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Sixth Circuit Holds Lender May be Liable for Broker's Failure to Disclose Commission
On August 13, the U.S. Court of Appeals for the Sixth Circuit held that a lender may be liable under state common law claims of civil conspiracy for failing to disclose fees paid to a mortgage broker. Lee v. Countrywide Home Loans, Inc., No. 10-3777, 2012 WL 3264064 (6th Cir. Aug. 13, 2012). In this case, the borrowers brought common law civil conspiracy and fraud claims against their lender, alleging that the lender defrauded the borrowers by failing to disclose a commission the lender paid to the broker (the Yield Spread Premium) and subsequently recouped by raising the interest rate on the borrowers’ loan over the life of the loan. The borrowers also brought a claim for rescission under TILA. The district court found no evidence that the lender had any knowledge that the broker failed to disclose the fee and granted summary judgment to the bank on both common law claims. The district court also granted summary judgment for the lender with regard to the borrowers’ federal TILA claim. The appeals court upheld the district court ruling on common law fraud and TILA rescission but reversed the district court’s holding with regard to civil conspiracy. The appeals court held that a jury could find the lender participated in a civil conspiracy if the borrowers could show that the lender was aware that the broker was breaching its fiduciary duty by misrepresenting or concealing the commission and that the lender aided in this breach.
CFPB Proposes National Mortgage Servicing Standards
On August 10, the CFPB proposed two sets of rules covering a number of residential mortgage servicing practices. The rules would amend Regulation Z (TILA) and Regulation X (RESPA) to implement certain mortgage servicing standards set forth by the Dodd-Frank Act and to address other issues identified by the CFPB. The TILA proposal includes changes to (i) periodic billing statement requirements, (ii) notices about adjustable rate mortgage interest rate adjustments, and (iii) rules on payment crediting and payoffs. The proposed changes to RESPA relate to (i) force-placed insurance requirements, (ii) error resolution and information request procedures, (iii) information management policies and procedures, (iv) standards for early intervention with delinquent borrowers, (v) rules for contact with delinquent borrowers, and (vi) enhanced loss mitigation procedures. While many of the rules implement changes required by the Dodd-Frank Act, other proposed requirements incorporate those placed on servicers as part of the national mortgage servicing settlement earlier this year, or corrective actions taken in 2011 by the prudential regulators. The proposed rules follow a small business review panel that provided feedback on the rules’ impact on small servicers. In response to the panel, the CFPB states that it incorporated small business concerns, such as an exemption from new periodic statement requirements for certain small servicers. In addition to comments on the substance of the proposals, the CFPB requests detailed comments about the appropriate effective date of the rules, including whether the CFPB should set staggered effective dates for different aspects of the rules or a single implementation deadline. The CFPB is accepting comments through October 9, 2012 and intends to finalize the rules by the Dodd-Frank statutory deadline in January 2013.
CFPB Seeks Input on Amicus Program
On August 2, the CFPB posted a request for email submissions recommending state or federal appellate-level “cases with one or more important legal questions about the interpretation or application of a federal consumer financial protection statute or regulation” in which the CFPB could file an amicus brief. The CFPB also announced that all of its amicus activity will be posted on its website. To date, the CFPB has filed six such briefs, four in cases involving TILA and two related to the FDCPA.
Tenth Circuit Overturns Heightened Pleading Standard for TILA Rescission Cases
On July 30, the U.S. Court of Appeals for the Tenth Circuit overturned a district court ruling that would have required borrowers seeking rescission under TILA to state their ability to repay in the initial complaint. Sanders v. Mountain Am. Fed. Credit Union, No. 11-4008, 2012 WL 3064741 (10th Cir. Jul. 30, 2012). The borrowers timely sued to compel rescission of their mortgage loan, claiming that the lender failed to provide disclosures required under TILA. The district court held that the borrowers were not entitled to rescission because they failed to plead their ability to repay. On appeal the court held that, while TILA recognizes that a court may entertain a creditor’s petition for an order equitably modifying the rescission procedure, in this case the district court impermissibly altered that procedure and created a pleading standard that would require all borrowers seeking TILA rescission to plead their ability to repay. The court reasoned that such a standard would add a condition not supported by TILA or Regulation Z, and that categorical relief is outside of the district court’s equitable powers. However, the court maintained that a district court still may use its equitable powers to protect a creditor’s interest during the rescission process. The appellate court also reversed the district court’s dismissal of the borrowers’ ECOA claim related to a separate refinance transaction because the district court made factual assumptions about the refinance process in violation of its obligation to draw all reasonable inferences in favor of the plaintiff borrowers. While the TILA and ECOA claims were remanded for further proceedings, the court upheld the district court’s dismissal of the borrowers’ claims that the lender also violated FCRA when it reported false information to consumer reporting agencies, holding that FCRA does not provide a private right of action against the furnisher of credit information.
