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CFPB issues fact sheet on TRID disclosures with assumption transactions
On May 1, the CFPB released a factsheet addressing when loan estimates and closing disclosures are required for assumption transactions under the TILA-RESPA Integrated Disclosure Rule (TRID Rule). The factsheet includes a flowchart and a narrative summary to demonstrate when the disclosures would be required. According to the factsheet, as a threshold matter, the new transaction must be within the TRID Rule’s scope of coverage (e.g., the transaction is a closed-end consumer credit transaction secured by real property or a cooperative unit and is not a reverse mortgage subject to § 1026.33). The creditor must then determine if the transaction is an “assumption” as defined in Regulation Z (under § 1026.20(b) an assumption “occurs when a creditor expressly agrees in writing to accept a new consumer as a primary obligor on an existing residential mortgage transaction.”) The factsheet includes three elements the transaction must meet in order to qualify as an assumption under Regulation Z: (i) the creditor must expressly accept the new consumer as a primary obligor; (ii) a written agreement must be executed, which includes the creditor’s express acceptance of the new customer; and (iii) it must be a “residential mortgage transaction” as to the new customer—specifically, the new customer must be financing the acquisition or initial construction of his or her principal dwelling. If the creditor determines the transaction is an assumption, based on the outlined factors, it must provide a loan estimate and closing disclosure required by the TRID Rule, unless the transaction is otherwise exempt from the requirements.
4th Circuit: RESPA time-bar annulled by fraudulent concealment
On April 26, the U.S. Court of Appeals for the 4th Circuit reversed a district court’s dismissal of five plaintiffs’ putative class actions alleging RESPA violations, concluding that the claims were not time-barred due to the fraudulent concealment tolling doctrine. According to the opinion, between 2009 and 2014, several banks and mortgage companies (collectively, “defendants”) referred plaintiffs to a title company to procure title insurance and obtain settlement services, which allegedly provided the defendants with “several forms of ‘unearned fees and kickbacks’ to induce those referrals” in violation of RESPA. The plaintiffs alleged the kickbacks came in the form of payments to advertising and marketing shell companies for the referrals, which would then make payments to brokers or loan officers of the defendants. The district court dismissed the class actions because the first of the five class actions was not filed until June 2016, which was well beyond the one-year statute of limitations under RESPA.
On appeal, the plaintiffs argued that they were entitled to relief under RESPA because the kickback scheme was allegedly “fraudulently concealed” by the defendants by using “sham” entities and not reporting the payments on the plaintiffs’ HUD-1 settlement statements. The 4th Circuit agreed, concluding that the district court erred in dismissing the plaintiffs’ claims. The appellate court noted that Congress did not intend to “allow individuals and entities that conceal their unlawful kickback schemes and other RESPA violations to reap the benefit of the statute of limitations as a defense.” Rejecting the defendants’ assertion that publicly-available information, including earlier court filings, should have “‘excited further inquiry’” by the plaintiffs to timely file the action, the appellate court emphasized that the fraudulent concealment doctrine requires only “reasonable diligence” and does not “necessarily hold individual borrowers to the diligence standard of combing court filings in potentially related cases, particularly when the borrower has no reason to be aware of the related cases.”
Utah applies RESPA provisions to title entity affiliated business arrangements
On March 29, the Utah governor signed SB 121, which modifies certain title insurance definitions and provisions and adopts, with certain exceptions, Section 8 of RESPA for the purposes of state law governing affiliated business arrangements involving title entities. SB 121 “repeals existing provisions governing controlled business relationships in the title industry,” and permits an “affiliated business arrangement” as defined under 12 U.S. Code § 2602, with the exception that the “services that are the subject of the arrangement do not need to involve a federally related mortgage loan.”
Specifically, title entities with affiliated-business arrangements will be regulated by the state’s Division of Real Estate (Division), which has enforcement authority over the bill’s provisions, including over certain RESPA provisions against real estate licensees such as “failing to timely disclose to a buyer or seller an affiliated business relationship.” Title companies are also required to file annual reports to the Division related to affiliated business arrangements as well as capitalization for the previous calendar year. SB 121 further provides a specific list of RESPA violations pertaining to affiliated business arrangements. The amendments take effect 60 days after adjournment of the legislature.
