that may be loaned upon the security of real estate.
  6. Escrow or impound accounts and similar accounts.
  7. Security property, including leaseholds.
  8. Access to, and use of, credit reports.
  9. Disclosures and advertising (i.e., laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit-related documents).
  10. Processing, origination, servicing, sale or purchase of, or investment or participation in, mortgages.
  11. Disbursements and repayments.
  12. Interest Rates (viz., the limitations on charges that comprise rates of interest on loans by national banks are determined under federal law).
  13. Due-on-Sale clauses (with some exceptions).
  14. Covenants and restrictions that must be contained in a lease to qualify the leasehold as acceptable security for a real estate loan.
  15. Debt collection, contracts, torts, criminal law, Homestead laws, acquisition and transfer of real property, taxation, zoning (viz., state laws on these subjects are not inconsistent with the real estate lending powers of national banks and apply to national banks to the extent consistent with the decision of the Supreme Court in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al).
  16. Any other law that the OCC determines to be incidental to real estate lending transactions of a national bank (viz., Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996), or that is made applicable by federal law). [12 CFR § 34.4 (a) & (b)]

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

I have been reading about a recent important United States Supreme Court decision which affects fair housing laws. Can you elaborate on the details of the case for me?

On June 25, 2015, the United States Supreme Court (the “Court”) in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (the “Case”) upheld that “disparate impact” is a viable theory of liability under the United States Fair Housing Act. “Disparate impact” occurs when certain housing or lending policies, which are neutral or seemingly non-discriminatory on their face, have a disproportionally adverse effect or impact on a member of a protected class and there is no legitimate, non-discriminatory business need for the policy or practice causing such disparate impact.

In the Case, the Court ruled that a consumer may bring an action claiming fair housing discrimination based on disparate impact even if no intent to discriminate exists. The Court further upheld that liability may be found where a legitimate business interest for the policy or practice exists but there was a less discriminatory option available.

The decision in the Case is significant in that real estate and mortgage professionals may be found guilty of fair housing violations even if they do not intend for their policies and/or practices to discriminate against, or disproportionately affect, protected classes. Under the Fair Housing Act, protected classes include race or color, religion, national origin, sex, familial status (defined as children under the age of 18 living with a parent or legal custodian, pregnant women, and people securing custody of children under 18), and disability or handicap.

An example of disparate impact could be a situation where a landlord adopts a policy which only permits tenants who have with full-time jobs. While this policy may not violate fair housing laws, it could bar disabled individuals (a protected class) who may not be able to work full-time even though they may meet the financial qualifications for the rental.

By Neil Garfinkel, Esq., Partner-in-Charge of AGMB’s Real Estate & Banking Practices and Executive Director of Realty & Title Services Compliance Group, affiliates of Lenders Compliance Group

We know about the seven day waiting period requirement between providing the initial disclosures and consummation. We need to know the criteria to use in order to determine if the consumer may waive the waiting period based on a personal emergency? And if a consumer can waive the waiting period, how is this done?

For a closed-end credit transaction that is secured by the consumer’s dwelling and subject to RESPA (excluding timeshares), the creditor must deliver or place in the mail the initial TILA disclosure no later than the seventh business day before consummation of the loan transaction. [12 CFR § 226.19(a)(2)(i)] The waiting period commences when the creditor delivers or places the disclosures in the mail, and not when the consumer receives or is deemed to receive the disclosures.

If the extension of credit is necessary to meet a “bona fide personal financial emergency,” the consumer may modify or waive the waiting period after receiving the initial TILA disclosures. [12 CFR § 226.19(a)(3)]What constitutes a bona fide personal financial emergency is a matter of some consternation, because it is not statutorily defined for purposes of waiving the waiting period, even though the emergency must be one that needs to be met before the end of the waiting period. [12 CFR Supp. I to 226, Official Staff Commentary § 226.19(a)(3)-1] Whether an emergency rises to the level of a bona fide personal financial emergency – obviously a higher, yet undefined standard – is determined on a case-by-case basis. There are illustrations of such events, but circumstances can vary. It would be prudent to take a narrow view of what may qualify as a bona fide personal financial emergency.

Nevertheless, if a decision has been reached that the consumer is faced with a bona fide personal financial emergency and, therefore, may waive the seven business day waiting period, each consumer who is primarily liable on the legal obligation must give the creditor a dated, written statement that describes the emergency, specifically modifies or waives the waiting period, and bears the signatures of all the consumers who are primarily liable on the legal obligation. Printed forms may not be used for a consumer to waive the waiting period. [12 CFR § 226.19(a)(3); 12 CFR Supp. I TO 226, Official Staff Commentary § 226.19(a)(3)-1]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

We realize the TILA/RESPA rules are complex. An affiliate or ours is a real estate company. So, we are wondering how the new rules will affect real estate agents. Do you have a list of items that we consider important for real estate agents to know about the TRID requirements?

TRID is a new federal consumer disclosure law that goes into effect October 3, 2015. TRID will significantly change the way a mortgage lender discloses to consumers the terms, conditions and closing costs associated with most residential mortgage loans.

To assist real estate professionals in understanding what TRID is and how it will affect the residential closing and mortgage loan process, we have created a “Top Ten List” of things to know about TRID:

  1. TRID stands for TILA-RESPA Integrated Disclosure. TILA stands for Truth-in-Lending Act and RESPA stands for the Real Estate Settlement Procedures Act.
  2. TRID is a federal law which requires mortgage lenders to provide consumers with certain disclosures during the loan application and closing process. These disclosures summarize the terms of the loan, such as the interest rate, and the costs associated with obtaining the loan.
  3. There are two new consumer disclosure forms required by TRID, (i) the Loan Estimate and (ii) the Closing Disclosure.
  4. The Loan Estimate, or “LE,” replaces the current disclosure forms known as the Good Faith Estimate and initial Truth-in-Lending disclosure (the “TIL”). The purpose of the LE is to give consumers a better, more clear understanding of the terms of their loan and the costs associated with such loan. With more complete knowledge the consumer can then, in theory, shop for and make an informed decision about the mortgage product that best fits their needs.
  5. The regulatory body responsible for implementing and overseeing TRID, the Consumer Finance Protection Bureau (the “CFPB”) refers to the LE as a “Know before you Owe” disclosure.
  6. The Closing Disclosure, or “CD,” replaces the current disclosure forms known as the HUD-1 Settlement Statement and the final TIL. The purpose of the CD is to finalize information that appears on the LE, including the mortgage terms and the projected payment amount, as well as to summarize the closing costs incurred by the purchaser and seller.
  7. TRID imposes certain dates by which the LE and CD must be delivered to a borrower. The Loan Estimate must be provided to the consumer by the third business day after receipt of a completed loan application and at least seven business days prior to the closing of the loan. The Closing Disclosure must be delivered to and received by the borrower at least three business days prior to “consummation” of the transaction (usually the closing of the transaction). The three business day period can be referred to as the “Waiting Period” and a closing cannot occur until the conclusion of the Waiting Period.
  8. There are three events that require a re-disclosure of the CD and a new Waiting Period prior to closing. They are:
    1. An increase in the annual percentage rate (APR) by more than 1/8 of a percentage point for a fixed rate loan or 1/4 of a percentage point for an irregular transaction, such as a variable rate transaction;
    2. The addition of a prepayment penalty; and,
    3. Changes in the loan product, such as from a fixed rate to an adjustable rate loan. Although the Waiting Period will not be required to commence again for changes other than these three events, the lender is still responsible for giving the borrower a new CD if there are any changes to the CD after it is presented to the borrower.
  9. The CFPB recently announced that it will be issuing a proposed amendment to delay TRID’s effective date from August 1, 2015 to October 3, 2015. TRID will apply to all applicable mortgage applications taken on and after October 3, 2015.
  10. Real estate agents are an integral part of the closing process and will play an important role in facilitating the implementation of TRID and its various delivery requirements. More specifically, real estate professionals should be prepared to do the following things:
    1. Educate consumers and professionals with respect to TRID and its various elements,
    2. Set reasonable expectations for all relevant parties regarding potential closing delays,
    3. Assist the various professionals associated with the closing process in creating a collaborative work environment so that all closing costs can be provided to the lender in order to prepare the CD, and
    4. Understand the situations which require a new Waiting Period as well as situations, such as adjustments necessitated by a pre-closing walk-through that do not require a new Waiting Period.

