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Financial Services Law Insights and Observations

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  • CFPB offers RESPA guidance on MSAs

    Federal Issues

    On October 7, the CFPB issued FAQs covering RESPA Section 8 and corresponding Regulation X sections. The FAQs provide a general overview of Section 8 and its prohibited activities. The FAQs also address the application of Section 8 to common scenarios involving gifts and promotional activities and marketing services agreements (MSAs). Highlights of the examples include:

    • Gifts. The FAQs note that if a gift ( “thing of value”) is given or accepted as part of an agreement or understanding for referral of business related to a real estate settlement service involving a federally related mortgage loan then it is prohibited under Section 8. The FAQs emphasize that the agreement or understanding need not be in writing or oral and can be established by a practice, pattern, or course of conduct.
    • Promotional activities. The FAQs state that promotional or educational activities connected to a referral source would be allowed under Regulation X if the activities (i) are not conditioned on referral of business; and (ii) do not involve defraying expenses that otherwise would be incurred by the referral source. The FAQs describe these conditions in more detail and provide example of activities that meet and do not meet Regulation X’s conditions.
    • Marketing Services Agreements. The FAQs emphasize that MSAs that involve payments for referrals are prohibited under RESPA Section 8(a), whereas MSAs that involve payments for marketing services may be permitted under RESPA Section 8(c)(2), depending on certain facts and circumstances. MSAs are lawful under RESPA when structured and implemented as an agreement for the performance of actual marketing services and the payment reasonably reflects the value of the services performed. The FAQs provide examples of prohibited MSAs under Section 8(a) and Section 8(b), including (i) agreements structured to provide payments based on the number of referrals received; or (ii) the use of split charges, either being paid to a person that does not actually perform the services or the amount paid exceeds the value of the services performed by the person receiving the split.

    Notably, with the release of the FAQs, the Bureau is rescinding its Compliance Bulletin 2015-05, entitled RESPA Compliance and Marketing Services Agreements, noting that the Bulletin “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X.” The Bureau emphasizes that with the rescission, MSAs will still “remain subject to scrutiny, and [the Bureau] remain[s] committed to vigorous enforcement of RESPA Section 8.”  

    Federal Issues CFPB RESPA Marketing Services Agreements Section 8 Referrals Regulation X

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  • District court certifies another RESPA class over kickback referrals

    Courts

    On October 2, the U.S. District Court for the District of Maryland certified a class of mortgage borrowers who alleged that a Maryland bank referred them to a title firm in exchange for cash and kickbacks in violation of RESPA. The court’s decision approved a class defined as borrowers of federally-related mortgage loans originated or brokered by the bank who were referred to the title firm in connection with the closing of their loan. As previously covered by InfoBytes, the case originally was dismissed on the grounds that the plaintiffs’ RESPA claims were time-barred, but the U.S. Court of Appeals for the Fourth Circuit reversed the decision, finding that the plaintiffs were entitled to proceed because the kickback scheme was allegedly “fraudulently concealed” by the defendants. Among other things, the plaintiffs claimed that the title firm provided bank loan officers kickbacks in exchange for referrals, including cash payments, free marketing materials, credits for future marketing services, and customer referrals from other lenders. Because of these alleged kickbacks, the plaintiffs contended they were deprived of “impartial and fair competition” and “paid more for their settlement services than they otherwise would have.” The defendant argued, among other things, that the plaintiffs lacked standing because they did not suffer a concrete injury, and that the class was overboard because the plaintiffs had not proven that each loan was affected by a RESPA violation or that every loan fell outside a relevant exemption.

    The court found that the plaintiffs had standing, stating that the plaintiffs have shown evidence supporting their claims that they may have been overcharged. But the court also noted that the bank may be able to continue to challenge that the plaintiffs failed to allege more than a mere procedural violation of RESPA. The court likewise rejected the bank’s objections to class certification, ruling that the plaintiffs were able to show that a majority of the loans were not subject to a RESPA exemption, and that the concern over RESPA exemptions “does not predominate over the numerous, imperative questions that are answerable on a class-wide basis.”

