Marx Sterbcow of the Sterbcow Law Group will speak on "The Essentials IV -- CFPB Consent Orders for Compliance Officers" at the Mortgage Bankers Association Regulatory Compliance Conference at the Grand Hyatt Hotel in Washington, D.C. on Sunday, September 18, 2016 from 3:30 PM to 4:45 PM. The session will be a comprehensive overview of key Consumer Financial Protection Bureau consent orders and it will provide tips on how to apply the findings to your mortgage business.
The Consumer Financial Protection Bureau "CFPB" announced they entered into a consent order on May 26, 2016 with a now former Wells Fargo loan officer employee, David Eghbali, for engaging in a purported illegal mortgage fee-shifting scheme. The Consent Order is "In the Matter of: David Eghbali" File No. 2016-CFPB-0011. The CFPB stated that David Eghbali referred a large number of loan closings to New Millennium Escrow Inc., who in return shifted its fees from some customers to others at Eghbali's request. Eghbali benefitted from this relationship because he could manipulate loan costs which helped him increase the number of loans he closed which in turn increased his loan originator commission.
The CFPB has the authority to take action against institutions or individuals engaging in unfair, deceptive, or abusive acts or practices "UDAAP" or that otherwise violate federal consumer financial laws. The CFPB found that this scheme violated the Real Estate Settlement Procedures Act "RESPA" Section 8(a), which prohibits giving a “fee, kickback, or thing of value” in exchange for a referral of business related to a real estate settlement service.
The CFPB stated from around November 2013 to February 2015, Eghbali had an arrangement with New Millennium Escrow which allowed him to manipulate the fees his customers would pay for escrow services. In California, escrow companies provides services such as document preparation and holding and transferring payments related to mortgage loan refinance transactions. Consumers who obtain a mortgage in California do not ordinarily have a preferred escrow company and often rely on their loan officers to recommend one.
In the CFPB's press release they said the investigation discovered that, based on the direction of Eghbali, New Millennium would reduce its fees for certain customers and make up for its loss by adding fees to loans for other customers. The arrangement helped Eghbali generate more business because it allowed him to offer "No-Cost" loans to price conscious consumers who might have gone to a competitor bank or lender to find a cheaper loan. Eghbali directed these fee reductions where borrowers' closing costs, including escrow fees, otherwise would have exceeded the credit available to them under Wells Fargo's pricing guidelines, given their chosen interest rates. Under the arrangement Eghbali referred nearly all of his more than 100 clients to New Millennium. New Millennium raised and lowered its fees on numerous occasions according to the Consent Order.
Eghbali received a top-producing loan officer award, the "President's Cup", from Wells Fargo from 2011 to 2014 which according to the CFPB meant that he also received a bonus on each loan he closed.
Eghbali received fees, kickbacks, or things of value under agreements or understandings that business incident to or a part of a real-estate-settlement service involving federally related mortgage loans would be referred to New Millennium, in violation of RESPA, 12 U.S.C. § 2607(a); 12 CFR § 1024.14(b).
Under the terms of the consent order David Eghbali is banned from the mortgage industry for a period of One (1) year and he must pay a civil penalty of $85,000.00 in installments to the CFPB's Civil Penalty Fund.
The CFPB did not disclose how they became aware of this matter or if it was self-reported by Wells Fargo but it does dispel any notion that the CFPB only targets large companies for activities they believe violate RESPA and/or UDAAP.
New Millennium Escrow, Inc. who would appear to be the giver under the definition of RESPA was not penalized under this Consent Order by the CFPB and it is unknown if they will also face their own Consent Order or Enforcement Action by the CFPB in conjunction with this matter.
RESPA Conference: Marx Sterbcow and Charles Cain to present at the 2016 National Settlement Services Summit in Charlotte, North Carolina
Marx Sterbcow, the Managing Attorney, of the Sterbcow Law Group, and Charles Cain, Vice President, Agency, WFG National Title Insurance Co. will present at the 2016 National Settlement Services Summit [NS3] at the Le Meridien & Sheraton Hotel in Charlotte, North Carolina on Wednesday, June 8, 2016.
The session titled "Ethics: UDAAP, Reverse Vendor Oversight and Legal Malpractice" will discuss how Title agents and attorneys are expected to adhere to the highest ethical standards, and how Dodd Frank’s ban on Unfair, Deceptive or Abusive Acts or Practices (UDAAP) have given the CFPB broad authority to root out questionable activities. Learn how UDAAP is requiring agents to gear up when it comes to ethical conduct, particularly in the area of RESPA compliance. The presentation will explain how UDAAP could make vendor management liability and oversight a two-way street through a new enforcement tactic known as "Reverse Vendor Management Oversight". Reverse Vendor Management Oversight could challenge the bounds of legal malpractice by requiring title agents, lawyers, and attorney notaries to be on the lookout for vendor compliance issues with their clients. Speakers will share real-world examples, and attendees will walk away with actionable tips for remaining UDAAP compliant in an increasingly active RESPA and UDAAP enforcement environment.
October Research Corporation has generously offered a Discount Code to attend NS3 for all friends and clients of the Sterbcow Law Group. To receive your Discount Code please contact the Sterbcow Law Group and we will send you the special discounted rate code to attend NS3.
RESPA CONSUMER CLASS ACTION LAWSUIT FILED AGAINST REALOGY, PHH CORP, TRG, NRT, AND OTHERS SURROUNDING THEIR AFFILIATED BUSINESS ARRANGEMENTS
A consumer class action RESPA lawsuit was filed on November 25, 2015 by Timothy L. Strader Sr., against PHH Corporation, REALOGY Holdings Corp., PHH Mortgage Corporation, PHH Home Loans LLC, RMR Financial LLC, NE Moves Mortgage LLC, PHH Broker Partner Corporation, REALOGY GROUP LLC, REALOGY Intermediate Holdings, Title Resources Group LLC, West Coast Escrow Company, TRG Services Escrow Inc., NRT LLC, REALOGY Services Group LLC, and REALOGY Services Venture Partner LLC in United States District Court for the Central District of California. (Case No. 8:15-CV-1973).
The allegations in this consumer class action lawsuit largely surround issues involving violations of Section 8(a) and Section 8(c)(4) of the Real Estate Settlement Procedures Act of 1974, as amended, 12 U.S.C. §§ 2601 et seq ("RESPA"), and its implementing regulations, 12 C.F.R. §§ 1024.1 et seq. ("Regulation X"). RESPA – and, in particular, the prohibition on referral fees and kickbacks in 12 U.S.C. § 2607 – was explicitly designed to protect consumers “from unnecessarily high settlement charges caused by certain abusive practices,” such as those described in this Complaint. 12 U.S.C. § 2601(a). As such, 12 U.S.C. § 2607(a) prohibits the giving or accepting of any “fee,” “kickback,” or “thing of value” in exchange for business incident to or part of a “settlement service” (as those terms are defined in RESPA and Regulation X) involving a federally related mortgage loan.
The complaints states the Defendants violated RESPA and distorted the market for title insurance and other settlement services in at least two different manners:
First, PHH and Realogy created an affiliated business arrangement called PHH Home Loans, which the Plaintiffs contend was a sham joint venture carefully engineered to facilitate and disguise the payment of unlawful referral fees and kickbacks in exchange for the referral of title insurance and other settlement services to Realogy's subsidiary, Title Resource Group ("TRG"). The allegations further state that prior to October 21, 2015, PHH was bound under a Strategic Relationship Agreement to refer all title insurance and settlement services to TRG. The consumers referred by PHH Home Loans paid approximately $1650 to TRG for title insurance and other settlement services. If this allegation is accurate it would violate Section 8(c)(4) under RESPA* which prohibits the "Required Use" of an affiliate if the consumer paid for those services.
Pursuant to the Strategic Relationship Agreement, PHH Home Loans is the exclusively recommended mortgage lender for Realogy's real estate brokerage network, which is operated by NRT, LLC (which operates such brands as Coldwell Banker, Sotheby's International Realty, ZipRealty, The Corcoran Group, and Citi Habitats.
The Plaintiffs also state that PHH receives a right of first refusal for the purchase of the mortgage servicing rights for PHH Home Loans originated mortgages, which permit PHH Home Loans to sell the servicing rights to PHH "on terms no less favorable" than those that could be obtained from an independent third party and that PHH owns a disproportionate share of the servicing rights for those mortgages relative to PHH's overall market share of residential mortgage servicing. The complaints states that the details of this relationship have not been publicly disclosed to consumers.
Second, the Plaintiffs allege that under a related Private Label Solutions ("PLS") model--in which PHH manages all aspects of the mortgage process for various large banking institutions that PHH directs the PLS Partners to refer title insurance and other settlement services to TRG without disclosing to consumers the existence of PHH's affiliation with TRG, nor the fact that PHH was required to cause the PLS Partners to refer title insurance and other settlement services to TRG under the terms of the Strategic Relationship Agreement.
The complaint further states that the undisclosed mandatory referral arrangement existed for over 10 years until October 21, 2015, when PHH and Realogy amended the Strategic Relationship Agreement to delete the mandatory referral provision. PHH filed their latest Form 10-Q with the SEC on November 5, 2015 and based on the exhibits it did not include the mandatory referral provision language. The Plaintiffs contend the reason that PHH deleted this provision is due to the Consumer Financial Protection Bureau v. PHH Corporation enforcement action where the CFPB fined PHH $109 million dollars for its relationship with Atrium Reinsurance Corporation, an affiliate of PHH.
This is a RESPA class action case worth monitoring given the allegations, parties involved, and the CFPB's related case against Atrium now pending in Federal District Court. Judge Fernando M. Olguin is presiding over the case.
If you have any questions about how your company's affiliated businesses are structured please contact us to set up a consultation.
Marx Sterbcow, managing attorney with the Sterbcow Law Group, and James Milano, member with Weiner Brodsky Kider PC will speak on RESPA News's webinar series on the topic of Lead Generation Compliance. The webinar is scheduled for Tuesday, November 10, 2015 from 2:20-3:15 PM EST. The Editor of RESPA News, Justine Jones will moderate the webinar.
We will train participants on the regulations governing the real estate lead generation industry and what increased attention the CFPB, Federal Trade Commission, and other agencies mean for your business practices. The webinar will focus on how the CFPB expanded its authority with the use of UDAAP, the potential ramifications of Regulation Z's Loan Officer Compensation Rule, the dangers of co-marketing with other settlement service providers, and how to carefully vet lead generation companies.
Marx Sterbcow, managing attorney, of the Sterbcow Law Group, has been invited to speak at the Louisiana Bankers Association 2015 Bank Counsel Conference on the topic of "Who's Your Vendor? Secondary Market Compliance & Title Agent Vendor Management." The session will provide insight into how banks should be managing their vendors and what requirements they should be requiring their title agent vendors to have in place. The presentation will also focus on managing the third party vendor management risks in a Post-TRID world and the expectations the secondary market will be playing in this new changing regulatory landscape.
The 2015 Bank Counsel Conference will be held on December 10-11, 2015 at the Ritz Carlton Hotel in New Orleans.
BREAKING: 9th Circuit Court of Appeals Grants Class Certification in Edwards v. First American Corp RESPA Class Action
The United States Court of Appeals for the Ninth Circuit issued their 24 page Opinion today, August 24, 2015, in the Denise P. Edwards versus The First American Corporation; First American Title Insurance Company class action lawsuit. No. 13-55542 D.C. No. 2:07-cv-03796-SJO-FFM.
The Edwards v. First American class action lawsuit was originally filed on June 12, 2007 and has spent over 8 years bouncing from federal court to federal court.
The 9th Circuit Court of Appeals affirmed in part and vacated in part the United States District Court for the Central District of California's order denying class certification in a case where the Plaintiffs alleged that First American Title engaged in a national scheme of paying title agencies things of value in exchange for the title agencies' agreement to refer future title insurance business to First American in violation of the Real Estate Settlement Procedures Act "RESPA".
The Court of Appeals Panel held that in determining the proprietary of class certification, the district court erred in holding that the RESPA Safe Harbor in 12 U.S.C. §2607(c)(2) requires Edwards to prove that First American overpaid for its ownership interests in each of the title agencies.
