Condominium Association Liens Have "Super-Priority" Over First Mortgage Liens, Rhode Island Supreme Court Holds

The Supreme Court of Rhode Island, in a 4-1 decision, recently joined a growing list of states that allow a homeowners or condominium association lien for delinquent assessments to take priority over, and potentially wipe out, a first mortgage lien. 

The Court interpreted the Rhode Island Condominium Act to grant a condominium association a "super-priority" lien for up to six months of delinquent assessments. This super-priority, the Court held, is superior to the lien of a first mortgage holder.  As a consequence, a condominium association foreclosure sale pursuant to the Act extinguishes a first mortgage holder's lien on that same property. The Court reached this conclusion even though a purchaser at the condominium association foreclosure sale may pay just a fraction of the amount of the first mortgage lien.

The Court acknowledged the harsh effects of its holding on first mortgage holders, but concluded that first mortgage holders are in a position to avoid extinguishment of their liens. For example, the Court noted that a first mortgage holder could either pay off the super-priority portion of the condominium association lien and add such amounts to the borrower's principal, or require the borrower to pay association assessments into escrow.

One justice vigorously dissented from the majority holding, arguing that the Act did not contain clear enough language to conclude that the legislature intended such a radical change in venerable principles in the law governing secured transactions.

The Rhode Island decision comes on the heels of state supreme courts in Nevada, Texas, and Washington reading similar statutes as having the same effect. The result of these statutory interpretations has been a wave of mortgage lenders being left with large unsecured loans as a result of homeowner and condominium association foreclosure sales. This decision will likely have the same effect on lenders conducting business in Rhode Island.

- Abran Vigil, Joseph P. Sakai, and Joel E. Tasca


Federal Reserve Repeals Regulation AA, Proposes Repeal of Regulation C

The Federal Reserve Board (Board) is repealing Regulation AA, which includes the Board's credit practices rule, effective March 21, 2016. The Board is also proposing to repeal its Regulation C, which historically implemented the Home Mortgage Disclosure Act (HMDA).

The repeal of Regulation AA results from the Dodd-Frank Act's repeal of Section 18(f)(1) of the Federal Trade Commission (FTC) Act. Section 18(f)(1) gave rulewriting authority to the Board and directed it to issue rules applicable to banks that were substantially similar to rules issued by the FTC to prohibit unfair or deceptive acts or practices by nonbanks. (The FTC's credit practices rule continues to be effective. However, the credit practices rules of the other banking agencies with Section 18(f)(1) rulewriting authority (Office of Thrift Supervision and National Credit Union Administration) were previously repealed.)

Regulation AA applied to all banks, other than federal savings associations, federal savings banks, and state savings associations and was patterned on the FTC's credit practices rule (FTC Rule). The Board adopted Regulation AA in 1985 in reliance on the FTC's findings that the prohibited practices were unfair or deceptive. Such prohibited practices are: using certain provisions in consumer contracts such as confessions of judgment and security interests in household goods (other than purchase money security interests), misrepresenting the nature and extent of a cosigner's liability and failing to inform a cosigner of the nature of such liability prior to becoming obligated, and pyramiding late fees.

Unlike its authority for other consumer financial protection regulations, the Board's Regulation AA authority did not transfer to the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act. However, Dodd-Frank gave the CFPB independent authority to issue rules prohibiting unfair, deceptive, or abusive acts or practices. In addition, the Board retains its authority to enforce the prohibition of unfair or deceptive acts or practices in Section 5 of the FTC Act. In the supplementary information accompanying its final rule repealing Regulation AA, the Board warned that it "will continue to monitor developments with respect to unfair or deceptive acts or practices and assess whether to issue additional supervisory guidance."

This warning follows an earlier warning issued by the Board, CFPB, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and the National Credit Union Administration (Agencies) in August 2014 interagency guidance (Guidance) that the repeal of Regulation AA and credit practices rules of other Agencies ''should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible.'' The Guidance stated that the Agencies ''believe that, depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.''

The Board is also proposing to repeal its Regulation C, which historically implemented HMDA. The proposal resulted from the Dodd-Frank Act's transfer of the Board's HMDA rulemaking authority to the CFPB. The CFPB has issued its own Regulation C to implement HMDA. Comments on the proposal are due on or before April 22, 2016.

- Alan S. Kaplinsky, Richard J. Andreano Jr., John L. Culhane, Jr., and Jeremy T. Rosenblum


TRID Rule Technical Correction?

In today's Federal Register the Consumer Financial Protection Bureau (CFPB) published a correction to the TILA/RESPA Integrated Disclosure (TRID) rule supplementary information as published on December 31, 2013, with regard to property taxes and certain similar charges. The move is intended to address an apparent oversight in the TRID rule regarding the treatment for tolerance purposes of property taxes and similar charges paid in advance, but not into an escrow or impound account. However, it does not appear that the CFPB's actions actually address the issue in the appropriate manner.

