CFPB Takes Aim (Again) at Loan Originator Compensation

Two days after announcing a proposed consent order with a mortgage company and its CEO to settle charges that the company paid bonuses and higher commissions to loan officers in violation of the Regulation Z loan originator compensation (LOC) rule, the CFPB announced a second settlement with another mortgage company involving alleged violations of the LOC rule. The consent order in the second settlement requires the mortgage company, which is no longer in business and in the process of dissolving, to pay a civil penalty of $228,000.

According to the consent order, the mortgage company paid monthly fees to marketing services entities (MSE) that were associated with each of its branch offices and set the fees based on the profitability of the associated branch. The owners of the MSEs, who included branch managers, and in some instances, other loan originators in a branch, drew the monthly fees as additional compensation. The consent order asserts that the fees paid to the MSEs by the mortgage company included income from loans originated by the owners of the MSEs that were based on the interest rates charged on the originated loans. As a result, the CFPB determined that the MSE owners received compensation based on the terms of the loans they originated in violation of the LOC rule.

 - Richard J. Andreano, Jr.


CFPB Provides Breathing Room on Compliance with TILA/RESPA Integrated Disclosure Rule But Misses Mark in Waiting Period Guidance

While not agreeing to the grace period from enforcement sought by lawmakers and industry, Director Richard Cordray stated in a letter sent yesterday to members of Congress that the CFPB “will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the [TILA/RESPA Integrated Disclosure (TRID)] Rule on time.” The TRID Rule becomes effective on August 1, 2015.

In his letter, Director Cordray indicated that his statement was “consistent with the approach we took to implementation of the Title XIV mortgage rules in the early months after the effective dates in January 2014, which has worked out well.” Indeed, Director Cordray’s statement regarding the CFPB’s “sensitive” approach to compliance with the TRID rule tracks nearly word-for-word statements he made in 2013 when the January 2014 effective date of the Title XIV mortgage rules was approaching.

Director Cordray’s letter also touts the CFPB’s efforts to provide guidance, and indicates that, to “clarify misunderstandings,” the CFPB has released a fact sheet regarding the limited circumstances in which the TRID rule requires a revised closing disclosure with a new waiting period. The letter includes certain guidance from the fact sheet. Unfortunately, this guidance is not legally accurate, suggesting that the CFPB does not understand the intricate nature of the TRID rule and corresponding Regulation Z provisions. (The fact sheet is part of a new CFPB blog post that repeats Director Cordray’s statement about the CFPB’s “sensitive” approach to compliance with the TRID rule.)

The fact sheet’s guidance correctly notes that only certain annual percentage rate (APR) changes trigger the need for a new waiting period. The guidance describes the APR changes that require a new waiting period as follows: “The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new three-day review if it is based on changes to interest rate or other fees.” (Footnote and emphasis omitted.)

The guidance attempts to summarize the APR tolerances set forth in Regulation Z section 1026.22. That section incorporates the statutory APR tolerances of 1/8 of 1 percent for regular transactions and 1/4 of 1 percent for irregular transactions. Under the statutory tolerances, the disclosed APR is deemed to be accurate if it is above or below the actual APR by no more than the applicable percentage. Section 1026.22 also includes a regulatory APR overstatement tolerance. Under that tolerance, if the finance charge is overstated and the APR is also overstated, but by no more than the equivalent finance charge overstatement, the APR is deemed to be accurate.

The guidance indicates that the 1/8 of 1 percent tolerance for regular transactions applies to fixed-rate loans, and that the 1/4 of 1 percent tolerance for irregular transactions applies to adjustable-rate loans. While often that will be the case, in many situations it will not. One of the factors that classifies a transaction as an irregular transaction is if there are irregular payment amounts, other than an irregular first or final payment. A fixed-rate loan that has an interest-only feature for a period of time or a graduated payment feature would have multiple payment levels and, thus, would be an irregular transaction and qualify for the ¼ of 1 percent tolerance. An adjustable-rate loan with an initial rate that equals the fully indexed rate would be disclosed as having a single payment level (ignoring the first and final payments) and, thus, would be a regular transaction and qualify for the 1/8 of 1 percent tolerance.

While the guidance indicates that any decrease in the APR based on a decrease in the interest rate or fees does not trigger a new waiting period, that is not the case. The tolerance for a disclosed APR that is higher than the actual APR applies only if the finance charge is also overstated and the APR is overstated by no more than the percentage equivalent of the finance charge overstatement. While the industry has asked for a straightforward tolerance under which the disclosure of an APR that is higher than the actual APR is not a violation without regard to the disclosed finance charge, no such simple tolerance has been adopted.

Are the distinctions between the CFPB guidance and the actual Regulation Z provisions technical? Yes. But the TRID rule and Regulation Z are inherently technical, and the CFPB guidance is not legally accurate. If the CFPB is not capable of providing legally accurate guidance on the TRID rule, this suggests that an actual delay of the rule is warranted. While the CFPB may initially take a more “sensitive” approach to enforcement, without an actual delay of the rule, lenders will still face the risk of private actions.

 - Richard J. Andreano, Jr.


CFPB Issues Instructions on how Industry May Place its Company Logo on the “Home Loan Toolkit”

The CFPB has issued instructions on how creditors and other housing professionals can use their logo with the new “Home Loan Toolkit” (Toolkit). Previously, at a May 26, 2015, webinar that addressed the new TILA/RESPA Integrated Disclosure rule, the CFPB staff informally advised industry members that they could add their logo to the Toolkit. The new instructions confirm this advice and provide further guidance on how a company may add their logo to the cover of the booklet, including information about the required disclaimer as well as the trademark licensing agreement.

