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District Court Concludes Mortgage Servicer's Actions Violated RESPA
On January 28, the U.S. District Court for the Western Division of Washington, having determined that a mortgage loan servicer violated the Real Estate Settlement Procedures Act (RESPA) and committed the tort of outrage, ordered the servicer to pay more than $200,000 in economic and emotional distress damages to a borrower. Lucero v. Cenlar FSB, No. 13-0602 (W.D. Wash. Jan. 28, 2016). The borrower and servicer had agreed to a loan modification in early 2013. However, the borrower believed that the servicer was misreporting her loan as delinquent, in spite of the modification. In April 2013, the borrower filed a lawsuit against the mortgage servicer alleging “that [it] violated its credit reporting obligations” and “seeking damages related to the way in which [the mortgage servicer] (and others) had sought to foreclose on her mortgage.” The servicer then began charging the plaintiff for attorney’s fees and costs that it was incurring in defending the ongoing litigation. The plaintiff requested additional information regarding the charges on numerous occasions, but it was not until June 2014 that the servicer’s counsel said “that the fees that were charged to her account had incurred in this litigation, that they are recoverable under the Deed of Trust, and that the notifications were required by a federal regulation.” The court found that the servicer “failed to timely and fully respond to [the plaintiff’s] March 25, 2014 requests for information regarding the nature of and jurisdiction for the fees that were appearing on her monthly statements,” a violation RESPA, which requires “servicers to respond to a qualified written request…for information within specified time frames.” It also held that the charging of attorney’s fees to the borrower was not permitted under the Deed of Trust under the circumstances. In awarding emotional distress damages, the court stated that the servicer’s message to the plaintiff – “continue this litigation and we will take your home” – was “beyond the bounds of decency and [] utterly intolerable.”
CFPB Responds to MBA Letter, Clarifies TRID Implementation Expectations
On December 29, the CFPB responded to a December 21, 2015 letter from the Mortgage Bankers Association (MBA) regarding “lingering misperceptions and technical ambiguities” in TRID regulations that went into effect on October 3. The CFPB’s letter notes that, given inevitable yet unintentional errors in the early stages of the mortgage industry’s implementation of the regulations, regulators’ initial examinations will focus on industry members’ good faith efforts to ensure compliance with the rule. The CFPB further emphasized that examinations will be “corrective and diagnostic, rather than punitive.” Regarding cure provisions for violations of the rule, the letter states that TRID allows for corrections of specific post-closing errors, such as correcting non-numerical clerical errors and curing violations of monetary tolerance limits, if they exist. Moreover, TILA provisions regarding the corrections of errors will continue to apply to integrated disclosures: “TILA has long permitted creditors to cure violations, provided the creditor notifies the borrower of the error and makes appropriate adjustments to the account before the creditor receives notice of the violation from the borrower. 15 U.S.C. 1640(b).” The CFPB’s letter further advises the MBA that while TRID integrates disclosure requirements under RESPA and TILA, it does not “change the prior, fundamental principles of liability under either TILA or RESPA.”
Fannie Mae Updates Servicing Guide; GSEs Update the Uniform Closing Dataset
On November 25, Fannie Mae issued Servicing Guide Announcement SVC-2015-14 to reveal recent updates to the Servicing Guide. Specifically, Fannie Mae updated guidance relating to 10 areas, including but not limited to: (i) the Remittance of Property (Hazard) Insurance Loss Proceeds for Short Sales; (ii) Pledge of Servicing Rights and Transfers of Interest in Servicing Compensation; (iii) Timeline Requirements for HAMP Expanded “Pay for Performance” Incentive Notices; (iv) Early Delinquency Counseling Requirements; and (v) the removal of the Borrower Notification Sample Letter Exhibit.
In separate November 17 announcements, Fannie Mae and Freddie Mac (collectively the GSEs) revealed updates to the Uniform Closing Dataset, developed as part of the Uniform Mortgage Data Program to facilitate lender submission of the Closing Disclosure Form under the new TILA/RESPA regulations. The updates revise Appendix A: Closing Disclosure Mapping to the MISMO and Appendix H: UCD Delivery Specification and include: (i) newly added data points; (ii) changes to conditionality for several data points; (iii) changes/additions to the enumerated values; and (iv) updates to conditionality details.
Special Alert: CFPB Issues Guidance Regarding Marketing Services Agreements
On October 8, 2015, the Consumer Financial Protection Bureau (“CFPB”) published a compliance bulletin providing guidance to mortgage industry participants regarding the permissibility of marketing services agreements (“MSAs”) under the Real Estate Settlement Procedures Act (“RESPA”).The bulletin summarizes the CFPB’s “grave concerns” that settlement service providers have been improperly using MSAs to circumvent RESPA’s restrictions on the payment of kickbacks and referral fees in exchange for real estate settlement services.
