CFPB eClosing Project Update

The CFPB issued a report on its study of the CFPB’s mortgage loan eClosing project on August 5, 2015, and held a public forum addressing the study results. As we reported, the CFPB launched the eClosing project to determine if the mortgage closing process could be improved for consumers through the use of technology.

The participants in the pilot project included seven lenders, four technology companies, many settlement agents, real estate professionals, and consumers with more than 3,292 loans. Certain consumers received traditional paper documents and certain consumers received either all electronic documents or a hybrid of electronic and paper documents. The borrowers who participated in the project were invited to complete a follow-up survey, and 1,254 surveys were completed.

The CFPB focused on three specific areas—consumer understanding, consumer empowerment, and the efficiency of the closing process. The CFPB advised that the study showed:

  • A 7 percent positive difference in perceived understanding for borrowers using eClosing as compared to borrowers using paper documents.
  • A 15 percent positive difference in the scores on consumer empowerment—or a feeling of control over the process—for eClosing borrowers as compared to borrowers using paper documents.
  • A 17 percent positive difference in scores on efficiency for eClosing borrowers as compared to borrowers using paper documents.

The CFPB cited the earlier receipt of documents by consumers using the eClosing process as a benefit, and the early receipt apparently contributed significantly to positive scores regarding consumer understanding and empowerment and the efficiency of the process. At the forum, however, the CFPB did not focus on whether the earlier receipt of documents, whether paper or electronic, or the use of electronic documents, was the driving factor. Certain industry participants in the forum noted the earlier receipt of documents, whether paper or electronic, was most important.

The TILA/RESPA Integrated Disclosure (TRID) rule, which becomes effective October 3, 2015, will require that consumers have the closing disclosure in hand not less than three business days before consummation, and the disclosure can be delivered in paper form or, with consumer consent, electronically. Certain borrowers in the pilot project not only received disclosures electronically before closing but also received the entire closing package electronically. The TRID rule will not require early delivery of the entire closing package. A consumer advocate at the forum stated that providing the entire closing package earlier would be an improvement. One particular benefit of electronic documents touted by many forum participants is the ability to include links to CFPB educational materials that provide helpful information on matters addressed in the documents.

During the forum, an industry participant advocated, at least initially, the use of the hybrid approach that was included in the pilot project. With that approach, consumers received documents electronically in advance and signed paper documents at the closing. The participant noted as important factors that there are investors that will not accept, and many recording offices are not able to accept, electronic documents. The CFPB study also noted challenges to the use of electronic documents that are presented by notarization requirements.

Although the CPFB touted that the use of electronic documents provides for earlier receipt of documents and overall efficiency, it did not address an aspect of the TRID rule that frustrates these goals. Currently under the E-Sign Act, a creditor can deliver documents to obtain consumer consent to electronic disclosures along with the electronic disclosures. However, the TRID rule requires that the creditor first complete the consent process under the E-Sign Act and then deliver the electronic disclosures. Although in adopting the TRID rule, the CFPB asserted that it did not believe that this extra step would pose a burden on the industry. Industry members have found the extra step does creates a burden in the implementation of the TRID rule and the loan process.

The CFPB noted in the study that it is encouraged by the results of the pilot project and remains interested in further evaluating and encouraging more consumer-friendly closing processes, particularly after the marketplace has implemented the TRID rule. At the forum, a consumer advocate that supported moving to an eClosing process cautioned that some consumers do not have ready access to technology and that they also should be able to experience an efficient closing process.

- Richard J. Andreano, Jr.