By Neil Garfinkel, Esq., Partner-in-Charge of AGMB’s Real Estate & Banking Practices and Executive Director of Realty & Title Services Compliance Group, affiliates of Lenders Compliance Group

Is there a requirement to provide the credit report to a consumer? If so, do we need to also give the credit score to the consumer?

The Fair Credit Report Act (FCRA) does not place a requirement on a financial institution to provide to the consumer a copy of a credit report that the institution obtains on the consumer. However, the FCRA’s provisions provide that a consumer reporting agency (“CRA”) may not prohibit the user of a credit report furnished by the CRA from disclosing the contents of the report to the consumer in instances where an adverse action is taken against the consumer based in whole or in part on the credit report. [15 USC § 1681e(c)]Under the FCRA, specifically section 609(g), a financial institution who makes or arranges loans and who uses a consumer credit score in connection with an application initiated or sought by a consumer for a closed-end or open-end loan for a consumer purpose, that is secured by one to four units of residential real property, must provide the following to the consumer:

  1. A copy of the credit score and accompanying information that is obtained from a CRA or which was developed and used by the user of the information; and
  2. A copy of the “Notice to the Home Loan Applicant” (“Notice”). [15 USC §§ 1681g(g)(1)(A), 1681g(f)]

The Notice must include the name, address, and telephone number of each CRA that provided a credit score that was used. [15 USC § 1681g(g)(1)(D)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

We would like to know how to handle nonpublic personal information where our affiliates are involved. Do we both have the same restrictions on disclosure?

A financial institution may disclose nonpublic personal information (NPI) to its affiliates, but the affiliates are subject to the same restrictions on reusing or re-disclosing the information as the originating financial institution. [15 USC § 6802(c)]The Gramm-Leach-Bliley Act (GLBA) defines an “affiliate” as “any company that controls, is controlled by, or is under common control with another company.” [15 USC § 6809(6)]Subject to certain exceptions, GLBA prohibits disclosure of a consumer’s NPI to non-affiliates unless the disclosing financial institution has given the consumer a privacy notice and an opt-out notice, along with a reasonable opportunity to opt out, and the consumer does not opt out of the information sharing with non-affiliates. [16 CFR § 313.10]The exceptions where financial institutions may share NPI with certain non-affiliated third parties without having to comply with the privacy notice and opt-out requirements are:

  1. Administering or enforcing transactions authorized by the consumer;
  2. Effectuating transactions with the consent of the consumer;
  3. Protecting the confidentiality of the financial institution’s records;
  4. Providing information to rating agencies;
  5. Disclosing data to law enforcement agencies to the extent required;
  6. Providing information to consumer reporting agencies as delineated in FCRA; and
  7. Complying with all federal, state or local laws or regulations.
    [15 USC § 6802(e); 16 CFR §§ 313.14, 313.15]

Mention also should be given to the condition where an exemption is allowed for the opt-out requirements, but not the notice requirements. This condition exists for entities that market the financial institution’s products and services, and products or services “offered pursuant to joint agreements between two or more financial institutions.” [15 USC § 6802(b)(2); 16 CFR § 313.13]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

We are having an internal debate as to how the HPML APOR is determined when a rate lock has expired and the rate is relocked.

When the rate lock expires, we need to relock the interest rate which provides a new lock in date, which in turn results in a new APOR being used for the purposes of the HPML test. This can be problematic in an improving market. For example, in instances in which we have relocked the interest rate and terms identical to those set forth in the expired lock, the new APOR is lower and the loan may now fail the HPML test. This situation often arises when the loan officer allows the rate to expire in order to enable the loan officer to relock at the same rate and pricing without charging the borrower a rate lock extension fee.

Our Secondary Department has determined that the APOR for the HPML test should be based on the rate sheet date used to price the loan as that is how the rate is “set”.

Can you please provide us with some guidance as to the date to be used? Also, if the rate lock has expired completely, can we simply extend the rate lock keeping the same rate/pricing and lock in date, as opposed to relocking the loan?

For the purposes of the HPML test, the APOR should be based on the date the rate is actually locked pursuant to the last rate lock agreement.

See Official Commentary to paragraph 35(a):

“2. Rate set. A transaction’s annual percentage rate is compared to the average prime offer rate as of the date the transaction’s interest rate is set (or “locked”) before consummation. Sometimes a creditor sets the interest rate initially and then re-sets it at a different level before consummation. The creditor should use the last date the interest rate is set before consummation.”

See also FFIEC’s “Data Requirements for the Rate Spread Calculator”:

“If an interest rate is set pursuant to a “lock-in” agreement between the lender and the borrower, then the date on which the agreement fixes the interest rate is the date the rate was set. If a rate is re-set after a lock-in agreement is executed (for example, because the borrower exercises a float-down option or the agreement expires), then the relevant date is the date the rate is re-set for the final time before closing. If no lock-in agreement is executed, then the relevant date is the date on which the institution sets the rate for the final time before closing.

As to “extending” a rate, when the rate lock agreement has completely expired instead of relocking, you cannot do so. If the rate has expired completely, the loan has started to float. Thus, you need to relock.

By Joyce Wilkins Pollison, Director of Legal & Regulatory Compliance at Lenders Compliance Group

Do we still have to use state law pre‐closing disclosures on or after the August 1, 2015 TRID effective date?

