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  • Kentucky enacts two bills: one on unlawful trade practices and another on mortgage liens

    State Issues

    On April 9, Kentucky enacted HB 488 (the “Bill”) which will establish when a county clerk admits any amendment, renewal, modification, or extension of a recorded mortgage to record. The Bill will also establish when a county clerk admits affidavits of amendment prepared and executed by an attorney to record. Additionally, the Bill will establish recording requirements and a section to establish when a promise, acknowledgment, or payment of money operates as an extension of a lien in a recorded mortgage or deed. Finally, the Bill establishes recording requirements for extensions on a lien in a recorded mortgage or deed.

    On April 4, Kentucky also enacted HB 88 (the “Act”) which will amend provisions related to unlawful trade practices, prohibiting (i) entities that are not banks or trust companies from implying that they are engaged in banking or trust activities, and (ii) entities to use in their marketing materials the name, trademark, logo or symbol of any financial institution or similarly resembling any financial institution, with exceptions for permitted use or disclosure of non-consent.

    The Act will also state that residential real property service agreements cannot give rise to rights or obligations lasting longer than two years after their effective date. Additionally, barring exceptions, service agreements cannot (i) be enforceable on future owners of interests in the residential real property or otherwise purport to remain attached to the property; (ii) create or impose a lien, encumbrance, or other real property interest on the residential real property; or (iii) require or permit recording of the agreement or any notice or memorandum of the agreement, among other things. 

    State Issues Kentucky Mortgages State Legislation Real Estate

  • West Virginia enacts act to prevent unfair real estate service agreements

    State Issues

    Recently, West Virginia passed a new law, HB 5346, titled the Unfair Real Estate Services Agreements Act (the “Act”). This new Act will amend the Code of West Virginia with respect to real estate service agreements. The Act would make the entering into of an “Unfair Real Estate Services Agreement” a deceptive act, including any real estate services agreement between a licensed real estate service provider and a consumer that included terms that would purport to run with the land or be binding to future owners of interest, purport to create a property lien, allow for assignment of the contract without timely notification to the owner of the property, or create a listing agreement for a property that has been listed for over a year past its listing date. Under the law, any unfair real estate service agreement created after the bill’s effective date would be void, and parties may bring a civil action against a real estate service provider. The Act will go into effect on June 6. 

    State Issues West Virginia Mortgage Servicing Real Estate Servicer Unfair

  • State Supreme Court vacates and remands TILA dispute

    Courts

    Recently, the Maine Supreme Judicial Court vacated a judgment in favor of a bank and remanded the decision to re-examine the nature of a loan and consider all relevant evidence to determine if the loan was for commercial purposes. The plaintiffs defaulted on a loan from the defendant, a bank, by securing the loan with a hunting cabin they owned, and a lease for the land on which they had built the cabin. The defendant successfully sued for recovery of the cabin. On appeal, the plaintiffs argued the bank failed to make the requisite disclosures under TILA and thus it was in error to decide in favor of the bank. The bank conceded that it did not make the required disclosures but countered that the credit transaction was not subject to TILA because the loan was for commercial purposes, and if the loan was secured by real property, it was not expected to be used as the principal dwelling of the consumer(s).

    First, the court found that it was an error not to consider extrinsic evidence when determining the purpose of the loan because the Official Staff Interpretations of Regulation Z outline factors to be considered in such a determination, which should be given great deference. Moreover, it found that most federal courts applied a holistic approach in determining the purpose of the loan. Because the Business and Consumer Docket court in Maine did not consider any extrinsic evidence, it decided to remand. Second, the court held that the TILA exemption for “credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer . . . in which the total amount financed exceeds $50,000” was inapplicable. Although the loan was for $378,698, the loan was secured by a leasehold. According to the court, the leasehold was an interest in real property, and the language in the exemption referencing “principal dwelling” only modified “personal property” and not “real property.”

     

    Courts TILA Maine Consumer Finance Real Estate Lending

  • Key Takeaways from the CFPB’s First Public Enforcement Action Alleging Violations of RESPA Section 8 Since 2017

    Federal Issues

    The Consumer Financial Protection Bureau (CFPB) has issued a consent order to a residential mortgage loan originator to resolve allegations that it provided illegal incentives to real estate brokers and agents in exchange for mortgage loan referrals.  This is the CFPB’s first public enforcement action alleging violations of RESPA Section 8 since 2017.

    The CFPB issued a parallel consent order against a real estate brokerage firm for accepting the incentives in exchange for referrals.

    Allegations Against the Lender

    The consent order against the lender alleges that the lender paid for several subscription services – for example, to a service that provided information concerning property reports, comparable sales and foreclosure data – and then provided free access to such services to real estate agents and brokers, which the CFPB determined to be a thing of value. According to the consent order, the agents and brokers who received access to the subscription services also referred mortgage business to the lender, which the CFPB alleges was in exchange for the free services and therefore violated RESPA Section 8(a).

