Monday, August 31, 2015

Tolerance for Owner’s Title Insurance

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Given the stringent disclosure demands of Regulation Z, the implementing regulation of the Truth in Lending Act, sometimes there is confusion around the tolerances for owner’s title insurance. The confusion stems from a relatively basic feature of identifying whether it is required by the lender. That determination is operative to the effect on tolerances.

TRID continues and expands RESPA’s Regulation X general rule that the charges actually paid by or imposed on a consumer for certain settlement services and transfer taxes when the loan is closed may not exceed the amounts included on the early disclosures, with several exceptions. Like Regulation X, Regulation Z establishes tolerance categories limiting the permissible variations between the estimated amounts and the actual amounts: an unlimited variation category, a 10% category, and a zero percent category.

The amount disclosed on the Loan Estimate is considered in good faith (and in compliance with the regulation) if the actual charge does not exceed the estimated amount by the amount permitted by the applicable tolerance rule. Under TRID, estimates of fees for owner’s title insurance may fit into any of the three tolerance categories, according to the category’s criteria.

Let’s look at an outline of the tolerance categories and a chart.

Unlimited Tolerance

An estimate of a fee for owner’s title insurance for which the consumer was permitted to shop and which is paid to a provider the creditor did not identify on its written list of service providers falls within the unlimited tolerance category. A fee for owner’s title insurance not required by the creditor falls in the unlimited tolerance category, even if paid to an affiliate of the creditor.

10% Tolerance

If the creditor requires owner’s title insurance, allows the consumer to shop, and the provider is not the creditor or an affiliate of the creditor but is on the written list of settlement service providers, then the fee falls in the 10% tolerance category. A fee for required owner’s title insurance not paid to the creditor or an affiliate of the creditor, for which the consumer is permitted to shop beyond the list of settlement service providers, as disclosed on the list, falls in the 10% tolerance category (assuming the aggregate amount of charges does not exceed the 10% tolerance).

Zero Tolerance

A fee for owner’s title insurance required by the creditor for which the creditor does not allow the consumer to shop falls in the zero tolerance category.

All of the tolerance categories assume that the estimates are consistent with the best information reasonably available to the creditor at the time of disclosure.

This chart provides a brief outline of how tolerances are affected by fees:

·       Prepaid interest
·       Property insurance premiums
·       Amounts escrowed
·       Charges paid to third-party service providers selected by the consumer (for which the consumer was permitted to shop) not on the creditor’s list of settlement service providers
·       Charges for third-party services not required by the creditor (even if paid to affiliates of the creditor)
10% Aggregate
·       Recording fees
·       A third-party charge not paid to the creditor or an affiliate of the creditor and for which the creditor (a) permits the consumer to shop, (b) provides a list of settlement service providers, and (c) includes a disclosure that the consumer is permitted to shop (whether the consumer selects the provider from the list or does not choose the provider; if the consumer chooses a provider not on the list, then the fee would fall into the unlimited tolerance category)
·       All fees that do not fit into either of the preceding two categories

If a particular fee appears to fit into more than one category, it is entitled to be placed in the more tolerant category. For example, if owner’s title insurance is not required, and the consumer is allowed to shop and selects a third-party provider who is not the creditor or an affiliate of the creditor, the fee falls in the unlimited tolerance category whether or not the provider is on the creditor’s written list of settlement service providers.

Tuesday, August 25, 2015

“A” is for Abusive

President & Managing Director
Lenders Compliance Group

Financial institutions and other market participants have struggled to understand how the Consumer Financial Protection Bureau defines "abusive" conduct, but a series of enforcement actions has shown that the bureau intends to go beyond the terms of a loan contract to wield its broad and unique power.

Dodd-Frank poked the financial services industry with an expansion of an age-old acronym, acronyms being the mnemonic that enables us to remember dozens and dozens of mortgage acts and practices and their abundant, multifarious regulations. I have actually kept count of the acronyms involving residential mortgage loans, and by my tally the current number is a whopping 345 acronyms of various stripes and sizes.

