CFPB To Reopen TRID Rulemaking

In a letter dated April 28, 2016, addressed to industry trades and their members and signed by Director Richard Cordray, the Consumer Financial Protection Bureau (CFPB) announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure (TRID) rule. The CFPB announced the Notice of Proposed Rulemaking (NPRM) would likely be issued in late July. In a change of tone from previous CFPB communications reiterating refusals to issue official guidance, the letter stated the CFPB’s intention to incorporate previous informal guidance, including “webinars and indices” into the NPRM in an effort to provide greater certainty and clarity. The letter cited the declining time it takes to close a given loan as evidence of improving implementation, but also acknowledged operational challenges created by technical problems and uncertainty. Finally, the letter noted that the CFPB will “continue to be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the [TRID] rule.”

- Matthew Smith


CFPB April 2016 Complaint Report Highlights Mortgage Complaints, Complaints From California Consumers

The Consumer Financial Protection Bureau (CFPB)has issued its April 2016 complaint report which highlights complaints about mortgages and complaints from consumers in California. The CFPB began taking complaints about mortgages in December 2011.

General findings include the following:

  • As of April 1, 2016, the CFPB handled approximately 859,900 complaints nationally, including approximately 26,500 complaints in March 2016. As of April 1, 2016, debt collection continued to be the most-complained-about financial product or service, representing about 26 percent of complaints submitted. Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 69 percent of the complaints submitted in March 2016.

  • Complaints about “other financial services” showed the greatest percentage increase based on a three-month average, increasing about 53 percent from the same time last year (January to March 2015 compared with January to March 2016). This category includes complaints about debt settlement, check cashing, credit repair, refund anticipation checks, and money orders. Complaints during those periods increased from 126 in 2015 to 193 2016.

  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 14 percent from the same time last year (January to March 2015 compared with January to March 2016). Complaints during those periods decreased from 489 in 2015 to 420 in 2016.  In the March 2016 complaint report, payday loan complaints also showed the greatest percentage decrease based on a three-month average.

  • Student loans were the product with the greatest month-over-month increase in complaints, with complaints increasing by 83 percent from February to March 2016. We note that, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects that in March 2016, the CFPB began accepting complaints about federal student loans. Previously, such complaints were directed to the Department of Education.

  • New Mexico, Indiana, and Minnesota experienced the greatest complaint volume increases from the same time last year (January to March 2015 compared with January to March 2016) with increases of, respectively, 32, 29, and 26 percent.

  • Hawaii, Vermont, and Maine experienced the greatest complaint volume decreases from the same time last year (January to March 2015 compared with January to March 2016) with decreases of, respectively, 29, 23, and 20 percent.

Findings regarding mortgage complaints include the following:

  • The CFPB has handled approximately 223,100 mortgage complaints, representing about 26 percent of total complaints. Mortgages are the second most-complained-about product or service after debt collection.

  • The most-complained-about issue involved payment-related problems. Problems raised in complaints included prolonged loss mitigation review processes in which the same documentation was repeatedly requested, a lack of responsiveness from the consumer’s single point of contact, receipt of conflicting foreclosure notices while the consumer was undergoing a loss mitigation assistance review, denial of modification applications, and offers of unaffordable modification terms.

  • Problems related to servicing transfers were also raised in complaints (such as not being properly informed of a transfer), a prior or current servicer’s failure to apply payments made around the time of transfer to the consumer’s account, a lack of explanation for increased monthly escrow payments, and a failure to provide a new servicer with documentation related to a loss mitigation review process that was ongoing at the time of servicing transfer.

  • Other problems raised in complaints involved payments not being accepted or applied as intended particularly for consumers approved for a loss mitigation option, difficulty in communicating with servicers that resulted in confusing and contradictory information, escrow discrepancies (such as over-collection, unexplained shortages and untimely tax and insurance disbursements), the failure by servicers to release funds needed for repairs after receiving insurance proceeds from the consumer that were paid to cover property damage, and difficulties with the loan origination process (such as unresponsive loan representatives, requirements for multiple loan applications and processing delays resulting in loss of favorable interest rates or expiration of rate locks).

In its press release about the complaint report, the CFPB highlighted the mortgage loan complaints regarding loss mitigation, servicing transfers, and communications with servicers. These matters are of significant concern to the CFPB, because it views them as presenting a greater risk of consumer harm. One must consider the potential for the CFPB to use the complaints to justify decisions regarding revisions to the RESPA and TILA servicing requirements in the upcoming final rule or to provide a basis for enforcement activity.