    The consent order also alleges that the lender hosted and subsidized events, including paying for food, beverages and entertainment, for the benefit of real estate agents and brokers. The consent order further alleges that the lender gave real estate agents and brokers free tickets to sporting events, charity galas and other events where the real estate agents and brokers would have otherwise needed to pay for their own admission, food, and alcohol.  The CFPB alleges that these events frequently cost the lender several thousand dollars or more. The CFPB asserts that the lender’s contributions to these events constituted a thing of value to the real estate agents and brokers and were given to create, maintain and strengthen mortgage referral relationships, in violation of RESPA Section 8(a).

    Finally, the CFPB alleges that the lender had marketing services agreements (“MSAs”) with numerous real estate brokerages, and that many of the compensable services were either performed by the lender itself rather than the brokerages or, based on the Bureau’s allegations against the broker, were not performed by the brokerages.

    Also, the consent order noted that the MSAs required the real estate brokers to promote the lender to the broker’s own agents rather than to consumers. The lender also encouraged its MSA partners to use a third-party smartphone app. The real estate agents shared the app with their clients. The app featured a photo of the lender’s loan officer and the lender’s logo and included buttons where consumers could contact the lender’s loan officer for assistance. As a result, the CFPB alleges that the payments the lender made to the brokerages were structured and implemented to generate referrals, rather than to compensate the brokerages for any marketing services they actually performed.

    Allegations Against the Real Estate Broker

    The consent order against the broker alleges that the broker’s real estate agents and brokers accepted the subscription services and subsidized events. It also alleges that the broker received payments in connection with an MSA that was primarily focused on the lender getting referrals from the broker’s brokers and agents rather than the broker marketing the lender to the public, and that the broker failed to perform many of the marketing tasks required by the MSA but received payments anyway. For example, the consent order alleges that the MSA required the broker to send 15,000 marketing emails a month while allocating 50% of the content to the lender, display video advertisements for the lender at its physical locations and create a number of property websites displaying the lender’s content.  However, the broker allegedly failed to perform any of these marketing services.

    Takeaways

    We note several key takeaways from these consent orders:

    • Taken at face value, none of the conduct alleged to violate RESPA Section 8(a) is novel or particularly notable. The crux of the alleged violations involved paying for obvious things of value in exchange for referrals and entering into MSAs where the contemplated marketing services were either not provided or directed to potential referral sources and not consumers. The consent orders, therefore, are largely consistent with prior RESPA enforcement actions involving lenders and real estate brokers.
    • This is the first public CFPB enforcement action alleging violations of RESPA Section 8 since 2017, which makes clear that although the CFPB’s focus on RESPA Section 8 may have waned somewhat from the Cordray era, it is still monitoring for RESPA Section 8 violations and will bring public enforcement actions when violations are discovered. Coupled with February’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, the CFPB is clearly still engaged in RESPA compliance.
    • The reference to the mobile app with a loan officer’s photo and the lender’s logo, and the ability for the consumer to reach out to the lender directly, is in accord with longstanding CFPB and HUD guidance that exclusivity is indicative of a referral to the extent that it “affirmatively influences” a consumer to select a particular provider of settlement services. This viewpoint was recently espoused in the CFPB’s Advisory Opinion on Digital Mortgage Comparison Shopping Platforms, and it appears that the CFPB views this principle as generally applicable.

    Penalties

    In addition to agreeing to cease engaging in the conduct alleged, the lender was ordered to pay a civil monetary penalty of $1.75 million and also agreed to implement a compliance program designed to prevent any future violations should the lender resume retail mortgage operations. The lender also agreed to meet certain recordkeeping and reporting requirements. 

    In addition to agreeing to cease engaging in the conduct alleged, the broker was ordered to pay a civil monetary penalty of $200,000 and meet certain recordkeeping and reporting requirements.

    In agreeing to enter into the consent orders, the lender and broker did not admit or deny any findings of fact or conclusions of law related to the violations alleged by the CFPB.

    Read the lender’s consent order.

    Read the broker’s consent order.

    Read the CFPB’s press release.

    Want to learn more? Contact John Kromer or Steve vonBerg.