    Courts Class Action RESPA Mortgages Kickback

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  • 4th Circuit reverses dismissal of RESPA property tax suit

    Courts

    On October 2, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of a putative class action, concluding that the current mortgage servicer has the obligation under RESPA to pay tax payments as they become due. According to the opinion, after a consumer refinanced their mortgage loan, the mortgage was sold to a new mortgage company (defendant), which took over the servicing rights and responsibilities from the previous servicer, effective October 2017. The consumer continued making payments on the mortgage loan, which included payments to an escrow account for property taxes. The defendant allegedly did not pay the consumer’s property taxes due in November 2017 until sometime in 2018. The city assessed late penalties (which the defendant ultimately paid) and the late payment adversely affected the consumer’s income tax bill in the amount of $895. The consumer filed a putative class action alleging, among other things, that the defendant violated RESPA by failing to make the tax payment on time. The district court dismissed the action, concluding that the previous servicer was “responsible as ‘the servicer’ under RESPA” to make the payments.

    On appeal, the 4th Circuit disagreed, concluding that the consumer plausibly alleged that the defendant was responsible for servicing his mortgage at the time, and therefore, responsible for making his tax payment when due. The appellate court rejected the defendant’s argument that RESPA requires the entity that “received funds for escrow” to make the tax payment when due. RESPA, according to the appellate court, “connects the servicer’s obligation to a payment’s due date, not the date of payment into escrow by the borrower.” Thus, the defendant would be “the servicer” responsible for paying the mortgage tax from the borrower’s escrow account on its due date.

    Courts Appellate Fourth Circuit Escrow RESPA Mortgages

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  • CFPB releases TRID five-year lookback assessment

    Federal Issues

    On October 1, the CFPB released the assessment report required by Section 1022(d) of the Dodd-Frank Act for the TILA-RESPA Integrated Disclosure Rule (TRID), concluding that the TRID Rule “made progress towards several of its goals.” The assessment report was conducted using the Bureau’s own research and external sources. In opening remarks, Director Kraninger noted that the Bureau was “unable to obtain or generate the data necessary” to include a cost-benefit analysis, but documented the benefits and costs when possible. In addition to studying the effectiveness of the TRID Rule, the report also summarized the public comments the Bureau received from its November 2019 request for information (covered by InfoBytes here).

    The Bureau issued the TRID Rule in November 2013, and the Rule took effect on October 3, 2015. Among other things, the TRID Rule integrated TILA’s Good Faith Estimate (GFE) and RESPA’s settlement statement (HUD-1), as well as other Dodd-Frank required disclosures, into the “Loan Estimate” and “Closing Disclosure” forms. Key findings of the assessment include:

    • The TRID disclosure forms improved borrower abilities to locate key mortgage information, and compare costs and features of different mortgage offers;
    • Evidence was mixed as to whether the TRID disclosure forms improved borrower abilities to understand loan estimates and transactions, and the TRID Rule increased consumer shopping for mortgages;
    • The median response for one-time costs for lenders of implementing the rule was roughly $146 per mortgage originated in 2015;
    • Evidence was unclear regarding ongoing costs for lenders, noting that over the last decade, lenders’ costs have increased steadily, but the data does not show a clear increase from the time the TRID Rule took effect; and
    • Purchases and refinances dropped notably (around 14 percent and eight percent, respectively) in the first two months after the effective date, and purchase closing times lengthened by about 13 percent. However, both changes returned to pre-TRID Rule amounts and durations. 

    Additionally, the Bureau released a Data Point report titled, “How mortgages change before origination,” which details how the terms and costs of a mortgage loan may change during the origination process. The Bureau examined about 50,000 mortgages originated between March 2016 and November 2017, and found, among other things, that (i) APR changes occurred in more than 40 percent of mortgages; (ii) loan amount and the loan to value ratio changed for nearly 25 percent of mortgages; and (iii) interest rate changed for eight percent of mortgages.

    Federal Issues TRID TILA RESPA Disclosures Mortgages Dodd-Frank CFPB

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  • Court certifies RESPA class

    Courts

    On August 28, the U.S. District Court for the District of Maryland certified a class of mortgage borrowers who alleged a national bank (defendant) referred them to a title firm in exchange for free marketing materials pursuant to an undisclosed agreement. In doing so, the court approved a class defined as borrowers who (i) had a loan originated or brokered through the defendant; and (ii) received title and settlement services from the title firm in connection with the closing of their loan. The plaintiffs claimed their payments to the title firm were shared in part with the defendant through their broker, who received free marketing materials in exchange for the referrals in violation of RESPA. Additionally, the plaintiffs alleged that “because of this kickback arrangement, they paid higher costs for their settlement services than they otherwise would have paid.”

