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CFPB Continues RESPA Enforcement With Action Against Nonbank Lender
On February 24, the CFPB announced that a nonbank mortgage lender agreed to pay an $83,000 penalty to resolve violations of RESPA’s Section 8. The lender primarily offers loss-mitigation refinance mortgage loans to distressed borrowers. According to the consent order, after the lender ceased obtaining funding for its loans from two subsidiaries of a hedge fund, the lender continued to split loss-mitigation and origination fees with the subsidiaries on 83 additional loans originated over an eight-month period, even though neither subsidiary provided financing or any other service in any of those transactions.
The lender self-reported the violation, admitted liability, and provided information related to the conduct of others, which the CFPB stated has facilitated other enforcement investigations. In addition, the consent order requires the lender make its “officers, employees, representatives, and agents” available for interviews and testimony, and to produce all non-privileged documents requested by the CFPB, “in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Bureau or to which the Bureau is a party.” The company also cannot apply for a tax deduction or credit for the penalty, and cannot seek indemnification from any source. The CFPB indicated that the lender’s self-reporting and cooperation, which were consistent with the Bureau’s Responsible Business Conduct bulletin, played a part in mitigating the penalty.
This consent order is another public action the CFPB has taken under RESPA’s Section 8, although this action appears to be the first under Section 8(b) of RESPA, which prohibits fee-splitting and the payment and receipt of unearned fees. The CFPB has previously enforced Section 8(a), which prohibits referral fees and kickbacks, most recently in the case of a mortgage company that allegedly made inflated rental payments in exchange for mortgage referrals. The Bureau’s Section 8(b) action emphasizes the CFPB’s commitment to enforcing all of the aspects of Section 8, particularly against nonbank lenders.
CFPB Director Richard Cordray summed up the CFPB’s RESPA enforcement stance, stating: “These types of illegal payments can harm consumers by driving up the costs of mortgage settlements. The Bureau will use its enforcement authority to ensure that these types of practices are halted. We will, however, also continue to take into account the self-reporting and cooperation of companies in determining how to resolve such matters.”
CFPB Takes Action Against Small Lender, President For RESPA Violations
On January 16, in the CFPB’s first settlement of 2014, the agency ordered a non-depository mortgage lender and its former owner to pay $81,076 for violating section 8 of the Real Estate Settlement Procedures Act (RESPA). The lender and its former owner—who currently serves as the company’s president—allegedly provided illegal kickbacks to a bank in exchange for loan referrals, disguised as inflated lease payments for renting office space within the bank. RESPA prohibits, among other things, the receipt or payment of kickbacks for settlement referrals involving federally-related mortgages. The consent order requires the company and its president to forfeit all proceeds from the allegedly unlawfully referred business—a total of $27,076 in origination fees related to 20 loans—and pay a $54,000 civil penalty.
The action extends two of the CFPB’s most recently-active enforcement patterns: RESPA section 8 and individuals. The CFPB press release announcing the action warns that the Bureau will “continue to enforce RESPA’s anti-kickback provisions” and “take action against schemes that steer consumers to lenders through unscrupulous and illegal business practices.”
CFPB Updates Mandatory Mortgage Publications
On January 10, 2014, the CFPB published a notice in the Federal Register that three mortgage publications lenders are required to provide to borrowers have been revised to reflect certain mortgage rules that went into effect on that date. These publications, which are available on the CFPB’s “Learn More” web page, are: (i) the What You Should Know About Home Equity Lines of Credit (HELOC) Brochure; (ii) the Consumer Handbook on Adjustable-Rate Mortgages (CHARM) Booklet; and (iii) the Shopping for Your Home Loan: Settlement Cost Booklet (sometimes called the RESPA Booklet).