11th Circuit: Consumer’s repayment agreement not an escrow account
On April 9, the U.S. Court of Appeals for the 11th Circuit held that a consumer’s insurance repayment plan on her reverse mortgage did not qualify as an escrow account under RESPA’s Regulation X. According to the opinion, a consumer’s reverse mortgage required her to maintain hazard insurance on her property, which she elected to pay herself, and did not establish an escrow account with the mortgage servicer to pay her insurance and property taxes. After her insurance lapsed, the mortgage servicer advanced her over $5,000 in funds paid directly to her insurance carrier to ensure the property was covered, subject to a repayment agreement. After the consumer failed to make any payments under the agreement, the servicer initiated a foreclosure action against the consumer and obtained a forced-placed insurance policy when the insurance lapsed for a second time. Ultimately, a state-run forgivable loan program brought the consumer’s past due balance current and excess funds were placed in a trust to cover future insurance payments on the property. The consumer filed an action against the mortgage servicer alleging the servicer violated RESPA’s implementing Regulation X when it initiated forced-placed insurance, because the repayment agreement purportedly established an escrow account, which required the servicer to advance the funds for insurance. The district court entered judgment in favor of the servicer.
On appeal, the 11th Circuit agreed with the district court, concluding that no escrow account existed between the consumer and the servicer, emphasizing that nothing in the repayment agreement set aside funds for the servicer to pay insurance or taxes on the property in the future. The 11th Circuit rejected the consumer’s characterization of the repayment agreement as an arrangement under Regulation X “where the servicer adds a portion of the borrower’s payment to principal and subsequently deducts from principal the disbursements for escrow account items.” The 11th Circuit reasoned that not only did the consumer never make a principal payment to the servicer, the consumer’s characterization is “entirely inconsistent” with the reverse mortgage security instrument. Because the servicer never deducted anything from the principal when it disbursed funds to pay the insurance, the repayment agreement did not qualify as an escrow agreement under Regulation X.
District Court dismisses non-borrower action against mortgage servicer
On January 11, the U.S. District Court for the Northern District of Mississippi granted a mortgage servicer’s motion to dismiss a lawsuit with prejudice brought by a homeowner’s widow alleging violations of, among other claims, TILA, RESPA, and FDCPA, for failing to include a credit-life-insurance provision in the loan note. According to the opinion, the plaintiff sued the mortgage servicer and mortgage originator after her husband passed and the servicer initiated foreclosure proceedings. The plaintiff argued that her husband, who was the sole borrower, and the mortgage originator had an oral agreement to include a credit-life-provision in the mortgage loan note but the originator failed to include it. The mortgage servicer moved to dismiss the action arguing, among other things, that the plaintiff lacked standing to bring the action. Upon review, the court agreed with the mortgage servicer, determining that the plaintiff lacks standing under TILA, RESPA, and the FDCPA because she was neither an “obligor” nor “borrower” on the loan even though she was identified as a “borrower” on the Deed of Trust. Moreover, the court rejected the plaintiff’s alternative claim that she is a third-party beneficiary with standing to sue under the laws, finding that no valid contract existed as to the credit-life-insurance policy and therefore, the plaintiff could not claim to be a beneficiary of a non-existent contract. The court also dismissed the plaintiff’s other state law and fraud claims, finding she failed to provide sufficient facts to make the claims plausible.
CFPB issues five-year lookback for 2013 ATR/QM and Mortgage Servicing Rule
On January 10, the CFPB released the assessment reports required by Section 1022(d) of the Dodd-Frank Act for two of its 2013 mortgage rules: the TILA Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA Mortgage Servicing Rule. The assessment reports were conducted using the Bureau’s own research and external sources. The reports do not include a benefit-cost analysis of either rule, nor do they propose amendments to the rules or contain any other policy recommendations. However, the Bureau expects the reports to be used to “inform the Bureau’s future policy decisions.”
The ATR/QM Rule became effective in January 2014 and generally requires that lenders make a reasonable and good faith determination, based on documented information, that the borrower has the reasonable ability to repay the mortgage loan. Highlights of the report’s findings include:
- While it is difficult to distinguish the effects of the ATR/QM Rule and the marketwide tightening of underwriting standards following the housing crisis, the rule may have restricted the reintroduction of certain types of loans that were associated with high delinquency or foreclosure rates, such as loans based on limited or no documentation of income or assets, loans with low initial monthly payments that reset after a period of time, and loans with high debt-to-income ratios.