TRID does not eliminate or replace other state‐mandated disclosures. The new disclosure regime only serves to replace existing federal law requirements. The comments to RESPA’s Regulation X specifically provide that “[s]tate laws that give greater protection to consumers are not inconsistent with and are not preempted by RESPA or Regulation X.” [Regulation X § 1024.5(c)(1)]This provision is not changed by TRID, so it remains in effect on and after August 1, 2015. Because state law disclosures are generally deemed to provide more protection for the borrower, TRID will not affect existing state‐mandated forms and procedures. For instance, states give deference to TRID with respect to the intent to proceed requirement. However, a state may provide greater protection to consumers with respect to other regulatory requirements set forth in the CFPB’s TRID rule. States are currently aligned with the CFPB regarding the intent to proceed mandate.

Thus, states permit the exception allowing a creditor or other person to impose a bona fide and reasonable fee for obtaining the consumer’s credit report, while also accepting the CFPB’s prohibition under TRID that a creditor or other person may not impose a fee on a consumer before the consumer has received the Loan Estimate and Indicated an intent to proceed with the transaction. [Regulation X § 1024.7(a)(4) and (b)(4) and TILA Regulation Z § 1026.19(a)(1)]You should check your individual state laws and regulations to determine whether adjustments to state disclosures are planned in conjunction with TRID implementation.

By Brennan Holland, Director of Legal & Regulatory Compliance at Lenders Compliance Group

Do services – and the fees for such services – that are not required by a lender need to be disclosed on the Loan Estimate once the TILA-RESPA Integration Rule becomes effective on August 1, 2015?

Yes, the CFPB has made it clear that fees paid by the borrower, even if not required by the lender or part of the loan transaction must be disclosed on the Loan Estimate. This would include the commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, engineer inspection fees and personal attorney fees.

Specifically, a creditor is required to itemize in the column titled “Other” in the Closing Costs Details provided on page 2 of the Loan Estimate “any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware”. [12 CFR 1026.37(g)(4)]The Official Commentary states:

Examples. Examples of other items that are disclosed under § 1026.37(g)(4) if the creditor is aware of those items when it issues the Loan Estimate include commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, and fees for inspections not required by the creditor but paid by the consumer pursuant to the property contract. [Official Commentary: 12 CFR 1026.37(g)(4)]
Further, Official Commentary provides additional guidance when discussing the good faith requirement for services chosen by the consumer that are not required by the creditor. [Official Commentary: 12 CFR 1026.19(e)(3)(iii)-3]The foregoing comment states, in pertinent part, that:

… if the subject property is located in a jurisdiction where consumers are customarily represented at closing by their own attorney, even though it is not a requirement, and the creditor fails to include a fee for the consumer’s attorney, or includes an unreasonably low estimate for such fee, on the original estimates (Loan Estimate) then the creditor’s failure to disclose, or under-estimation, does not comply with § 1026.19(e)(3)(iii).

As this is a big change from existing requirements, brokers, lenders and loan originators need to make sure that they have policies and procedures in place to comply with the foregoing requirements.

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

We have been cited by our regulator for disparate treatment. The matter is with our attorneys. However, in our discussions with staff it seems that we do not know the difference between overt discrimination, disparate treatment, and disparate impact. From a regulatory perspective, what is overt discrimination, disparate treatment, and disparate impact?

Courts have held that there are primarily three classes of discrimination, each with its own proof requirements, under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Going back to 1994, there was an Interagency issuance published in the Federal Register that affirmed this observation. The issuance was called Policy Statement on Discrimination in Lending (“Policy Statement”). [Federal Register, Vol. 59, No. 73, April 15, 1994, Notices, 18266-18274]These three methods of discrimination are:

  1. Overt evidence of discrimination, which occurs when a lender blatantly discriminates on a prohibited basis;
  2. Disparate treatment, which occurs when there is evidence that a lender treats applicants differently based on one of the prohibited facts; and
  3. Disparate impact, occurring when there is evidence that a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity. [Supra, 18266, 18268]

With respect to disparate treatment, the Policy Statement provides that disparate treatment ranges from overt discrimination to more subtle disparities in treatment and, importantly, does not require any showing that treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself.

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

We maintain good disclosure procedures, but sometimes we have a violation of TILA. The mistake is not intentional. It is systemic. Still, what do we say to a regulator when faced with a violation that was not in our control?

If a creditor (or assignee) can show by a preponderance of evidence that the violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such errors, the creditor (or assignee) will not be held liable in a civil action for the violation.

Some examples of bona fide errors include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing. However, an error of legal judgment with respect to a person’s obligations under TILA is not a bona fide error. [15 USC § 1640(c)]Regulators have a view of errors that the ancient Stoics would appreciate. Epictetus, the great Stoic philosopher, said:

There are things which are within our power,
and there are things which are beyond our power.
(The Enchiridion, by Epictetus.)

Generally, when it comes to the regulators’ perspective, ‘things which are within our power’ are subject to higher liability and administrative action with respect to statutory penalties and remedies than ‘things which are beyond our power.’

Systemic errors may be controversial, given the complexity of system maintenance over a long period of time. Depending on the type of violation caused by this kind of TILA error, it is a good idea to notify the supervising regulator of the event or document the corrective action. Both responses would likely be viewed as acting in good faith.

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

Recently, we were faced with the need to get medical information from an applicant in order for the underwriter to approve the applicant’s eligibility. Since we had never had to do this before, it set off a lot of alarm bells in our compliance department. We are hoping you could offer some guidance. Basically, what we need to know is this: what are the conditions that allow us to obtain and use an applicant’s medical information in order to determine the applicant’s eligibility for credit?

The rule of thumb is that a lender may not obtain or use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility or continued eligibility for credit unless the use is authorized under the Fair Credit Reporting Act (FCRA). [15 USC §§ 1681b(g)(1), (2)]With few exceptions, if the lender does not specifically request medical information a violation of this prohibition does not take place; that is, if the creditor receives medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility or continued eligibility for credit without specifically requesting medical information, the information is not deemed to be a violation of the prohibition. [12 CFR § 334.30(c), 12 CFR § 222.30(c), inter alia]With respect to use of medical information to determine borrower eligibility, the lender may use the consumer’s medical information in determining eligibility or continued eligibility for credit as long as:

  1. The information is the type of information that is routinely used in making credit eligibility determinations, such as information relating to debts, expenses, income, benefits, assets, collateral or the purpose of the loan (including the use of loan proceeds);
  2. The creditor uses the medical information in a manner and to an extent that is no less favorable than the creditor would use comparable information that is not medical information in a credit transaction; and,
  3. The creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of the credit determination. [12 CFR § 334.30(d)(1), 12 CFR § 222.30(d)(1), inter alia]

This means that a lender may treat medical information of a type that is routinely used in credit eligibility determinations in the same manner that the creditor treats the same type of information that is not medical information.

It is worth mentioning that there are special exceptions that permit a creditor to obtain and use medical information. For instance, one exception is where a creditor uses medical information at the request of the consumer to determine if the consumer qualifies for a legally permissible special credit program or credit-related assistance program that is designed to meet the special needs of consumers with medical conditions, and other conditions are also satisfied. [12 CFR § 334.30(e)(1), 12 CFR § 222.30(e)(1), inter alia]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

Much has been in the news recently of very large companies experiencing failures of their Information Technology infrastructure to prevent access to private, secure data. Breaches in security have compromised very large companies like Sony, Target and Home Depot.