Findings regarding complaints from California consumers include the following:

  • As of April 1, 2016, approximately 118,900 complaints were submitted by California consumers of which approximately 50 percent were from consumers in the Los Angeles and San Francisco metro areas.

  • Mortgages are the most-complained-about product, representing 32 percent of the complaints submitted by California consumers and 26 percent of complaints submitted by consumers nationally.

  • Debt collection and credit reporting were, respectively, the second and third most-complained-about financial products by California consumers. The percentage of debt collection and credit reporting complaints submitted by California consumers was lower than the national average.

- Barbara S. Mishkin


Mobile Financial Services Addressed in FFIEC Examination Handbook

The federal body tasked with creating standards for the uniform regulation of financial institutions has released new information to assist examiners in evaluating mobile services offered by financial institutions and their third-party service providers.

"Appendix E: Mobile Financial Services" of the "Retail Payment Systems Booklet" of the Federal Financial Institutions Examination Council (FFIEC) IT Examination Handbook focuses on identifying the risks associated with mobile financial services. It emphasizes the importance of an enterprise-wide risk management approach for effectively managing and mitigating risks as they evolve.

The Handbook, including Appendix E, applies to any financial institution supervised by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, or the Consumer Financial Protection Bureau.

Mobile financial services may be offered through a number of technologies, including:

  • Short message service (SMS)/text messaging
  • Mobile-enabled websites and browsers
  • Mobile applications
  • Wireless payment technologies

Consequently, offering mobile financial services can elevate risks related to device security, authentication, application security, data transmission, compliance, and third-party management. The FFIEC notes that there are numerous types of mobile devices that present different risks, and financial institutions must identify the unique risks associated with specific devices and operating systems.

Two other risk areas that the FFIEC highlights in the appendix are risks introduced by customers, as well as risks arising from third parties involved in offering mobile financial services. Customers tend to neglect activating security controls, virus protection, or personal firewall functionality on the devices through which they use mobile financial services. Furthermore, customers are often left with the responsibility to implement the security settings related to individual mobile financial services. This ultimately results in increased dependence on the customer to manage the controls over sensitive financial data. Managing this risk may require financial institutions to provide security awareness materials to customers, such as prudent security practices for the device (for example, use of mobile anti-malware or PIN protection), so that customers understand their roles in securing their devices and the need for such security.

It is also critical to understand, the FFIEC notes, that mobile financial services are conducted in a broader mobile ecosystem. This ecosystem includes carriers, networks, platforms, operating systems, developers, and application stores that enable mobile devices to function and interact with other applications and devices. Effective management of risks involves working with other parties involved in the mobile ecosystem. Depending on the type of mobile financial services offered, financial institutions may need to interact, and manage risks associated, with application developers, mobile network operators, device manufacturers, specialized security firms, and other nonfinancial third-party service providers.

The Handbook continues to offer essential guidance to financial institutions in identifying and managing risk. As the popularity of mobile financial services continues to grow, financial institutions should keep themselves apprised of such key resources.

- Alan S. Kaplinsky, James Kim, Roshni Patel, and Bowen Ranney


New York Court Finds Borrower Must Strictly Comply with Notice Requirements to Hold Servicer Liable Under Regulation X

In an issue of first impression, the Supreme Court of New York refused to find a loan servicer violated Regulation X by initiating foreclosure when a borrower failed to strictly comply with the servicer’s instructions for submitting notice of a reconsideration request. Emigrant Savings Bank—Long Island v. Berkowitz, 25 N.Y.S.3d 862 (N.Y. Sup. Ct. Feb. 19, 2016). The court concluded, however, that a servicer could violate Regulation X by foreclosing on a borrower who did not strictly comply with the servicer's notice requirement, if the servicer had unambiguously promised that it would not foreclose.  See id. at 865.

The Consumer Financial Protection Bureau's Regulation X provides certain conditions precedent to foreclosure. Among these conditions, a mortgage servicer cannot hold a foreclosure sale if a borrower has appealed the servicer’s denial of a loss mitigation package “unless the servicer has rendered a determination on the appeal and advised the borrower how long the borrower has to accept or reject any prior offer.” Id. at 862 (citing 12 C.F.R. § 1024.41(h)(4)). Relying on this provision, the borrower in Berkowitz moved to stop her mortgage servicer from proceeding with a foreclosure sale because the servicer had neither made a determination on nor responded to her loss mitigation appeal.       

