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Federal Appeals Court Holds Good Faith Estimate Not a Contract
On May 31, the U.S. Court of Appeals for the Eleventh Circuit held that a Good Faith Estimate is not a contract but rather an estimate, and thus cannot support an action for breach of contract. Hackett v. Columbia Equities, Ltd., No. 1:10-cv-03530-AT, 2012 U.S.App. LEXIS 10949 (11th Cir. May 31, 2012). The court of appeals also dismissed a claim for material alteration of a note because the plaintiff failed to provide any statutory or common law rule that imposes civil liability on a party that materially alters a note. The pro se plaintiff asserted a variety of state and federal claims against three financial institutions related to a mortgage contract, all of which were dismissed by the district court for improper service, being time barred, or failing to state a claim upon which relief could be granted. The court of appeals affirmed the dismissal of all counts.
State Law Update: Mortgage Law Changes in Alabama & West Virginia
Alabama Enacts Residential Mortgage Satisfaction Act. On May 3, Alabama enacted Senate Bill 347, which establishes procedures by which a borrower can obtain a payoff statement for a residential mortgage, including the form of such a request, deadlines for responding to a request (14 days), and the method for providing the statement, among other things. The bill also requires a secured creditor to record a mortgage satisfaction within 30 days after it receives full payment and performance of the obligation, and establishes a process for enforcing the recording requirement. The bill takes effect March 1, 2013.
West Virginia Amends Mortgage Record Keeping Requirements. Recently, West Virginia amended regulations that implement the record keeping requirements for all licensed residential mortgage lenders, brokers, and servicers. For lenders who provide the initial funding on a loan, the rules now make clear that the requirement to retain electronic records includes emails between the lender and borrower. Initial lenders and mortgage brokers also must maintain an itemized list of all fees and charges imposed on each loan and received by the lender or broker and by any third party. Further, the regulation adds a new requirement that a lender or broker document tangible net benefit to the borrower prior to refinancing a residential mortgage. The regulation also contains a new section on the process by which the state Division of Banking will determine if mortgage loan originator applicants meet certain standards of financial responsibility required by West Virginia law. The requirements took effect May 1, 2012.
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.
HUD Announces Another Mortgage False Claims Act Settlement
On May 10, HUD and the U.S. Attorney for the Southern District of New York announced the settlement of a lawsuit alleging violation of the False Claims Act by a mortgage originator and affiliated entities. The government alleged that, for nearly a decade, MortgageIT, Inc. certified falsely that the mortgages it originated complied with HUD rules. MortgageIT and its affiliates agreed to pay $202.3 million to resolve the suit. After the Bank of America and Countrywide FCA claims settled in February, this marks the third mortgage-FCA lawsuit settled to date. A fourth case remains pending in the Southern District of New York.
State Law Update: Oklahoma, Georgia, New York
Oklahoma Updates Uniform Consumer Credit Code. On May 1, Oklahoma enacted House Bill 2742, which amends the state’s Uniform Consumer Credit Code. The bill increases the dollar threshold for transactions exempt from the Code from $45,000 to $50,000 and requires that the threshold be adjusted annually henceforth. With regard to mortgages particularly, the bill (i) expands the language required to be included in the disclosure statement, (ii) requires that the creditor mail the disclosure statement at least seven business days before the transaction, and (iii) requires the creditor to send a new statement at least three days before closing if the interest rate changes. It further requires that (i) a consumer cannot be charged any fee prior to receipt of the statement, except for a fee to obtain a credit report; and (ii) a consumer can waive the disclosure statement timing requirements. The law also increases the penalties for violations of the mortgage disclosure statement or right to rescind rules and requires that, within 30 days of the sale or transfer of a mortgage loan, the new creditor must notify the borrower that the loan has been transferred and provide contact and other relevant information.
Georgia Enacts Mortgage-Related Bills. On May 1, Georgia enacted two mortgage-related bills. House Bill 110 permits local jurisdictions to create vacant and foreclosed property registries and establishes uniform requirements for such registries. The law takes effect July 1, 2012. House Bill 237 expands the state’s mortgage fraud law to cover the foreclosure process.