    Federal Issues CFPB Consumer Finance RESPA Enforcement Referrals Real Estate Mortgages Loan Origination

  • Michigan Supreme Court limits applicability of “usury savings clauses”

    Courts

    On June 23, the Michigan Supreme Court reversed a circuit court’s decision on a case involving Michigan’s “longstanding prohibition on excessive interest rates for certain loans.” The case involved a “usury savings clause,” which is a term sometimes used in notes, which requires the borrower to pay the maximum legal interest rate if the contractual terms impose an illegal rate.  In the case, a nonbank investment group (plaintiff) lent a realty service company (defendant) $1 million to flip tax-foreclosed homes. Plaintiff sued for breach of contract and fraud after defendant discontinued payments after paying more than $140,000 in interest on the loan. Defendant argued that plaintiff violated the criminal usury statute by, “knowingly charging an effective interest rate exceeding 25%,” which it alleged barred plaintiff from recovering on the loan under the wrongful-conduct rule.

    The circuit court determined that the fees and charges associated with the loan constituted disguised interest, making the total interest the plaintiff was seeking above the legal 25% limit and “criminally usurious.” However, the court agreed with the defendant that the usury savings clause was enforceable and the note was not facially usurious. Nevertheless, “the court agreed that the appropriate remedy is to relieve [defendant] of its obligation to pay the interest on the loan but not its obligation to repay the principal.”

    The Michigan Supreme Court held that in determining whether a loan agreement imposes illegal rates of interest, a usury savings clause is ineffective if the loan agreement requires a borrower to pay an illegal interest rate, even if the interest is labeled as a “fee” or something else. Further, the court held that enforcing usury savings clauses would undermine the state’s usury laws because it would nullify the statutory remedies for usury, which would relieve lenders of their obligation to ensure that their loans have a legal interest rate. The court also held that a lender is not criminally liable for seeking to collect on an unlawful interest rate in a lawsuit. The court reasoned that seeking relief through the court of law is generally encouraged over extrajudicial means. According to the opinion, the court held that “[t]he appropriate remedy for a lender’s abusive lawsuit is success for the borrower in that lawsuit and appropriate civil sanctions, not a criminal conviction for usury.”

    Courts State Issues Usury Consumer Finance Real Estate Mortgages Michigan Lending

  • Agencies put out policy on CRE workouts

    On June 29, the FDIC, OCC, Federal Reserve Board, and NCUA, in consultation with state bank and credit union regulators, jointly issued a final policy statement addressing prudential commercial real estate loan accommodations and workouts for borrowers experiencing financial difficulty. The policy statement applies to all supervised financial institutions and supersedes previous guidance issued in 2009. Building on existing supervisory guidance, the policy statement advises financial institutions “to work prudently and constructively with creditworthy borrowers during times of financial stress.” The policy statement (i) updates interagency supervisory guidance on commercial real estate loan workouts; (ii) adds a new section on short-term loan accommodations (for purposes of the policy statement, “an accommodation includes any agreement to defer one or more payments, make a partial payment, forbear any delinquent amounts, modify a loan or contract, or provide other assistance or relief to a borrower who is experiencing a financial challenge”); (iii) addresses relevant accounting standard changes on estimating loan losses; and (iv) provides updated examples on how to classify and account for loans modified or affected by loan accommodations or loan workout activity. The policy statement takes effect upon publication in the Federal Register.

    Bank Regulatory Federal Issues Federal Reserve OCC FDIC NCUA Real Estate Commercial Lending

  • West Virginia amends real estate licensing provisions

    On March 28, the West Virginia governor signed HB 3203 to amend certain provisions relating to the West Virginia Real Estate License Act, which requires persons engaging, directly or indirectly, in the capacity of a real estate broker, associate broker, or salesperson in the state to be licensed. A license is required “even if the person or entity is licensed in another state and is affiliated or otherwise associated with a licensed real estate broker in [West Virginia].” The changes, among other things, (i) eliminate requirements for certain information to be included on license applications; (ii) modify qualifications for licensure; (iii) clarify and amend requirements for prelicense and continuing education requirements; (iv) modify licensing requirements based on licensure in another jurisdiction or for license certifications issued by the Real Estate Commission (Commission); (v) eliminate certain requirements for persons holding a broker’s license; (vi) clarify language relating to when the Commission “may refuse a license or revoke, suspend, or impose any other sanction against a licensee”; (vii) require a licensee “to disclose in writing whether the licensee represents the seller, the buyer, the seller and the buyer, the landlord, the tenant, or the landlord and the tenant”; and (viii) modify certain provisions relating to complaint procedures, the judicial review of final decisions/orders issued by the Commission, criminal penalties, and suits for the collection of compensation. The amendments take effect 90 days from passage.

