Transitional period and initial supervisory practice over TRID

The CFPB sent industry trade groups a letter on October 1, 2015 to address the approach of the Federal Financial Institutions Examination Council (FFIEC) member agencies during the initial months following the implementation of the TILA-RESPA Integrated Disclosure (TRID) rule on October 3, 2015. In the letter, the CFPB noted that it and the other FFIEC member agencies recognized the implementation challenges presented by the TRID rule and the significant efforts made by the industry to implement the rule. Notably, the letter acknowledges that “additional technical and other questions are likely to be identified once the new forms are used in practice after the effective date.”

The CFPB advises that during initial examinations for TRID rule compliance, examiners will look at an institution’s compliance management system and its overall efforts to comply. The CFPB also advised that examiners will expect institutions to make good faith efforts to comply in a timely manner, and will consider the institution’s implementation plan, including actions taken to update policies, procedures, and processes; training of appropriate staff; and handling of early technical problems or other implementation challenges.

As we previously reported earlier this year, the CFPB stated that it would be sensitive to the progress made by institutions that have squarely focused on making good faith efforts to come into compliance with the TRID rule on time. In 2013, the CFPB made a similar statement regarding its approach to assessing compliance with the mortgage rules that became effective in January 2014, as we reported.

Fannie Mae and Freddie Mac (the GSEs) also released guidance to their sellers explaining that they too expect lenders to make good faith efforts to comply with the TRID rule in a timely manner. While the GSEs will evaluate whether a lender used the correct forms, until further notice, the GSEs will not conduct routine post-purchase loan file reviews for technical compliance with the TRID rule during this transitional period. However, the GSEs also advised that they will exercise contractual remedies, including repurchase, in the following two “limited circumstances”: 1) the required form is not used, or 2) if a particular practice would impair enforcement of the note or mortgage or would result in assignee liability, and a court of law, regulator or other authoritative body has determined that such practice violates the TRID rule. Fannie Mae also indicated that it will post FAQs on its website that will answer additional questions.

The efforts of the CFPB and other FFIEC member agencies fall short of industry requests for protection from legal liability during a transitional period for institutions that have acted in good faith to implement the TRID rule be. As we have described, H.R. 3192, the Homebuyers Assistance Act, would provide a hold-harmless period for the TRID rule until February 1, 2016. The bill provides that a suit cannot be filed for violations of TRID before then as long as good faith efforts are made to comply. H.R. 3192 passed in the House on October 7, 2015, and will be reviewed by the Senate.

Wendy Tran and Richard J. Andreano, Jr.


 

Director Cordray sends warning to vendors on TRID rule compliance

In remarks yesterday at the Mortgage Bankers Association’s annual convention, CFPB Director Richard Cordray stated that the CFPB may need to look more closely at vendors of software and other tools used by lenders to comply with the TILA-RESPA Integrated Disclosure (TRID) rule, which became effective on October 3.

Director Cordray stated that he was “disturbed” by reports that such vendors are creating obstacles for lenders attempting to comply with the TRID rule. He indicated that not only the CFPB but all of the financial regulators might “need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace.” Director Cordray’s remarks suggest that the CFPB may be questioning whether various vendors are qualified to provide the services they offer and is preparing to use its supervisory and enforcement authority as to “servicer providers” to take a closer look. (Under Dodd-Frank, the CFPB can examine “service providers” to entities it supervises.)

Director Cordray also downplayed lenders’ concerns that the TRID rule is hurting business because of the need to delay closings to provide new disclosures when changes occur. It appears the Director does not fully appreciate that these concerns largely do not involve the limited situations that require a revised Closing Disclosure with a new waiting period. Rather, lenders mainly are concerned 1) with last-minute changes that can delay delivery of the initial Closing Disclosure, which can delay a closing, and 2) that depending on the circumstances, they may not be able to reset the tolerances with a Closing Disclosure.

- Richard J. Andreano, Jr.