The servicer had previously obtained a judgment of foreclosure and sale and scheduled a foreclosure sale to take place on January 14, 2016. The borrower had submitted a loss mitigation proposal, but the servicer rejected the proposal in writing months earlier, on August 12, 2015. The written rejection advised the borrower that, to seek reconsideration, she must comply with certain notice requirements:

"You MUST notify Emigrant of your request for reconsideration IN WRITING within 14 days after this notice. Requests for reconsideration WILL NOT be taken by telephone. You may submit your request for reconsideration via email to Ms. Kandel at LossMitigation @emigrant.com or in the form of a letter mailed to Ms. Kandel at 6 E. 43rd Street, 10th Floor, New York, N.Y. 10017.” 

Id. at 863 (emphasis in court's decision). The borrower claimed she submitted an appeal by email and by regular mail. Scrutinizing the borrower’s evidence, the court found two facts significant: the borrower used an incorrect email address and the proffered documents did not contain the regular address for the servicer’s agent. Id. at 863-64. The court further noted that these facts corroborated the servicer’s claim that it did not receive notice of the borrower’s appeal. 

The court next examined—and distinguished—federal court decisions for guidance on Regulation X’s “recent creation of procedural rights for debtors facing threat of foreclosure.” Id. at 864. It ultimately turned to established principles of statutory construction and concluded “that Title X, conferring rights in derogation of the common law of Contract and Real Property, requires strict compliance with its notification mandate in order for a party to claim protection under its rule.” Id. (emphasis added). Thus, because the borrower failed to properly serve her request for reconsideration pursuant to the servicer’s directions, she could not enforce the regulation.

Significantly, the court recognized an equitable exception. Despite a borrower’s failure to strictly comply with the servicer’s notice requirements, a court may overlook the strict compliance requirement where the servicer received actual notice of the appeal and the borrower relied on the servicer’s statements that it would not foreclose.  See id. at 864-65. The court declined to apply this exception in the case at bar, however. Even though the servicer continued to negotiate with the borrower, there was “no indication that Plaintiff made an unambiguous promise that it intended to refrain from enforcing its rights to proceed to foreclosure.” Id. at 865. 

- Lindsay C. Demaree and Theodore R. Flo


FinCEN Finalizes Beneficial Ownership Identification Rules

As part of the U.S. Treasury Department's ongoing efforts to prevent bad actors from using U.S. companies to conceal money laundering, tax evasion, and other illicit financial activities, the Financial Crimes Enforcement Network (FinCEN) today issued a final rule to strengthen the customer due diligence (CDD) efforts of "covered financial institutions." The CDD rule requires covered financial institutions, including banks, federally insured credit unions, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities, to identify the natural persons that own and control legal entity customers—the entities' "beneficial owners." Covered financial institutions have until May 11, 2018, to comply with the CDD rule.

The rule imposes several new obligations on covered financial institutions with respect to their "legal entity customers." These include corporations, limited liability companies (LLCs), general partnerships, and other entities created by filing a public document or formed under the laws of a foreign jurisdiction. Certain types of entities are excluded from the definition of "legal entity customer," including financial institutions, investment advisers, and other entities registered with the Securities and Exchange Commission, insurance companies, and foreign governmental entities that engage only in governmental, noncommercial activities.

For each such customer that opens an account, including an existing customer opening a new account, the covered financial institution must identify the customer's "beneficial owners." The CDD adopts a two-part definition of "beneficial owner," with an ownership prong and a control prong. This is somewhat similar to the first two prongs of the definition of "control" under the Bank Holding Company Act. Under this approach, each covered financial institution must identify:

  • each individual who owns 25 percent or more of the equity interests in the legal entity customer; and

  • at least one individual who exercises significant managerial control over the customer

The same individual(s) may be identified under both prongs. If no individual owns 25 percent or more of the equity interests, the covered financial institution may identify a beneficial owner under only the control prong. The same approach is used for nonprofit entities, which do not have "owners."