As a small financial company, should I still be concerned?

The simple answer is “Yes!”

Compliance and security issues keep financial industry IT professionals up at night. And for good reason. Security breaches and instances of non-compliance can lead to fines, a loss of customer confidence and even criminal charges in extreme cases of negligence. The problem is that maintaining compliance and ensuring data protection is both time consuming and complicated.

Since the financial crisis, regulators have increased requirements and scrutiny of financial institutions for maintaining compliance. At the same time, every financial services organization needs to be aggressive about increasing and improving their services in order to remain competitive and attract new customers.

IT departments within financial organizations are facing unprecedented change:

  • Companies now face competition on a global scale with nanosecond transactions
  • Customer applications are on 24x7 and outages are unacceptable
  • Security threats have become the #1 IT issue
  • Company reputation / brands threats – the Ponemon Institute reported in September 2014 that 43% of companies experienced a data breach in the past year
  • Cloud, Big Data, Mobility & Security require additional investments in order to compete
  • IT budgets continue to be constrained and/or are shrinking

There are also market challenges financial companies must deal with:

  • 24x7 Infrastructure (always on)
  • Cost of downtime is ever increasing
  • Cybercrime is rampant
  • New data privacy laws

By Kevin Origoni, Director of IT and Information Security at Lenders Compliance Group

Much has been said about obtaining E-Sign consent. But we received a notice from our borrower to withdraw the consent they had previously given to us. Now we are unsure how their withdrawal of E-Sign consent affects the disclosures that they had agreed to receive and already received. What are the disclosure consequences in a withdrawal of E-Sign consent?

The withdrawal by the consumer of consent to receive electronic records does not affect the legal effectiveness, validity or enforceability of electronic records provided to the consumer before the implementation of the withdrawal of such consent, if the applicable procedures to obtain the E-Sign consent have been fully implemented. [15 USC § 7001(c)(4)]For instance, applicable procedures include that, prior to consenting, the consumers are to be provided with a statement of the hardware and software requirements for access to and retention of the electronic records, and they also consent electronically in a manner that reasonably demonstrates that they can access information in the electronic form that will be used to provide the information that is the subject of the consent.

The consumers’ withdrawal of consent to receive electronic records is effective within a reasonable period of time after the record provider receives the withdrawal.

Under certain conditions, the consumers’ failure to comply may be treated as a withdrawal for E-Sign consent purposes if, after consumers give consent and upon their election, the following circumstances pertain:

  1. A change in the hardware or software requirements needed to access or retain electronic records creates a material risk, such that consumers will not be able to access or retain a subsequent electronic record that was the subject of the consent; and
  2. Consumers are provided with a statement of both the revised hardware and software requirements for access to and retention of the electronic records as well as the right to withdraw consent without the imposition of any fees for such withdrawal, and without the imposition of any condition or consequence that was not disclosed. The foregoing applies where, prior to consenting, consumers were provided with (A) a clear and conspicuous statement informing them of any right or option they have to the record provided or made available on paper or in non-electronic form; and (B) they had been notified of their right to withdraw the consent to have the record provided or made available in an electronic form, and of any conditions, consequences (which may include termination of the parties’ relationship), or fees in the event of such withdrawal.

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

Our state banking department has cited us for a violation of RESPA, because we did not comply with RESPA’s “Required Use” provisions. What is “Required Use” and how can we avoid this violation in the future?

The Real Estate Settlement Procedures Act (RESPA) contains a definition relating to the use of a settlement service provider. Under RESPA, “required use” occurs when a loan applicant must use a particular provider of a settlement service in order to have access to some distinct service or property, and the applicant will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.
[24 CFR § 3500.2(b)]The following two caveats should be followed in order to avoid causing a violation of RESPA if, for instance, the lender offers a package, or a combination of settlement services, or offers discounts or rebates to consumers for the purchase of multiple settlement services:

  1. Any package or discount is optional to the purchaser; and,
  2. The discount is a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.

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

We are a residential mortgage lender. Customers are asking us if we can order an appraisal prior to their submission of an application to us so that they are sure that the property will appraise sufficiently. We are aware that if a customer orders an appraisal we would not be able to accept it, as it will not be in our name and our investors do not allow for a transfer of the appraisal. We would like to accommodate our customers by offering this service and helping them avoid paying for an appraisal twice.

We envision that we will order the appraisal with the customer paying for the appraisal at the time it is done. The appraisal report will come directly to us as the lender and then we will provide a copy of the appraisal to the customer. If the customer then wants to proceed, we will use the same appraisal to support the loan. Is the foregoing procedure permissible and, if so, are there any risks to proceeding in this manner?

While it is understandable that the customer does not want to pay for an appraisal twice and you as the lender want to accommodate your customers, for the reasons set forth below, it is recommended that a lender does not order the appraisal prior to issuing initial disclosures and obtaining an intent to proceed. Your scenario is fraught with RESPA, Fair Lending and UDAAP implications.

You state that the potential applicant will pay for the appraisal “at the time it is done”. If the idea is that the customer will pay the appraiser directly at the time he does the appraisal, and if the appraisal is to be later used to support the loan, this is not permissible. Appraiser Independence requirements do not permit an appraiser to collect payment directly from the borrower. The lender or its designated third party must select, retain, and provide for all compensation to the appraiser. So, if the appraisal is to be used in the loan origination process, the lender must be the party that orders the appraisal and pays for same.

Similarly, it is not permissible for the customer is to pay the lender upfront with the lender remitting payment to the appraiser, as this scenario constitutes a RESPA violation. In order to collect payment from the applicant, the lender must charge the applicant the cost of the appraisal. Under RESPA, a lender, cannot charge a potential loan applicant any fee, including an appraisal fee, prior to issuing the GFE and the applicant indicating an intent to proceed. Although RESPA does not prevent a lender from ordering the appraisal prior to the issuance of the GFE and receipt of an intent to proceed, in the event the potential applicant does not proceed with an application or the transaction does not close, the lender runs the risk it will not be able to seek reimbursement from the potential applicant.

Even if the lender is willing to assume the risk of non-payment, this scenario presents many other issues, including possible TILA and RESPA disclosure violations. The lender needs to determine what information it has in its possession. If the loan originator has enough information from the potential applicant to identify the property and is willing to order an appraisal (and take the risk of not being paid for the appraisal), it is probable that the LO has sufficient information from the applicant to have an application triggering disclosure obligations.

Additionally, although a lender may look at absorbing the cost of the appraisals that do not close as a “cost of doing business”, this scenario may subject a lender to fair lending implications. It is difficult to justify having one set of applicants who are required to pay for appraisals up front (after giving an intent to proceed) but never close the transaction for whatever reason, and another group of applicants who obtain “free” appraisals because the application fails to close. If a non-protected group is receiving the benefit of these “free” appraisals, while a protected group is not receiving this benefit, there will be a fair lending issue.