    Licensing State Issues West Virginia Real Estate

  • FinCEN looks at business email threat in real estate

    Financial Crimes

    On March 30, FinCEN released a Financial Trend Analysis examining threat patterns and trends identified in Bank Secrecy Act (BSA) data relating to business email compromise (BEC) in the real estate sector during 2020 and 2021. According to the analysis, BEC attackers target businesses and financial institutions that routinely conduct large wire transfers and rely on email for communication about these wires. FinCEN explained in its announcement that attackers “may obtain unauthorized access to networks and systems to misappropriate confidential and proprietary information,” noting in its analysis that “[p]erpetrators typically compromise a key email account by using computer intrusions or social engineering and send an email that fraudulently directs funds to criminal-controlled accounts” where many times “the victim is tricked into thinking a legitimate email from a trusted person or entity is directing them to make a payment.” According to the Federal Bureau of Investigation’s Internet Crime Compliant Center, BEC incidents resulted in more than $43 billion in worldwide losses between June 2016 and December 2021.

    FinCEN’s analysis found that attackers most commonly impersonated title and closing entities and personnel, and that 1,767 incidents involved initial domestic transfers of fraudulent funds to accounts at U.S. depository institutions (151 incidents involved initial transfers of fraudulent funds to international institutions). Additionally, the analysis found that 83 of the 2,103 reported real estate-related BEC incidents involved convertible virtual currency.

    FinCEN reiterated that financial institutions, real estate sector entities, and the public “may all play an important role in protecting the U.S. financial system from [real estate] BEC attacks through awareness of actions to detect and mitigate attacks, information sharing mechanisms that can prevent attacks, and various ways to report incidents when they occur.” FinCEN further encouraged these entities to “[a]ssess the vulnerability of their business processes with respect to BEC and consider actions to ‘harden’ or increase the resiliency of their processes and systems against email fraud schemes.” This includes understanding quantifiable risks associated with the authentication of participants involved in communications, the authorization of transactions, and the communication of information and changes about transactions. Additionally, entities should “[a]dopt a multi-faceted transaction verification process—as well as training and awareness-building—to identify and evade spear phishing attempts.” FinCEN emphasized that “[i]dentifying fraudulent transaction payment instructions before payments are issued is essential to preventing and reducing unauthorized transactions.”

    Financial Crimes FinCEN Of Interest to Non-US Persons Bank Secrecy Act Real Estate Business Email Compromise Digital Assets

  • FinCEN alert covers potential CRE investments by sanctioned Russians

    Financial Crimes

    On January 25, the Financial Crimes Enforcement Network (FinCEN) issued an alert to financial institutions on potential investments in the U.S. commercial real estate sector by sanctioned Russian elites, oligarchs, their family members, and the entities through which they act. The alert provides a list of possible red flags and typologies regarding attempted sanctions evasion in the commercial real estate sector and emphasizes financial institutions’ Bank Secrecy Act reporting obligations. The alert noted that banks frequently work with market participants who seek financing for commercial real estate projects, and that banks have customer due diligence obligations to verify the beneficial owners of legal entity customers. Specifically, the alert noted that “banks therefore may be in a position to identify and report suspicious activities associated with sanctioned Russian elites and their proxies including [politically exposed persons], among banks’ [commercial real estate]-related customers.” According to FinCEN, the recent alert builds on FinCEN’s March 2022 alert identifying real estate, luxury goods, and other high value assets involving sanctioned Russian and elites, and is the fourth alert issued by FinCEN on potential Russian illicit financial activity since Russia’s invasion of Ukraine in February 2022 (covered by InfoBytes here).

    Financial Crimes Of Interest to Non-US Persons FinCEN Russia Real Estate Bank Secrecy Act OFAC Sanctions OFAC Designations Customer Due Diligence Beneficial Ownership SARs Illicit Finance

  • SEC fines bank $1.7 million over misstating value of real estate loans

    Securities

    On August 24, the SEC issued a cease and desist order to a bank for allegedly misstating representations regarding the securitization of commercial real estate (CRE) loans. According to the order, from the first quarter of 2017 to the first quarter of 2019, the respondent bank made filings with the SEC in which it reported gains that it received from the sales of loans included in five CRE securitizations. Among other things, the SEC alleged that the bank: (i) “failed to document adequately and incorporate all reasonably available market data into its valuation assumptions for the CRE certificates” it received as consideration in the CRE securitizations, and (ii) “omitted and misstated material information related to the certificates and the assumptions that it had used in valuing those certificates in certain of its quarterly and annual financial statements.” The SEC noted that the bank allegedly improperly used unreasonably low assumptions for the prepayment risks applicable to the CRE certificates. In particular, the SEC alleged that the bank used baseline prepayment assumptions of 0 percent or 5 percent constant prepayment yields (CPY) while not properly documenting why other approaches were not adopted, such as the existing convention of using 100 CPY, or using available market research which indicated comparable loans generally exceeded 30 percent CPY. Without admitting or denying the allegations, the bank agreed to pay a $1.75 million civil penalty. The company will also cease and desist from committing or causing any future violations of the Exchange Act.

    Securities Enforcement SEC Real Estate Securities Exchange Act Commercial Lending

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