In Dodd-Frank, a new word – and, therefore, a new letter – was added to Unfair or Deceptive Acts or Practices; that word being “Abusive,” which parachuted down and nudged itself disjunctively between “Deceptive” and “Acts.” So, the new term is Unfair, Deceptive, or Abusive Acts or Practices, and the acronym has asymptotically expanded from UDAP to UDAAP.

Back in July 2013,[i] the Bureau set forth a whole set of guidelines on UDAAP, some of which told us what we already know, some of it new, and some of which did not enlighten us at all. Amongst regulatory compliance nerds and cognoscenti the need for the word “Abusive” seemed like an arcanum for Dodd-Frank to prime the litigation pump.

Defining “Abusive” has been a task for the Bureau. Director Cordray has stated that figuring out what is and is not ‘abusive’ is “a little bit of a puzzle.” Reminds me of Justice Potter Stewart’s observation for an obscenity test in Jacobellis v. Ohio: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it …”[ii]

When it comes to abusive conduct, we know it by the litigation it causes!

Going by the Bureau’s involvement in enforcement actions and litigation, it’s possible to draw some understanding – I reiterate, some understanding – of how the Bureau seems to set up certain criteria for pinpointing the potential dissymmetry between creditors and consumers. But the process is steadily and always evolving, meaning that Dodd-Frank requirements may be only a baseline threshold.

Let’s get this conundrum into the schematic that the Bureau actually derives mutatis mutandis from Dodd-Frank, with respect to determining various conditions as being ‘abusive.’ There are but four prongs, it would seem. Think of them as four sharp tentacles with deep claws. Or, like gangplanks: walk far enough out on them and you know what will happen!

Here they are, in brief: a financial institution "materially interferes" with consumers' ability to understand a product's terms or conditions; it "takes unreasonable advantage" of consumers' lack of understanding regarding a product's material risks, costs or conditions; it exposes consumers' to the risk of inability to take steps to protect themselves; and last, but not least, it causes consumers to believe that the company is putting its interests above theirs.

Of such material are litigation and administrative settlements made!

You might think that the Bureau has clearly, concisely, and conspicuously defined what constitutes an abusive practice. You would be correct to think that, but wrong to conclude that there are guidelines to follow. The fact is the Bureau does have the authority to define abusive acts or practices. However, it simply has not done so to date.

Why? Because, quite obviously, by not defining abusive conduct the Bureau gains a significant advantage in enforcement and, by extension, in the ability to prevail in litigation. Perhaps it will define rules for abusive conduct eventually in the forthcoming rules that apply to debt collection and payday lending. But those rules are still in the hopper awaiting the Bureau’s annunciation.

That leaves divination and enforcement actions. Setting aside divining rods and other dowsing methodologies – though a double-blind study might yield the same outcome as any construal provided by the Bureau’s current, litigious consuetude – we might look to some enforcement actions as a guide.

For instance, using abusive conduct as leverage, the Bureau has obtained a $25 million settlement with PayPal. New York’s Department of Financial Services and the Bureau, working jointly, used abusive practices in its enforcement action against two pension advance companies. So there’s gold in them there hills!

CashCall and NDG Financial matters are good examples of enforcement at its finest. Both cases involved offshore, online payday lenders that offered loans in states where usury laws or interest rate caps made the loans illegal. Neither complaint has gone to trial yet. While many of the allegations in the cases are similar, the ways that the Bureau interpreted "abusive" are different.

In CashCall,[iii] the Bureau alleged that the company took “unreasonable advantage of consumers’ lack of understanding about the impact of applicable state laws on the parties’ rights and obligations” to recover the full amount of loans they obtained despite a lack of enforceability.

In NDG Financial,[iv] the Bureau used a broader reading of an ‘abusiveness standard,’ alleging that NDG “materially interfered” with consumers’ ability to understand that they were not required to repay the loans under state laws and took “unreasonable advantage” of consumers' lack of understanding by repeatedly telling borrowers they were exempt from state law.