CFPB issues final HMDA rule

The CFPB has issued a final rule amending Regulation C, its Home Mortgage Disclosure Act regulation. The changes, which in part, implement the Dodd-Frank Act’s amendments to HMDA, expand the scope of data required to be collected and reported, change the scope of HMDA’s coverage of both institutions and transactions, and adopt new processes for disclosing data. Most of the new and revised requirements take effect on either January 1, 2018 or January 1, 2019.

Key provisions of the nearly 800-page final rule include the following:

  • Coverage. The final rule adopts a uniform loan-volume reporting threshold for both depository institutions and for-profit mortgage lending institutions that are not depository institutions. A financial institution will be subject to Regulation C if it originated at least 25 covered closed-end mortgage loans in each of the two preceding calendar years or at least 100 covered open-end lines of credit in each of the two preceding calendar years, and it meets other applicable coverage requirements. Banks, savings associations, and credit unions must also meet the current Regulation C asset-size, location, federally related and loan activity tests. Other for-profit mortgage lending institutions must also satisfy the existing Regulation C location test, but will no longer be subject to a dollar-volume and asset test. Covered loans will generally include closed-end mortgage loans and open-end lines of credit secured by a dwelling. (Only covered institutions that originated at least 100 covered open-end lines of credit in each of the preceding two calendar years will be required to collect and report information about open-end lines of credit.) Dwelling-secured business purpose mortgage loans and credit lines must also be reported if they are home purchase or home improvement loans or refinancings. (Only dwelling-secured home improvement loans will have to be reported. However, the collection and reporting of certain preapproval requests will no longer be optional.)
  • New Information. The new information that a covered institution must collect and report includes: 1) an applicant’s or borrower’s age, credit score, and debt-to-income ratio, 2) application channel used (but not for purchased loans) and name of automated underwriting system used, 3) property information, including address, construction method, property value, and certain information for manufactured and multifamily housing, 4) loan feature information, including pricing information such as borrower-paid loan costs and origination fees, discount points, loan term, interest rate, introductory rate period, non-amortizing features, and prepayment penalty term, and 5) unique identifiers, such as a universal loan identifier and loan originator identifier. A covered institution must also report how it collected information about an applicant’s or borrower’s ethnicity, race or sex (i.e., based on visual observation or surname) when an applicant chose not to provide the information for an application taken in person (and must allow applicants choosing to self-identify to use disaggregated ethnicity and race subcategories).
  • Quarterly reporting. Beginning in 2020, a covered institution that reported a combined total of at least 60,000 applications and covered loans in the preceding calendar year must submit quarterly HMDA reports.
  • Disclosure. A financial institution will be able to fulfill its obligation to publicly disclose HMDA data by providing a notice that its disclosure statement and modified loan/application register are available on the CFPB’s website. The CFPB has not yet determined which new information items will be made publicly available and has stated that it plans use “a balancing test to determine whether, and if so, how HMDA data should be modified prior to its disclosure in order to protect applicant and borrower privacy while also fulfilling HMDA’s disclosure purposes.”

We are currently preparing a legal alert that will contain a more detailed discussion of the final rule and will share the alert with our blog readers.

- Richard J. Andreano, Jr.


U.S. Supreme Court Hears Oral Arguments in Case to Decide Whether Loan Guarantors Are “Applicants” Under ECOA

ECOA

The U.S. Supreme Court heard oral arguments on Oct. 5 in the case of Hawkins v. Community Bank of Raymore, the result of which will determine whether a spousal guarantor is an “applicant” under the Equal Credit Opportunity Act (ECOA). As discussed in our previous legal alert, the Court is expected to resolve a circuit split created by the Eighth Circuit’s decision in Hawkins, which conflicts with the ruling by the Sixth Circuit in RL BB Acquisition LLC v. Bridgemill Commons Development Group LLC.

At its core, Hawkins is a case about statutory interpretation, the key issue being whether a spouse-guarantor is an “applicant” under the ECOA.