The Opinion written by Judge Gould explained that the ownership goods purchased by First American are equity shares--not goods, services or facilities within the meaning of RESPA §2607(c)(2). The Panel also held that the district court abused its discretion in denying class certification on the grounds that 12 U.S.C. §2697(a) requires an individual inquiry, on each transaction, to determine whether First American's purchase prices of the ownership interests exceeded their fair market value.
The Court also held that cases involving illegal kickbacks in violation of RESPA §2607(a) are not necessarily unfit for class adjudication. The 9th Circuit Court of Appeals wrote that Edwards need only prove the existence of an exchange involving a referral agreement, which does not require inquiry into individual facts across all 38 captive title agencies, and that the proposed class members also share common questions of fact.
The Panel concluded that the alleged common scheme, if true, presents a significant aspect of First American's transactions that warrant class adjudication: Whether First American paid a thing of value to get its agreement for exclusive referrals in violation of RESPA. The Federal Appeals Court vacated the District Court's denial of class certification in part to these transactions that involved the common scheme presented to First American's Board of Directors.
The Panel of Judges also disagreed with the District Court's holding that influences by third parties constitute individual issues that render RESPA class adjudication improper. The panel wrote that other sources of referral do not defeat the predominate common questions of fact, i.e. whether the title agencies have contractual obligations to refer their customers to First American.
The Court also held that the District Court erred in determining that individual inquiries are required in connection with twelve title agencies that are affiliated business arrangements and in connection with certain agencies that are majority-owned by First American.
First American however did score one small victory when the 9th Circuit Court of Appeals agreed with the District Court that First American's transactions with newly formed title agencies do not raise common issues sufficient for class action adjudication, and affirmed the District Court's denial of certification as to the newly formed title agencies.
The Consumer Financial Protection Bureau "CFPB" announced today they will delay "enforcement" of the new Truth In Lending-RESPA Integrated Disclosure "TRID" rule for an undefined period of time. Over two hundred members of Congress were pushing for an enforcement delay until December 31, 2015 but the CFPB did not place a definitive time frame for compliance thus leaving the date that CFPB enforcement starts very murky.
The CFPB also said they will apply a standard of "sensitivity" in their TRID enforcement oversight with companies who provide "good-faith efforts" to comply with TRID. However, the Bureau failed to define what "sensitivity" or "good-faith efforts" actually mean and how they will be applied.
The enforcement delay is certainly a good step because the CFPB clearly heard from the industry that a number software companies were unable to get their lending customers ready in time. The American Bankers Association recently conducted a study which said that 8 out of 10 bank members couldn't verify when their software system would be ready or were informed their software system wouldn't be ready before June. The Loan Originator System "LOS" troubles were discussed in a blog post we did in January.
Despite the CFPB's decision to delay enforcement of TRID for an unspecified period of time, TRID still goes into full effect on August 1, 2015 and loans that are originated after August 1 will still be required to comply with TRID because the real regulators of this rule will expect complete compliance. The real regulators in this case are the secondary market investors, mortgage insurance companies, and the plaintiffs bar. TRID loans will still be subject to representations and warranties by lenders who sell their mortgages to the secondary market. Additionally, the TRID enforcement delay at this point only pertains to the CFPB not other state and governmental agencies who also have oversight over TRID compliance.
So the single most important message from today's announcement by the CFPB is that nothing is really changing with TRID and that all companies need to ensure they are in compliance on August 1st. We hope this message does not get misinterpreted by the industry into thinking the CFPB has delayed the entire rule because it has not.
MARX STERBCOW AND CHARLES CAIN TO PRESENT AT THE 2015 NATIONAL SETTLEMENT SERVICES SUMMIT "NS3" CONFERENCE ON VENDOR MANAGEMENT FOR TITLE AGENTS
Marx Sterbcow, Managing Attorneyat Sterbcow Law Group, and Charles Cain, Of Counsel to Sterbcow Law Group and Senior Vice President to WFG National Title Insurance Company, will speak at the 2015 National Settlement Services Summit"NS3" Conference in Atlanta, Georgia on June 9, 2015. The presentation "Who's Your Vendor? Vendor Management for Title Agents" will provide in-depth analysis and guidance on how title agents can understand and monitor the risks associated with their vendor relationships. We will discuss third party vendor management expectations originating not just from the OCC/FFIEC/FDIC/CFPB but from the secondary market on closing and settlement providers.
Marx Sterbcow, Managing Attorney of the Sterbcow Law Group LLC, will be presenting on the ATS Secured & Advanced Bank Solutions Webinar Series on Tuesday, March 31, 2015 (1:30 PM - 2:30 PM CDT) on the topic of "RESPA Section 8: Understanding Marketing & Advertising Regulations." The webinar will cover the topics such as marketing agreements, advertising agreements, co-branding, lead generation, CFPB expectations on financial institutions, third party vendor management marketing concerns for financial institutions, and preparing your organization to remain RESPA compliant.
The Consumer Financial Protection Bureau “CFPB” announced another Consent Order with NewDay Financial, LLC on February 10, 2015 where they agreed to settle allegations that NewDay engaged in deceptive acts or practices by failing to disclose payments to a veteran’s organization that endorsed NewDay for reasons other than for NewDay’s consumer service. The CFPB also said NewDay made payments to third parties in connection with the marketing of home loans that constituted illegal payments for referrals of mortgage origination business under section 1053 and 1055 of the Consumer Financial Protection Act of 2010 (CFPA).
This CFPB Consent Order opens up new compliance territory with respect to consumer disclosure involving agreements between settlement service providers because it expands UDAAP into RESPA for the first time. However, this consent order is not the model of clarity that we were hoping for because it raises a number of new compliance issues outside of this particular arrangement.
The CFPB alleged that NewDay contracted with a third party marketing and lead generation company (i.e. “broker company”) whose business services included licensing the use of a Veterans’ Organization mailing list, logo, and other proprietary marks and managed the relationship between NewDay and the Veteran’s Organization. The members of the Veterans’ Organization learned about NewDay because of its contractual relationship with the marketing and lead generation company and Veterans’ Organization. NewDay purchased the Veterans’ Organization mailing list via the broker company and sent advertisements to the members of the Veterans’ Organization who in turn contacted NewDay for mortgage products.
NewDay according to the Consent Order is a mortgage lender who is in the business of originating refinance home loans through a program where the VA guarantees a portion of home loans taken out by service members, veterans, and eligible surviving spouses. NewDay also originated government insured reverse mortgage products to seniors.
The CFPB said NewDay advertised its mortgage products to consumers primarily through direct mail campaigns. NewDay sent over 50 million solicitations by postal and electronic mail to consumers offering reverse and forward mortgages. These advertising communications were typically sent to a pre-screened list of consumers, generally veterans and older Americans, selected due to various characteristics that NewDay believed made them more likely to be potential customers for NewDay’s offerings. Consumer members who were interested in learning more were invited by these mailings to call NewDay’s call center, during which calls NewDay’s Account Executives would answer questions, provide information, and take applications.
NewDay’s relationship with the Veterans’ Organization was arranged and coordinated by marketing and lead generation company, which contracted directly with NewDay on behalf of Veterans’ Organization and which paid Veterans’ Organization a portion of the fees it received from NewDay. Pursuant to agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, NewDay was designated as the exclusive lender of Veterans’ Organization, and NewDay drafted and sent advertising communications by postal and electronic mail to Veterans’ Organization members, with Veterans’ Organization’s approval, that were identified as being from Veterans’ Organization. These advertising communications promoted the relationship between NewDay and Veterans’ Organization, and encouraged and recommended the use of NewDay’s mortgage products to Veterans’ Organization members.
The fees paid pursuant to agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company included:
(1) NewDay paid marketing and lead generation company a monthly “licensing fee” of $15,000;
(2) For each referred consumer member who contacted NewDay to inquire about a reverse mortgage and who completed mandatory counseling, NewDay paid Veterans’ Organization $75 as a “lead generation fee” and NewDay paid the marketing and lead generation company $100 as a “lead generation fee.”
(3) For each referred consumer member who contacted NewDay to inquire about a 100% loan-to-value (LTV) mortgage refinancing and had his/her credit report pulled, NewDay paid Veterans’ Organization $15 as a “lead generation fee” and NewDay paid the marketing and lead generation company $20 as a “lead generation fee.”
The CFPB stated that at no point were the Veterans’ Organization members made aware of the payments by NewDay to Veterans’ Organization and the marketing and lead generation company nor has this information been available publically.
Section 1036(a)(1)(B) of the CFPA prohibits “unfair, deceptive, or abusive” acts or practices. 12 U.S.C. § 5536(a)(1)(B). A practice is “deceptive” when there is a representation or omission of information that is likely to mislead consumers acting reasonably under the circumstances, and that information is material to consumers.
“NewDay mailed advertising communications to Veterans’ Organization members, with Veterans’ Organization’s approval and that were identified as being from Veterans’ Organization, endorsing NewDay’s products. These advertising communications articulated reasons why Veterans’ Organization selected NewDay as its lender-of-choice. NewDay also made similar statements to Veterans’ Organization members during phone conversations. The affirmative reasons offered to members created the impression that there were no other connections between NewDay and Veteran’s Organization, when, in fact, NewDay was making regular undisclosed payments, both directly and indirectly, for these endorsements.”
The paid endorsements included language such as:
1. “Veterans’ Organization chose NewDay to be our exclusive Reverse Mortgage provider after spending significant time with the company’s management team and watching its loan professionals in action.”
2. “NewDay USA is [Veterans’ Organization’s] exclusive provider of home loan programs based on their high standards for service and the excellent value of their programs. If you need money, we recommend you give them a call at 1-800-995-4193. Even easier, click here and find out more!”
3. “NewDay is the EXCLUSIVE lender for [Veterans’ Organization]. We earned this because of our focus on helping veteran’s [sic] payoff their debt, lower their interest rates and payments, or get additional cash out as well.”
The CFPB consent order state the failure to disclose material connections between NewDay and Veterans’ Organization while making affirmative statements concerning a substantive basis for the endorsements likely would have been material to consumers evaluating the weight or credibility of Veterans’ Organization’s endorsement and whether to obtain a mortgage loan from NewDay, and likely would have been misleading to reasonable consumers. Thus, these communications constitute deceptive acts or practices in violation of sections 1031(a) and 1036(a)(1)(B) of the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1)(B).
The Bureau alleged that the paid endorsements or recommendations violated the Real Estate Settlement Procedures Act “RESPA”, 12 USC. 2607(a) which provides that no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreements and understandings, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
The CFPB said there was an agreement and understanding between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, NewDay mailed advertising communications to individual members of Veterans’ Organization, with Veterans’ Organization’s approval, that were identified as being from Veterans’ Organization which was in violation of RESPA. These communications typically were sent to pre-screened members of Veterans’ Organization and referred recipients to NewDay by encouraging and recommending that members use NewDay for mortgage lending services.
The consent order say the agreements and understandings between and among NewDay, Veterans’ Organization, and the marketing and lead generation company, consumer members who called Veterans’ Organization’s call center for information on mortgage products were referred to NewDay. The CFPB also pointed out that the marketing and lead generation company (i.e. the “Broker Company”) maintained a website for Veterans’ Organization members (the marketing and lead generation website) which were linked to from the Veterans’ Organization website and that was identified as being part of the Veterans’ Organization website. Consumer Members who visited the marketing and lead generation website were referred to NewDay by text “recommend[ing]” NewDay as a source for home loans, along with hyperlinks to NewDay’s website and the phone number for the Veterans’ Organization’s call center.
The Consumer Financial Protection Bureau stated they found more than 3,900 payments to the Veterans’ Organization and the marketing and lead generation company (in the form of both monthly payments and “lead generation fees”) for these referral activities. The referral mechanism set up resulted in close to 400 loans being originated.
The CFPB’s consent order prohibits NewDay from engaging any payment schemes where part of the compensation is for an endorsement. The CFPB also ordered NewDay to cease entering into any business relationship that would involve third party endorsements which might be inconsistent with the Federal Trade Commission’s guidance on endorsements which can be found in 16 C.F.R. part 255. NewDay is also prohibited from violating any aspect of Section 8 of RESPA and must submit a Compliance Plan to the CFPB.