Friday, August 21, 2015

A Hermeneutical Approach to State Advertising

President & Managing Director
Lenders Compliance Group

We are often asked about what is or is not permitted in nonbank advertisements. Many people are aware of the federal guidelines set forth in Regulation Z, the implementing regulation of the Truth in Lending Act. However, some people are not familiar with the state requirements. The lack of familiarity with state advertising requirements happens a lot with multi-state lenders. They have a good grasp of their home state advertising rules, but this becomes less so as they add more and more states to their geographical footprint. Multi-state residential mortgage loan originators do alright in home state banking examinations in the review of advertisements, but advertising in other states can, and often does, pose a threat to a clean examination audit in this category.

In our Advertising Manual, we have a whole section devoted to “Do’s” and “Don’ts” relating to advertisements. But it might be helpful to look at one state in particular, as a kind of guide, to see how that state’s advertising rules stack up against similar rules in other states. Of course, taking one state’s guidelines as a template is not suggested. Many states differ from one another with respect to advertising requirements. So, a licensee should research the statutory mandates in each state.

Advertising covers a very broad array of media, including Social Media. The range includes, but is certainly not limited to, any written or verbal message, such as:
  • Newspapers, magazines, or catalog advertisements
  • Brochures, direct mail literature, messages on customer statements, or other printed materials, including applications
  • Electronic media, including Internet home pages and electronic billboards
  • Signs, either interior or exterior, and displays, and billboards
  • Radio, television, or public address system broadcasts
  • Oral communications between financial institution employees and actual or potential customers, including telephonic and face-to-face solicitations or response to inquiries
  • Communications made through Facebook, LinkedIn, Twitter, text messaging, and other social media avenues 

Under Regulation Z, an advertisement is “a commercial message in any medium that promotes, directly or indirectly, a credit transaction.”[i]

Additionally, there are so-called “triggering terms,” which are specific terms used in various advertising media that "trigger" additional disclosure mandates.

Regulatory frameworks and rules most associated with advertising are the Fair Housing Act, Equal Credit Opportunity Act, Truth in Lending Act, Fair Credit Reporting Act, Federal Trade Commission rules, Mortgage Advertising Rules, FHA Regulations, Real Estate Settlement Procedures Act, and, of course, state requirements.

I could pick a bevy of states that have comprehensive and nuanced advertising guidelines. I thought it might be worthwhile to look at Virginia’s requirements, as a hermeneutical exercise in getting a sense for what to consider as possible de minimis guidelines. Requirements may vary from state to state. For instance, a state may require an advertisement to have a specific licensee category and the state’s own banking department name (i.e., “Licensed Mortgage Banker, [Name of] State Banking Department”). Doing more disclosure than is minimally required by the applicable statute, in order to ensure proper disclosure to the consumer, is a fine way to ensure a ‘best efforts’ approach toward a financial institution’s safety and soundness.

Virginia’s advertising statute goes back a long way.[ii] For our purposes of extracting some interpretive applications for other states’ advertising guidelines, let’s take a look at Virginia’s guidelines.

There are nine separate categories in Virginia’s statute, and I will paraphrase and describe each of them. Assume that the requirements must be met by mortgage lenders and mortgage brokers alike, which I will refer to as “RMLO,” for Residential Mortgage Loan Originator. Use the categories as a basic checklist and then go to each state’s advertising statute to do a comparative analysis.

1.      Every advertisement used by, or published on behalf of an RMLO must clearly and conspicuously disclose the following information:
a.      The name of the RMLO as set forth in the license issued by the banking department.
b.      The abbreviation "NMLS ID #" followed immediately by both the unique identifier assigned by the Registry to the RMLO and the address for the NMLS Consumer Access website in parenthesis. For example: NMLS ID # 999999 (
c.      If an advertisement contains a rate of interest, a statement that the stated rate may change or not be available at the time of the loan commitment or lock-in.