According to the bulletin, while MSAs are purportedly designed to permit individuals or entities to pay service providers bona fide compensation for goods, facilities, or services actually provided—which is expressly permitted under RESPA—in some cases, MSAs are actually used as a cover for illegal referral fee arrangements. The bulletin further notes that even facially-compliant MSAs can be implemented in a manner that ultimately results in the impermissible exchange of compensation for referrals of settlement service business, often as a result of the significant financial pressures that exist for participants in the mortgage and settlement service markets. The CFPB’s guidance emphasizes the dangers posed to consumers by MSA arrangements that hide or indirectly or inadvertently facilitate the unlawful exchange of payment for referrals of settlement service business, including potential increases in mortgage pricing and negative impacts on consumers’ ability to freely shop for mortgages and mortgage-related settlement services.
Click Here to View the Full Special Alert
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Joseph M. Kolar, (202) 349-8020
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Steven VonBerg, (202) 524-7893
Buckley Sandler Files Amicus Curiae Brief on Behalf of Industry Group in RESPA Case; Marks First Appeal Against CFPB Director Decision
On October 5, BuckleySandler attorneys filed an amicus curiae brief on behalf of the Consumer Mortgage Coalition (CMC) in the first case to come up on appeal to the District of Columbia Circuit since the CFPB was founded in 2011. In the CMC’s brief, BuckleySandler attorneys argued that the CFPB Director’s decision to ignore the decades-long interpretation of Section 8 of RESPA will harm consumers by eliminating an important form of risk retention, making the home mortgage closing process more difficult and expensive for consumers, and will particularly harm the country’s least affluent mortgage borrowers.
Ninth Circuit Rules Against Title Insurer in Long-Running RESPA Litigation
On August 24, the Ninth Circuit held that a title insurer’s equity investments in title agencies in exchange for agreements that the agencies would refer customers to the insurer violated the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA). Edwards v. First Am. Corp., 2015 WL 4999329 (9th Cir. Aug. 24, 2015). In this long-running case (covered in InfoBytes here, here, here, and here), borrowers filed a putative class-action lawsuit against the title insurer claiming violations of Section 8 of RESPA, which prohibits payments for the referral of settlement service business. In prior phases of the litigation, courts declined to certify the class, and the U.S. Supreme Court eventually granted certiorari but declined to rule on the merits of the litigation. In this appeal, the plaintiff-borrowers asked the Ninth Circuit to review the district court’s most recent denial of class certification, and the CFPB filed an amicus brief in the appeal as well. The Ninth Circuit affirmed the denial of the certification, finding that common issues did not predominate over individual issues for the proposed class. The court further stated that, while RESPA exempts payments for “goods,” “facilities,” and “services” from Section 8’s prohibition on referral fees, the title insurer’s equity investments in the title agencies were not payments for “goods,” “facilities,” or “services.” Further, the court found that RESPA’s exemption from Section 8 available to affiliated business arrangements did not apply because no compensable services were performed by the title agencies in exchange for the payments and the title insurer did not receive any payments from the title agencies as a return on its ownership interests.
United States District Court: Mortgagor Lacks Standing to Bring RESPA Claim
On August 11, the U.S. District Court for the District of New Hampshire rejected the addition of a potential RESPA claim to plaintiff’s complaint due to lack of standing, and the court dismissed the remaining counts for failure to state a claim. Sharp v. Deutsche Bank National Trust Company, As Trustee For Morgan Stanley ABS Capital Inc. Trust 2006-HE3, No. 14-cv-369 (D.N.H. Aug. 11, 2015). Although plaintiff and his father were both mortgagors on the mortgage document, the promissory note identified plaintiff’s father as the sole borrower for the loan. After plaintiff’s father died and plaintiff defaulted on the mortgage, plaintiff sought to enjoin the bank’s subsequent foreclosure proceedings. Plaintiff moved to amend his complaint to add a RESPA claim based on the bank’s allegedly inadequate responses to his requests for information pursuant to 12 C.F.R. § 1024.35 and 12 C.F.R. § 1024.36. The court determined that plaintiff lacked standing to assert his RESPA claim because the RESPA provisions at issue only applied to borrowers, not mortgagors like plaintiff. The court also rejected plaintiff’s argument that his status as the successor-in-interest to his father under 12 C.F.R. § 1024.38 established standing to bring the RESPA claim. The court confirmed that plaintiff was protected by 12 C.F.R. § 1024.38, but the court relied on the CFPB’s official interpretation of 12 C.F.R. § 1024.38 to determine that no private right of action existed to enforce the rule. The court also dismissed plaintiff’s original claims that sought to enjoin foreclosure by asserting that the bank (i) lacked authority to foreclose because the bank could not demonstrate that it was an assignee of the mortgage and (ii) it breached the implied covenant of good faith and fair dealing by pursuing foreclosure despite plaintiff’s request to postpone it. The court held that the bank had authority to foreclose because New Hampshire law did not require the bank to record the assignment in order to exercise the statutory power of sale. Regarding plaintiff’s second claim, the court determined that the bank did not breach the implied covenants because its actions were consistent with its contractual rights and there was no duty to postpone the foreclosure sale upon plaintiff’s request.