NewDay was fined $2,000,000.00 for participating in this arrangement.
The TILA-RESPA Integrated Disclosure Rule's implementation date is beginning to cause heightened concern and worry for those involved in the residential lending industry. One reason is the emerging news that a number of the 3rd party vendors engaged to write the loan originator system “LOS” software may not be able to do so until April, May, June, or even worse that some of the LOS systems that are rolled out may not be in compliance when the residential lender implements the LOS into their system. One reason for the delay by these vendors is that they were busy designing and creating other software to address the Qualified Mortgage "QM" rule that went into effect on Jan. 1, 2014 and only now are the turning to the TILA-RESPA integration.
Kate Larson, Regulatory Counsel, with the Consumer Bankers Association wrote an article for InformationWeek on the "2015 Banking Regulatory Outlook" on Jan. 7, 2015 in which she stated "Despite their diligent efforts, many of our members are concerned their systems will not be ready by the August 2015 deadline because of the limited number of vendors in the market."
The downstream impact of a delayed LOS system integration is causing many banks and mortgage bankers to have to reassess their risks associated with their third party vendor management compliance obligations with respect to the TILA-RESPA Rule. Many banks and mortgage bankers to whom we have spoken will only be utilizing one title vendor because they are concerned about the integration timeline and do not want to be left shut down in whole or in part on or after August 1st, 2015 as a result of spreading their compliance across to many vendors.
There are simply to many lenders, banks, credit unions, mortgage brokers, and others who are relying on the limited number of mortgage software companies to integrate the new TILA-RESPA LOS system. Several of the TILA-RESPA disclosure task force groups we serve on are sensing real concern by the various trade associations.
On the title side of the business, many of the title software companies have finished or are finalizing their software systems to address the compliance of their title vendors. However, finalization of these systems depend on the mortgage LOS systems integration, testing that integration, and educating the employees of both the lenders and title vendors.
The CFPB has been adamant that they will not delay the implementation date of this rule and even if by some miracle the CFPB suspends enforcement for 6 months (similar to what HUD did with the 2010 RESPA Reform Rule) this will not provide sufficient safeguards because the secondary market may not purchase loans that are not in compliance with new TILA-RESPA Rule. In sum, if something is out of compliance then the lenders face claims by investors that they have violated the reps. and warrants under their repurchase agreements, thus leaving them exposed to future mortgage buy-back claims.
We are hearing that a few of the biggest banks will be completely ready by the end of Feb. 2015 as they went in-house and designed their LOS systems due to concerns about meeting the implementation rule deadline. However, let's hope the 3rd party LOS software companies can get their systems in place, integrated & tested with their title vendor(s), and all the staff trained well in advance of August 1st, 2015.
The Consumer Financial Protection Bureau (CFPB) announced today, September 30, 2014, that they had entered into a Consent Order with Lighthouse Title, a Michigan title insurance agency, for entering into Marketing Service Agreements (MSAs) with various real estate brokers with the understanding that the companies would refer mortgage closing and title insurance business to Lighthouse Title.
The CFPB found that Lighthouse Title violated the Real Estate Settlement Procedures Act (RESPA) which prohibits providing something of value to any person with an agreement or understanding that the person will refer real estate settlement services.
The CFPB noted that Lighthouse's MSA agreements made it appear as if the payments would be based on marketing services the companies were supposed to provide to Lighthouse Title. "Lighthouse actually set the fees it would pay under the MSAs, in part, by considering the number of referrals it received or expected to receive from each company." The Consumer Financial Protection Bureau's investigation found that the companies on average referred significantly more business to Lighthouse Title when they entered into MSAs than when they did not enter into them.
The CFPB issued a civil money penalty against Lighthouse Title in the amount of $200,000.00; prohibited Lighthouse Title from entering into any Marketing Service Agreements in the future; ordered Lighthouse to terminate all existing MSAs; and Lighthouse must document for a period of five years all exchanges of things of value worth $5.00 or more with persons in a position to refer business.
The Consumer Financial Protection Bureau often provides subtle clues as to where they may be headed on the enforcement front and on November 6, 2013 they addressed the topic on their website about online Lead Generation and consumer safety involving payday loans. The topic "Is applying for a payday loan online safe?"
The CFPB stated that anytime a consumer gives out sensitive personal and financial information on the Internet there are risks involved to the consumer. They warned consumers that if a consumer applies online for a payday loan online, the consumer could be increasing their risk significantly. The CFPB stated the reason for this is because many websites that advertise payday loans are not lenders. They are businesses known as "lead generators" which make money primarily by finding customers for lenders.
The Bureau expressed concern that the online application or form that consumers filled out could be sold to a lender who offers to make the consumer a loan. The Bureau also indicated they have concerns as well that multiple lenders or other service providers could pay for this information causing the them to contact or email the consumer.
"Lead generators might not find you the lowest cost loans, and you should be cautious of sites that promise they will. Many consumers can also be confused about who actually made the loan, which makes getting help when the you [the consumer] need it harder."
They even provided a tip to consumers on what to look out for "Key phrases can help you spot a lead generator. It can be hard to tell if the website you click on is a lead generator or an actual lender. Lead Generators might disclose that they are not lenders somewhere on their site, but this information can be hard to find. In addition, look for phrases like "matching you with lenders," "connecting you with a network of participating lenders," or "something similar, as an indication that you [the consumer] is on a lead generator's site."
The CFPB also dropped another hint as to payday loan lead generators which should bear careful examination to everyone in the residential lending industry who is purchasing leads from an lead generation company. Another CFPB webpage titled "What is the difference between an online payday lender and one with a storefront?" said consumers need to make sure the online website is licensed to do business in the consumer's state and whether they follow the state's payday lending laws.
If the CFPB starts looking at online Lead Generation industry involving residential mortgage loans will they apply an even stricter standard to those lead generation companies who solicit mortgage information or a mortgage conversation from consumers and sell it or even pass it on to a lender? Will the CFPB take the position that the Lead Generation companies are violating the SAFE Act if they aren't licensed in the state they are operating in? And if they are licensed under the SAFE will they be violating the broadly defined Loan Officer Compensation Rule?
Will the Bureau deem website statements like "We can help you find a mortgage, call us!" by a Lead Generation company to be a advertising and soliciting a mortgage conversation from a consumer? In a number of states this could be considered a violation of the SAFE act even if no payment is made by the lender or loan officer to the Lead Generation company because this type of solicitation would trigger a license.
Even if the Lead Generation is properly licensed under a particular state's SAFE Act if they sell that lead to an unlicensed lender in that state then the CFPB could pursue an action against the Lead Generation company because the Lead Generation company assisted or facilitated a consumers information to be sold to an unlicensed entity under the various third party vendor management bulletins.
Some states already require Lead Generation companies collecting information be licensed as "mortgage brokers" such as Arizona and Virginia. Most of the payday lenders in Ohio for example have become Mortgage Brokers under the SAFE Act as it takes them out of the state usury statute for payday lenders.
What types of online Lead Generation companies could be issues of concern?
(1) those unlicensed lead generation companies who tell the consumer whether they are "Qualified for a Loan or Not";
(2) those online Lead Generation companies who collect any sort of non-public data (the definition of what non-public data is varies from state to state) and who fail to inform and obtain the consumers consent that their information will be shared with a third party; and
(3) those online Lead Generation companies where the lead generation company has spoken directly with the consumer and then transfers the "Live Handoff" over to the lender or Loan Officer (especially if the Lead Generation company is not licensed) If they act a "sub-mortgage broker" then it may be best to stay away because this could violate the Loan Officer Qualifying Rule effective Jan. 1, 2014.
Additionally, the CFPB has broad authority to enforce the Fair Lending Laws, Telemarketing Sales Rule, Mortgage Lending and Regulations, Mortgage Acts and Practices Advertising Rule, and the most important law the Unfair, Deceptive or Abuses Act or Practices (UDAAP).
So what might the CFPB examine if a lender or loan officer uses a lead generation company? They will look to see if the relationship is properly disclosed; review privacy and how the consumers data was shared; identify whether party is a third party provider or not; review the lead generation website or advertising portal itself; and they could to review all fees, terms, and conditions associated with the lead generation process.
So is the CFPB investigating Lead Generation companies involving residential loans? The answer is YES they are and any companies involved in the lead generation business should be on alert and actively assess the compliance risks associated with the online lead generation industry.
Sometimes the past provides a good glimpse of the future so remember the name Steven Antonakes when it comes to online Lead Generation and CFPB enforcement. Mr. Antonakes was the former Commissioner of the Massachusetts Department of Banks. He is also on the governing board for the Nationwide Mortgage Licensing System (NMLS). When he was the Commissioner of Banks in Massachusetts he was involved number consent orders with unlicensed online Lead Generation companies.
Where is Steven Antonakes now? He is the Deputy Director of the Consumer Financial Protection Bureau whose responsibility is supervision, enforcement, and fair lending.
The Consumer Financial Protection Bureau announced they entered into a Consent Order (File No. 2014-CFPB-0010) with Atlanta-based Amerisave Mortgage Corporation; Novo Appraisal Management Corp.; and Patrick Markert on August 12, 2014 for violating a series of laws including Section 1031 and 1036 of the Consumer Financial Protection Act of 2010 (CFPA), Section 8 of the Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), and the Mortgage Acts and Practices Rule (MAP Rule).
The CFPB found that Amerisave Mortgage Corp., which operates primarily as an online lender, designed its website to advertise and quote mortgage rate information in a deceptive bait and switch lending manner towards consumers. The Bureau stated that Amerisave advertised specific mortgage products online by listing specific mortgage rates in rate tables publicized through the website of an unrelated third-party company ("Rate Publisher") which compiles rate quotes and other information of mortgage lenders who use its service.
Amerisave advertised lower rates than they were actually providing to consumers but once the consumers contacted them for those rate the consumers wound up paying higher rates than what Amerisave advertised. Amerisave also ran banner or display ads on various websites advertising lower rates as well to consumers.
The CEO of Amerisave, Patrick Markert, also had an indirect beneficial ownership interest in both Amerisave and Novo Appraisal Management. The CFPB discovered that Amerisave required almost of all of its customers to use Novo for their home appraisal services. Amerisave referred and required consumers to use Novo more than 99% of the time which is a violation of RESPA Section 8(c)(2). RESPA's Required Use of an Affiliated Business prohibition.
The Consumer Financial Protection Bureau found that Amerisave and its CEO engaged in a marketing and advertising campaign that violated The Mortgage Acts and Practices Rule. The MAP Rule provides in part that "It is a violation of this part for any person to make any material misrepresentation, expressly or by implication, or any commercial communication, regarding any term of any mortgage credit product, including but not limited to misrepresentations about (a) The interest rate charged for the mortgage credit product....(b) the annual percentage rate, simple annual rate, periodic rate, or any other rate, or (c) the existence, nature, or amount of fees or costs to the consumer associated with the mortgage credit product..."
The "Rate Publisher" which was not named in the Consent Order periodically received Amerisave's mortgage interest rate information which the Rate Publisher published on its published rate tables. The CFPB said for a period of close to two years a systemic problem caused Amerisave to lower its mortgage rates lower than it was willing to honor on the Rate Publisher's rate tables for "jumbo conforming loans." Amerisave was aware that the rates they advertised were not accurate and misleading according to the Consent Order.
The Order also states that Amerisave failed to perform any sort of systemic due diligence or quality control to check the accuracy of its listed rates and that the Rate Publisher received consumer complaints about Amerisave and notified them of those complaints. The Rate Publisher also used mystery shoppers to audit the accuracy of Amerisave's rates to which Amerisave failed the Rate Publisher's test five times.
The interest rates Amerisave quoted on Rate Publisher also were problematic because they were based on consumers with credit scores of 800. The CFPB said the 800 credit score methodology they used to advertise and market their interest rates was not disclosed to consumers either. Additionally the advertised rates sometimes were based on consumers paying discount points as high as $10,000 which was not disclosed to consumers.
The CFPB's Consent Order and Stipulation are very detailed and well worth reviewing for all companies involved directly or indirectly in the residential real estate industry. This is a well written consent order by the CFPB which focuses on a myriad of different compliance issues.
