CFPB Proposes TRID Rule Modifications

As previously reported, the Consumer Financial Protection Bureau (CFPB) proposed substantive and technical revisions to the TILA/RESPA Integrated Disclosure (TRID) rule, which the CFPB refers to as the "Know Before You Owe" rule. The proposal would incorporate into the TRID rule informal guidance provided by the CFPB staff and make various substantive changes to address issues, many of which were raised by the industry. Comments on the proposal are due by October 18, 2016, and the CFPB is targeting the promulgation of a final rule on or before April 1, 2017. The CFPB expressly requests comments on the time needed to make the changes provided for in the proposal, and whether there is a better or worse time of year for any of the proposed changes to become effective.

CFPB Approach. In a preamble addressing the scope of the proposal, the CFPB states that "it is reluctant to entertain major changes that could involve substantial reprogramming of systems so soon after the October 2015 effective date [of the TRID rule] or to otherwise distract from [the] industry’s intense and very productive efforts to resolve outstanding implementation issues." The CFPB emphasizes that it is "not proposing any revisions that implicate fundamental policy choices" in the TRID rule. The CFPB cites both the rule’s approach to the disclosure of title insurance premiums when lender and owner policies will be issued simultaneously, and the rule’s cure provisions, as examples of policy choices the proposal will not alter. With regard to the cure provisions, the CFPB states it "is concerned that further definition of cure provisions would not be practicable without substantially undermining incentives for compliance with the [TRID] rule." This likely will be a disappointment to the industry, which sought clarification on cures that could be made under the provisions, and a longer time period to implement cures that is more in line with common post-consummation loan file review timeframes.

A number of the proposed revisions to the TRID rule are addressed below. 

The "Black Hole." One of the most—if not the most—frustrating aspects of the TRID rule for lenders is the so-called "black hole," which refers to an inadvertent limit on the ability of a creditor in certain situations to increase fees based on changes. The TRID rule imposes limits, often referenced as "tolerances," on the ability of a creditor to increase fees, and when a permitted basis to increase a fee exists, a creditor may do so by issuing a revised Loan Estimate. The TRID rule also provides that once a lender issues a Closing Disclosure, it may no longer issue a Loan Estimate. To enable a lender to address changes occurring just before consummation, the TRID rule includes a limited exception that allows a creditor to use a Closing Disclosure to increase fees. The exception applies when there are less than four business days between the time that a lender is required to provide a revised Loan Estimate and consummation. 

Industry experience reflects that the exception is too narrow. For example, in many cases, lenders provide a Closing Disclosure and then learn of a change in a timeframe that does not fall within the timing construct of the limited exception. Changes that require a delay in consummation also do not often allow a creditor to rely on the exception. 

The CFPB proposes a relatively straightforward solution, by revising the exception to allow a creditor to use a Closing Disclosure to increase fees based on changes when there are less than four business days between the time that a lender is required to provide a revised Loan Estimate and consummation, or the lender has provided a Closing Disclosure, as long as the lender still complies with the delivery timing requirements for the Closing Disclosure.

TRID Rule Scope—Cooperative Units. The mortgage loan provisions under Regulation Z typically apply to loans secured by a dwelling. The TRID rule takes a different approach as it applies to loans secured by real property. As a result, loans on units in a cooperative often are not subject to the TRID rule, because interests in a cooperative often are not considered real property under state law. The CFPB proposes to change the scope of the TRID rule to apply to loans (other than reverse mortgage loans) secured by real property or a cooperative unit. 

Exemption for Certain Assistance Loans. Subordinate lien loans that are made for the purpose of down payment assistance, closing cost assistance, or similar purposes are exempt from the TRID rule if various conditions are satisfied. If the exemption applies, the creditor must issue the standard initial and final Truth in Lending Act (TILA) disclosures. No disclosures are required under the Real Estate Settlement Procedures Act (RESPA) based on a corresponding exemption.

Two fee-related conditions for the exemption to apply are that the consumer may pay only recording fees, a bona fide and reasonable application fee and a bona fide and reasonable fee for housing counseling, and the total of the fees must be less than one percent of the loan amount. The CFPB notes in the preamble to the proposal that it "has learned that the exemption may not be operating as intended." Industry member experience reflects that, because of the typical low balance of the assistance loans, the fee limit often is exceeded based on recording fees. This can present a difficult compliance issue for a creditor if it initially provided TILA disclosures based on the belief that the exemption would apply, and near the time of consummation the creditor learns that the exemption will not apply because the permitted fees are higher than expected and will exceed the percentage limit. 

The CFPB proposes to modify the fee limits by allowing the consumer to pay transfer taxes, in addition to recording fees and bona fide and reasonable application and housing counseling fees, and imposing the fee limit of less than one percent of the loan amount on only the application and housing counseling fees.