Update Regarding Marketing Services Agreements ("MSAs")
On Thursday, June 30, 2015, a CFPB spokesman issued a statement to HousingWire in response to the announcement by a large lender that it was terminating its MSAs:
[This] decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with [the Real Estate Settlement Procedures Act (“RESPA”)] and freeing up more choices for consumers. We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers. Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referrals.
These announcements come in the wake of the CFPB’s September 2014 consent order against Lighthouse Title, Inc. and CFPB Director Cordray’s June 2015 ruling against PHH Corporation and its affiliates. Both matters involved alleged violation of Section 8 of RESPA, which states that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). However, Section 8 also states that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” 12 U.S.C. § 2607(c)(2).
In the Lighthouse order (at ¶ 20), the CFPB stated that “[e]ntering a contract is a ‘thing of value’ within the meaning of Section 8, even if the fees paid under that contract are fair market value for the goods or services provided.” This statement raised concerns that, notwithstanding Section 8(c)(2) which market participants have believed for decades permitted MSAs and similar arrangements so long as the payments were fair market value, the CFPB believed a MSA violated RESPA if its “true purpose” was the referral of settlement services, regardless of whether fair market value was paid in exchange for actual marketing services.
Director Cordray’s opinion in the PHH appeal appears to confirm these concerns. The opinion repeatedly states that payments for services are only “bona fide” under RESPA § 2607(c)(2) if they “are solely for services actually performed (i.e., not for referrals)….” CFPB PHH Opinion at 18; see also id. at 17 (“[T]he distinct meaning of ‘bona fide’ in section 8(c)(2) is that the payment must be solely for the service actually being provided on its own merits, but cannot be a payment that is tied in any way to the referral of business.”); id. (“A payment made ‘in good faith’ for services performed is made for the services themselves, not as a pretext to provide compensation for a referral.”). In reaching this result, Director Cordray rejected guidance provided by HUD in a 1997 letter “[t]o the extent … inconsistent with [his] textual and structural interpretation of [RESPA].” Id. at 17 (stating that “[t]he HUD letter is not in such a form as to be binding on any adjudicator” because it was not published in the Federal Register and therefore “provides no protection to PHH in this proceeding”).
But the CFPB faces additional challenges if it were to take the position that MSAs generally are per se impermissible in light of the fact that, unlike the 1997 letter regarding captive reinsurance, HUD published guidance in the Federal Register in 2010 regarding the marketing of home warranty companies (the “HWC Guidance”) that “may be applicable to payments made by other settlement service providers to real estate brokers or agents.” HWC Responses, 75 Fed. Reg. 74620, 74621 (Dec. 1, 2010) (question 7). Among other things, the HWC Guidance concludes that the interpretive rule does not “prohibit payments from an HWC to real estate brokers or agents for general advertising services performed by the brokers or agents on behalf of the HWC[.]” 75 Fed. Reg. at 36272-73. The HWC Guidance uses the following example to illustrate this conclusion: “a reasonable payment for an advertisement by an HWC in a real estate broker's or agent's publication or on the broker's or agent's website would not, in and of itself, be a payment for a referral under RESPA.” Id.
The PHH decision is being appealed to the U.S. Court of Appeals for the D.C. Circuit.
Special Alert: CFPB Consent Order Applies Loan Originator Compensation Rule to Marketing Services Agreements
On June 5, the CFPB announced a consent order against Guarantee Mortgage Corporation, resolving allegations that the company paid loan originators based on the terms of their mortgage loans in violation of the Loan Originator Compensation Rule (the “LO Comp Rule”). Since inheriting responsibility for the LO Comp Rule in 2011, the CFPB has devoted substantial resources to revising the rule and enforcing its provisions. During that same period, the CFPB brought several actions enforcing the prohibition on referral fees in the Real Estate Settlement Procedures Act (“RESPA”), including an action against Lighthouse Title, Inc. that created considerable uncertainty about the Bureau’s view of marketing services agreements (“MSAs”).
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- John P. Kromer, (202) 349-8040
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
CFPB Director Issues Decision on First Appeal of an Administrative Enforcement Proceeding
On June 4, CFPB Director Richard Cordray issued a decision on a mortgage lender’s appeal of an administrative law judge’s (ALJ) order concerning alleged RESPA violations with respect to the lender’s mortgage reinsurance business. In his decision, Cordray largely affirmed the ALJ decision and ordered the lender to pay $109 million in disgorgement. Notably, because most of the conduct alleged occurred prior to the CFPB assuming jurisdiction over enforcement of RESPA, Cordray declined to impose a civil money penalty. In addition, Cordray agreed with the ALJ that no statute of limitations applies when the CFPB challenges a RESPA violation in an administrative proceeding, declaring that the statute of limitations applies only to judicial proceedings. Cordray also held that the lender committed a separate violation of RESPA every time it accepted a reinsurance payment from a mortgage insurer, even if the loan with which the payment was associated had already been consummated. This was the first appeal of an administrative enforcement proceeding before the CFPB.