In the pre-TRID rule environment, property taxes, homeowners association dues, condominium fees, and cooperative fees that a borrower was required to pay in advance to the applicable parties (and not into an escrow or impound account) were not subject to a specific percentage tolerance. However, based on a typographical error in the supplementary information to the TRID rule, such charges were referred to as charges that were subject to tolerances in both the TRID rule and pre-TRID rule worlds. While that was unfortunate, the bigger problem was the TRID rule itself.

In the pre-TRID rule environment, fees and charges were not subject to any tolerance unless Regulation X under RESPA specifically provided that the fee or charge was subject to the 0 percent tolerance or the 10 percent aggregate tolerance. The TRID rule takes a different approach in that every fee and charge is subject to the good faith standard, unless there is an express exception. The good faith standard effectively imposes a 0 percent tolerance on fees and charges, unless an exception applies. Due to an apparent oversight, in identifying fees and charges that are not subject to a tolerance the CFPB neglected to list property taxes, homeowners association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account). Thus, it appeared to many in the industry that such items are subject to an effective 0 percent  tolerance.

After this issue was raised with the CFPB with regard to property taxes, the CFPB staff informally advised that property taxes are charges paid for third-party services not required by the creditor. Under the TRID rule, charges paid for third-party services not required by the creditor are not subject to any specific percentage tolerance. The CFPB now states in the Federal Register release that property taxes, homeowners association dues, condominium fees, and cooperative fees are charges paid for third-party services not required by the creditor. The CFPB also corrects the typographical error in the supplementary information to the TRID rule to provide that property taxes, homeowners association dues, condominium fees, and cooperative fees are not subject to tolerances. The CFPB, however, does not actually amend the TRID rule.

It is questionable if the CFPB's actions address in the appropriate manner the issue regarding property taxes, homeowners association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account). Although the CFPB states that property taxes, homeowners association dues, condominium fees, and cooperative fees are charges paid for third-party services not required by the creditor, often a creditor will require that such items due within a certain period of time after closing be paid by the borrower. So, in many cases these items are in fact charges that the creditor requires to be paid. Also, in addressing recording fees, the TRID rule commentary provides that ''Recording fees are not charges for third-party services because recording fees are paid to the applicable government entity where the documents related to the mortgage transaction are recorded . . . .'' If recording fees are not charges for third-party services, how are property taxes charges for third-party services?

The definitive way to address this issue is to simply amend the TRID rule to add an item (F) to section 1026.19(e)(3)(iii) to read as follows: “(F) Property taxes, homeowners association dues, condominium fees, and cooperative fees, whether or not paid into an escrow, impound, reserve or similar account.” We hope that the CFPB will act promptly to propose amendments to the TRID rule to address this and other important issues.

- Richard J. Andreano, Jr.


HNMLS Issues 8th SRR Annual Report

The NMLS issued the 2015 State Regulatory Registry (SRR) Annual Report on February 17, 2016. The Report provides 2015 highlights, including how the National Test with Uniform State Content (UST) was adopted by four additional state agencies during 2015. Fifty agencies have now adopted the UST. In addition, about 80,000 MLO test components were administered in 2015. The Report also includes additional highlights, an overview of the NMLS, resources, policies, developments and new enhancements, testing and education, legal and administrative issues, and the SRR financial perspective. The full Report can be found here.

Georgia Clarifies the Application of Its Disclosure Requirements

As we reported in November, the Georgia Department of Banking and Finance revised its disclosure requirements to reflect the TILA-RESPA Integrated Disclosure Rule (TRID). Since then, the Department has adopted rules to clarify that these disclosure requirements only apply to entities that are licensed, registered, or required to be licensed or registered under the Georgia Residential Mortgage Act. In addition, the Department clarified that these disclosure requirements do not apply to applicants seeking a home equity line of credit, a residential mortgage loan not secured by real property, such as a mobile home, or a residential mortgage loan related to a reverse mortgage. 

These rule clarifications took effect on January 26, 2016.

- Wendy Tran


Did you know?

by Wendy Tran

NMLS Issues 8th SRR Annual Report

The NMLS issued the 2015 State Regulatory Registry (SRR) Annual Report on February 17, 2016. The Report provides 2015 highlights, including how the National Test with Uniform State Content (UST) was adopted by four additional state agencies during 2015. Fifty agencies have now adopted the UST. In addition, about 80,000 MLO test components were administered in 2015. The Report also includes additional highlights, an overview of the NMLS, resources, policies, developments and new enhancements, testing and education, legal and administrative issues, and the SRR financial perspective. The full Report can be found here.

Georgia Clarifies the Application of Its Disclosure Requirements

As we reported in November, the Georgia Department of Banking and Finance revised its disclosure requirements to reflect the TILA-RESPA Integrated Disclosure Rule (TRID). Since then, the Department has adopted rules to clarify that these disclosure requirements only apply to entities that are licensed, registered, or required to be licensed or registered under the Georgia Residential Mortgage Act. In addition, the Department clarified that these disclosure requirements do not apply to applicants seeking a home equity line of credit, a residential mortgage loan not secured by real property, such as a mobile home, or a residential mortgage loan related to a reverse mortgage.

These rule clarifications took effect on January 26, 2016.


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