In addition to fair lending concerns, Unfair Deceptive or Abusive Acts and Practices (UDAAP) should be considered. If a loan officer tells the potential applicant (who has not received a GFE or other disclosures) that the lender will order the appraisal which the applicant can pay for at a later date, the lender may be creating an impression in the applicant’s mind that the applicant is obligated to proceed with the transaction notwithstanding that he has not received the GFE or other disclosures. The purpose of the GFE is to allow the applicant to compare offers, understand the real cost of the loan, and make informed decisions in choosing a loan. In ordering the appraisal, the LO may be creating the impression that the applicant is not permitted to shop and compare loans, and must continue with the application, irrespective of the fact that the applicant has not been given sufficient information to make an informed decision in choosing a loan. This could be viewed as a deceptive practice.

The bottom line is that the appraisal ordered by the lender is for the lender’s benefit. If the potential applicant wants an appraisal to verify value prior to bidding on a property, refinancing, etc., it is best that he directly contract for his own appraisal.

By Joyce Wilkins Pollison, Director of Legal & Regulatory Compliance at Lenders Compliance Group

Once a consumer locks his or her interest rate, are there any waiting period requirements prior to closing?

In certain instances, a lender will not be able to close a mortgage loan immediately following a consumer locking the rate. Waiting period requirements exist in some instances depending on the circumstances as well as the state in which the subject property is located.

There are many considerations to take into account when determining whether a waiting period exists between rate lock and closing.

First, a mortgage lender must consider whether the seven business day waiting period from initial disclosures expired. A creditor must deliver or mail initial disclosures no later than three business days after receiving the consumer’s application and at least seven business days before consummation.

If this requirement has been met, a mortgage lender must next consider whether the rate lock resulted in any changes in terms requiring re-disclosure of the Truth-in-Lending Statement (“TIL”) due to inaccuracy of the annual percentage rate (“APR”). The APR is inaccurate if the APR varies by more than one-eighth of one percent (.125) in a regular transaction or more than one quarter of one percent (.25) in an irregular transaction; and, if either inaccuracy occurs, a revised TIL must be re-disclosed. Irregular transactions include transactions with multiple advances, irregular payment periods, or amounts other than an irregular first or last period or payment. If the APR is inaccurate and re-disclosure is required, the mortgage loan transaction cannot close until three business days after the consumer receives the revised TIL.

In addition to the above waiting periods, various states impose additional waiting periods between rate lock and closing. Currently, the following states require a waiting period between rate lock and closing in certain instances:

Colorado Mortgage lenders must provide borrowers with a final TIL or a similar written disclosure (containing the APR, finance charge, amount financed, total amount of each payment, and amount of points or prepaid interest) after a rate lock is entered into and prior to closing. 4 Colo. Code Regs. 725-3:5.14
District of Columbia Mortgage lenders must provide each borrower with a Financing Agreement or written Commitment setting forth all terms of the loan, including the interest rate and points and fees, at least 72 hours before settlement. D.C. Code § Ann. 26-1113
Maryland If the terms initally disclosed as part of Maryland's Financing Agreement change or are subject to change, a final Financing Agreement or executed commitment must be provided at least 72 hours before closing, with final terms (including the effective interest rate and restating all the remaining unchanged provisions of the Financing Agreement). Md. Code Ann. Com. Law § 12-125(c)
New Jersey The interest rate (or inital interest rate for the variable loans), discount points or fees charged by the lender must be fixed no later than midnight of the third business day before the date the loan closes. N.J.A.C. 3: 1-16.5
Ohio A registrant or licensee must inform the borrower of any material changes in the terms of the loan not later than 24 hours after the change occurs or 24 hours before the loan is closed, whichever is earlier. Ohio Rev. Code Ann. § 1322.063
Vermont Lenders must issue commitments in connection with every mortgage loan. Amoung other requirements, the commitment must include the rate program (locked or floating) and interest rate (if known). All commitment letters must be delivered to the borrorwer not less than 24 hours prior to the closing. Regulation B-98-1
Wyoming A mortgage lender may not receive a fee that exceeds the fee disclosed on the most recent Good Faith Estimate ("GFE") unless the need to charge the fee was not reasonable foreseeable when the GFE was written and the lender has given the borrower, not less than three business days before signing the closing documents, a new GFE, a clear written explanation of the increase and the reason for the increased fees. Wyo. Stat. Ann. § 40-23-113

There are several factors to take into account once a consumer locks his or her interest rate and prior to closing the loan. Lenders must be cautious when determining if a waiting period exists. Waiving a waiting period for a bona fide emergency or other reason should likely only occur in rare instances and must be properly evaluated and documented.

By 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 stateside licensed mortgage lender in many states, I am frustrated with the process of manually managing the surety bond and related requirements. Are there any plans in place to automate this process?

A number of state laws and regulations require financial service licensees to obtain a surety bond as a condition of licensure. State regulators and consumers can file claims against a surety bond to cover fines or penalties assessed or provide restitution to consumers due to the failure of a licensee to comply with licensing or regulatory requirements.

Additionally, the SAFE ACT imposes the requirement of net worth or surety bonds. This requirement stipulates that mortgage loan originators obtain their own surety bond or be covered by an aggregate surety bond under the sponsoring company’s blanket coverage surety bond. Approximately forty-eight states require this bond as a condition of originating residential home mortgages. State regulators provide statutes and regulations that spell out the specific requirements that must be met and maintained in order to become licensed and remain licensed.

At this time, NMLS has 177 license authorities on the system that require surety bonds as a condition of obtaining and keeping a license.

NMLS functionality is currently limited to the uploading of a surety bond document but does not provide any solutions for tracking bonds or requirements for maintaining bond information that is validated by insurance companies or surety bond providers. The manual tracking of these bonds is very time consuming and requires hands-on monitoring and reviewing by agency employees resulting in processing delays of renewals and approvals of new licenses.

In the coming two years, NMLS plans to provide functionality that will dramatically change how industry and regulators handle bond requirements.

State regulators have the following expectations for NMLS Electronic Surety Bond (NEBS) functionality:

  • Regulators will be able to track surety bond compliance;
  • The process for regulators to make a claim against a bond will be streamlined;
  • The surety bond forms and processes will be simplified;
  • Reliance on paper surety bonds will be dramatically reduced by using electronic bonds;
  • The monitoring and enforcement of surety bonds thresholds will be accomplished by relying on information on the NMLS system such as the Mortgage Call Reports; and,
  • Automation of the process will also include automating reports, notifications, deficiencies and other related issues.

At this year’s NMLS Annual Conference, representatives from the Conference of State Bank Supervisors, state banking agencies and the insurance industry discussed some of the steps being taken to accomplish the objective of automating the process. A working group has been established that includes industry representatives and eight states.

Basically, only insurance companies and surety bond providers that are entitled in NMLS will be able to provide bonds to their licensee clients. It is anticipated that some states will need to modify their statutes, regulations and rules prior to opting into the electronic bond system.

The entitled companies will designate the appropriate bond in line with bond limits that will be made part of the entity’s record. Going forward, the bond will be continuous and information from the Mortgage Call report will be used to determine the adequacy of the bond amount.