    The defendant argued, among other things, that the named plaintiffs lacked Article III standing because they did not pay more for settlement services, contending that the title firm’s fees “were based on prevailing market rates in the geographic location and did not depend” on the “alleged kickbacks.” Additionally, the defendant argued that the named plaintiffs are not adequate class representatives because they do not have knowledge sufficient to prove their own claims. The court disagreed, stating the plaintiffs “presented some evidence to corroborate the claim that they were harmed by paying higher fees than they would have absent the alleged RESPA violations,” and that “burdensome individualized scrutiny of each proposed class member’s transaction” was not necessary to establish each violation.

    Courts Mortgages RESPA Class Action Kickback

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  • Court rejects consumer’s RESPA claims against mortgage servicer

    Courts

    On August 5, the U.S. District Court for the Northern District of West Virginia granted a mortgage servicer’s motion for summary judgment, concluding that the servicer “maintained contact and regularly worked” with the consumer to complete her loss mitigation application and thus did not violate Regulation X. According to the opinion, after obtaining the rights to the property and assuming mortgage responsibilities pursuant to a divorce decree, the consumer stopped making mortgage payments in July 2018. The mortgage servicer confirmed the consumer as the successor in interest to the mortgage on March 7, 2019 and on March 14, 2019, the consumer sent the servicer an incomplete loss mitigation application. Between March 2019 and June 2019, the consumer submitted additional loss mitigation application materials and partial application materials for a loan assumption, with the servicer regularly contacting the consumer to obtain documents necessary to complete the applications. The consumer asserted that the servicer, in violation of §1024.41(b)(1), failed to exercise reasonable diligence in obtaining documents and information from her to complete her loss mitigation application and, in violation of §1024.41(c)(1) and §1024.41(c)(2), failed to evaluate her complete loss mitigation application for all loss mitigation options available.

    The court granted summary judgment in favor of the servicer. The court reasoned that “undisputed evidence” establishes that the servicer “maintained contact and regularly worked” with the consumer to obtain the paperwork it needed. Moreover, the court noted that while Regulation X requires a servicer to “evaluate a borrower for all loss mitigation options available, that does not mean it must offer every option it considered—or any option at all.” The court rejected the consumers’ claims that the servicer should have offered a loan modification that did not require information from her ex-husband, concluding that Regulation X “required” her ex-husband’s inclusion and nonetheless, “[u]nder the regulatory framework, [the servicer] has discretion to determine which option(s), if any, it offers an applicant.” Lastly, the court disagreed that the mortgage servicer’s actions caused the consumer to incur “substantial damages,” concluding that “evidence of record is clear that her damages were not caused by or even attributable to [the servicer].”

    Courts RESPA Mortgage Servicing Regulation X Mortgages

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  • CFPB eases Covid-19 loss mitigation rules

    Federal Issues

    On June 23, the CFPB issued an interim final rule that provides relief to mortgage servicers from certain Regulation X requirements when offering Covid-19 related loss mitigation options. Among other things, the interim final rule amends Regulation X to temporarily permit servicers to offer eligible loss mitigation options without obtaining a complete loss mitigation application from borrowers who have experienced a financial hardship due to Covid-19. In order to qualify for the exception, the loss mitigation option must satisfy certain criteria, including that (i) it must permit the borrower to delay paying certain amounts until liquidation, refinance, maturity, or, for a mortgage insured by FHA, the mortgage insurance terminates; (ii) the servicer cannot charge interest on delayed payment amounts, cannot charge fees in connection with the option, and must waive all existing penalties and fees upon acceptance; and (iii) the borrower’s acceptance must resolve any prior delinquency. The interim final rule is effective on July 1.

    Federal Issues CFPB Covid-19 Loss Mitigation RESPA Regulation X Agency Rule-Making & Guidance Mortgages

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  • FDIC releases April enforcement actions