Amerisave, Novo, and Patrick Markert agreed to pay $19.3 million dollars as a penalty.
If you have any questions about this Consent Order, need Lender Affiliated Business Arrangement compliance guidance, or have marketing & advertising compliance questions please don't hesitate to give us a call at the Sterbcow Law Group.
The Federal Deposit Insurance Corporation entered into a consent order with New Frontier Bank in St. Charles, Missouri on May 5, 2014 which was recently made public. (FDIC-14-0084b and FDIC-13-151k) The FDIC ordered New Frontier Bank to cease and desist from the violating the Real Estate Settlement Procedures Act "RESPA" Section 8, 12 U.S.C. §2607 and its implementing regulation, Regulation X, 12 C.F.R. §1024.14, which is the prohibition against kickbacks and unearned fees.
The FDIC's consent order did not mention the facts surrounding this consent order only that "the Bank shall cease all acts or practices in violation of RESPA and take all necessary steps to effect and maintain future compliance with RESPA."
The consent agreement also ordered New Frontier Bank to reimburse all consumers who were affected by the undisclosed RESPA violations to pay an amount not less than $400 per consumer as restitution for the RESPA violations the FDIC said New Frontier Bank may have violated. The consent agreement did not state how many consumers may have been impacted. In addition to the consumer restitution New Frontier Bank was ordered to pay a $70,000 dollar penalty to the Treasury of the United States.
Sylvia H. Plunkett who is the Senior Deputy Director in the Division of Depositor and Consumer Protection signed off on the consent order on behalf of the FDIC. The lack of information in the FDIC consent order could signal that the CFPB or other regulator is continuing the investigation as was the case In the Matter of Benchmark Bank, Plano, Texas FDIC-11-461k. In the Benchmark Bank consent order the FDIC provided very little information and the CFPB later instituted an enforcement action against Paul Taylor Homes out of Dallas, Texas.
Sterbcow Law Group's Marx Sterbcow was quoted in a New York Times article titled "Cracking Down on Illegal Mortgage Referrals" written by NY Times Mortgage Columnist Lisa Prevost. The article published June 5, 2014, discusses the recent RESPA regulatory enforcement actions by the Consumer Financial Protection Bureau (CFPB) against mortgage, title, real estate brokerages. The CFPB has now been involved in 12 RESPA enforcement actions since taking over from HUD in July of 2011.
Mr. Sterbcow was quoted in his description of the RealtySouth consent order: "That’s Respa 101 of what not to do,” said Marx David Sterbcow, a New Orleans lawyer specializing in Respa issues. “You don’t write it into the contracts and basically steer customers to your affiliated company.”
"Respa is intended to protect consumers from having to pay inflated costs for mortgage and closing services. In looking for violators, the bureau has shown that “they don’t care how big your company is,” Mr. Sterbcow said. “Nor do they care how small your company is.""
The RealtySouth consent order was an enforcement action which was triggered against RealtySouth because it inserted into it's pre-printed contract sale form that consumers were required to use TitleSouth (RealtySouth's affiliated title company). The language in the pre-printed contract which was only in operation for a year stated in Paragraph 5, "Title Insurance. Seller agrees to furnish Buyer a standard form owner's title insurance policy issued by TitleSouth, LLC in the amount of the purchase price."
This was the crux of the RESPA enforcement action although the CFPB also added a seemingly trivial charge against RealtySouth's for not strictly adhering to the exact font and language specifications required in an affiliated business disclosure form. The CFPB argued the disclosure was modified because fonts, word capitalization requirements, and marketing slogans were either not allowed or out of compliance and deviated from the required format.
While CFPB did not identify how many consumers actually opted out of that provision in the pre-printed contract and used a third party title company it didn't matter as the language spoke for itself which is why the RealtySouth action was commenced by federal regulators.
CFPB: RESPA SECTION 8 CONSENT ORDER AGAINST TITLE AGENCY IN NEW JERSEY FOR ILLEGAL KICKBACKS AND UNEARNED FEES
The Consumer Financial Protection Bureau announced today another consent order involving violations of Section 8 of the Real Estate Settlement Procedures Act "RESPA". Administrative Proceeding File No. 2014-CFPB-0006 "In the Matter of Stonebridge Title Services, Inc." The CFPB reviewed the business practices of Stonebridge Title Services, Inc. of Parsippany, New Jersey and its two owners Bruce Dostal and Cesare Stefanelli operated the title agency to determine if Stonebridge Title was violating RESPA Section 8(a) "illegal kickbacks" and 8(b) "unearned fees". Stonebridge Title is an appointed title agent for several national title insurance underwriters who paid referral commissions of up to 40% of the title insurance premiums they received from consumers to Independent Salespeople for the referral of title insurance work to Stonebridge Title.
The CFPB stated the Independent Salespeople had or developed relationships with entities, typically law firms, and referred these entities to Stonebridge for title insurance and related services on behalf of consumers. The commission agreements Stonebridge utilized with the Independent Salespeople were structured in a way that commissions were paid on each title order placed by a firm that the Independent Sales person referred to Stonebridge. The commission payment amounts for title insurance orders were determined solely based on the value of the title insurance premiums multiplied by a previously agreed-to commission percentage according to the CFPB consent order.
The Independent Salespeople did not perform any title services for the consumers who paid the title insurance premiums to Stonebridge. The Independent Salespeople did not provide any non-referral services for Stonebridge for which they were to receive compensation according to the order.
The CFPB found Stonebridge guilty of violating Section 8(a) and 8(b) of RESPA.
One area we will focus more attention to in this consent order is page 5 section 17 which states "Although the Independent Salespeople received Form W-2s during this period of time, they were not "employees" covered by 12 CFR 1024.14(g)(1)(vii). Rather, they acted as independent contractors, and Stonebridge did not have the right or power to control the manner and means by which the Independent Salespeople performed their duties."
The CFPB noted in the consent order that in assessing the penalties against Stonebridge Title and its owners in this case that the amount was lower than it should have been but this is due to their belief that Stonebridge Title may now be financially insolvent. The CFPB ordered them to only pay $30,000.00 in this action but more importantly this consent decree solidifies the stance the CFPB has publicly touted that they will force companies out of business financially if they don't adhere to the rules. The language in the consent order insinuates that Stonebridge Title was financially shut down due to the bureau's enforcement action.
For more information about this consent decree or if your company is operating in this manner please contact the Sterbcow Law Group.
The Consumer Financial Protection Bureau "CFPB" announced another enforcement action today against JRHBW Realty, Inc. d/b/a RealtySouth and TitleSouth, LLC (both HomeServices of America companies) for violating Section 8 Real Estate Settlement Procedures Act , 12 U.S.C. §2607, and its implementing regulation, 12 C.F.R. Part 1024 (formerly codified at 24 C.F.R. Part 3500)(collectively, RESPA).
Administrative Proceeding File No. 2014-CFPB-0005 "In the Matter of JRHBW Realty, Inc., doing business as RealtySouth; TitleSouth LLC found that RealtySouth used illegal Affiliated Business Disclosure Statements and inserted language in the RealtySouth purchase agreements which mandated the use of TitleSouth both of which violate RESPA.
RealtySouth is a real estate brokerage company operating in the state of Alabama who also owns another company, TitleSouth LLC, which provides title closing services in Alabama. The CFPB made note in the consent order that the President of TitleSouth also is the General Counsel of RealtySouth.
RealtySouth and TitleSouth were order to pay a fine of $500,000 to the CFPB and faced additional requirements as identified below. It should be noted that this isn't RealtySouth's first experience with RESPA as it was involved in the infamous RESPA class action case: Vicki V. Busby versus JRHBW Realty, Inc. d/b/a Realty South involving administrative brokerage fees.
The Consumer Financial Protection Bureau "CFPB" issued a Consent Order against Fidelity Mortgage Corporation "FFMC" and Mark Figert on January 16, 2014 for engaging in illegal business practices which violated Section 8 of the Real Estate Settlement Procedures Act, 12 U.S.C. §2607 "RESPA". The CFPB stated that Fidelity Financial Mortgage Corporation, which is based in St. Louis, Missouri, entered into a office-rental agreement with the Bank of Sullivan.
The CFPB described the illegal office space lease agreement between FFMC and Bank of Sullivan as a rental arrangement based the volume of successful mortgage transactions that FFMC would originate out of the Bank of Sullivan's office. The parties discussed anticipated loan volume and a pipeline of referrals under this office space rental agreement. The parties negotiated a daily rental rate of $200.00 and the lease agreement contained an exclusivity clause which required the Bank of Sullivan to only promote FFMC and FFMC could only promote the Bank of Sullivan.
The office space consisted of an interior office surrounded by bank personnel. FFMC also did not exclusively use the bank's office to meet bank related borrowers. The CFPB stated that FFMC met Bank of Sullivan borrowers at a variety of locations, including coffee shops. The office rental agreement between March 2012 and November of 2012 showed that Fidelity had originated approximately 20 loans resulting an average monthly rental amount of $1,350.00 per month. The monthly office space rental amount fluctuated each month (from $800 to $2000 per month). The CFPB conducted a investigation into what the prevailing monthly rental rate was in the market place for office of similar stature and the found a monthly amount ranging from $600 to $900 a month which was substantially lower than the average monthly amount Fidelity had paid the Bank of Sullivan under this office space rental agreement. The rental agreement the CFPB violated RESPA Section 8(a) which prohibits giving a fee, kickback or thing of value in exchange for a referral of business related to a real estate settlement service.
The CFPB also pointed out that HUD's 1996 Statement of Policy which analyzed and discussed office rental agreements was used to help determine whether this rental agreement was a disguised referral fee. The Consumer Financial Protection Bureau concluded that an above market rent was a disguised referral fee because the general market value of the property, not the value of the property to a settlement service provider was the definitive method of calculating whether RESPA was violated or not. HUD defined "general market value" as 'the rent that a non-settlement service provider would pay for the same amount of space and services in the same or a comparable building."
If you have an existing office rental lease you are using or you are contemplating entering into a office space rental agreement please contact us so the Sterbcow Law Group can guide you through any RESPA regulatory hurdles.
The United States District Court for the District of Maryland, Northern Division certified a Real Estate Settlement Procedures Act "RESPA" class action lawsuit on Tuesday, Jan. 28, 2014 involving marketing agreements between a "Team" of real estate agents "and Lakeview Title Company, Inc. The Creig Northrop Team, PC (a/k/a The Northrop Team) is a team of independent contractor real estate agents who work for Long & Foster Real Estate, Inc.. The class action lawsuit arises out of an alleged scheme for a team of real estate agents to receive over half million dollars in illegal kickbacks from a title insurance company for referrals over a period of 13 years.
Patrick Baehr, et al., v. The Creig Northrop Team, P.C., et al. (Civil No: 1:2013cv00933). Judge William D. Quarles is the presiding judge in this case.
The allegations specifically state that the defendants "used a 'sham employment arrangement and a sham marketing agreement' 'to generate unearned fees and kickbacks.'" The employment agreement allegation involves Carla Northrop who was a full-time employee of the Northrop Team but secretly received payments from Lakeview Title under an employment agreement, even though Ms. Northrop allegedly did not perform any services or actual work for Lakeview Title nor was she provided an office, telephone number, or email address showing she was working for Lakeview Title. The employment agreement was not disclosed to the plaintiffs in this case. These allegations if proven would likely violate 12 U.S.C. §2607 of RESPA which is the prohibition against kickbacks and unearned fees section.
The Marketing Agreement allegation states that Lakeview Title began funneling illegal kickbacks through a sham Marketing Agreement or Marketing Services Agreement with Creig Northrup and The Northrop Team. The Marketing Agreement stated that Creig Northop and The Northrop Team would designate Lakeview Title as their "exclusive settlement and title company" and would "provide mostly unspecified marketing services." The Marketing Agreement it is alleged also contained language that prohibited the endorsement of other title companies. The marketing agreement was originally $6,000 a month for marketing services but according to the complaint Lakeview Title paid as much as $12,000 per month to The Northrop Team. The court states that there is "no record of 'any real joint marketing services reasonably related to actual amounts paid by Lakeview Title. These allegations if proven true would also violate 12 USC §2607 of RESPA.