New York Extends Temporary Mortgage Servicer Rules. On May 2, the New York Department of Financial Services published an extension of its emergency rules to implement the 2008 Mortgage Lending Reform Law. The rules will remain in effect through July 11, 2012, unless further extended or permanently adopted.
FDIC Issues Statement Regarding Applicability of CFPB Mortgage Compensation Rules
On April 17, the FDIC issued Financial Institution Letter 2012-02 to apply the recent CFPB guidance on compensation for mortgage originators to FDIC-regulated institutions. The statement directs covered institutions to ensure that their policies and practices are consistent with the compensation rules as interpreted by the CFPB.
State Law Update: Vermont and Nebraska Address Mortgage Licensing
Vermont Adjusts Mortgage Licensing Law. On April 20, Vermont enacted H 565, which, in relevant part, amends definitions and exceptions related to the licensing of mortgage loan originators, mortgage brokers, and other consumer lenders to (i) permit owner financing without obtaining a license, (ii) expand the types of properties that can be sold and financed by the owner without having to obtain a license, and (iii) expand exceptions applicable to practicing attorneys.
Nebraska Issues Interpretation of Mortgage Originator, Processor, and Underwriter Licensing Rules. Recently, the Nebraska Department of Banking and Finance issued several interpretive opinions relating to mortgage loan originator, processor, and underwriter licensing. For mortgage loan originator licensing, one opinion provides examples of activities or situations that would and would not require licensure as a mortgage loan originator. A separate opinion identifies the factors and documentation the Department will consider when evaluating the “financial responsibility” of a person seeking a mortgage loan originator license. Additional separate guidance (i) clarifies the licensing responsibilities of clerical employees of licensed or registered mortgage bankers or installment loan companies, (ii) asserts that loan processing and underwriting activities are essential to origination and therefore entities performing those services must register as mortgage bankers, and (iii) establishes requirements pertaining to the use of the NMLS unique identifier on solicitations and advertisements. All of the interpretive opinions took effect April 16, 2012.
Financial Stability Board Publishes Mortgage Underwriting Principles
On April 18, the Financial Stability Board (FSB), an international group comprised of representatives from all G-20 member countries and the European Commission, published principles for sound residential mortgage underwriting practices. The principles are intended to provide minimum acceptable standards to achieve: (i) effective verification of income and other financial information; (ii) reasonable debt service coverage; (iii) appropriate loan-to-value ratios; (iv) effective collateral management; and (v) prudent use of mortgage insurance. The FSB did not attempt to set detailed international standards, but rather established a framework to limit the risks posed by mortgage markets to global financial stability. The report also sets out an implementation framework and describes tools that can be used to monitor and supervise implementation.
CFPB Clarifies Transitional Licensing for Mortgage Loan Originators
On April 19, the CFPB issued Bulletin 2012-05 to clarify issues related to the transitional licensing of mortgage loan originators under the SAFE Act and Regulation H. According to the Bulletin, (i) states are allowed to provide a transitional license to an individual with a valid license from another state, but (ii) states are prohibited from providing a transitional license for a registered loan originator who leaves a federally regulated financial institution to act as a loan originator while pursuing a state license.
Ohio Amends Ability to Repay Mortgage Rules
Last month, the Ohio Attorney General’s office finalized amendments to that state’s “ability to repay” rules adopted under the Ohio Consumer Sales Practices Act. Under that Act, it is unconscionable for a lender to, among other things, (i) engage in a pattern or practice of providing consumer transactions to consumers based predominantly on the supplier’s realization of the foreclosure or liquidation value of the consumer’s collateral without regard to the consumer’s ability to repay the loan in accordance with its terms, and (ii) enter into a consumer mortgage transaction knowing there was no reasonable probability of payment of the obligation by the consumer. Effective March 30, 2012, the Act’s two new rules (available here and here) provide a safe harbor for certain loans. A consumer will be considered to have an ability to repay and to have a reasonable probability of payment under the provisions identified above if the lender is offering a fully-amortizing fixed-rate refinance loan that (i) has the same or lesser interest rate as the rate of the consumer's current loan, (ii) has the same or lesser principal amount as the consumer's current loan, and (iii) does not extend the payoff date of the consumer's current loan.