Friday, August 7, 2015

The New Settlement Cost Booklet

President & Managing Director
Lenders Compliance Group

Every once in a while we are asked about “the home buying information booklet,” as the Bureau has charmingly euphemized it, though it is known throughout the residential mortgage banking industry as the Special Information Booklet – which incidentally is the phraseology that was given to it by RESPA or, if you prefer, the “Settlement Cost Booklet.”

Let’s just call it the “Booklet.”

Regulation Z provides a general rule that requires banks and nonbanks to provide a special booklet issued by the Bureau that describes home purchases to all applicants for federally related mortgage loans.[i] This mandate previously was required under rules set forth in Regulation X, RESPA’s implementing regulation. The requirement has been removed from Regulation X and added to Regulation Z.[ii] 

Let me first straighten out the evolving nomenclature.

In 2013 the Bureau revised both the Booklet (viz., dubbing it, “Shopping for Your Home Loan: Settlement Cost Booklet”) and also the home equity loan booklet, the latter remaining a requirement for home equity loans under Regulation Z. In 2015 the Bureau again revised the Booklet, initially to be issued beginning on August 1, 2015, but postponed to October 3, 2015; the Booklet was renamed “Your Home Loan Toolkit: A Step-by-Step Guide.” It reflects the numerous changes to both Regulation Z and Regulation X (viz., TRID) in the Final Rule of January 2014.

The latest version of the Booklet can be downloaded from the Bureau’s website. 

Earlier revisions of these booklets have been announced by the Bureau with a statement that lenders may, at their option, use up existing stock of earlier publications or provide the revised versions immediately. However, with the announcement of the latest revision, the Bureau has emphasized that this update includes information on the new Loan Estimate and Closing Disclosure required to be provided to consumers for applications received on or after October 3, 2015. As previous versions of the Booklet do not reference or explain the new integrated disclosures, the Bureau “believes that providing consumers with the updated Booklet in conjunction with the integrated disclosures is important to facilitating consumers’ understanding of the transaction.”[iii]

Sometimes, the question is asked whether there are exceptions to this disclosure requirement and, if so, what are those exceptions. There are a few obvious and maybe a few not-so-obvious exceptions. I’ll point these out.

The Booklet describes home purchases, so the regulation exempts the following loan types:
  • Refinance transactions
  • Closed-end loans, when the lender takes a subordinate lien on the property
  • Reverse mortgages

Generally, all other federally related mortgage loans with a purpose other than for the purchase of residential property are exempt from requiring the Booklet disclosure, to wit, consumer credit transactions secured by real property, the purpose of which is not the purchase of a one-to-four family residential property.

The Bureau has taken the position that it may revise the Booklet to address other types of loans or to adopt a booklet prepared by another federal agency. But, when and if the Bureau actually does this, the Booklet requirement will be extended to appropriate types of loans, based on the contents of such booklet.

There are three exceptions to the requirement of a lender to provide the Booklet.

These are where:

1.     A borrower uses a mortgage broker; that is, the mortgage broker is required to give the applicant the Booklet. If a consumer uses a mortgage broker, the mortgage broker provides the special information booklet and the lender need not do so.
2.     The lender decides to deny an application within three business days after it was prepared or received; specifically, if the lender denies the consumer's application before the end of the three-business-day period, the lender need not provide the Booklet.
3.     A consumer applies for an open-end credit plan[iv] and the lender or mortgage broker provides a copy of the brochure, “What you should know about Home Equity Lines of Credit,” published by the Bureau.

The Booklet is available through the Bureau. It may be reproduced in any form, but no changes, deletions from, or additions to the Booklet may be made, except as follows:
  • Booklet Cover: The cover of the Booklet may be in any form and with any drawings, pictures or artwork, provided the words “settlement costs” are used in the title. The cover may not provide any discussion regarding the matters covered in the Booklet. Names, addresses, and telephone numbers of the lender or others and similar information may appear on the cover, but no discussion of the matters covered in the booklet may appear on the cover. References to HUD on the cover of the booklet may be changed to references to the Bureau.
  • Other Languages: The Booklet may be translated into languages other than English.