The court also stated that because the Plaintiffs did not discover their claim until March 16, 2013, after the statute of limitation had run, that the plaintiffs had sufficiently pled their entitlement to equitable tolling.
The certification of this RESPA class action lawsuit is significant for any company who has a Marketing Agreement with individual agents or Teams of agents. If you have a Marketing Agreement with real estate agents individually or with teams of real estate agents you should seek legal counsel immediately.
The Dodd-Frank Update and The Legal Description legal publications at October Research, LLC have teamed up to host a 90-minute federal regulatory outlook webinar for mortgage, title insurance and settlement services professionals. This in-depth training features two top compliance attorneys who will educate participants on significant regulations impacting the industry in 2014. The webinar will be held on Tuesday, December 10, 2013 from 2:00-3:30 PM EST.
Speakers Mitch Kider, of Weiner Brodsky Kider PC, and Marx Sterbcow, of The Sterbcow Law Group, will define significant regulations, what companies should be doing now to prepare and what the regulatory landscape will look like as we move into yet another year of complying with thousands of pages of new and existing regulations. Topics will include:
•CFPB enforcement actions: Who’s at risk and what to expect;
•QM/QRM and what mortgage lending will look like;
•RESPA/TILA mortgage disclosure forms;
•Lender supervision of title agents; and
•The changing dynamics of affiliated business arrangements.
To register click here
On October 30, 2013, the Office of the Comptroller of the Currency "OCC" issued a bulletin on "Risk Management Guidance" which will have wide ranging implications for all vendors of national banks and federal savings associations. The bulletin provides new guidance for assessing and managing compliance risks associated with third-party relationships. A 3rd party relationship is any business arrangement between a banks and another entity, by contract or otherwise.
3rd party relationships include activities that involve outsourced products and services, use of independent consultants, networking arrangements, merchant payment processing services, services provided by affiliates and subsidiaries, joint ventures, and other business arrangements where the bank has an ongoing relationship or may have responsibility for the associated records. Affiliate relationships are also subject to sections 23A and 23B of the Federal Reserve Act (12 USC 371c and 12 USC 371c-1) as implemented in Regulation W (12 CFR 223). Third-party relationships generally do not include customer relationships.
The OCC stated that it "expects a bank to practice effective risk management regardless of whether the bank performs the activity internally or through a third party. A bank's use of 3rd parties does not diminish the responsibility of its board of directors and senior management to ensure that the activity is performed in a safe and sound manner and in compliance with applicable laws."
The OCC released the bulletin in response to the on-going concern that banks were continuing to increase the number and complexity of third party relationships with both foreign and domestic 3rd parties. Specifically they highlighted:
(1) outsourcing entire bank functions to third parties, such as tax, legal, audit, or information technology operations;
(2) outsourcing lines of business or products;
(3) relying on a single third party to perform multiple activities, often to such an extent that the third party becomes an integral component of the bank’s operations;
(4) working with third parties that engage directly with customers;
(5) contracting with third parties that subcontract activities to other foreign and domestic providers;
(6) contracting with third parties whose employees, facilities, and subcontractors may be geographically concentrated; and
(7) working with a third party to address deficiencies in bank operations or compliance with laws or regulations.
The OCC is concerned that the quality of risk management over third-party relationships may not be keeping pace with the level of risk and complexity of these relationships. The OCC has identified instances in which bank management has:
(1) failed to properly assess and understand the risks and direct and indirect costs involved in third-party relationships.
(2) failed to perform adequate due diligence and ongoing monitoring of third-party relationships.
(3) entered into contracts without assessing the adequacy of a third party’s risk management practices.
(4) entered into contracts that incentivize a third party to take risks that are detrimental to the bank or its customers, in order to maximize the third party’s revenues.
(5) engaged in informal third-party relationships without contracts in place.
These examples represent trends whose associated risks reinforce the need for banks to maintain effective risk management practices over third-party relationships.
MARX STERBCOW AND CHARLES CAIN TO PRESENT AT LOUISIANA LAND TITLE ASSOCIATION'S (LLTA) ANNUAL CONFERENCE ON MARKETING SERVICES AGREEMENTS AND RESPA COMPLIANCE
Marx Sterbcow, Managing Attorney at Sterbcow Law Group, and Charles Cain, Of Counsel to Sterbcow Law Group and Senior Vice President to WFG National Title Insurance Company, have been selected by the Louisiana Land Title Association (LLTA) to speak at the LLTA's Annual Conference on the topic of real estate settlement procedures act (RESPA) compliance involving marketing service agreements. They will discuss the latest issues surrounding the use of Marketing Agreements and whether an enforcement action or guidance bulletin by the CFPB involving the use of these agreements may be forthcoming.
The presentation will discuss what a typical Marketing Agreement is; how the HUD interpretive rule on home warranties impacts Marketing Services Agreements, identifying red flags in MSAs, and the impact the Federal Financial Institutions Examination Council (FFIEC) third party social media compliance bulletin may have on your marketing agreement.
The LLTA Conference is being held at the Hotel Monteleone in New Orleans on Dec. 4-6, 2013.
The 8th Circuit Court of Appeals overturned a district court decision in the Charvat v. Mutual First Federal Credit Union case. The case involved a violation of the Electronic Fund Transfer Act ("EFTA") 15 U.S.C. §1693 where the Charvat's made several ATM withdrawals from two Nebraska banks. The 8th Circuit stated "The EFTA requires ATM operators to provide two forms of notice, one "on or at" the ATM machine and another on-screen during the ATM transaction, if the bank operators charged a ATM transaction fee. The ATM machines in question failed to provide the required notice disclosure on the "on ATM machine" and this was the basis for the class action.
The 8th Circuit held that "[D]ecisions by this Court and the Supreme Court indicate that an informational injury alone is sufficient to confer standing, even without an additional economic or other injury." The 8th Circuit further stated that Charvat identified a variety of instances where the denial of a statutory right to receive information was sufficient to establish standing and cited to the Fed. Election Comm'n v. Akins case and more importantly the Dryden v. Lou Budke's Arrow Fin. Co. which was a Truth-In-Lending Act case.
The citing of the Dryden case is particularly important because the 8th Circuit said ""f [borrower] proved that the disclosure provisions of [TILA] and Regulation Z were violated in connection with the January 26 transaction, [lender] is liable for statutory damages.")." The 8th Circuit said the EFTA creates a right to a particular form of notice before an ATM transaction fee could be levied. If that notice was not provided and a fee was nonetheless charged, an injury occurred, and the statutory damages are directly related to the consumer's injury."
"Informational Injury" in RESPA and TILA class actions will certainly cite to the Charvat case in order to overcome any standing challenges.
The Consumer Financial Protection Bureau "CFPB" ordered a Texas homebuilder, Paul Taylor, to pay $118,194.20 he received in kickbacks for referring mortgage origination business to Benchmark Bank and to Willow Bend Mortgage Company in violation of the real estate settlement procedures act "RESPA". The CFPB also prohibited Paul Taylor from engaging in future real estate settlement services, including mortgage origination.
The CFPB said Paul Taylor received illegal referral fees through partnerships with Benchmark Bank and Willow Bend Mortgage Company. Taylor and Benchmark Bank created and jointly owned Stratford Mortgage Services, LC, which claimed to be a mortgage originator. The CFPB stated that Taylor and Willow Bend were created and jointly owned a company called PTH Mortgage Company. The CFPB stated that both entities were shams designed to allow Taylor to receive the kickbacks. Pat Taylor's homebuilding company, Paul Taylor Homes, then referred mortgage origination business to the sham entities but the work was actually performed by Benchmark Bank and Willow Bend Mortgage Company. The Consumer Financial Protection Bureau said the kickbacks were passed through the sham entities back to Taylor through profit distributions and as a payment through a “service agreement.”
Of particular note is the CFPB's emphasis on payment via a "service agreement" in this settlement and of the language "employees in a position to refer customers or potential customers to settlement providers." This could be a hint at where the CFPB is headed next in their enforcement actions.
The Federal Deposit Insurance Corporation "FDIC" referred the incident to the CFPB. The FDIC separately fined Benchmark Bank for violating RESPA. The CFPB settlement can be viewed by clicking here.
RESPA CONFERENCE: MARX STERBCOW TO PRESENT AT NATIONAL SETTLEMENT SERVICES SUMMIT IN CLEVELAND, OHIO
Attorney Marx Sterbcowof the Sterbcow Law Group will lead a panel presentation along with Attorney Jeff Arouh of McLaughlin & Stern at the October Research Corporation's National Settlement Services Summit being held at the Marriott at Key Center in Cleveland, Ohio on June 11, 2013. The session titled "Strategic Alliances and the Future of Affiliated Businesses" will offer practical guidance on the issues surrounding affiliated businesses and their future under the Qualified Mortgage (QM) and Qualified Residential Mortgage proposals under the Dodd-Frank Act and we will examine who the winners and losers are in the affiilated business industry. The session also discusses why lending compliance under the new federal rules and regulations may be fueling growth in the creation of new affiliated businesses even with the 3% lender affiliated business arrangement annual percentage rate (APR) cap on points and fees restriction.
For more information and on-line registration, please go to: 2013 National Settlement Services Summit.
Marx Sterbcow, Managing Attorney at Sterbcow Law Group, and Charles Cain, Of Counsel to Sterbcow Law Group and Senior Vice President to WFG National Title Insurance Company, have been selected by RESPA News to co-present a webinar on the future of marketing agreements under the Consumer Financial Protection Bureau (CFPB). We discuss way to prepare for and deal with the latest issues surrounding the use of Marketing Agreements (also known as Preferred Provider Agreements, Marketing Services Agreements, Advertising Agreements, or Co-Branding Agreements) and whether an enforcement action or guidance bulletin by the CFPB involving the use of these agreements may be forthcoming.
The presentation, entitled "Reviewing your Marketing Agreement and the Interpretive Rule Webinar" will cover issues such as the what a typical Marketing Agreement is; how the HUD interpretive rule on home warranties impacts their use, how to minimize your risks by looking for red flag language, and the impact the Federal Financial Institutions Examination Council (FFIEC) third party social media compliance bulletin may have on your marketing agreement. The FFIEC's social media bulletin will have a significant impact on the use of these agreements so this is a webinar event you do not want to miss.
This event is from 2:00-3:00 PM EST on Wednesday, May 18, 2013.
To register for Part 3 of the RESPA News Webinar Series please click here.
The Consumer Financial Protection Bureau "CFPB" released the "Integrated Mortgage Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act" (Regulation Z) proposed rule today. The CFPB is asking the public to comment on the rule on or before November 6, 2012 with the exception of 12 CFR 1026.1(c) and 1024.4 in which comments are due on or before September 7, 2012. The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the CFPB to issue proposed rules and forms that combine certain disclosures that consumers recieve in connection with applying for and closing on a mortgage loan under the TILA and RESPA. The CFPB has proposed to amend Regulation X (RESPA) and Regulation Z (TILA) to establish new disclosure requirements and forms in Regulation Z for most closed-end consumer credit transactions secured by real property.
To read a copy of this proposed rule please click the link below. Warning the document is 1099 pages so becareful before hitting the print button on your computer!
If you care to comment on the proposed rule the comment form can be accessed by clicking the link below:
On April 13, 2012 the Consumer Financial Protection Bureau (CFPB) issued Bulletin 2012-03 titled "Service Providers". The CFPB stated that it expects supervised banks and nonbanks to oversee their business relationships with their service providers in a manner that ensures compliance with Federal consumer financial law, which is designed to protect the interests of consumers and avoid consumer harm.
The term "Service Provider" is defined in Section 1002(26) of the Dodd-Frank Act as "Any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service." (12 U.S.C. Section 5481(26)). A "Service Provider" may or may not be affiliated with the person to which it provides services."
The Consumer Financial Protection Bureau in its bulletin states that the CFPB "recognizes that the use of service providers is often an appropriate business decision for supervised banks and nonbanks. Supervised banks and nonbanks may outsource certain functions to service providers due to resource constraints, use service providers to develop and market additional products or services, or rely on expertise from service providers that would not otherwise be available without significant investment."
