CFPB Orders New Jersey Title Services Company To Pay for Illegal Mortgage Referrals

On June 12, 2014, the CFPB announced the issuance of a Consent Order under which a New Jersey title services company, Stonebridge Title Services Inc., agreed to pay a $30,000 civil money penalty for paying illegal kickbacks for referrals in violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). 

According to the CFPB’s press release, Stonebridge paid commissions to more than 20 independent salespeople who referred title insurance business to the company. Stonebridge paid referral commissions of up to 40 percent of the title insurance premiums it received from consumers to the individuals who solicited title insurance business for the company. The amount of the commission was based on the value of the title insurance premiums multiplied by a commission percentage agreed to beforehand between Stonebridge and the independent salespersons.  

Although the individuals who referred business to Stonebridge received W-2s, the CFPB determined that they were not “employees” who are allowed to collect commissions from employers for referrals under 12 C.F.R. § 1024.14(g)(1)(vii). According to the CFPB, the individuals acted as independent contractors, and Stonebridge did not have the right or power to control the manner and means by which they performed their duties. 

The settlement bars Stonebridge from taking a tax deduction or credit for the civil money penalty, or from seeking or accepting reimbursement or indemnification for the penalty, including under any insurance policy. 

Similar to other recent CFPB Section 8 enforcement actions we have reported on involving a law firmhome builder, national mortgage insurers, and a mortgage lender, this matter was not initiated by the CFPB, but was referred to the CFPB from another agency. In this particular settlement, the matter was referred to the CFPB by HUD.

- Marc D. Patterson


New York Passes Legislation To Reduce Number of FHA Loans That Would Be Classified as Subprime

The New York Assembly recently passed a bill that would result in fewer FHA loans being classified as “subprime” under Section 6-M of the New York Banking Law. The legislation—already passed by the Senate—would make permanent prior emergency rules issued by the Department of Financial Services (DFS), which raised the subprime threshold 75 basis points for those loans subject to the revised FHA life-of-loan mortgage insurance premium (MIP) policy.

As we wrote in October, although the emergency rules were initially set to expire on December 31, 2013, the DFS granted an extension to allow the Legislature additional time to craft a permanent solution. The bill, which passed with overwhelming bipartisan support and received strong industry backing, is expected to be signed into law by Governor Andrew Cuomo.

- Justin Angelo


Loan Servicer Properly Identified as Party with Authority To Negotiate Mortgage Terms in Foreclosure Notice, Georgia Court Holds

A recent decision by the Georgia Court of Appeals helps to add further clarity to the state’s foreclosure notice statute. The statute, which was amended in 2008, requires that the written notice of a foreclosure sale “shall include the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” The Court of Appeals determined that a loan servicer who holds the security deed has such authority.

In Reese v. Provident Funding Associates, LLP, the plaintiffs alleged that the foreclosure notice sent by the lender did not comply with Georgia law. While the lender later sold the promissory note to a third party, the lender remained the servicer of the loan and the grantee on the security deed. As a result, the lender retained the authority to collect payments and perform all other mortgage servicing functions authorized by the security deed.

After the borrowers defaulted, the lender sent a notice of foreclosure sale and identified itself as the party with “full authority to negotiate, amend, and modify” the mortgage. The Court of Appeals unanimously held that the lender had the necessary authority to negotiate, amend, and modify the mortgage, even though a third party owned the promissory note, as the servicer and grantee on the security deed. Accordingly, the court held that the foreclosure notice complied with Georgia law and affirmed the grant of summary judgment in favor of the lender.

This ruling follows the Georgia Supreme Court’s landmark decision last year in You v. JP Morgan Chase Bank, N.A., which clarified a number of issues related to Georgia’s foreclosure notice statute. The Supreme Court, however, did not address the meaning of the “full authority to negotiate, amend, and modify” requirement. As a result, litigants challenging the validity of foreclosure sales regularly allege that servicers who do not own the promissory note do not have “full authority” to negotiate on the mortgage loan, as required by Georgia law, and therefore sent an invalid notice of foreclosure sale. The decision in Reese provides some much-needed guidance and may discourage future litigation regarding this issue. 

Anthony C. Kaye, Stefanie H. Jackman, and Sarah T. Reise

House Passes Bill To Modify TILA 'Points and Fees' Definition

H.R. 3211, which amends the Truth in Lending Act's (TILA) definition of "points and fees," was passed by a voice vote in the House of Representatives on June 9, 2014.  

The "points and fees" definition is used to determine whether a mortgage loan triggers application of the TILA high-cost mortgage loan provisions under the points and fees test, and whether a loan satisfies the points and fees limitation to be a qualified mortgage loan under the TILA ability to repay provisions. The bill amends the definition to clarify that amounts escrowed for insurance are excluded, and to reverse the existing requirement that title charges must be included in points and fees if paid to an affiliate of the creditor.  

As amended, title charges are excluded from points and fees, whether paid to an affiliate of the creditor or a non-affiliated company, as long as the charges are reasonable and the creditor receives no direct or indirect compensation from the charges (except as permissible returns under the RESPA affiliated business arrangement provisions).

The focus now turns to the Senate, where a companion bill (S. 1577) is under consideration.

Richard J. Andreano, Jr.  

Oklahoma To Require Classroom Instruction for MLO Continuing Education


The Oklahoma Department of Consumer Credit (OK-DOCC) has informed the NMLS that a mortgage loan originator (MLO) must satisfy the annual continuing education requirement in a classroom at least once every two years. Accordingly, the requirement for an MLO to complete continuing education in a classroom or classroom equivalent setting may be met during calendar year 2014 or calendar year 2015.  

The OK-DOCC annual continuing education requirements for licensed MLOs are:

  • Three hours of federal law
  • Two hours of ethics
  • Two hours of lending standards for non-traditional mortgage products
  • One hour of undefined elective

Connecticut Amends Mortgage Licensing and Financial Services Laws

Connecticut Governor Dannel Malloy recently signed HB 5353, which amends numerous unrelated provisions to Connecticut's laws regulating financial services companies. Among the changes, the bill:

  • Renames mortgage servicing companies "mortgage servicers"
  • Expands the scope of who is subject to licensure
  • Adds new licensing, application, fee, bonding, and recordkeeping requirements
  • Limits the exemptions from mortgage lender, mortgage correspondent lender, mortgage broker, and debt negotiator licensure that apply to certain subsidiaries of banks and credit unions
  • Extends the Banking Commissioner's authority to use the NMLS, authorizes the system to receive and maintain licensing and registration records, and establishes filing, licensing, fees, reports, and other system procedures and requirements
  • Narrows the scope of the exemption from MLO licensure that applies to certain attorneys
  • Increases the pre-licensing and continuing education and testing requirements for mortgage lenders, mortgage correspondent lenders, and mortgage brokers
The effective dates of the changes, which vary by provision, are either October 1, 2014, or January 1, 2015.

- Marc D. Patterson

Copyright © 2014 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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