- HELOC Brochure – The CFPB states that this brochure was revised to add a reference to the requirement that lenders must provide borrowers with a list of housing counselors in their area, CFPB contact information, and updates to other Federal agency contact information. It also adds CFPB resources for consumers, including information about how consumers can submit a complaint to the Bureau, a link to the Bureau’s online ‘‘Ask CFPB’’ tool to find answers to questions about mortgages and other financial topics, and a link to an online tool to find local HUD-approved housing counseling agencies.
- CHARM Booklet – According to the CFPB, these revisions: (i) remove references to certain fees and product types that are no longer permitted, such as prepayment penalties on adjustable-rate mortgages; (ii) add information about the lender’s obligation to consider the borrower’s ability to repay the loan, provide disclosure of interest rate adjustments, and ensure a borrower has received homeownership counseling before making a negative amortization loan; and (iii) add CFPB contact information and resources for consumers and updates to other federal agency contact information.
- RESPA Booklet – The CFPB explains that this booklet was revised to also add contact information and consumer resources, along with information about new servicing protections for borrowers, including servicer obligations to: (i) respond promptly to consumer requests for information and notices of errors; (ii) provide mortgage payoff statements and monthly billing information; and (iii) contact delinquent consumers regarding options to avoid foreclosure.
The notices states that “[t]hose who provide these publications may, at their option, immediately begin using the revised HELOC Brochure, CHARM Booklet, or Settlement Cost Booklet, or suitable substitutes to comply with the requirements in Regulations X and Z. The Bureau understands, however, that some may wish to use their existing stock of publications. Therefore, those who provide these publications may use earlier versions of these publications until existing supplies are exhausted. When reprinting these publications, the most recent version should be used.”
CFPB Seeks Information On Mortgage Closing "Pain Points"
On January 2, the CFPB issued a request for information about “key consumer ‘pain points’ associated with mortgage closing and how those pain points might be addressed by market innovations and technology.” The request includes 17 specific questions about the closing process, common errors at closing, the role of “other parties” at closing, and closing documents. The CFPB stated that the request is part of the next phase of its Know Before You Owe initiative in which the CFPB will “encourage interventions that increase consumer knowledge, understanding, and confidence at closing.” In particular, the CFPB seeks to promote “the development of a more streamlined, efficient, and educational closing process as the mortgage industry increases its usage of technology, electronic signatures, and paperless processes.” The CFPB first announced this initiative in November 2013 in conjunction with the release of the final rule combining mortgage disclosures under TILA and RESPA. Responses to the request are due by February 7, 2014.
Sixth Circuit Rejects HUD Test For RESPA Affiliated Business Safe Harbor
On November 27, the U.S. Court of Appeals for the Sixth Circuit held that HUD’s supplemental ten factor test for determining whether RESPA’s affiliated business arrangements safe harbor applies is not entitled to deference or persuasive weight, and determined that a real estate agency and its affiliated title servicers companies satisfied RESPA’s statutory affiliated business arrangements safe harbor provision. Carter v. Welles-Bowen Realty, Inc., No. 10-3922, 2013 WL 6183851 (6th Cir. Nov. 27, 2013). On behalf of a putative class, a group of homebuyers who used a real estate agency’s settlement services claimed that the agency and two title services companies violated RESPA’s referral fee prohibition. The agency and title companies asserted that they satisfied RESPA’s affiliated business arrangements safe harbor provision because (i) they disclosed the arrangement to the homebuyers, (ii) the homebuyers were free to reject the referral, and (iii) the companies only received a return from the referral through their ownership interest. The homebuyers countered that the companies must also demonstrate that they were bona fide providers of settlement services under HUD’s ten factor test for distinguishing sham business arrangements, which HUD established in a 1996 policy statement. A district court granted summary judgment in favor of the companies, finding that HUD’s ten factor test was void for unconstitutional vagueness. On appeal, the Sixth Circuit affirmed but on different grounds. The Sixth Circuit held that HUD’s policy statement is not entitled to Chevron or Skidmore deference because the statement provides only ambiguous guidelines HUD intends to consider rather than HUD’s interpretation of the statute. As a result, the companies’ compliance with the three conditions set out in the statute sufficed to obtain the exemption under the affiliated business safe harbor provision. The Sixth Circuit noted that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
Sixth Circuit Holds Servicers Exempt from TILA Liability
On November 26, the U.S. Court of Appeals for the Sixth Circuit held that mortgage servicers are exempted from TILA liability, despite recent amendments to the statute. Marais v. Chase Home Fin. LLC, No. 12-4248, 2013 WL 6170977 (6th Cir. Nov. 26, 2013). A borrower had alleged that her servicer violated TILA by failing to properly respond to her written request for information regarding her loan. The Sixth Circuit rejected the borrower’s argument that amendments to TILA as part of the Helping Families Save Their Homes Act of 2009 created a cause of action against mere servicers, and held that servicers who are not creditors or creditor assignees are expressly exempt from TILA liability. The court, however, held that the servicer could be liable under RESPA for damages caused by its purported deficient response to the borrower’s request for information.