- The ATR/QM Rule was not generally associated with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination.
- The ATR/QM Rule did not impact access to credit for self-employed borrowers who were eligible for a GSE loan. For other self-employed borrowers, the Bureau acknowledged lenders may find it difficult to comply with the Appendix Q documentation and calculation requirements but found that approval rates for this population decreased only slightly.
- While the costs of originating a mortgage loan have increased substantially over time, the ATR/QM Rule does not appear to have materially increased the lenders’ costs or the prices the lenders charged to consumers, at an aggregate market level. However, based on data from nine lenders, the Bureau estimated the foregone profits from not originating certain types of non-QM loans at $20-$26 million per year.
- Contrary to the Bureau’s expectations when it issued the ATR/QM Rule, the GSEs have maintained a persistently high share of the market, and the market for non-QM loans remains relatively small.
The Mortgage Servicing Rule became effective in January 2014 and, among other things, imposes procedural requirements on servicers with respect to loss mitigation and foreclosure for delinquent borrowers. Highlights of the report’s findings include:
- Loans that became delinquent were less likely to proceed to a foreclosure during the months after the Mortgage Servicing Rule’s effective date compared to months prior to the effective date and were more likely to return to current status. For borrowers who became delinquent the year the rule took effect, the Bureau estimated that, absent the rule, at least 26,000 additional borrowers would have experienced foreclosure within three years, and at least 127,000 fewer borrowers would have recovered from delinquency within three years.
- The cost of servicing mortgage loans has increased substantially; the main increase in costs occurred before the Mortgage Servicing Rule took effect and is not attributable to the rule. However, some servicers reported significant ongoing costs of complying with the rule, which can be attributable with the need for “robust control functions” and higher personnel costs to support increased communication with delinquent borrowers.
- The time from borrower initiation of a loss mitigation application to short-sale offer increased in 2015 compared to 2012.
- A larger share of borrowers who completed loss mitigation applications in 2015 were able to avoid foreclosure than borrowers who completed loss mitigation applications in 2012.
- The rate of written error assertions per account fell by about one-half after the Mortgage Servicing Rule’s effective date compared to the prior three years.
- There was a moderate decrease in the share of borrowers receiving force-placed insurance and the Rule’s effective date, which can be attributable to the Rule but also to the changes in the insurance market.
5th Circuit: Loan originators cannot be liable for loan servicers’ violations of RESPA loss mitigation requirements
On December 21, the U.S. Court of Appeals for the 5th Circuit held that a mortgage loan originator cannot be held vicariously liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA (and its implementing Regulation X). According to the opinion, in response to a foreclosure action, a consumer filed a third-party complaint against her loan servicers and loan originator alleging, among other things, that the loan servicers had violated Regulation X’s requirement that a servicer evaluate a completed loss mitigation application submitted more than 37 days before a foreclosure sale. In subsequent filings, the consumer clarified that the claims against the loan originator were for breach of contract and vicarious liability for one of the loan servicer’s alleged RESPA violations. The district court dismissed both claims against the loan originator and the consumer appealed the dismissal of the RESPA claim.
On appeal, the 5th Circuit affirmed the dismissal for two independent reasons. First, the 5th Circuit noted it is well established that vicarious liability requires an agency relationship and determined the consumer failed to assert facts that suggested such a relationship existed. Second, in an issue of first impression at the circuit court stage, the court ruled that, as a matter of law, the loan originator could not be vicariously liable for its servicer’s alleged violations of RESPA, as the applicable statutory and regulatory provisions only impose loss mitigation requirements on “servicers,” and therefore only servicers could fail to comply with those obligations. The appellate court reasoned that Congress explicitly imposed RESPA duties more broadly in other sections (using the example of RESPA’s prohibition on kickbacks and unearned fees that applies to any “person”), but chose “a narrower set of potential defendants for the violations [the consumer] alleges.” The court concluded, “the text of this statute plainly and unambiguously shields [the loan originator] from any liability created by the alleged RESPA violations of its loan servicer.”