While there are still some issues that need to be worked out, the automation process is well underway and all involved can look forward to the day in the not too distant future when the process will be automated.

By Alan Cicchetti Director of Agency Relations at Lenders Compliance Group

Under RESPA, lenders are allowed to charge a cushion for maintaining an escrow account up to two months. Are there state laws that would be more restrictive? For example, are there states that will not allow any cushion at all or allow only up to one month cushion?

During the course of the loan, Section 10 of RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year. (The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.)

However, state law may impose more restrictive limits on the amount of cushion a lender may establish and maintain. As of today’s date, the chart below shows those states with express escrow cushion requirements:

Arizona 2 month max cushion
Montana Escrow account may not exceed 110% of projected amount needed to pay escrow expenses unless written agreement between and lender for additional cushion.
Nebraska 2 month max cushion
Nevada Must require contribution in an amount resonable necessary to pay obligations as they become due (essentially, no cushion)
North Dakota Max cushion equals amount needed to pay assessments during calendar year + $300
Oregon Loans <$100k = 1 month max cushsion
Tennessee 2 month max cushion
Utah 2 month max cushion
Vermont 1 month max cushion

By Brennan Holland, Director of Legal & Regulatory Compliance at Lenders Compliance Group

I am a mortgage broker, one-man shop. I have been told that I must have an anti-money laundering program in place and have a test of the program conducted by a third party. Given that my company consists only of me, this requirement seems very onerous and expensive. Must I have such a program in place and, if so, what does it consist of?

Yes, as a mortgage broker, you must have an Anti-Money Laundering Program in place, regardless of whether you are a company employing 100 loan originators or a ‘one-man shop’.

The Bank Secrecy Act of 1970 (BSA, or “Act”) requires financial institutions to assist U.S. government agencies in detecting and preventing money laundering. Among the activities to be performed by a financial institution is the reporting of suspicious activity that might signify money laundering. The Financial Crimes Enforcement Network (FinCEN) is responsible for implementing and enforcing compliance with the BSA.

On February 7, 2012, FinCEN extended the requirement for an Anti-Money Laundering Program to include residential mortgage loan originators (RMLOs) as it was thought that RMLOs could fill a regulatory gap open to exploitation by criminals. RMLOs, as the primary providers of mortgage financing, deal directly with consumers, and are in a unique position to identify and assess money laundering fraud. Under the Act, an RMLO includes a “person who accepts a residential mortgage loan application, or offers or negotiates terms of a residential mortgage loan”, such as a mortgage broker. [31 CFR § 1010.100(lll)(1)(iii)] The requirement became effective August 13, 2012.

An RMLO’s AML Program, at a minimum, should consist of the following four elements: (1) policies, procedures and internal controls; (2) designation of an AML Compliance Officer; (3) on-going training; and, (4) an independent test. A brief overview of each of these elements is set forth below.
CFR: Title 31, Subtitle B, Chapter X, Section 1029.210 (a)-(d)

First, you must develop and implement policies, procedures and internal controls designed to limit and control risks and achieve compliance with the BSA. The policies and procedures should be based upon a risk assessment of your company, identifying the level of risk posed by your customers. Such an assessment should take into account your products and services, your geographic lending locations, and customer markets served by your company. Additionally, the Program should include sound policies and processes to verify your customer’s identity and information. The Program should also contain methods for identifying suspicious activity, such as a red flags worksheet, and the procedures to be followed upon discovery of such activity.

Second, the company must appoint an AML Compliance Officer, which in the case of your one-man shop, would be you. This individual is responsible for managing AML compliance at the company. The AML Compliance Officer must monitor the compliance of all personnel with your AML Program, update the Program as necessary, and ensure that all affected personnel are trained on the various AML components.

Third, training on at least an annual basis is essential. Any company personnel who handles any aspects of a residential mortgage loan transaction must be kept informed about both the BSA and its regulations and your company’s specific policies, procedures and processes. It is essential that should an employee identify a red flag, the employee must know the procedures to be followed in order to bring the matter to a resolution. Thus, in a small shop, it is most likely that training should be required of all employees.

Fourth, your company’s AML Program should require annual independent testing to verify the effectiveness of the Program. This testing is generally in the form of an audit and can be performed by a third party or a Company employee. If it is performed by a company employee, it cannot be performed by the AML Compliance Officer or anyone reporting to the AML Compliance Officer. The frequency of testing is risk-based. Generally, regulators recommend that the testing be conducted no less than every 12 to 18 months and the scheduling of the audit be done commensurate with the company’s size, complexity, and risk profile. The findings of the AML audit may indicate the frequency of testing. A risk assessment and testing should be conducted as loan products, services, or your business changes.

By Joyce Pollison, Director of Legal & Regulatory Compliance at Lenders Compliance group

What is an acceptable defect rate target? Has the mortgage industry set a maximum defect rate target that lenders need to adhere to?

No, at this point there is no acceptable defect rate standard established by the mortgage industry. However, Fannie Mae requires lenders to establish a methodology for identifying, categorizing, and measuring defects and trends against established defect rate targets in order to effectively evaluate and measure its loan quality standards.

Defects are defined as findings, errors or mistakes found within the loan documents of a loan file. Findings found within the compliance documents are not included in the defect rate calculations.

The Gross Defect Rate is calculated by dividing the number of loans with defects by the number of loans in the Quality Control sample for the period being audited.

The Net Defect Rate is calculated by dividing the number of loans with defects (gross defects), minus the defects that have been corrected or cured, by the number of loans in the Quality Control sample for the period being audited.

Target defect rates need to be established as reasonably low as possible and based upon the current defect rates.

Lenders should review the current actual defect rates obtained from their Post Closing Quality Control Audits and then set their Gross and Net Targets accordingly, for the purposes of improving the quality standards. Once the defect rate targets are set, a lender should develop procedures or an action plan to reduce the defect rates to the new target levels. Defect rate targets must be reviewed at least annually and reset, if necessary.

By Bruce Culp, Director of Loan Analytics and Quality Control at Lenders Compliance Group

Our loan officer compensation plan has been approved by the Board of Directors. Over time, it seems that the factors used for adjusting compensation have changed. We want a core set of compensation factors that must always be applied. Is there a minimum set of compensation factors?

There is a set of factors, mostly in the form of illustrative examples; nevertheless, if these are to be used as a sort of core set of compensation methods, they can be relied on – unless otherwise prohibited by law. This list is not to be viewed as exhaustive.

Many compensation plans have at least the following nine compensation methods:

  1. The loan originator’s overall loan volume delivered to the creditor. This can be based on the total dollar amount of credit extended or the total number of originated loans.
  2. The long term performance of the originator’s loans.
  3. An hourly rate of pay to compensate the originator for the actual number of hours worked.
  4. Whether the consumer is an existing customer of the creditor or a new customer.
  5. A payment that is fixed in advance for every loan the originator arranges for the creditor. For illustration purposes, an example would be $600 for every originated loan or $1,000 for the first 1,000 arranged loans and $500 for each additional arranged loan.
  6. The percentage of applications submitted by the loan originator to the creditor that result in consummated transactions.
  7. The quality of the loan originator’s loan files submitted to the creditor. An example would be the accuracy and completeness of the loan documentation.
  8. A legitimate business expense, such as fixed overhead cost.
  9. Compensation that complies with the exception for compensation based on a fixed percentage of the transaction amount, which can be subject to a minimum and maximum dollar amount.