Tenth Circuit Holds Notice Does Not Extend Three-Year TILA Rescission Right
On June 11, the U.S. Court of Appeals for the Tenth Circuit held that mere notice from a borrower does not extend the three-year period for filing an action for rescission under TILA. Rosenfield v. HSBC Bank, USA, No. 10-1442, 2012 WL 2087193 (10th Cir. Jun 11, 2012). In so holding, the unanimous three-judge panel rejected the position of the amicus brief filed by the CFPB and sided with the defendant-lender and three financial industry trade groups. Relying on Beach v. Ocwen Federal Bank, 523 U.S. 410 (1998), the Tenth Circuit emphasized that TILA’s three-year statute of repose was a strict limit on the time for filing suits for rescission. According to the court, an attempt to extend the period by filing a notice within the three-year period would be inconsistent with that strict limit. Furthermore, the court reasoned that adopting the borrower’s position would make TILA enforcement difficult and expensive, all while clouding title on foreclosed homes. This decision deepens an already-existent circuit split between the Ninth Circuit (which took the same approach as the Tenth Circuit) and the Fourth Circuit (which concluded that notice within the three-year period was sufficient). The Eighth and Third Circuits currently are considering the same issue in pending cases.
Federal Court Holds Offset Against Delinquent Card Account May Violate TILA
On June 4, the United States District Court for the District of Maryland in a pending class action denied defendant’s motion for summary judgment, and ruled that the plaintiffs properly alleged that a federal credit union violated the TILA and Regulation Z prohibition on offsets when it withdrew funds from members’ deposit accounts to satisfy amounts due on the members’ credit card accounts without clearly establishing a security interest in such deposit accounts. Gardner v. Montgomery County Teachers Federal Credit Union, No. 10-02781, 2012 WL 1994602 (D. Md. Jun 4, 2012). The court rejected the credit union’s argument that it had a consensual security interest in the members’ deposit funds. In doing so, the court closely analyzed the Federal Reserve Board’s Official Staff Commentary on § 226.12(d) of Regulation Z, and determined that the credit union did not meet any of the conditions necessary to claim a security interest in the deposit funds.
CFPB Outlines Potential Mortgage Loan Originator Compensation and Qualification Rules
On May 9, the Consumer Financial Protection Bureau (CFPB) outlined in its outreach materials to small business representatives its proposals to implement the loan originator compensation provisions of the Truth in Lending Act (TILA). These proposals will amend the rules applicable to compensation in mortgage loan transactions, and they would also "help level the playing field" in connection with regulation of mortgage loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The CFPB intends to finalize rules on these topics by January 21, 2013.
Under the Dodd-Frank Act, restrictions were placed on the ability of creditors and consumers to compensate mortgage loan originators (which includes employee loan officers, mortgage brokerages, and employees of mortgage brokerages). This restriction is similar to the restrictions implemented by the Federal Reserve Board (Board), effective April 2011, that prohibit a creditor from compensating a loan originator based on the terms and conditions of the transaction.
The Dodd-Frank Act generally provides that loan originators may be compensated only by consumers, unless two conditions are met: (i) the loan originator must not receive any compensation directly from a consumer; and (ii) the consumer must not make an upfront payment of discount points, origination points, or fees, other than bona fide third-party fees that are not retained by the creditor, the loan originator, or either company's affiliates.
The CFPB has the authority to create exemptions to the second "points and fees" provision if it finds that an exemption is "in the interest of consumers and in the public interest." In its proposal, the CFPB states that it is considering using this exemption authority to permit consumer payment of upfront points and fees under certain circumstances, and the CFPB is further considering whether to propose particular conditions for payments to affiliates. The CFPB is considering a number of proposals that would carry out this restriction:
- No-Discount-Point Loan Option: Under the CFPB's proposal, the loan originator would be required to offer a no-discount-point transaction. Offering this option, according to the CFPB, would enable the homebuyer to better compare competing offers from different lenders.
- Interest-Rate Reductions When Consumers Pay Discount Points: The CFPB's proposal would mandate that any "discount point" be a "bona fide" discount point that actually reduces the interest rate by at least a minimum amount.
- Origination Charges Must Not Vary with the Size of the Loan: The CFPB proposes that mortgage brokerage firms and creditors would be allowed to charge only flat origination fees instead of fees that vary with the size of the loan. The CFPB proposes that upfront fees may be paid to affiliates, provided that these fees are likewise flat and so do not vary with the size of the loan (except for title insurance payments).