The CFPB's bulletin expresses concerns about the lack of liability by the lender to the consumer for third party behavior. "The mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility of complying with Federal consumer financial law to avoid consumer harm. A "service provider" that is unfamiliar with the legal requirements applicable to the products or services being offered, or that does not make efforts to implement those requirements carefully and effectively, or that exhibits weak internal controls, can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship." The Consumer Financial Protection Bureau states that "depending on the circumstances, legal responsibility may lie with the supervised bank or nonbank as well as with the supervised service provider."
In short the CFPB now expects supervised banks and nonbanks to make sure the service providers comply with the law. The CFPB by issuance of this bulletin has effectively put the entire real estate industry on notice that if they want to do business in the future they had better make sure their internal controls are in place otherwise the supervised bank or nonbank will cease doing business with you.
The Heather Q. Bolinger, et al v. First Multiple Listing Service, Inc., et al (Case 2:10-cv-00211-RWS) which is being litigated in the United States District Court for the Northern District of Georgia Gainesville Division survived the Defendant's Motion to Dismiss the case on January 18, 2012.
The First Multiple Listing Service Inc. lawsuit contends the federal Real Estate Settlement Practices Act (“RESPA”) requires full disclosure of all fees and charges in real estate closings involving a federal mortgage loan. RESPA also prohibits unearned fees or kickbacks designed to encourage the referral of business by settlement service providers, such as First Multiple Listing Service ("FMLS") and its member real estate brokers. One of the principal purposes of these RESPA provisions is to lower the cost of real estate closings to consumers by eliminating secret, disguised, and inflated charges.
The Bolinger et al. class action lawsuit alleges that:
1. Members of FMLS, which include virtually every residential real estate broker and agent in North Georgia, are required to list with FMLS all properties for sale and to pay undisclosed, unearned transaction fees to FMLS after closing and all services are rendered. Consumers either pay these fees directly or through inflated commissions.
2. Real Estate Brokers receive a kickback of all or substantially all of those fees from FMLS, and share in transaction fees paid on other closings. The suit further contends that these unearned hidden settlement fees and kickbacks are funded by real estate commissions paid by consumers. The hidden transaction settlement fee is $1.20 per thousand dollars of the selling price (i.e., .0012% of the sales price), and is doubled if the listing and selling agents work for different real estate brokers.
For example, the sale of a house for $200,000 with different listing and selling real estate agents would result in an undisclosed hidden transaction settlement fee of $480. In most transactions, the hidden settlement fee is not disclosed to the buyer or seller, either in the voluminous documents executed at closing or otherwise, and the kickbacks are never disclosed.
3. In addition to violating RESPA, these practices violate the Sherman Act, which is the core federal antitrust law. Notably, the “MLS Antitrust Compliance Policy” of the National Association of REALTORS® expressly prohibits basing MLS fees on a percentage of the sales price rather than the value of the services rendered [download NAR policy here]. Yet investigation for the lawsuit found not only that, as alleged, FMLS charges a per-transaction fee based on the sales price, and pays a kickback to brokers for utilizing its services, but that FMLS may be the only MLS in the country to do so. Further, the fees associated with FMLS are alleged to be higher than those charged by MLS’s elsewhere in Georgia and around the country.
Taylor English Duma LLP, a law firm with offices in Atlanta and Savannah, Pope, McGlamry, Kilpatrick, Morrison & Norwood, LLP, a Georgia law firm with offices in Atlanta and Columbus, and the New Orleans based Sterbcow Law Group LLC have filed a lawsuit on behalf of buyers and sellers of residential real estate in metro Atlanta and North Georgia against First Multiple Listing Service, Inc. (“FMLS”), its member real estate brokers, the agents who handled the transactions of the named plaintiffs, and three boards of REALTORS®, alleging a longstanding practice of FMLS and its members in charging buyers and sellers unearned hidden transaction fees in connection with residential real estate closings in violation of federal and state law. FMLS is a multiple listing service (“MLS”) that provides an electronic database for listing residential real estate for sale. It is the largest MLS in metro Atlanta and North Georgia.
For more information please visit the FMLS CLASS ACTION WEBSITE.
H.R. 2446 known as the "RESPA Home Warranty Clarification Act of 2011" passed The Insurance, Housing, and Community Opportunity Subcommittee last week. US Congresswoman Judy Biggert sponsored the bill and is the Chairman of the subcommittee. The RESPA Home Warranty Clarification Act as currently written by Rep. Biggert seeks to clarify the scope of RESPA by exempting home warranty companies as settlement service providers and would require that consumers are given clear notice that their real estate agent could receive a referral fee for selling them a home warranty. According to Rep. Biggert, Home warranties should not be subjected to these RESPA regulations because the sale of home warranties is outside the scope of RESPA.
Rep. Biggert seeks to overturn the Department of Housing and Urban Development's Interpretive Rule which stated that a "homeowner's warranty is covered as a "settlement service" under HUD's RESPA regulations at 24 CFR 3500.2 it issued on June 25, 2010.
CONSUMER FINANCIAL PROTECTION BUREAU: "THE EARLY WARNING NOTICE" PROCEDURE ANNOUNCED FOR ENFORCEMENT ACTION
The Consumer Financial Protection Bureau "CFPB" announced plans today to implement an early warning enforcement action plan ("the Early Warning Notice") which would allow those under investigation the ability to respond to the CFPB. The CFPB Bulletin 2011-04 (Enforcement) announced the first in a series of periodic bulletins the CFPB will release which are aimed at providing information about the policies and priorities of the CFBP's Bureau of Enforcement.
"Before the Office of Enforcement recommends that the Bureau commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response. The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly."
It is important to note that if the subject(s) of an investigation is asked to provide the Bureau of Enforcement a response statement and the subject prepares and submits the response statement under oath to the Bureau the response may be discoverable by third parties.
The Early Warning Notice also allows any person involved in an investigation to voluntarily submit a written statement at any point during an investigation.
RESPA SECTION 8(B): U.S. SUPREME COURT GRANTS CERTIORARI IN "FREEMAN VERSUS QUICKEN LOAN" UNEARNED FEE DISPUTE
The United States Supreme Court announced that it would finally resolve the issue of whether the Real Estate Settlement Procedures Act ("RESPA") under Section 8(B) prohibits one settlement service provider from charging consumers a fee for settlement service work the provider did not perform or whether an unearned fee must be split by two or more providers in order for the service fee to be deemed illegal.
Section 8(B) of RESPA states:
"No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed." 12 U.S.C. 2607(b)
The Supreme Court granted certiorari in the Freeman v. Quicken Loans case because not only have the district courts been divided on the issue but the appellate courts have been divided as well. The Freeman case is lawsuit that was heard in the 5th Circuit out of New Orleans. The 5th Circuit said Quicken's charges for loan discount fees and a loan processing fee were not prohibited by RESPA Section 8(B), 12 U.S.C. 2607(b) even though the fees the consumer paid did not go towards lowering their interest rate nor could Quicken show where they performed any work in connection with their charges.
The 5th Circuit Court of Appeals agreed with the 5th Circuit District Court Judge Carl Barbier and ruled in favor of Quicken Loan. The Obama Administration pushed the US Supreme Court to hear this issue because they side with the plaintiff's position in this case. Currently the 4th, 5th, 7th, and 8th Circuits have held that RESPA Section 8 is exclusively an anti-kickback statute and under Section 8(b) that two or more parties are required in order to have a Section 8(b) violation. The 2nd, 3rd, and 11th Circuits rejected the two or more party requirement and have held that RESPA Section 8(b) prohibits mark-ups where only one party is involved. The 2nd Circuit (Cohen v. JP Morgan) ruled that Section 8(b) prohibits one settlement service provider's from charging undivided unearned fees.
It is interesting to note that this is only the second RESPA case the Supreme Court has ever taken up and the first case is also being heard this session in the "Edwards v. First American" case. The oral arguments are scheduled sometime in January and the Supreme Court should rule sometime in June 2012.
RESPA VIOLATION LITIGATION COULD HINGE ON WHETHER PLAINTIFF HAS STANDING TO SUE WITHOUT AN ACTUAL INJURY IN FACT
Daniel Fisher of Forbes Magazine wrote an article today titled ""Sleeper" Case Asks Whether Plaintiffs Can Sue Without An Injury." Mr. Fisher's article highlights the Edwards v. First American case and discusses the positive impact a Supreme Court's ruling would have for corporations facing civil and class action lawsuits from consumers who might have a hard time showing actual injury in fact damages.
The Edwards case stems from a real estate settlement procedures act (RESPA) class action where the Edwards' were required to purchase a title insurance policy from First American. First American's actions allegedly violated Section 8(c)(2) of RESPA where the federal rules state that affiliated businesses can't require that borrowers use their affiliated businesses and the civil penalty for violating this rule is treble damages on all fees paid to First American plus attorney's fees.
The US Supreme Court is looking at standing to sue under Article 3 of the US Constitution in the Edwards case. "First American argues Edward suffered no harm and therefore has no standing to sue under Article III of the Constitution. Under Article III federal courts are limited to hearing “cases” or “controversies” and the Supreme Court has since decided that means somebody who has suffered actual harm or is in imminent danger of it."
Fisher's business article on Forbes.com explains how the future decision by the Supreme Court in the Edwards case would impact not only the financial services industry but the decision will have a major impact on the automobile industry among others. The ramifications of the Edwards decision by the US Supreme Court could certainly change the way businesses operate because the threat of civil litigation by consumers will be significantly curtailed. A ruling in favor of First American would also put more pressure on regulators to regulate compliance issues.
Reporter Avi Salzman with Barron's is reporting that Bank of America may file for bankruptcy protection for it's Countrywide subsidiary if litigation costs from Countrywide threaten Bank of America. Bank of America is the parent company of Countrywide but it is a separate legal entity. If Bank of America (NYSE: BAC) decides to declare bankruptcy it would only affect the Countrywide division not the entire company.
If Bank of America does file for bankruptcy protection for Countrywide it could have a material impact on on-going litigation involving RESPA, TILA, and other legal actions across the United States involving Countrywide. The purchase by Bank of America is widely viewed as one of the worst acquisition decisions in corporate American history.
Prospect Mortgage reached a settlement today with the U.S. Department of Housing and Urban Development (HUD) over Prospect's use of the Series Limited Liability Company "aka Series LLC" joint venture business model. The terms of the settlement are not yet available but we will update the Respa Lawyer Blog as soon as HUD releases that information.
This is the second major settlement enforcement action in the last two days by HUD's RESPA division which moves over to the Consumer Financial Protection Bureau on July 21, 2011. It is highly possible that other settlement actions may be announced by HUD prior to the July 21, 2011 due to stronger monetary penalties under the CFPB.
RESPA: HUD ANNOUNCES SETTLEMENT WITH FIDELITY NATIONAL TITLE OVER USE OF TRANSACTIONPOINT KICKBACKS AND ILLEGAL REFERRAL FEES
The United States Department of Housing and Urban Development "HUD" announced a settlement with Fidelity National Financial (NYSE: FNF) in the amount of $4.5 million dollars for HUD's contention that Fidelity violated the Real Estate Settlement Procedures Act "RESPA" when it paid real estate brokers and other settlement service providers illegal kickbacks and improper referral fees for referring business through an "Application Service Provider Agreement." The Application Service Provider Agreement provided real estate brokers and other settlement service providers with access to Fidelity's TransactionPoint closing software. TransactionPoint allowed real estate brokers and others to select real estate settlement service providers for a particular real estate transaction. The real estate brokerages would then enter into Sub-License Agreements with subsidiaries of Fidelity to enable Fidelity's subsidiaries to be listed in TransactionPoint as a provider of settlement services.
The settlement said Fidelity's subsidiaries would then in turn compensate the real estate brokerages a fee for each referral of real estate. Re-insider.com was the first to break this story and has extensive coverage on the topic for those who wish to learn more. It is important to note that HUD's Settlement Agreement only applies to Fidelity and not to the real estate brokerages who recieved the kickbacks and illegal referrals fees so it is possible that more settlements will be announced as it pertains to those companies who recieved the kickbacks and improper referral fees.