[75 FR 58,509, 58,536, codified in 12 CFR Supplement I to Part 226-Official Staff Commentary § 226.36(d)(1)-3]
By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice

I have heard of recent CFPB’s enforcement actions involving deceptive advertising claims. Can you provide me with more detail?

Recently, the CFPB (or “Bureau”) filed a lawsuit against one mortgage lender for false and misleading reverse mortgage advertisements. [United States District Court for the District of Maryland, Baltimore Division on February 12, 2015 (CFPB v. All Financial Services, Inc.)]

Two other mortgage lenders have consented to the issuance of a Consent Order which, among other things, obligates the lenders to file compliance plans with the CFPB, pay significant civil monetary penalties and report certain of their actions to the CFPB. [Administrative Proceeding File No. 2015-CFPB-0005 dated February 10, 2015 (In the Matter of American Preferred Lending Inc.); Administrative Proceeding File No. 2015-CFPB-0006 dated February 11, 2015 (In the Matter of Flagship Financial Group, LLC)]

In the lawsuit against All Financial Services, the Bureau alleged, among other things, that the lender misrepresented the source of its advertisement by including an eagle resembling the Great Seal of the United States with the headers, “Government Lending Division” and “Housing and Recovery Act of 2008 Eligibility Notice.” Further, the Bureau claimed that the lender advertising a reverse mortgage payment as having “no monthly payments” is misleading, since a borrower is still responsible for taxes and insurance.

In one of the Consent Orders (supra, Flagship Financial), the Bureau took issue with mailings that included the header, “Pursuant to the Federal Housing Administration (FHA) HUD No. 12-045” and that the mailer directed consumers to contact their “assigned FHA loan specialist.” In the other Consent Order (supra, American Preferred Lending), the CFPB objected to mailings that included the FHA-approved lending institution’s logo, along with reference to a FHA website, while obscuring the source of the advertisement. The CFPB deemed this to be misleading to a consumer as it provides the impression that the lender is in some way affiliated with the government.

Based on these recent enforcement actions, the Bureau is focusing attention on preventing not only false but also misleading advertisements. Residential mortgage loan originators must be particularly cautious in how they market their products and services. The lawsuit and Consent Orders referred to above make it clear that misleading claims of federal authority or affiliation will not be tolerated.

By Marie O’Brien, Senior Associate in AGMB’s Mortgage Compliance Practice

Recently, I learned that the new TILA/RESPA disclosure is going to have a disclosure term, called TIP. We already have the APR, why now do we need yet another interest rate disclosure? What is this TIP and how is it calculated?

Section 1419 of the Dodd-Frank Act amended TILA to add the new section 128(a)(19), which requires that, in the case of a residential mortgage loan, the creditor must disclose the total amount of interest that the consumer will pay over the life of the loan as a percentage of the principal of the loan. [15 USC 1638(a)(19)] TILA section 128(a)(19) also requires that the amount be computed based on the assumption that the consumer makes each monthly payment in full and on time, and does not make any overpayments.

This calculation is the “Total Interest Payment,” or “TIP.” Briefly put, TIP is the total amount of interest that a consumer will pay over the loan term as a percentage of the loan amount.

The Bureau commissioned a report on the concept, known as the Kleimann Testing Report. This report concluded that participants used the TIP as a measure of what they would pay in interest in the Closing Disclosure. Further, it showed that participants expressed surprise at how much they would pay in interest on their mortgage loans and seemed to appreciate the disclosure for this reason.

The TIP concept is controversial. There were numerous comments about it before it became the law of the land. Among other things, some loan originators believe that TIP information is completely unnecessary and will prove very confusing for consumers. They assert that the interest rate and the annual percentage rate (APR) are already required to be disclosed on these forms. Adding a third rate, the TIP, would be very confusing and consumers will simply not understand that this rate is unrelated to the interest rate and APR, which is essentially the costs over the long term expressed as a rate. [§ 1026.37(l)(3) and comments 37(l)(3)-1 as proposed]

There are mortgage industry members who think that the TIP will only serve to alarm consumers when they see how high the TIP is, especially if consumers believe there is some connection to the other rates listed. In other words, these consumers would simply not understand the reason this rate is high, how it is calculated, or whether they may choose the type of loan to apply for based on the fact that the TIP may be lower – even though another type of loan may be more appropriate.

Importantly, residential mortgage lenders and originators themselves are unsure about how the TIP rate is calculated if (1) the interest rate can change over the life of the loan and (2) the future rates are not known at the time of application. Nevertheless, the Bureau held that the total interest percentage is a useful tool for consumers.

Calculating the TIP requires a set of algorithms that utilize the assumptions set forth in the requirement to disclose the total interest percentage on the Loan Estimate, found in § 1026.37(l)(3) and its commentary.

The Bureau also provides guidance to creditors on calculating the TIP for adjustable rate mortgage loans. In particular, when creditors use an initial interest rate that is not calculated using the index or formula for later rate adjustments, the disclosure should reflect a composite annual percentage rate based on the initial rate for as long as it is charged and, for the remainder of the term, the rate that would have been applied using the index or formula at the time of consummation. [§ 1026.37(a)(10)(i)(A), § 1026.37(l)(3); comment 17(c)(1)-10] For Step Rate loan products, the creditor computes the TIP in accordance with § 1026.17(c)(1) and its associated commentary. [§ 1026.37(a)(10)(i)(B), § 1026.37(l)(3)]

For negative amortization loans, the creditor computes the TIP using the scheduled payment, even if it is a negatively amortizing payment amount, until the consumer must begin making fully amortizing payments under the terms of the legal obligation. [§ 1026.37(a)(10)(ii)(A), § 1026.37(l)(3)]

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

Our bank’s compliance officer has the view that CAN-SPAM requirements preempt all state laws that are similar to it. Are there any instances where state law trumps CAN-SPAM?

CAN-SPAM preempts any statute, regulation, or rule of a state, or even a political subdivision of a state, that expressly regulates the use of electronic mail to send commercial messages – except to the extent that any such statute, regulation, or rule prohibits falsity or deception in any portion of a commercial electronic mail message or information attached thereto.
[15 USC § 7707(b)(1)]

Thus, CAN-SPAM carves out an exception from preemption for state laws that govern the use of commercial email by prohibiting fraud or deception in messages or attachments.

CAN-SPAM does not preempt the applicability of (1) state laws that are not specific to electronic mail, including state trespass, contract or tort laws, or (2) state laws that relate to acts of fraud or computer crime. [15 USC § 7707(b)(2)]

State laws that are not specific to commercial email, but would apply to commercial email (together with other types of communication or activity), are not preempted; neither are state laws that address computer fraud or crime more generally.