House Financial Services Committee passes CFPB-related bills including bill creating TRID Rule hold harmless period

On July 29, the following four CFPB-related bills were passed by the House Financial Services Committee:

  • H.R. 3192, the “Homebuyers Assistance Act”: The bill would provide a hold harmless period for the TILA/RESPA Integrated Disclosure (TRID) rule that is scheduled to go into effect on October 3, 2015. Although the CFPB recently delayed the effective date of the TRID rule until such date, it declined to adopt a formal hold harmless period, despite industry calls for such a period. H.R. 3192 provides that the TRID rule may not be enforced against any person until February 1, 2016, and that no suit may be filed against a person for a violation of the TRID rule occurring before such date, so long as the person has made a good faith effort to comply with the rule. Passed by a vote of 45-13, the bill’s bi-partisan support in the Committee likely signals passage by the full House. Prospects in the Senate, however, are less clear. An existing bill, S. 1711 (which is a companion bill to H.R. 2213), would provide for a TRID rule hold harmless period until January 1, 2016. The bill was introduced on July 7, 2015, and referred to the Committee on Banking, Housing and Urban Affairs, but no further action has been taken.
  • H.R. 1210, the “Portfolio Lending and Mortgage Access Bill”: The bill would modify the TILA ability to repay provisions by creating a safe harbor for depository institutions without regard to their size for loans that the institution retains in portfolio from origination where any prepayment penalties comply with the phase-out requirements for prepayment penalties on qualified mortgages. The bill would also create a safe harbor from the TILA anti-steering provision (for which the CFPB has not yet proposed implementing regulations) that prohibits a mortgage originator from steering a consumer from a qualified mortgage for which the consumer is qualified to a mortgage that is not a qualified mortgage. The conditions for the safe harbor are that the creditor on the loan is a depository institution that has informed the mortgage originator that it intends to retain the loan in portfolio for the life of the loan and the originator informs the consumer that the creditor intends to do so. The bill also had bipartisan support in the Committee, passing by a vote of 38-18.
  • H.R. 1737, the “Reforming CFPB Indirect Auto Financing Guidance Act”: The bill would nullify the CFPB’s indirect auto finance guidance issued in March 2013 and require the CFPB to provide for a notice and comment period before issuing any new guidance on indirect auto finance. The bill also includes requirements for the CFPB when proposing and issuing such guidance to make publicly available “all studies, data, methodologies, analyses, and other information” it relied on; consult with the Fed, FTC and DOJ; and conduct a study of the guidance’s impact on consumers and “women-owned, minority-owned, and small businesses.” The bill passed by a vote of 47-10.
  • H.R. 1941, the “Financial Institutions Examination Fairness and Reform Act”: The bill would establish deadlines within which the banking regulators and CFPB must hold exit interviews after an examination and issue final examination reports. The bill would also establish an Office of Independent Examination Review from which financial institutions can seek an independent review of a material supervisory determination contained in a final examination report. The bill passed by a vote of 45-13.

- Richard J. Andreano, Jr. and Barbara S. Mishkin


Pennsylvania County Recorder Cannot Sue MERS for Failure to Record Mortgage Assignments, Third Circuit Rules in Overturning Oft-Cited District Court Opinion

Pennsylvania County Recorder Cannot Sue MERS for Failure to Record Mortgage Assignments, Third Circuit Rules in Overturning Oft-Cited District Court Opinion

The U.S. Court of Appeals for the Third Circuit has ruled that Pennsylvania’s recording statute does not require the recording of all conveyances. As a result, the Third Circuit reversed the district court’s refusal to enter summary judgment in favor of Mortgage Electronic Registration Systems (MERS) in a class action filed by a county recorder of deeds seeking to compel MERS to record past, present, and future mortgage assignments and pay the associated recording fees.

In Montgomery County, Pennsylvania, Recorder of Deeds v. MERSCORP, Inc. and Mortgage Electronic Registration Systems, Inc., the district court had interpreted Pennsylvania’s recording statute to require, rather than merely permit, the recording of all conveyances. Although a mortgage is recorded naming MERS the mortgagee as nominee for the lender and its assigns, no assignment is recorded when the lender’s rights are assigned to a new owner who is a MERS system member. Instead, the change in beneficial ownership is registered in the MERS electronic database and MERS remains the nominee for the new owner. The county recorder’s class action complaint sought a declaratory judgment and permanent injunction establishing that each transfer required a formal mortgage assignment and alleged that MERS had violated state law by failing to record such assignments. The county recorder also asserted a claim for unjust enrichment based on MERS’s failure to pay recording fees.