The settlement can be viewed by clicking this link: FIDELITY SECTION 8 RESPA SETTLEMENT
BREAKING RESPA NEWS: UNITED STATES SUPREME COURT GRANTS WRIT OF CERTIORARI IN EDWARDS VS. FIRST AMERICAN'S RESPA CLASS ACTION LAWSUIT
The United States Supreme Court granted First American Financial Corporation's Writ of Certiorari it filed in the Denise P. Edwards et al. v. First American Financial Corporation, et al. RESPA class action lawsuit today (June 20, 2011). The Supreme Court will now decide whether a plaintiff has standing to sue, on behalf of a nationwide class, when a plaintiff asserts that a real estate company violated the Real Estate Settlement Procedures Act of 1974 (RESPA) without showing the RESPA violation affected the services rendered.
The Edwards lawsuit accuses First American and others of operating an illegal kickback scheme which violated Section 8 of RESPA. The Supreme Court decision will focus strictly on Question 2 presented in the Writ of Certiorari. The issue presented in Question 2 is whether the a privte purchaser of real estate has standing to sue under Article III, Sec. 2 of the United States Constitution.
The case is First American Financial v. Edwards, 10-708.
The US Department of Housing and Urban Development's (HUD) Real Estate Settlement Procedures Act (RESPA) Division released its latest RESPA ROUNDUP newsletter (Volume 5, April 2011). The newsletter asks and answers one question each on HUD-1 Line 803 tolerance violations, credit report charges, what happens if a loan originator fails to issue a Good Faith Estimate "GFE", and clarifies 4506-T "Tax Transcript Fees" disclosure.
Question #1. HUD-1 Line 803 tolerance violation
"Does zero tolerance for HUD-1 Line 803 (see “adjusted origination charges”; 24 CFR § 3500.7(e)(1)(iii)) mean that loan originators must double the cure of a tolerance violation of Line 801 or Line 802 because each tolerance violation on those Lines also results in an increase in the Adjusted Origination Charge on Line 803?
No. Correcting a Line 801 or Line 802 tolerance violation will serve to correct a tolerance violation that stems from the calculation of Line 803.
Loan originators should carefully monitor their own charges to avoid tolerance violations. However, if the loan originator fails to correct Line 801, 802 or consequently Line 803 tolerance violations before settlement, the loan originator can effectuate a cure within 30 days by listing and describing a credit in either the 200 Series on Page 1 or in a blank line in the 800 Series on Page 2. Whether the cure is shown in the 200 Series or 800 Series, the settlement agent should include a notation of P.O.C.(lender), to indicate that the lender has made a payment of a specified amount to correct a potential tolerance violation.
Whether the cure is shown in the 200 Series on Page 1 or the 800 Series on Page 2, a cure to correct a tolerance violation on Lines 801 and/or 802 will serve to correct the tolerance violation on Line 803.
After the revised HUD-1 has been prepared by the settlement agent, the settlement agent must provide the revised HUD-1 to the borrower and lender, and, as appropriate, to the seller."
Question #2. Credit Report Charges
"The regulations provide that the only charge that a loan originator may impose on a potential borrower before issuing a GFE is a charge limited to the cost of a credit report (see 24 CFR §§ 3500.7(a)(4) and (b)(4) “…the [loan originator] may, at its option, charge a fee limited to the cost of a credit report”). Only after a loan applicant both receives a GFE and indicates an intention to proceed with the loan covered by the GFE may the loan originator collect fees beyond the cost of a credit report.
For example, if the loan originator’s cost for a credit report is an $8.75 charge from a third party, the total amount that the loan originator can charge the borrower before the GFE is issued is $8.75. In this case, the actual charge of the credit report listed on Line 805 of the HUD-1 is $8.75.
Alternatively, pursuant to 24 CFR § 3500.8(b)(2), the loan originator’s cost for a credit report may also be calculated, charged, and disclosed on the GFE and HUD-1 as an average charge, as long as all of the requirements in 24 CFR § 3500.8(b)(2) are met. This section provides, in part: “The average charge for a settlement service shall be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider on behalf of borrowers and sellers for a particular class of transactions involving federally related mortgage loans….”"
Question #2: What if the Loan Originator fails to issue a Good Faith Estimate "GFE"?
If a loan originator fails to deliver a GFE in clear violation of 24 CFR § 3500.7(a) and (b), the loan originator will have significant potential tolerance violations at settlement. See RESPA § 3500.7(e).
Where the loan originator has not provided the consumer with a GFE, when completing the HUD-1 comparison chart the loan originator’s instructions to the settlement agent must indicate that the settlement agent must fill in the GFE columns with $0 and the HUD-1 columns with the actual charges from Page 2 of the HUD-1. If this results in one or more tolerance violations, the loan originator may cure the tolerance violation(s) by reimbursing the borrower the amount by which the tolerance was exceeded at settlement or within 30 calendar days after settlement.
As with other compliance areas, loan originators should adopt policies and procedures to ensure that GFEs are delivered timely, in accordance with the requirements of RESPA.
Question #4: 4506-T "Tax Transcript Fees"
The fee for obtaining a tax transcript using IRS Form 4506-T, “Request for Transcript of Tax Return” is an administrative charge that is part of processing and underwriting that should be disclosed as part of Block 1, “Our Origination Charge,” on the GFE regardless of whether the charge is paid to a third party or directly to the IRS.
RESPA CLASS ACTION: UNITED STATES ATTORNEY GENERAL JOINS APPEAL IN THE CARTER VERSUS WELLES-BOWEN REALTY INC. TITLE FEE KICKBACK CASE
The 6th Circuit Court of Appeals in Cincinnati, Ohio approved a motion by the United States Attorney General allowing it to intervene on behalf of the plaintiffs in a RESPA class action lawsuit involving kickbacks. The Federal 6th Circuit Court of Appeal will hear the case in early Spring.
The United States Department of Treasury has hired Richard Cordray to lead the Enforcement Division of the Consumer Financial Protection Bureau (CFPB) which was created under the Dodd-Frank Bill. Richard Cordray was elected as the Ohio Attorney General in 2008. Cordray has filed numerous lawsuits during his tenure as the Ohio Attorney General, most notably against AIG, Marsh & McLennan, Bank of America, and Merrill Lynch which resulted in more than 2.5 billion dollars in settlements.
Given Cordray's history it appears that he will be focusing on federal preemption of nationally chartered banks and the problems state regulators have had with their inability to enforce laws. The doctrine of preemption was used by the Office of Comptroller of the Currency as a way to stop states from enforcing rules and regulations against nationally chartered banks. He has pledged to jointly work with state attorney generals while at the CFPB in his investigations which could significantly hamper nationally chartered banks argument of federal preemption against state laws. Cordray and The American Bankers Association have opposing stances on the bank preemption issue. The underlying premise is that nationally chartered banks who engage in abusive and fraudulent tactics better be prepared for an onslaught of litigation and penalties when the enforcement team starts working with the states.
Richard Cordray's reputation is that of a staunch advocate for consumer rights against financial services companies who break the law. Cordray is responsible for selecting the enforcement team and preparing for the exercise of enforcement powers. RESPA enforcement under Cordray appears to be a priority based on his past history and Section 6 of RESPA is a prime target for future regulatory enforcement action by the CFPB.
REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA): HUD ISSUES RESPONSE TO PUBLIC COMMENTS ON HOME WARRANTY COMPANY PAYMENTS TO REAL ESTATE AGENTS AND BROKERS
On November 23, 2010, the Office of General Counsel's Helen Kanovsky with the Department of Housing and Urban Development "HUD" responded to public comments HUD received on the "Home Warranty Companies' Payments to Real Estate Brokers and Agents" Interpretive Rule it published on June 25, 2010. HUD's response was very clear that the interpretive RESPA rule they issued in June did not need to be changed. However, HUD did provide some clarification to the public by providing additional guidance relating to matters covered in the interpretive rule and from the public's comments. HUD's answered seven questions as listed below:
CONSUMER FINANCIAL PROTECTION BUREAU: PRESIDENT OBAMA APPOINTS ELIZABETH WARREN AS ASSISTANT TO THE PRESIDENT AND AS A SPECIAL ADVISOR TO TREASURY
The Consumer Financial Protection Bureau which will oversee the Real Estate Settlement Procedures Act (RESPA) now has a decision maker to help set up the CFPB. President Obama announced today the appointment of Harvard Professor Elizabeth Warren to implement policies and procedures to protect consumers from financial products. Ms. Warren who is widely known as the person who developed the idea for the CFPB will also be responsible for helping select a director to head up the CFPB.
Warren is considered a strong consumer advocate and her ideology has some in the financial services industry concerned. The concern reached a fevered pitch over the last two months with Republicans and the financial services industry pledged to hold up her confirmation in the Senate. Obama's move of not appointed her to the CFBP but rather giving Warren supervisory authority of the CFPB without going through a senate confirmation process stunned her critics.
It remains to be seen how Warren will tackle the enforcement of RESPA in the near future but I suspect that we will see a huge increase in both funding and manpower in the RESPA enforcement arena.
REAL ESTATE SETTLEMENT PROCEDURES ACT: RESPA ISSUES INTERPRETIVE RULE ON HOME WARRANTY MARKETING AGREEMENTS
The Department of Housing and Urban Development (HUD) issued an interpretive rule on June 26, 2010 in the Federal Register on the issue of how home warranty companies can pay real estate agents and real estate brokers under the Real Estate Settlement Procedures Act (RESPA) without violating Section 8(a) and 8(b).
The interpretive rule was released in response to a Feb. 21, 2008 unofficial staff interpretation letter that Paul Ceja of HUD's Office of General Counsel issued that caused a great deal of confusion in the real estate industry. Since the letter was issued The National Association of Realtors (NAR), Real Estate Settlement Providers Council (RESPRO), National Home Service Contract Association (NHSC), and others pressed HUD to clarify the rule on the subject of home warranty compensation.
HUD's new clarification breaks down the issue into three distinct categories:
1. Unlawful Compensation for Referrals: RESPA does not prohibit a real estate broker or real estate agent from referring business to a home warranty company. But RESPA does prohibit a real estate broker or agent from receiving a fee for merely referring or "marketing" a buyer or seller to purchase an insurance policy from the home warranty company. A referral by itself is not a compensable service for which compensation can be given and would be a violation of Section 8(a) illegal kickback and Section 8(b) unearned fees under RESPA.
2. Bona Fide Compensation for Service Provided: HUD's RESPA guidance rule says that Section 8(c) allows payment of bona fide compensation for services actually performed. HUD said that depending on the facts of a particular case (based on a case-by-case determination), a home warranty company may compensate a real estate broker or agent for services when those services are actual, necessary, and distinct from the primary services provided by the real estate broker or agent and those additional services must not be nominal or duplicative. An example would be a real estate agent filling out all the information required to issue a home warranty policy and submitting the policy to the home warranty company.
3. Reasonableness of Compensation: Lastly, HUD said they want to assess whether the value of the payment by the home warranty company is reasonably related to the value of the services actually performed by the real estate agent or broker and not just compensation for the mere referral of business. The compensation from the Home Warranty Company to the real estate agent must be based on the fair market value of the services performed in the area where real estate agent operates. For example if the fair market value is $200 dollars in New York but in Missoula the fair market value is $60 to fill out the home warranty application, fill in the registration codes for various appliances, and do some other functions then the real estate agent in Missoula should recieve $60 dollars for that work not $200 if that is the going rate in New York. HUD appears to have taken the position that charging $200 in Des Moine when the fair market value is $60 is unreasonable compensation.
The RESPA interpretive rule raises a large legal question on the issue of whether this rule expands the definition of who a settlement service provider is. Lenders do not typically require a home warranty policy to be purchased by a buyer (or seller) as a condition in securing a federally related residential loan. The result has been that in many jurisdictions across the United States the home warranty policy is paid outside of closing and not listed on the HUD-1.
The question we need clarification on is whether RESPA believes that all home warranty policies issued on the purchase of a home where a federally related mortgage is involved be listed on the HUD-1. If that is not the case does this interpretive rule extend to companies that traditionally were not considered settlement service providers (pest inspection companies, home repair companies, privacy protection companies, etc.) under the original definition?