Special Alert: CFPB Finalizes Rule Combining TILA and RESPA Mortgage Disclosures
UPDATED OCTOBER 14, 2014: Updated to reflect amendments proposed by the CFPB on October 10, 2014.
On November 20, 2013, the CFPB finalized its long-awaited rule combining the mortgage disclosures consumers receive under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). For more than 30 years, the TILA and RESPA mortgage disclosures had been administered separately by, respectively, the Federal Reserve Board (“FRB”) and the U.S. Department of Housing and Urban Development (“HUD”). In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) transferred authority over TILA and RESPA to the Bureau and directed the Bureau to create “rules and model disclosures that combine the disclosures required under [TILA] and sections 4 and 5 of [RESPA], into a single, integrated disclosure for mortgage loan transactions covered by those laws.” Congress did not, however, amend TILA and RESPA provisions governing timing, responsibility, and liability for the disclosures, leaving it to the Bureau to resolve the inconsistencies. The final rule generally applies to covered transactions for which the creditor or mortgage broker receives an application on or after August 1, 2015.
Click here to read our Special Alert. (Updated 10/15/14)
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.
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- John P. Kromer, (202) 349-8040
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
Preliminary Observations Regarding CFPB's Final Mortgage Disclosure Rule And Forms
**Update – The CFPB has now released the final rule and related materials, available here.**
Later today, as anticipated, the CFPB will release its final rule combining the TILA and RESPA mortgage disclosure forms and rules. We will review the final forms and rule, monitor the related field hearing, and prepare a preliminary Special Alert followed by a more detailed summary.
The final rule and forms follow two years of drafting, testing, and revision by the Bureau. According to the Bureau, its testing demonstrates that the new forms significantly improve the ability of consumers with a variety of experience levels and loan types to answer questions about their loans, compare competing loans, and compare estimated and final loan terms and costs.
The text of the final rule will not be available until later today. However, we are able to make several preliminary observations based on our review of the materials made available thus far, perhaps most importantly that industry will have until August 1, 2015 to make the changes to systems and training necessary to implement the new forms, which is longer than anticipated. Additional observations follow.
Loan Estimate Disclosure
- The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
- It appears that the final rule will require lenders to provide the Loan Estimate three business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays). However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
- The design and layout of the Loan Estimate does not appear to differ substantially from the proposed form, except that estimated closing costs and estimated cash to close are now disclosed in separate rows on the bottom of page 1. The CFPB also states that it modified the forms to include checkboxes to tell consumers whether they are receiving or paying cash at closing and to provide a streamlined calculation of that amount.
- Owner’s title insurance is listed as “optional” on page 2. During a recent House Financial Services Committee hearing with CFPB Director Cordray, two committee members–Reps. Miller (R-CA) and Perlmutter (D-CO)–expressed concern that identifying this cost as optional would not serve consumers’ best interests.