The covered financial institution must verify the identity of each beneficial owner identified by the customer. Importantly, the covered financial institution is entitled to rely on the customer's certification regarding each individual's status as a beneficial owner. However, using the same procedures employed in its Customer Identification Program, the covered financial institution must obtain personally identifying information about each beneficial owner. This information must be documented and maintained by the covered financial institution. The CDD Notice of Proposed Rulemaking contemplated requiring the use of a standard certification form. However, the final rule makes use of the form, a copy of which is attached to the rule, optional and permits the covered financial institution to obtain and record the necessary information "by any other means that satisfy" its verification and identification obligations.

In response to industry concerns that the beneficial ownership identification obligation would require covered financial institutions to continually monitor the allocation of its customers' equity interests and the composition of its management team to update its beneficial ownership information, FinCEN made clear that the CDD rule does not require covered financial institutions to continuously update each customer's beneficial ownership information. Rather, the CDD calls for a "snapshot" of the customer's beneficial owners at the time of account creation. However, FinCEN does expect covered financial institutions to update beneficial ownership information when it detects relevant information about the customer during the course of regular monitoring.

The CDD rule has been almost four years in the making; the process has included an Advance Notice of Proposed Rulemaking, issued in February 2012, and a Notice of Proposed Rulemaking, issued in August 2014. The release of this long-delayed rule appears to have been motivated in part by the recent disclosure of the so-called "Panama Papers," which purport to reveal information about wealthy individuals' and public officials' use of shell companies to conceal assets offshore. The Panama Papers have created a growing national and global focus on the anti-money laundering, terrorist financing, tax evasion, and other illicit activity risks associated with the use of U.S. entities whose owners are obscured through the corporate form, and the need to identify the individuals behind these entities.

In addition to the CDD rule, the Treasury Department also issued a Notice of Proposed Rulemaking (NPR) on May 10, 2016, which is aimed at identifying the beneficial owners of foreign-owned single member LLCs. The NPR would impose additional reporting and recordkeeping requirements on these entities, by treating them as domestic corporations separate from their owners "for the limited purposes of the reporting and record maintenance requirements" imposed by the Internal Revenue Code. Under the proposed approach, each LLC would be required to:

  • Obtain entity identification numbers from the Internal Revenue Service (IRS), which requires identification of a responsible party—a natural person

  • Annually file IRS Form 5472, an informational return identifying "reportable transactions" that the LLC engaged in with respect to any related parties, such as the entity's foreign owner

  • Maintain supporting books and records

In a letter to Congress, Treasury Secretary Jacob Lew stated that the NPR is designed "to close a current loophole in our system" that allows foreign persons to use U.S. LLCs in order to hide assets both in and out of the United States. Although the CDD rule and the NPR represent important steps in the government's efforts to combat financial crime by increasing transparency of entity ownership, Secretary Lew urged Congress to "pass meaningful beneficial ownership legislation" to build on Treasury's actions. Whether Congress will act remains an open question.

On June 2, 2016, Ballard Spahr attorneys will hold a webinar discussing FinCEN's final CDD rule from 12:00 PM to 1:00 PM ET. The webinar registration form is available here.

- Alan S. Kaplinsky, Peter D. Hardy, and Beth Moskow-Schnoll


Did you know?

by Wendy Tran

Connecticut Requires New Disclosure of Housing Discrimination And Fair Housing Laws

Connecticut is requiring that on or before July 1, 2016, the Commission on Human Rights and Opportunities (Commission) must create a one-page disclosure form which contains information on housing discrimination and federal and state fair housing laws. This disclosure must be available on the Commission's website.

Each person offering residential property containing two or more units for sale, exchange, or for lease with an option to buy, must attach a copy of the disclosure signed by a prospective purchaser, to any purchase agreement, option, or lease containing a purchase option at the time of closing.

Compliance with this disclosure will begin 60 days after the date that the Commission makes this form available.

Idaho Adopts New Residential Mortgage Practices Act Provision 

The Idaho Department of Finance adopted provisions in its Residential Mortgage Practices Act that update references to the incorporated federal laws and regulations (e.g., Truth in Lending Act (RESPA), and Regulation X). For instance, after receipt of a residential mortgage application, a licensee must provide disclosures in compliance with TILA and Regulation Z, and disclosures in compliance with RESPA, and Regulation X. In addition, provisions containing duplicative disclosure requirements, such as a prepayment penalty disclosure and lock-in agreement, have been eliminated.


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