The U.S. Housing and Urban Development (HUD) made a number of surprising management changes last month including the shuffling of Ivy Jackson, the Director of the Office of RESPA and Interstate Land Sales to the Office of Insured Health Care Facilities. Ivy Jackson's departure took the real estate industry by surprise and created uncertainty for state regulators who were relying on her to educate them the new RESPA regulations this year.
The Sterbcow Law Group would like to thank Ivy Jackson for her contributions over the years at RESPA. She will always be remembered as a federal regulator who was fair to the real estate industry and to consumer interests while at RESPA. Ms. Jackson's work ethic, honesty, and experience will be missed.
HUD promoted Teresa Baker Payne to the position of Assistant Deputy Assistant Secretary and Barton Shapiro was named Acting Director of RESPA and Interstate Land Sales. Ms. Payne and Mr. Shapiro both bring experience to their new positions. Ms.Payne and Mr. Shapiro both are excellent choices for their respective roles at HUD.
RESPA CLASS ACTION LITIGATION: CLASS ACTION CERTIFICATION DENIED IN CARTER V. WELLES-BOWEN REALTY, INC
The United States District Court for the Northern District of Ohio denied certifying a Real Estate Settlement Procedures Act "RESPA" class action lawsuit on March 11, 2010. The Carter v. Welles-Bowen Realty, Inc., case No. 3:05 CV 7427, consolidated No. 3:09 CV 400, 2010 WL 908464 (Northern District of Ohio) is a case where the plaintiffs asserted that Welles-Bowen Realty, Inc was engaged in operating illegal affiliated business arrangements (aka sham AfBAs) which is a violation of RESPA Section 8(a) and 8(b) (12. U.S.C. 2607 (a) and (b)).
Judge Jack Zouhary's reasoning for his latest denial of class certification in this RESPA lawsuit is controversial because he believes that class actions are not a proper method of litigating RESPA civil suits. Judge Zouhary's partially based his decision to deny class certification because it was his opinion that state and federal regulators should prosecute RESPA claims not class action litigation. The controversy surrounds the opinion because the Real Estate Settlement Procedures Act does allow for civil class action lawsuits. State and federal regulators routinely rely on class action lawsuits to help them in their investigations the loss of this informational stream may have an adverse impact on the consumers some believe if this ruling is universally adopted across the United States.
It should be noted that the Court was overruled once before in this case by the U.S. Court of Appeals for the Sixth Circuit on the issue of whether a RESPA class action requires a concrete financial injury in fact. The question is whether the plaintiffs will appeal this ruling or will they find another way to continue on but avoid this particular Court.
The United States Court of Appeals for the 9th Circuit ruled in favor of Wells Fargo Home Mortgage Inc., WFC Holdings Corporation, Wells Fargo & Company, and Wells Fargo Financial Services Inc. on the issue of whether overcharging a settlement service fee to the consumer violates the real estate settlement procedures act (RESPA). The RESPA fee at issue was an $800.00 dollar "underwriting fee" which was charged to the borrowers in Martinez v. Wells Fargo
The U.S. Housing and Urban Development's Real Estate Settlement Procedures Act (RESPA) Division released new updated FAQs on Jan. 28, 2010. The new RESPA frequently asked updated question and answers (FAQs) are in bold.
One of the new questions asks whether a loan originator can require the use of its affiliate company for the tax or flood certificate. The updated RESPA guidance says that the loan originator may not require the use of its affiliate for the tax service or flood certificate, but a loan originator may require the use of a non-affiliated provider.
HUD announced today a delay in "HUD ENFORCEMENT" on the new RESPA Rule which goes into effect on Jan. 1st, 2010 on FHA loans. We need to highlight the fact that only HUD Enforcement of the new RESPA rule has been delayed for 120 days on FHA loans. Civil litigation on the new RESPA Rule goes into effect on Jan. 1st, 2010 and therefore is not delayed.
We applaud HUD for delaying enforcement of the new rule for 4 months it still exposes companies that do not implement the new changes to potential civil litigation issues for not complying with the new rule.
Another RESPA attorney said it best: "Better pin on your badge and strap on your gun looks like HUD will look to the plaintiff's bar to bring the heat in the first 4 months."
Below is a copy of the HUD press release:
The Real Estate Settlement Procedures Act "RESPA" regulations set to take place on January 1, 2010 has purportedly been delayed by HUD for six months. We are now waiting for an official announcement to take place by HUD to officially confirm the six month delay which should make the new implementation date on or around July 1, 2010.
We don't know what precipitated this possible delay by HUD but the real estate industry has stepped up their criticisms on the new rule, including a recent letter sent to HUD by numerous trade organizations, issues with the new Truth In Lending Act form "TILA" integration, and other federal enforcement agencies concerns about the transparency of the new HUD-1 have forced HUD to re-evaluate parts of the new rule. Of course one of the other problems is that many in the real estate industry are still very much unaware or uneducated on the new RESPA Rule.
UPDATED at 10:39 PM:
Assistant Secretary of Housing David Stevens informed me that there will not be a delay in the implementation of the Jan. 1, 2010 RESPA rule. The information we received came from numerous credible sources in Washington, D.C. but it appears that the information regarding the delay according to HUD will not occur.
UPDATE #2 AT 11:53 ON THURSDAY:
Kelly McCarel atRESPA NEWS.COM is now confirming "that HUD has been holding private meetings about the possibility of a delay" according to their sources.
However, Assistant Secretary of Housing Dave Stevens stated to us in an email at 3:00AM this morning that "There have been all sorts of discussions on readiness but a delay on implementation has not been one of them. The industry needs to be prepared for January 1st."
Latest Update November 13, 2009
HUD Announced a 120 day (4 month) delay in HUD Enforcement of the new rule or as HUD calls it a "Restraint in Enforcement."
THE CONSUMER FINANCIAL PROTECTION AGENCY (CFPA) PROPOSAL INCLUDES RESPA AND TILA REGULATORY GOVERNANCE
U.S. Rep. Barney Frank officially introduced legislation to create the Consumer Financial Protection Agency (CFPA). The legislation, which is backed by the Obama Administration, would consolidate the consumer protection powers of the fifty various federal financial regulatory agencies by creating a single regulatory agency. The creation of this single regulatory agency is the single most important aspect of the proposed 229 page Consumer Financial Protection Agency proposal.
The current financial governing system encourages abuses in the industry to take place because of the loopholes created by an inefficient and ineffective regulatory structure. The loopholes are exploited even further by the mass infighting that many of the governmental regulatory bureaucracies regularly display. The consolidation of these various federal agencies into one rule-making and investigative federal division should provide more uniform rules for those in the real estate industry and for consumers of real estate products.
The CFPA will have sole authority to draft and interpret regulations under the existing consumer financial services and fair lending statutes. The recent Good Faith Estimate/HUD-1 Settlement Statement forms developed by HUD and the Truth In Lending Act form is a prime example of decisions being made by one federal agency without input from a completely different agency. The biggest benefit consolidation presents to the industry and to the consumer is that this will increase the number of enforcement investigators. The consolidation of regulatory investigators is crucial because quite often investigators in one agency stop investigating abuses that relate to other agencies due to a myriad of reasons.
Reporter Kate Moran of the Times Picayune wrote a terrific article on a lawsuit the Sterbcow Law Group LLC and Melancon Rimes LLC filed on in behalf of their client and plaintiff Sarada LeBourgeois who was the victim of mortgage fraud.
"Lawsuit alleges that a loan originator stole money from a client" was published on May 12, 2009 and briefly describes the events surrounding the lawsuit. The federal case was recently remanded back to Civil District Court in New Orleans by U.S. District Judge Lance Africk.
Kelly McCarel with RESPA News also wrote an excellent article on the case on Feb. 12, 2009 entitled Louisiana case ties RESPA violations to alleged mortgage fraud"
The case was filed in the Orleans Parish, Civild District Court in Louisiana with the docket number 2008-2705 and is listed under the name Sarada LeBourgeois, et al. v. Allied Home Mortgage Capital Corporation, et al.
The Obama Administration is pushing new legislation which would create a financial services regulatory commission. The commission would be called "The Financial Product Safety Commission" and it would regulate all mortgages, credit cards, and mutual funds. The Washington Post's Zachary A. Goldfarb, Binyamin Appelbaum and David Cho wrote an article on May 20, 2009.
The Senate version of this bill under Section 10: Enforcement has some very strong criminal and civil money penalties that could further strengthen consumer protections against businesses. The current senate & house versions of the bill could add considerable consumer protections against loan servicing companies which under Section 6 of RESPA offer consumers very little protection from some mortgage servicing companies abusive practices. This is definitely one of those bills to keep an eye on as the ramifications could be huge for businesses and consumers.
REAL ESTATE SETTLEMENT PROCEDURES ACT "RESPA": ADMINISTRATIVE BROKERAGE COMMISSION FEE ("ABC FEE") VIOLATE RESPA
U.S. District Court for the Northern District of Alabama's Southern Division handed down a decision on April 20, 2009 in the Vicki V. Busby v. JRHBW Realty, Inc. d/b/a RealtySouth case. The case centered on Section 8(b) of the Real Estate Settlement Procedures Act (RESPA) and whether Administrative Brokerage Commissions (ABC Fees) are illegal.
United States District Judge Virginia Emerson Hopkins ruled the ABC Fees that RealtySouth charged consumers in a residential real estate transaction involving a federally related mortgage was nothing more than an unearned fee because the ABC fee would not be linked to a bona-fide settlement service that RealtySouth performed in the transaction.
The Birmingham News "Homebuyers were unfairly charged fee, federal court in Birmingham rules" by Russell Hubbard broke the story.
Section 8(b) of RESPA clearly states that no fee may be charged for the rendering of a real estate settlement service other than for settlement services actually performed.
RealtySouth charged a $149.00 Administrative Brokerage Fee since 2003 on over 30,000 real estate transactions in the state of Alabama. The defense was dealt a significant blow when two RealtySouth executives testified in their depositions that the ABC fees they charged did not go any particular settlement service but rather was implemented to increase revenues for the brokerage only. They further testified that the consumers did not get any benefit from the ABC fee. The testimony from the RealtySouth executives damaged RealtySouth to point where the defense didn't have any real hope of winning in this case.
If RealtySouth had charged the consumers a fee that was based on some benefit (i.e. technology closing platform to store all their documents) and labeled attached an appropriate label to that bona-fide fee then I believe the verdict would have been different. The wholesale blanket of charging ABC fees "where no service has been provided to the consumer" should be curtailed by any real estate brokerage or in some cases real estate agents themselves from charging such a fee.
The bottom line is that real estate brokerages need to make sure if they charge consumers an additional fee separate and apart from the real estate commission that the fee is reasonable, verified, service is provided, and most importantly the fee provides some benefit to the consumer.
The damages against RealtySouth could exceed $13.5 million dollars (treble damages on $149.00 with potentially 30,000 borrowers) plus the plaintiffs attorneys fees and costs in the civil action. If HUD's RESPA division sanctions RealtySouth as well the price tag could go up even further because Section 8 under RESPA also has criminal penalties.
The Real Estate Settlement Procedures Act (RESPA) under the United States Department of Housing and Urban Development (HUD) has a mechanism for consumers and others to file a complaint with RESPA if RESPA violations are being committed or you believe that RESPA violation is being committed. If a complaint is going to be filed with the RESPA division please make sure you follow the following steps so your complaint gets the most attention from the investigators:
1. List the names,addresses, and phone numbers of the alleged violators of RESPA;
2. Write a detailed summary of what happened or what's happening that leads you to believe that a violation is taking or has taken place;
3. Make sure you list the specific section of the RESPA statute that was violated. Often times regulators or investigators will miss even the most generic of violations so listing the appropriate violations will help them do their job better;
4. Check your spelling and make sure the complaint is coherent and easily understood to the reader; and
5. Include your name, phone number, and address in the complaint so that an investigator can contact you for more information, if they need to contact you. RESPA Complaints can be submitted confidentially to HUD as well. If you believe you have a potential litigation matter with RESPA to HUD, I would recommend that you submit your complaint to your attorneys prior to submission to the HUD office or let your attorneys file the complaint for you.