Articles Posted in REGULATION Z

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.

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.
Continue reading

On March 9, 2011, Saul Ewing, LLP; Herman, Herman, Katz & Cotlar, and Sterbcow Law Group LLC, filed a lawsuit on behalf of the National Association of Mortgage Brokers (NAMB) against the Board of Governors Of The Federal Reserve System; Honorable Ben S. Bernanke, Chairman of the Board of Governors of the Federal Reserve System; and Sandra F. Braunstein, Director,Division of Consumer Affairs, Board of Governors of the Federal Reserve System, seeking temporary and preliminary restraints to delay the April 1, 2011 implementation of the loan originator compensation rule under the Truth-in-Lending Act.

The lawsuit, (Case 1:11-cv-00506-RLW) filed in the U.S. District Court for the District of Columbia, is based on the rule prohibiting mortgage brokers from paying their loan officers commissions from fees paid by the consumer, which will cause irreparable harm to small businesses. NAMB is seeking the Federal Reserve Board to avoid the effects of its rule by withdrawing this section of the rule and allowing the Consumer Financial Protection Board to perform its mandated responsibilities in this area.
Continue reading

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.

The National Association of Realtors (NAR) and the Department of Housing and Urban Development (HUD) collaborated to produce a series of videos on which are geared at educating future home buyers on the real estate buying process. The joint effort was unveiled at the National Association of Realtors 2010 National Conference in New Orleans last week.

The first 10 minute video “Shopping for your home” features HUD associate deputy assistant secretary Teresa Baker Payne explaining the home buying process.

The second 12 minute video “Shopping for your loan” features HUD deputy assistant secretary for FHA Vicki Bott explaining what home buyers need to look for when shopping for their mortgage loan and includes a consumer friendly approach to the Good Faith Estimate “GFE.”

The Sterbcow Law Group’s Marx Sterbcow and Charles Cain will be presenting “The Next Regulatory Tidal Wave — New Regulation Z Rules” on Friday, October 15, 2010 at 2:30 – 3:45 at the American Land Title Association’s (ALTA) Annual Conference in San Diego, California.

The presentation will focus on how “the closing process has been dramatically impacted lately by MDIA in 2009, then RESPA changes in 2010 and now Reg Z changes are set to take effect in 2011. Because of these regulations software changes will be needed and closing time frames will need to be adjusted. This session will introduce title professionals to the basics of the new rules and the potential impact upon their businesses. Among the topics discussed will be how will the new rules directly affect the closing process including documentation, what new calendars the rules will create, and how the new rules conflict or contrast with MDIA, the RESPA changes and other existing laws.”

Click here more information about the ALTA Annual Conference.

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.

The Federal Reserve Board’s new final rules amending Regulation Z appear to have major implications on the real estate industry effective April 1, 2011 if the final rule isn’t amended quickly. The new Fed Rule slipped in language that re-defines mortgage brokerage firms into the classification of “loan originators.” Currently mortgage brokerage firms can collect an origination fee, in-direct compensation (i.e. Yield Spread Premium), and processing fees. However the re-classification of a mortgage brokerage firm into the “loan originator” classification means that mortgage brokerage firms starting on April 1, 2011 are now prohibited from collecting both origination fee and in-direction compensation in the same transaction. The mortgage brokerage firms will only be allowed to collect processing fees and either an origination fee or in-direct compensation not both.

Creditors (i.e. lenders who fund loans in their own name) can still receive an origination fee, in-direct compensation (YSP or SRP), underwriting fees, processing fees, document prep fees, and funding fees.

So what is the issue? If you look at the operating costs for a Creditor the costs typically involve office space/rent, support staff, insurance, federal & state taxes, loan originator compensation, technology, telephone & communications and advertising. The operating costs for a mortgage brokerage firm include the same but add in National Mortgage Licensing System (NMLS) fees and continuing education expenses per the SAFE Act.

What the Fed has done effectively is significantly reduced the income that mortgage brokerage firms can receive while at the same time they will continue to have the same operating costs to manage to keep their operations in business. The 70,000 plus mortgage brokerage firms across the United States won’t be able to compete against banks who fund loans in their own name because they won’t be able to bring in enough operating capital to keep their operations afloat.

The new Fed rule will have an impact on credit unions, small bank, and mortgage brokerages across the United States who have typically third party originated (TPO) their loans. It will have an impact on TPO warehouse lines who relied on the TPO business model and on state bond loan programs who have traditionally relied on mortgage brokerage firms, credit unions, and small banks to market their bond loan programs to consumers.

One question that we have is has the Federal Reserve Board overstepped its authority in re-classifying a mortgage brokerage firm as a “loan originator” when the Secure and Fair Enforcement Act for Mortgage Licensing Act clearly defines what a mortgage brokerage firm and loan originator both are. It should be interesting to see if the Federal Reserve Board is sued over this new re-classification..

At issue is language that was buried on the bottom of page 34 and on page 35 with regards to loan compensation.

“Furthermore, the definition of “loan originator” in Sec. 226.36(a)(1) is consistent with new TILA Section 103(cc)(2), as enacted in Section 1401 of the Reform Act, which defines “mortgage originator” to include employees of a creditor, individual brokers and mortgage brokerage firms, including entities that close loans in their own names that are table funded by a third party. Consistent with Section 1401 of the Reform Act, the Board does not purport to address transactions that occur between creditors and secondary market purchasers, to which consumers are not a direct party, and appropriately does not extend the rule to compensation earned by entities on those transactions.

Existing Section 226.36(a) defining mortgage broker is revised and re-designated as new Section 226.36(a)(2). Comments 36(a)-1 and -2 regarding the meaning of loan originator and mortgage broker, respectively are adopted substantially as proposed. However, comment 36(a)-1 regarding the meaning of loan originator is amended to clarify when table funding occurs. For example, a table funded transaction does not occur if a creditor provides the funds for the transaction at consummation out of its own resources, such as by drawing on a bona fide warehouse line of credit, or out of its deposits. In addition, comment 36(a)-1 is also amended to clarify that the definition of “loan originator” does not apply to a loan servicer when the servicer modifies an existing loan on behalf of the current owner of the loan. This final rule only applies to extensions of consumer credit and does not apply if a modification of an existing obligation’s terms does not constitute a refinancing under Section 226.20(a).

Under existing Section 226.2(a)(17)(i)(B), a person to whom the obligation is initially payable on its face generally is a “creditor.” However, as noted the definition of “loan originator” in Section 226.36(a)(1) provides that if a creditor closes a loan transaction in its own name using table funding by a third party, that creditor is also deemed a “loan originator” for purposes of Section 226.36. Thus, new comment 36(a)-3 clarifies that for purposes of Section 226.36(d) and (e), the provisions that refer to a “creditor” exclude those creditor that are also deemed “loan originators” under Section 226.36(a)(1) because they table funded the credit transaction (i.e. do not provide the funds for the transaction consummation out of their own resources). New comment 36(a)-4 clarifies that for purposes of Section 226.36, managers, administrative staff, and similar individuals whose compensation is not based on whether a particular loan is originated are not loan originators.”
Continue reading

The Federal Reserve Board issued an interim proposed rule today, August 16, 2010, that revises the disclosure requirements for closed-end mortgages under Regulation Z (Reg Z) of the Truth In Lending Act (TILA). The Fed said the proposed rule implements provisions of the Mortgage Disclosure Improvement Act (MDIA) which require lenders to disclose how loan borrower’s regular mortgage payments can change over time.

The Fed’s notice can be accessed by clicking here:
Continue reading

Contact Information