- The Total Interest Percentage (TIP) disclosure, which was required by the Dodd-Frank Act and opposed by industry, has been retained on page 3.
- The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page. In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”
- It is unclear from the materials provided what changes, if any, will be made to the restrictions on changes in costs (or tolerances) imposed by the Department of Housing and Urban Development (HUD) in 2010. It is also unclear whether, under the final rule, TILA or RESPA liability will apply to violations of those restrictions.
Closing Disclosure
- The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement.
- It appears that the final rule will require the lender to ensure that the consumer receive the Closing Disclosure three business days before closing. This would mean that the lender must be able to demonstrate that the consumer received the Closing Disclosure three business days before closing.
- The CFPB materials indicate that, in comparison to the proposal that changes to the information provided in the Closing Disclosure generally require re-disclosure and an additional three business day waiting period before closing, the final rule limits the additional waiting period to situations in which there is a substantial change in the APR, a change in the loan product, or the addition of a prepayment penalty.
- It is unclear from the materials provided what role, if any, the settlement agent will play in the preparation of the Closing Disclosure and whether TILA or RESPA liability will apply.
- Like the final Loan Estimate, the design and layout of the final Closing Disclosure do not appear to differ substantially from the proposed form, except for the changes noted above.
- In addition, the final Closing Disclosure, like the proposed form, eliminates the HUD-1 line numbers. The final Closing Disclosure also eliminates the Average Cost of Funds (ACF) disclosure, which was added by the Dodd-Frank Act but opposed by industry.
Other Issues
- It appears that the CFPB has not adopted the proposed requirement that lenders retain records in an electronic, machine-readable format. Instead, the CFPB will work with the Fannie Mae and Freddie Mac to create a data standard based on the Closing Disclosure.
For additional background, please review our report on the rule as proposed.
CFPB Settles With Mortgage Insurer Over Alleged RESPA Violations
On November 15, the CFPB announced a settlement with a mortgage insurer accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA. The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders’ captive reinsurers, but over time ceded increasingly large percentages of its premiums—up to 40% for each referral—in exchange for lenders’ continued referral of customers.
The proposed consent order requires the company to pay $100,000 in penalties and subjects the company to regular and mandatory compliance reporting and monitoring for a period of four years. In addition, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims.
The action follows several other RESPA enforcement actions announced earlier this year, including actions against four mortgage insurers.
CFPB Issues Interpretive Rule Regarding Homeownership Counseling Organizations Lists
On November 8, the CFPB issued an interpretive rule setting forth instructions for lenders on how to comply with the homeownership counseling list requirements set forth in the High-Cost Mortgage and Homeownership Counseling Amendments to TILA and the Homeownership Counseling Amendments to RESPA, which are scheduled to take effect on January 10, 2014. In addition, the CFPB released its homeownership counseling list generation tool to help lenders produce a list that complies with RESPA requirements.
The interpretive rule clarifies the requirement under RESPA that lenders must provide a list of homeownership counseling organizations to consumers obtained from the CFPB or HUD. Specifically, the rule requires lenders to:
- Provide a list of ten HUD-approved housing counseling agencies to consumers;
- Generate the list by using the consumer’s current five-digit zip code to ensure that the homeownership counseling organization will be in the consumer’s location;
- Include the following information for each housing counseling agency listed: (i) agency name; (ii) phone number; (iii) street address, city, state, zip code; (iv) website URL; (v) email address; (vi) counseling services provided; and (vii) languages spoken; and
- Include the following language:
The counseling agencies on this list are approved by the U.S. Department of Housing and Urban Development (HUD), and they can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost to you. This list shows you several approved agencies in your area. You can find other approved counseling agencies at the Consumer Financial Protection Bureau’s (CFPB) website: consumerfinance.gov/mortgagehelp or by calling 1-855-411-CFPB (2372). You can also access a list of nationwide HUD-approved counseling intermediaries at http://portal.hud.gov/hudportal/HUD?src=/ohc_nint.