Illinois amends Residential Mortgage License Act
On December 19, the Illinois governor signed HB 5542, which amends the state’s Residential Mortgage License Act of 1987 (the Act) to make various changes to state licensing requirements. Among other things, the amended Act (i) clarifies the definition of a “bona fide nonprofit organization”; (ii) provides a list of prohibited acts and practices; (iii) stipulates that a licensee filing a Mortgage Call Report is not required to file an annual report with the Secretary of Financial and Professional Regulation (Secretary) disclosing applicable annual activities; (iv) repeals a provision requiring the Secretary to obtain loan delinquency data from HUD as part of an examination of each licensee; (v) clarifies that the notice of change in loan terms disclosure requirements do not apply to any licensee providing notices of changes in loan terms pursuant to the CFPB’s Know Before You Owe mortgage disclosure procedure under TILA and RESPA, while removing the provision that previously excluded licensees limited to soliciting residential mortgage loan applications as approved by the Secretary from the requirements to provide disclosure of changes in loan terms; (vi) removes certain criteria concerning the operability date for submitting licensing information to the Nationwide Multistate Licensing System; and (vii) makes other technical and conforming changes. The amendments are effective immediately.
District court grants judgment in favor of loan servicer on remand
On December 10, the U.S. District Court for the District of Minnesota ruled on a motion for summary judgment concerning whether the Minnesota Mortgage Originator and Servicer Licensing Act’s (MOSLA) provision prohibiting “a mortgage servicer from violating ‘federal law regulating residential mortgage loans’” provides a cause of action under state law when a loan servicer violates RESPA but where the consumer ultimately has no federal cause of action because the consumer “sustained no actual damages and thus has no actionable claim under RESPA.”
As previously covered by InfoBytes, the U.S. Court of Appeals for the 8th Circuit reviewed the district court’s earlier decision to grant summary judgement in favor of a consumer who claimed the mortgage loan servicer failed to adequately respond to his qualified written requests concerning erroneous delinquency allegations. The 8th Circuit overturned that ruling, opining that while the loan servicer failed to (i) conduct an adequate investigation following the plaintiff’s request as to why there was a delinquency for his account, and (ii) failed to provide a complete loan payment history when requested, its failure did not cause actual damages.
Now, revisiting the issue on remand, the district court stated that any MOSLA violation or injury is predicated on the RESPA violation or injury. Reasoning that since there were “no actual damages under RESPA, then there are no actual damages under MOSLA,” the court concluded that the consumer did not have a viable cause of action under MOSLA and dismissed the action with prejudice.
Court grants summary judgment, finding no concrete harm in alleged kickback scheme
On December 7, the U.S. District Court for the District of Maryland granted a motion for summary judgment filed by a real estate team and title company (defendants), finding that an alleged kickback scheme involving the defendants did not constitute a violation of RESPA, and that the plaintiffs failed to demonstrate that they suffered from any concrete harm. According to the court, the plaintiffs filed a suit on behalf of a putative class more than four and a half years after they purchased their home, claiming the defendants violated RESPA by allegedly “using a ‘sham’ marketing agreement . . . to disguise an illegal kickback scheme,” which provided the real estate team with “unearned fees” through settlement referrals to the title company. The plaintiffs further argued that they were entitled to equitable tolling because the kickback scheme was allegedly concealed in an undisclosed marketing and services agreement, and that even if the agreement had been disclosed, it would have seemingly appeared to be valid. However, the court found “no genuine issue of material fact that the [p]laintiffs failed to exercise reasonable diligence to discover their claim” because at the time of closing, “they knew that they could choose their own settlement and title company” but elected not to. In addition, the court disagreed with the plaintiffs’ argument that they had Article III standing because they were “deprived of impartial and fair competition between settlement services,” finding that the plaintiffs were not overcharged for services due to the alleged kickback scheme and failed to show that the costs of settlement services were unnecessarily increased.
Moreover, the court found that the plaintiffs (i) did not inquire about a potential relationship between the defendants; (ii) did not claim dissatisfaction with the title company services provided; and (iii) did not claim that the fees paid to the title company were “unreasonable or undeserved.” Furthermore, the court found that the claim was barred by RESPA’s one-year statute of limitations and that equitable tolling did not apply.