The petitioners argued that Community Bank of Raymore engaged in marital status discrimination in violation of the ECOA when the bank required them to serve as loan guarantors on business loans made to their respective husbands to fund a failed real estate venture in Missouri. When the husbands’ company failed to make payments, Community declared the loans to be in default and demanded payment from both the company and from the petitioners as guarantors. In response, the petitioners brought a marital status discrimination claim under ECOA, seeking damages and an order declaring their personal guarantees void and unenforceable.

The Eighth Circuit had concluded that ECOA did not provide a cause of action to the petitioners, declining to grant deference to an interpretation of “applicant” that would include a spouse-guarantor. The ECOA defines an “applicant” as one who “applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” However, Regulation B, which implements the ECOA, expands on this definition, interpreting ECOA’s definition of “applicant” as including a spouse-guarantor. The Federal Reserve Board added this interpretation to Regulation B in 1985; prior to that addition, the Regulation had specifically excluded guarantors.

At oral argument on October 5, 2015, the justices were not hesitant to ask questions of both sides, and the questions appeared to reflect differing positions by the justices on the Court. Attention centered around the meaning of the word “applicant,” and whether this term should be understood as including a person who is not directly applying for a loan.

Attempting to predict the outcome of such a case based on the questions and remarks of the justices at oral argument is generally a fool’s errand. That said, Chief Justice Roberts, along with Justices Alito and Justice Scalia, appeared skeptical of the argument advanced by the petitioners, focusing on the plain meaning of the term “applicant.” Justice Scalia offered the analogy of writing a letter of recommendation on behalf of a student applying to law school, asking whether he would be a law school “applicant” under petitioners’ argument. Justice Breyer, on the other hand, gave the counterexample of a parent applying for private school admission on behalf of his or her child, suggesting that the meaning of “applicant” depends on context.

Justice Kennedy voiced concern as to whether treating guarantors as applicants could have the effect of allowing guarantors to have a loan declared unenforceable, and Justice Kagan similarly asked about whether petitioners’ proposed reading of the ECOA could “create liability on a scale that Congress wouldn't have expected.”

Justices Sotomayor and Ginsburg, occasionally joined by Justices Breyer and Kagan, directed a number of questions at counsel for the respondents. Justice Sotomayor in particular appeared open to accepting the understanding of “applicant” set forth in Regulation B. Additionally, Justice Ginsburg mentioned multiple times the fact that the Federal Reserve Board had previously excluded guarantors from the definition of “applicant,” implying she did not think that a “plain language” reading of the term “applicant” should be controlling.

Notably, the United States filed a brief in the case as amicus curiae, asserting that Regulation B “permissibly interprets ECOA to protect guarantors from discrimination” and is entitled to deference. The CFPB—the agency now charged with overseeing the ECOA and promulgating implementing regulations—joined in the brief. Additionally, Assistant to the Solicitor General Brian Fletcher argued on behalf of the United States in support of the petitioners.

- Alan S. Kaplinsky, John L. Culhane, Jr., and Jeremy C. Sairsingh


Did you know?

Missouri Adopts Uniform State Test

The Missouri Division of Finance adopted the Uniform State Test (UST) for state-licensed mortgage loan originators, becoming the 50th state regulator to do so. The following regulators have yet to adopt the UST--Arkansas, Colorado, Florida, Illinois, Minnesota, South Carolina (Board of Financial Institutions and Department of Consumer Affairs), Utah (Division of Real Estate), and West Virginia.

The UST will be implemented on January 1, 2016.

Oklahoma Amends UCCC Renewal Requirements

Oklahoma has changed renewal licensing requirements under the Uniform Consumer Credit Code. It removed the condition that if the annual fee has not been paid within 15 days after written notice of delinquency has been given to the licensee by the administrator, the license will expire, but not before December 31 of any year for which an annual fee has been paid. Instead, the license will "expire December 31 of any year for which an annual fee has not been paid."

This provision is effective November 1, 2015.

-Wendy Tran


Copyright © 2015 by Ballard Spahr LLP.
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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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