The Third Circuit agreed with MERS that, when read in context, the Pennsylvania recording statute’s language relied on by the county recorder stating that all conveyances “shall be recorded” meant “not that every conveyance must be recorded, but only that conveyances must be recorded in the county where the property is located in order to preserve the property holder’s rights as against a subsequent bona fide purchaser.” According to the Third Circuit, the recording statute’s primary purpose is to prevent deception by providing public notice of who holds title to land. The court noted that the only consequence of failing to record is that an unrecorded conveyance will be void as to a subsequent purchaser. Observing that recording is not necessary to validly convey property in Pennsylvania, the court commented that if recording of conveyances was statutorily required, Pennsylvania courts would not recognize unrecorded conveyances as valid.

The Third Circuit also found that, in light of its interpretation of the recording statute, the county recorder’s unjust enrichment claim failed as a matter of law. Since there was no requirement to record conveyances, the recorder had not conferred any benefit on MERS for which it failed to pay.

In addition to ruling that MERS was entitled to summary judgment in its favor, the Third Circuit denied the county recorder’s motion to certify two issues to the Pennsylvania Supreme Court. In the Third Circuit’s view, the answer to the first issue, whether the state statute required conveyances to be recorded, was “so clear that we would be abdicating our responsibilities by punting.” With regard to the second issue, whether a recorder has a private right of action under the statute, the Third Circuit stated that the recorder’s “lack of an express right or implied right of action under [the statute] would provide an independent ground for judgment in favor of MERS.” (The district court found it unnecessary to decide whether the recorder had a private right of action and instead construed the pleadings as a quiet title claim. The Third Circuit commented that it took no position on whether it was proper for the district court to do so “because it is clear that the Recorder cannot maintain a quiet title claim, as she does not claim an interest in land, only an interest in recording fees.”)

In its decision, the Third Circuit cited decisions from other courts, including the Seventh and Eighth Circuit Courts of Appeals, in similar lawsuits likewise against MERS brought under similar state statutes by local recording officials. Those lawsuits found that the statutes created no mandatory duty to record.

- Barbara S. Mishkin


Courts, States Continue to Wrestle with Homeowners Association Assessment Liens

The circumstances under which a condominium or homeowners association (HOA) lien for unpaid assessments may wipe out a lender’s mortgage lien continues to evolve across the country. As noted in our previous alerts regarding assessment lien priority cases in Nevada and Washington, D.C., the relative priority of these assessment liens, vis-à-vis mortgage liens, continues to have significant impact on lenders, associations, and consumers and potentially impacting the cost and availability of mortgage loans for homes within HOAs.

Ruling on FHFA Priority

New questions regarding the statutory lien priority provided to HOA assessment liens arose out of several 2014 court rulings holding that an HOA could foreclose an otherwise first priority mortgage lien, in some cases even if the mortgage lender received no notice of the foreclosure action. While litigation surrounding the bounds of this principle continues in several states, several federal agencies have asserted that interests in a mortgage held by a government agency are not susceptible to being wiped out without the federal government’s consent pursuant to the Property Clause of the U.S. Constitution. This position was successfully argued on behalf of HUD’s interest in insured mortgages, in Washington & Sandhill Homeowners Ass’n v. Bank of America, Case No. 2:13-CV-01845- GMN-GWF.

Taking the federal interest preemption argument one step further, the Federal Housing Finance Authority (FHFA), as conservator for Fannie Mae and Freddie Mac, has argued in several cases that mortgages held by Fannie Mae or Freddie Mac are entitled to similar protection under the Property Clause. In short, FHFA argues that (a) the FHFA is an agency of the federal government whose property interests are subject to protection under the Constitution; (b) FHFA’s role as conservator for Fannie Mae and Freddie Mac creates a federal property interest in the assets of Fannie Mae and Freddie Mac; and (c) therefore, mortgages held by Freddie Mac and Fannie Mae may not be foreclosed as part of an HOA’s assessment lien foreclosure without the consent of the FHFA.