In connection with these proposals, the CFPB indicates that it may allow (i) certain payments and bonuses to loan originator based on profitability, (i) certain payments to mortgage brokerage employees when the consumer pays the brokerage, and (iii) certain types of pricing concessions to be covered by the loan originator's compensation. The CFPB's proposal also considers whether to permit certain types of "point banks," and whether to impose record-retention requirements on loan originators directly. Further, the CFPB is considering whether to "sunset" any potential partial exemption from the statute that it implements.
Significantly, the CFPB's proposal would restrict the ability of a lender to charge its own up-front origination fees, except for a fixed fee that does not vary based on loan size. Under the Board's rules, compensation to loan originators is restricted, but lenders may charge origination fees and discount points without restriction. This proposal, if implemented, would require lenders to make significant adjustments to their fee schedules. Further, the CFPB interprets the Dodd-Frank Act's amendments as imposing a ban on loan originator compensation that varies based on loan terms (except principal balance) even in transactions in which the consumer pays compensation directly.
Although the Dodd-Frank Act requires the CFPB to draft rules related to the anti-steering provisions of the loan originator compensation rules, the CFPB indicates that it will address those provisions at a later date.
In a second major aspect of the outline, the CFPB indicates its intention to carry out its authority under TILA to ensure that loan originators be "qualified." Currently, the SAFE Act imposes registration or licensing requirements on loan originators, but these requirements vary widely based on whether the loan originator is an employee of a depository institution or of a non-bank institution.
Under the CFPB's proposal, loan originators-regardless of employer-would be subject to certain qualifications:
- All loan originators would be subject to the same standards for character, fitness,
and financial responsibility;
- Loan originators would be subject to a criminal background check; and
- Loan originators would be required to undertake training commensurate with the size and mortgage lending activities of the employer. This training would be analogous to the continuing education requirement that applies to individuals who are subject to SAFE Act licensing.
As a result of these proposals, registered mortgage loan originators would be subject to some of the same requirements as licensed loan originators.
The CFPB proposal was created in connection with the CFPB's compliance with the Small Business Regulatory Enforcement Fairness Act (SBREFA), which mandates that the CFPB convene a Small Business Review Panel anytime a proposed rule may have a significant impact on a substantial number of small entities. This panel meets with selected representatives of small businesses, and these representatives provide feedback to the panel on the potential economic impact of the proposal. In addition to the outline, the CFPB also issued a press release, a fact sheet, and a set of discussion questions for the panel.
Fourth Circuit Reverses Dismissal of TILA Claim
On May 9, Fannie Mae announced new requirements for document custodians with respect to compliance audits and certification practices. In Servicing Guide Announcement SVC-2012-08, Fannie Mae states that document custodians must engage third-party auditors to conduct an annual assessment of eligibility and operational compliance. Custodians that had a Fannie Mae on-site review prior to August 1, 2011 must engage an independent third-party auditor and complete the first annual audit by July 31, 2013, while custodians that had or will have a Fannie Mae audit between August 1, 2011 and July 31, 2012 will have until December 31, 2013. All custodians must also develop and implement a monthly quality control review by September 30, 2012.
Buckley Sandler Files Amicus Brief on Behalf of Industry Groups in Tenth Circuit TILA Case
On May 3, BuckleySandler filed an amicus brief on behalf of three industry trade groups in a Tenth Circuit case addressing the right to rescind a mortgage under the Truth in Lending Act. The CFPB previously filed an amicus brief in Rosenfield v. HSBC Bank, No. 10-1442 (10th Cir.), in which it argued that borrowers who do not receive certain TILA-required disclosures should be permitted to rescind so long as they notify their lenders within three years—even if they did not file suit within TILA’s three-year repose period. The industry amicus brief, filed on behalf of the American Bankers Association, Consumer Bankers Association, and Consumer Mortgage Coalition, urges the Tenth Circuit to hold that TILA’s statute of repose requires that any right of rescission expire three years after origination even if the consumer previously notified the lender. The industry amicus brief argues that holding otherwise contravenes the purpose of TILA's statute of repose and creates unnecessary uncertainty that will negatively affect the industry and consumers alike.
CFPB Files Briefs in Three TILA Actions
On April 13, the CFPB filed amicus briefs in TILA cases pending in the Third, Fourth, and Eighth Circuits. As it did previously in a brief filed in the Tenth Circuit, the CPFB argued that borrowers who do not receive the material disclosures required by TILA are not required to file suit within the three-year rescission period. Rather, the CFPB argues that a borrower can rescind the transaction as long as they provide notice to the lender of the cancellation within three years of consummation.