As we have previously written, the Toolkit has been redesigned to explain to consumers how the loan estimate and the closing disclosure work, and how the two documents interact during a home loan purchase. Among other things, the Toolkit provides questions consumers should consider to help define their homeownership goals and mortgage lending choices. Lenders must deliver or mail the Toolkit to consumers no later than three days after receipt of an application. The CFPB has also encouraged all market participants, including Realtors, to integrate the Toolkit with its consumer marketing materials.

In addition, the CFPB is currently developing a Spanish version of the Toolkit, and will publish a notice of availability in the Federal Register when it is released. The new Toolkit must be used with the new TILA/RESPA integrated disclosures and be given to consumers for applications received on or after August 1, 2015.

 - Marc D. Patterson


CFPB Issues Reverse Mortgage Focus Group Report and Consumer Advisory

The CFPB has issued a report that discusses the results of a focus group study it conducted on reverse mortgage advertisements and a consumer advisory about such advertisements.

In conducting its study “A Close Look at Reverse Mortgage Advertisements and Consumer Risks,” the CFPB interviewed 59 homeowners age 62 and older in focus groups and in one-on-one interviews in Chicago, Los Angeles, and Washington, D.C. The consumers were shown reverse mortgage advertisements selected from 97 unique ads collected by the CFPB.

The CFPB found that after viewing the advertisements, consumers often misunderstood important loan features and the loans’ potential risks. The issues of greatest concern to the CFPB are:

  • Many consumers did not understand that reverse mortgages are loans with fees, compounding interest and repayment terms unless an interest rate was explicitly stated in the advertisement.
  • Advertisements may create the false impression that reverse mortgages are a risk-free government benefit, and not a loan.
  • Consumers were confused by advertisement messages stating that they could remain in their homes indefinitely.
  • Advertisements contributed to consumers not understanding that taking out a reverse mortgage too early can jeopardize financial security.

The CFPB’s consumer advisory “Don’t Be Misled by Reverse Mortgage Advertising,” is intended to address these concerns by warning consumers about the false impressions that might result from reverse mortgage advertisements and highlighting facts consumers should consider when viewing such advertisements. The facts highlighted by the CFPB are that reverse mortgages are loans and not government benefits, can result in loss of a home if mortgage requirements are not met, and do not guarantee financial security no matter how long a consumer lives.

Advertisements targeting older Americans have been a continuing CFPB focus. In 2012, the CFPB sent warning letters to mortgage advertisers urging them to review their marketing materials to ensure that they complied with applicable law. Examples of the types of problems the CFPB identified in the ads included potential misleading statements about the costs of reverse mortgages.

 - John D. Socknat


Nevada Senate Passes Bill Affecting Super-Priority Liens in Foreclosure

The Nevada Legislature recently passed a bill intended, in part, to address issues resulting from the Nevada Supreme Court’s decision that a homeowners association lien is a true super-priority lien that, if foreclosed, extinguishes a first deed of trust. We wrote about the SFR Investments Pool I, LLC v. U.S. Bank, 130 Nev. Adv. Op. 75, 334 P.3d 408 (2014) decision in the October 9, 2014, edition of the Mortgage Banking Update.

Senate Bill 306, approved by Nevada Governor Brian Sandoval on May 27, 2015, makes several significant changes to NRS 116.3116 et seq. affecting unit-owner associations’ super-priority liens and the procedures for foreclosing such liens. Some of the changes include:

  • Authorizing the inclusion of certain costs associated with enforcing an association’s lien as part of the super-priority lien;
  • Providing that if the holder of a subordinate lien on the unit pays an amount included in the association’s lien, the payment becomes a debt due from the unit’s owner to the holder of that lien;
  • Requiring an association that records a notice of default and election to sell (NODES) to send a copy of the NODES to holders of recorded security interests by certified mail no later than 10 days after it is recorded; 
  • Requiring an association that records a notice of foreclosure sale of the unit (NOS) to send a copy of the NOS to holders of recorded security interests by certified mail no later than 10 days after it is recorded;
  • Provided that the holder of a first security interest pays the amount of the super-priority lien no later than five days before the date of sale, then the foreclosure of the association’s lien will not extinguish the first security interest; and;
  • Granting a unit’s owner or a holder of a security interest a right to redeem the unit and be restored to ownership subject to any security interest existing at the time of the sale (in the case of a unit owner) or become the owner of the unit (in the case of a holder of a security interest) by paying certain amounts to the purchaser within 60 days of the foreclosure sale.

The provisions of Senate Bill 306 take effect on October 1, 2015. We recommend that those involved in the mortgage industry in Nevada review Senate Bill 306 carefully.

 - Steven D. Burt and Alan S. Petlak


Texas Adds Exemptions to Texas SAFE Act Licensing Requirements

Texas has amended its provisions relating to exemptions from the applicability of the Texas SAFE Act for certain nonprofit organizations and their residential mortgage loan originators (MLOs). Under the amendment, a nonprofit organization that has the designation as a Section 501(c)(3) organization by the Internal Revenue Service and originates residential mortgage loans for borrowers who, through a self-help program, have provided at least 200 labor hours or 65 percent of the labor to construct the dwelling securing the loan, are exempt from the SAFE Act's licensing requirements. The employees of such nonprofit entities, when acting for the benefit of those entities, are also exempt from the licensing requirements applicable to MLOs.

The amendment is effective September 1, 2015. 

NMLS Adds New Rhode Island Third-Party Loan Servicer License

The Rhode Island Department of Business Regulations is now receiving new application filings through the Nationwide Mortgage Licensing System & Registry (NMLS) for the third-party loan servicer license. As previously reported, Rhode Island passed a bill last year that requires persons who, directly or indirectly, engage in the business of servicing a loan made to a resident of Rhode Island to obtain a third-party loan servicer license.

 - Marc D. Patterson


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