FHFA, directly or through lender defendants, has advanced this argument in multiple cases including cases in which Ballard Spahr presently represents the defendant lenders. A federal judge in Nevada issued the first decision on this line of argument in Skylights LLC v. Byron on June 24, 2015. In that decision, the court held in favor of FHFA’s argument, finding that “a homeowner association’s foreclosure of its super-priority lien cannot extinguish a property interest of Fannie Mae or Freddie Mac while those entities are under FHFA’s conservatorship.” Skylights LLC, 2015 WL 3887061. If adopted by other courts, this interpretation of the Constitution would have a dramatic effect on the scope and applicability of both prior state judicial holdings and state assessment lien laws that otherwise permit HOAs to foreclose mortgage liens as part of their assessment collection efforts against delinquent homeowners.

Legislative Responses

In the wake of this nationwide litigation regarding assessment lien priority, state legislatures may also be asked to resolve the competing interests of community associations and mortgage lenders when it comes to their respective liens. As noted in our June 16, 2015, alert, Nevada’s legislature acted during the 2015 session to amend its law to clarify and ensure that while an association assessment lien may in fact have priority over a mortgage lender’s lien, that mortgage lender must have received notice of the pending assessment lien foreclosure and an opportunity to pay the amount of the association’s lien that is senior to the mortgage lien so as to preserve the lien of its mortgage. Additionally, with the Uniform Law Commission’s revisions to the assessment lien provisions of the Uniform Common Interest Ownership Act (discussed in a previous alert), states that have adopted the uniform act (or are considering doing so) may be called upon to respond legislatively to lien priority, notice to lenders, as well as quiet title issues raised by these various assessment lien cases.

- Joseph E. Lubinski, Abran Vigil, Roger D. Winston, and Kenneth M. Jarin


Envelope’s Display of Barcode With Embedded Account Number Violates FDCPA, Federal Court Rules

A federal court in Pennsylvania has ruled that a debt collector violated the Fair Debt Collection Practices Act (FDCPA) by sending a collection letter in an envelope that allegedly revealed a barcode in which the plaintiff’s account number was embedded.

In Kostik v. ARS National Services, Inc., the plaintiff alleged that the debt collector had mailed a collection letter to her in an envelope containing a glassine window through which the return address and a barcode printed directly below the address were visible. According to the plaintiff, when electronically scanned, the barcode revealed her account number. She claimed that the display of the barcode violated the FDCPA provision that prohibits a debt collector from communicating with a consumer using an envelope on which there is any language or symbol other than the debt collector’s address.

In moving to dismiss the complaint, the debt collector argued that the envelope did not violate the FDCPA because the barcode was a “benign symbol.” It also argued that viewing the account number would require illegal action by a third party since scanning the envelope to obtain the account number would violate federal law.

In refusing to adopt a “benign symbol” exception to the FDCPA, the district court relied on the 2014 decision of the U.S. Court of Appeals for the Third Circuit in Douglass v. Convergent Outsourcing. In Douglass, the Third Circuit ruled that even if such an exception existed, an envelope’s disclosure of a debtor’s account number was not, as the debt collector contended, a “meaningless string of numbers and letters” and therefore “benign” language. Instead, the Third Circuit ruled that the disclosure of the account number was not “benign” and violated the FDCPA because the account number was information capable of identifying the plaintiff as a debtor.

Only a week before deciding Kostik, federal district court Judge William J. Nealon had ruled in Styer v. Professional Medical Management that disclosure of a quick response (QR) code on a debt collection envelope that revealed a consumer’s name, address, and account number when electronically scanned constituted a FDCPA violation. Applying Douglass and his previous decision in Styer, Judge Nealon concluded that the debt collector’s alleged display of the barcode violated the FDCPA and denied the debt collector’s motion to dismiss.

- Barbara S. Mishkin


Florida Court of Appeals Reverses Foreclosure of Reverse Mortgage by Expanding the Definition of “Borrower” to Include Surviving Spouse

Home equity conversion mortgages, commonly known as “reverse mortgages” are popular loan products in Florida. In order to foreclose on a reverse mortgage, the lender generally must allege that all conditions necessary to accelerate the loan have occurred. One common condition is that the borrower has passed away, and the property is no longer the principal residence of a surviving borrower. Recently, the Florida Court of Appeals expanded the definition of “borrower” to include a non-signing spouse.