Although not specific to mortgage banking, policies and procedures used by “internet access services” to block spam are also protected from preemption. Internet access services’ policies and procedures are preempted from CAN-SPAM with respect to declining to transmit, route, relay, handle, or store certain types of electronic mail messages. [15 USC § 7707(c)]

Questions as to which state anti-spam laws are preempted, and to what extent such laws are preempted, are ultimately answered through the legal interpretation of courts. So far, the issue of CAN-SPAM preemption has been addressed by three Federal Circuit Courts of Appeals: the Fourth Circuit, the Fifth Circuit, and the Ninth Circuit.

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

Is it true that FHA modified the manner in which interest is to be calculated when a FHA loan is paid in full by a borrower, allowing mortgagees to charge interest only through the date a mortgage is paid and not beyond that?

Yes. The new rule, called “Handling Prepayments: Eliminating Post-Payment Interest Charges”, applies for FHA-insured mortgages closed on or after January 21, 2015. For FHA loans that close on or after January 21, 2015 mortgagees may only charge interest through the date the mortgage is paid off; that is, mortgagees will be prohibited from charging interest beyond the date the mortgage is paid in full. Previously, FHA charged interest for the entire month at the beginning of the month. Therefore, if a borrower paid off their FHA mortgage at the beginning of the month they still paid interest for the entire month.

Additionally, for all FHA mortgages that close on or after January 21, 2015 a borrower will not be subject to a prepayment penalty at any time or in any amount. The rule explicitly prohibits lenders from charging borrowers post settlement interest, which the Consumer Financial Protection Bureau broadly defines as a “prepayment penalty” for all FHA single-family mortgage products and programs.

Monthly interest on the mortgage will be calculated on the actual unpaid principal balance of the loan as of the date the prepayment is received, and not as of the due date for the next mortgage payment.

Again, please note that these changes will only be effective for FHA loans that close on or after January 21, 2015.

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

We are a large mortgage banker. Our concern involves our servicing unit trying to collect a debt and the prohibitions against communications with third parties in debt collection. We often are not sure about the guidelines for communicating with the consumer in such circumstances. Please let us know what prohibitions affect these kinds of communications?

The Fair Debt Collection Practices Act (FDCPA) sets forth certain guidelines for communicating with the consumer via a third party. The FDCPA is Title VIII of the Consumer Credit Protection Act, which also includes other federal statutes relating to consumer credit, such as the Truth in Lending Act (Title I), the Fair Credit Reporting Act (Title VI), and the Equal Credit Opportunity Act (Title VII).

Although there are a few exception cases, for the most part, in collecting any debt, a debt collector may not communicate with any person other than:

  1. The consumer;
  2. The consumer’s attorney;
  3. A consumer reporting agency if otherwise permitted by law;
  4. The creditor;
  5. The creditor’s attorney; or
  6. The debt collector’s attorney. [15 USC § 1692c(a)-(d), inter alia; also see Federal Trade Commission Staff Commentary on the Fair Debt Collection Practices Act]

The debt collector may communicate with other persons, as follows:

  1. With the consumer’s prior consent given directly to the debt collector;
  2. With the express permission of a court of competent jurisdiction; or
  3. As reasonably necessary to effectuate a post-judgment judicial remedy. [Idem]

Please note that “consumer” includes a consumer’s spouse, parent (if the consumer is a minor), guardian, executor, or administrator. [Idem]

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

We have been told that our advertising is unfair, deceptive, and abusive. Now we’re facing administrative action. The Consumer Financial Protection Bureau seems to be really looking for these violations. But we had no intention of being “deceptive” at all! What criteria is used to determine if there is a violation of this kind with regard to mortgage companies?

In the current iteration of the rules relating to unfair, deceptive, and abusive practices, Dodd-Frank transferred to the Bureau the FTC’s authorities to adopt rules with respect to mortgage loans. The FTC’s authorities resided in the Omnibus Appropriations Act of 2009. Prior to the transfer and thereafter, several developments took place, such as rules that address mortgage assistance relief services, mortgage advertising, marketing, appraisals, origination, and servicing.

Dodd-Frank authorized the Bureau to meet two goals:

  1. Take any actions to enforce the prevention of a mortgage company or service provider from committing or engaging in unfair, deceptive or abusive acts or practices, commonly known by its acronym “UDAAP,” under federal law in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service.
  2. Promulgate rules to address unlawful, unfair, deceptive or abusive acts or practices under federal law by a mortgage company or service provider in connection with any transaction with a consumer involving a financial product or service or offering a consumer financial product or service.
    [PL 111-203, § 1031(a), (b)]

To determine what constitutes an unfair act or practice, the Bureau must have a reasonable basis to conclude that (1) the act or practice causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers, and (2) such substantial injury is not outweighed by the countervailing benefits to consumers or to competition.
[PL 111-203, § 1031(c)]

This position is entirely in keeping with the FTC’s position.
[15 USC § 45(n); also FTC Policy Statement on Unfairness (December 17, 2980)]

The Bureau will determine if an act or practice is a UDAAP violation by forming a reasonable basis for showing that the act or practice:

  1. Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or
  2. Takes unreasonable advantage of:
    1. A lack of understanding on the part of the consumer of the material risk, costs or conditions of the product or service;
    2. The inability of the consumer to protect his or her interests in selecting or using a consumer financial product or service; or
    3. The reasonable reliance by the consumer on a covered person (i.e., mortgage company, service provider) to act in the interests of the consumer.
      [PL 111-203, § 1031(d)]

While Dodd-Frank did not specifically denote what is considered a “deceptive” act or practice in its directive to the Bureau, the FTC’s definition is still the most precise. According to the FTC, an act or practice is deceptive if there is a representation, an omission of information or practice, that is likely to mislead consumers who are acting reasonably under the circumstances, and the representation, omission or practice is material.
[FTC Policy Statement on Deception (October 1983)]

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 a lender is not permitted to request information about a spouse or former spouse of an applicant during the underwriting process. Surely, there are some exclusions where this prohibition does not apply. In what situation is a lender allowed to get such information?

Regulation B, the implementing regulation of the Equal Credit Opportunity Act (ECOA), does provide certain exceptions. However, except as permitted by Regulation B, the lender may not request information regarding the spouse or former spouse of an applicant. [12 CFR § 202.5(c)]

There are generally five situations that permit exceptions. These are:

  1. The spouse will be permitted to use the account;
  2. The spouse will be contractually liable on the account;
  3. The applicant is relying on the spouse’s income as a basis for repayment of the credit requested;
  4. The applicant resides in a community property state or is relying on property located in such a state as a basis for repayment of the credit requested; or,
  5. The applicant is relying on alimony, child support, or separate maintenance payments from a spouse or former spouse as a basis for repayment of the credit requested.

So, a lender may request any information concerning an applicant’s spouse (or former spouse as noted in the situation above, describing reliance on alimony, child support, or separate maintenance payments), if the foregoing situation(s) apply. [12 CFR § 202.5(c)(2)]

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