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. 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. 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. 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. 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
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. As with post-closing reviews, loans selected for pre-closing reviews must consist of both random and discretionary samplings. 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. 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:
- appraisal data,
- validity of the comparables,
- value conclusion (as required by FHA guidance),
- any changes made by the underwriter, and
- the overall quality of the appraisal. Field reviews are not required for pre-closing reviews.
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
A creditor may not pay a contractor under a home improvement contract from the proceeds of a HOEPA loan, other than:
- 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
- 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.
By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice
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
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. 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.) 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. By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice
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:
- any director, officer, or employee charged with managerial responsibility for, or controlling shareholder of, or agent for, such covered person;
- 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
- any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in any –
- violation of any provision of law or regulation; or
- 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. 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.
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.
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
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. 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).” 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.” In order to qualify for the partial exemption from TRID disclosure requirements, the down payment assistance program must meet the following criteria :
- The transaction is secured by a subordinate lien;
- The transaction is for the purpose of:
- Downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies;
- Property rehabilitation assistance;
- Energy efficiency assistance; or
- Foreclosure avoidance or prevention;
- The credit contract does not require the payment of interest;
- The credit contract provides that repayment of the amount of credit extended is:
- 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;
- Deferred for a minimum of 20 years after consummation of the transaction;
- Deferred until sale of the property securing the transaction; or
- Deferred until the property securing the transaction is no longer the principal dwelling of the consumer;
- 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:
- Fees for recordation of security instruments, deeds, and similar documents;
- A bona fide and reasonable application fee; and
- A bona fide and reasonable fee for housing counseling services; and
- 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
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.
There are generally five situations that permit exceptions. These are:
- The spouse will be permitted to use the account;
- The spouse will be contractually liable on the account;
- The applicant is relying on the spouse’s income as a basis for repayment of the credit requested;
- 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,
- 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.
By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practic