In Smith v. Reverse Mortgage Solutions, Inc., Mr. Smith executed a promissory note creating a reverse mortgage. His wife, the plaintiff, did not sign the promissory note, but did sign the mortgage. After Mr. Smith died, the lender filed a judicial foreclosure action, and alleged that all conditions precedent to the acceleration of the loan and the foreclosure were met. Specifically, the lender asserted that Mr. Smith was the only borrower, and therefore, after his death, the property was no longer the residence of the borrower. The trial court agreed, and entered judgment in favor of the lender.

On appeal, the Florida Court of Appeals reversed, and found that Mr. Smith’s spouse was also a “borrower,” as that term is defined in both the mortgage and under Florida and federal law. With respect to the mortgage, the Court of Appeals held that, although the first paragraph of the mortgage defined the “borrower” as the husband, the final portion of the mortgage indicated that both spouses were the “borrower.” Specifically, the Court found that both spouses executed the mortgage as the “borrower” and the signatures of both spouses were jointly verified by two witnesses and a notary.

The Court of Appeals also relied upon Florida’s constitutional homestead exemption, which provides that a security interest is only valid if signed by both the owner of property and his spouse. The Court held that under the homestead exemption, the security instrument could only be valid if both spouses executed the instrument as “borrowers.”

Finally, the Court of Appeals relied upon federal law governing reverse mortgages. The reverse mortgage was insured by the Department of Housing and Urban Development (HUD), and therefore was governed by 12 U.S.C. § 1715z-20. Under this statute, HUD may not insure a reverse mortgage unless it provides that a homeowner’s obligation to satisfy the debt is deferred until the homeowner’s death. The provision also expressly defines the term “homeowner” to include the homeowner’s spouse. Because the reverse mortgage in this case was insured by HUD, the Court of Appeals reasoned that the mortgage should be construed to be consistent with the statute that regulated and governed the mortgage. Because the statute’s explicit safeguard against the displacement of elderly homeowners would be without effect if the lender could foreclose while a homeowner’s spouse still resided in the property, the Court concluded that, to be consistent with governing federal law, the term “borrower” in the mortgage should be construed to include the surviving spouse.

This decision from the Florida Court of Appeals will forestall lenders’ foreclosure actions on reverse mortgages in Florida with respect to a surviving spouse and the Court’s reasoning may be followed in other jurisdictions.

- Alan S. Petlak and Sarah T. Reise


California Adds New Continuing Education Requirement for Real Estate Brokers

California has amended its continuing education requirements for real estate brokers (broker) licensed by the California Bureau of Real Estate. The amendment requires a broker, as part of the broker’s 45 hours of continuing education, to successfully complete a three-hour course in the management of real estate offices and supervision of real estate licensed activities. Note that real estate law requires real estate salespersons to be supervised by a responsible broker, and allows an employing broker or corporate designated broker officer to appoint a licensed broker as a manager of a branch office or division of a real estate business.

The provisions are effective on January 1, 2016.

Illinois Amends Collection Agency Act

Illinois has amended provisions of the state Collection Agency Act, including extending the repeal of the Act from January 1, 2016, to January 1, 2026. The amendment makes changes concerning definitions, exemptions, restrictions, and qualifications for license and makes revisions to improve readability and clarity in addition to other technical changes. Among the changes, the amendment adds to the list of licensable activities, engaging in the business of collection of a check or other payment that is returned unpaid by the financial institution upon which it is drawn. Further, the amendment clarifies the exemption from licensing for “loan and finance companies” to specifically include entities licensed under the Residential Mortgage License Act. The amendment also adds provisions concerning expiration, renewal, and restoration of registration.

The amendments are effective immediately.

- Marc D. Patterson


Copyright © 2015 by Ballard Spahr LLP.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

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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