    Federal Issues

    On May 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in April. The FDIC issued 23 orders and 2 notices of changes, which “consisted of 12 Section 19 orders, 3 orders of prohibition, 1 order to pay, 3 consent orders, 1 order to cease and desist, 4 orders terminating consent orders, and 1 order terminating an order of restitution.” Among the actions is a cease and desist order and civil money penalty issued against a Louisiana-based bank for allegedly violating the Bank Secrecy Act, EFTA, RESPA, TILA, the National Flood Insurance Program, and HMDA. The order follows the issuance of a 2019 recommended decision on remand by an FDIC administrative law judge (ALJ), who also found that the bank failed to comply with a majority of the provisions outlined in a 2011 memorandum of understanding entered into with the FDIC two years prior to the filing of this action. Specifically, the recommended decision found that the bank, among other things, “violated the independence requirement of the FDIC’s rules and regulations pertaining to appraisals by allowing a lending officer originating loans to appraise the collateral underlying the loan,” and “allow[ing] a high ranking officer to repeatedly overdraw his bank account without being charged overdraft fees” in violation of Regulation O of the Federal Reserve Board. Other violations included that the bank failed to: (i) conduct independent property evaluations and appraisals; (ii) disclose unauthorized fees or investigate reports of erroneous charges; (iii) assess flood insurance needs or inform borrowers of force-placed flood insurance rules; (iv) file suspicious activity reports and currency transaction reports; (v) implement a “meaningful compliance program” to ensure the bank did not engage in foreign financial transactions with prohibited persons identified by the Office of Foreign Assets Control; and (v) “conduct proper compliance training or maintain an effective audit program for consumer compliance matters.” The FDIC’s order affirmed the ALJ’s recommended decision to subject the bank to an order to cease and desist and pay a $500,000 civil money penalty.

    Additionally, the FDIC entered a consent order against an Illinois-based bank relating to alleged weaknesses in its Bank Secrecy Act compliance program.

    Federal Issues FDIC Enforcement Bank Secrecy Act EFTA RESPA TILA National Flood Insurance Program HMDA Regulation O

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  • CFPB issues TRID interpretive rule, ECOA FAQ

    Federal Issues

    On April 29, the CFPB issued an interpretive rule (IR) “clarifying that consumers can exercise their rights to modify or waive certain required waiting periods” in order to allow borrowers impacted by Covid-19 to access mortgage credit faster. The IR states that if, as a result of the Covid-19 pandemic, a mortgage borrower determines that a mortgage transaction must be completed prior to the end of the waiting period for either the TRID Rule or the Regulation Z right of rescission rule, the borrower may waive the waiting period. Further, the IR asserts that the Covid-19 pandemic qualifies as a “changed circumstance” for purposes of certain TRID Rule provisions, permitting the use of revised estimates of settlement charges. In addition, the Bureau issued a frequently asked question that addresses the Equal Credit Opportunity Act Valuations Rule, which states that a first-lien loan borrower may also waive the requirement that a lender provide the borrower with appraisals and valuations at or before settlement of the loan.

    Federal Issues Agency Rule-Making & Guidance CFPB Mortgages ECOA TILA RESPA TRID Regulation Z CARES Act Covid-19

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  • CFPB guidance provides clarity to mortgage servicing transfers

    Agency Rule-Making & Guidance

    On April 24, the CFPB outlined new guidance to help facilitate compliance with mortgage servicing rules when transferring mortgage servicing rights to a servicer or a sub-servicer. According to the CFPB, after significant changes were made to Regulation X (RESPA) that took effect in 2014, the Bureau found weaknesses in the management of mortgage transfers. The new guidance provides “a roadmap for servicers that will prevent consumer harm,” and notes that when transferring a loan, “servicers should have policies and procedures reasonably designed to transfer all of the information and documents in their possession or control relating to a transferred mortgage loan, such as, a unique identifier for each loan, the terms of the loan, current unpaid principal balance as of a specific date, information concerning any escrow, and copies of any loss mitigation applications submitted by a borrower and of any loss mitigation agreements agreed to with a borrower.” According to the Bureau’s press release, servicers should also consider: (i) developing a servicing transfer plan, including an escalation plan for potential problems; (ii) engaging in quality control work to validate data; (iii) determining servicing responsibilities for legacy accounts; (iv) conducting post-transfer reviews to determine the effectiveness of a transfer plan; (v) monitoring consumer complaints and loss mitigation performance metrics; and (vi) identifying defaulted loans, active foreclosures, bankruptcies, or any forbearance agreements entered into with a borrower, and including loss mitigation activity for each loan where applicable.

    The Bureau recognizes that entities may face particular challenges as a result of the Covid-19 pandemic and states it intends to consider such challenges, including operational and time constraints related to the transfer, and will “be sensitive to good-faith efforts demonstrably designed to transfer the servicing without adverse impact to consumers.”

    Agency Rule-Making & Guidance CFPB Mortgage Servicing Mortgages Regulation X Covid-19 RESPA

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