Total of Payments Tolerance. The proposal would expressly provide for total of payments tolerances. For purposes of the general disclosure requirement, the amount disclosed for the total of payments would be considered accurate if it is understated by no more than $100 or greater than the amount required to be disclosed (i.e., greater than the actual total of payments amount). 

For purposes of the right to rescind, there would be three express tolerances:

  • A general tolerance under which the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than one-half of one percent of the face amount of the note or $100, whichever is greater, or greater than the amount required to be disclosed.

  • Except for a high-cost mortgage loan, with a refinancing by a new creditor with no new advance and no consolidation of existing loans, the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than one percent of the face amount of the note or $100, whichever is greater, or greater than the amount required to be disclosed.

  • After the initiation of foreclosure on a loan secured by the consumer’s principal dwelling that secures the loan, the amount disclosed for the total of payments would be considered to be accurate if it is understated by no more than $35, or greater than the amount required to be disclosed.

Escrow Cancellation Notice and Mortgage Transfer Notice. In the same rulemaking that included the TRID rule, the CFPB adopted an escrow account cancellation notice requirement (Regulation Z section 1026.20(e)), and a requirement that a mortgage transfer notice include the new owner’s policy on the acceptance of partial payments (Regulation Z section 1026.39). The CFPB notes in the preamble to the proposal that there is uncertainty among industry members as to whether the disclosure requirements apply only to transactions for which the creditor received the application on or after October 3, 2015 (the effective date of the TRID rule), or to transactions regardless when the application was received. The CFPB states in the preamble that it "considers either approach compliant under existing [Regulation Z] comment 1(d)(5)-1." Nevertheless, the CFPB proposes to revise the comment to provide that the two disclosure requirements apply to transactions for which the lender received the application on or after October 3, 2015, and commencing October 1, 2017, to transactions for which the lender received the loan application before October 3, 2015.

Written List of Providers. The CFPB proposes to clarify that the model written list of providers form in Appendix H-27(A) to Regulation Z is not required, although creditors properly using the form will be deemed to be in compliance with disclosure requirements for the written list. The CFPB explains in the preamble to the proposal that the use of the form is not mandatory, and that a creditor may delete non-required information from the form without losing the safe harbor, as long as the changes do not affect the substance, clarity, or meaningful sequence of the disclosure. Note that while the model form includes a column for the amount of each service, the TRID rule does not require that the form include the amount for each service that is disclosed in the form.

The CFPB also proposes to revise the TRID rule to provide that if a creditor permits a consumer to shop for a service, but the creditor fails to provide a written list of providers or the list is not compliant with the TRID rule, then the charges for the applicable services will be subject to the effective zero percent tolerance on increases. This would change the current approach, under which the 10 percent aggregate tolerance would apply for service providers that are not affiliates of the creditor, and the effective zero percent tolerance would apply for service providers that are affiliates of the creditor.

Additionally, the CFPB proposes that when the creditor knows that a service is provided as part of a package or combination of settlement services offered by a single service provider, the specific identification of each service in the package is not required, provided that all the services are services for which the consumer is permitted to shop. 

Property Taxes. The TRID rule lists the following as charges that are not subject to a specific percentage tolerance limit on increases: prepaid interest; property insurance premiums; amounts placed into an escrow, impound, reserve, or similar account; charges paid to third-party service providers when the consumer may shop for the service and selects a provider that is not on the creditor’s written list of providers; and charges paid for third-party services not required by the creditor. The list does not expressly refer to property taxes, which appears to have been an oversight. The CFPB staff has informally advised that property taxes could be treated as charges paid for a third-party service not required by the creditor. The CFPB now proposes to expressly include property taxes in the list of charges that are not subject to a specific percentage tolerance limit on increases. Estimates of property taxes would, however, be subject to the requirement that the creditor estimate the taxes based on the best information reasonably available to the creditor. 

Fees to Affiliates. Affiliate fees generally are subject to the effective zero percent tolerance, but there is an exception for certain affiliate fees. In the preamble to the proposal, the CFPB addresses the list of services that are not subject to any specific percentage tolerance, and notes that there is uncertainty in the industry regarding whether only the fifth listed charge—charges paid for third-party services not required by the creditor—or all of the listed charges are not subject to a specific percentage tolerance even if paid to an affiliate of the creditor. The CFPB states that it "believes there are reasonable arguments to support either of those interpretations under the current rule." The CFPB proposes to revise the rule to expressly provide that all of the listed fees are not subject to a specific percentage tolerance, even if paid to an affiliate of the creditor.

Construction to Permanent Loans. The CFPB proposes to make various technical changes regarding construction loans, including the incorporation into the TRID rule of guidance that CFPB staff provided informally in webinars or in other contexts. The proposal addresses the following matters, among others:

  • The proposal would require that when a creditor elects to disclose a construction-to-permanent loan as one transaction, the creditor must allocate to the construction phase all costs that would not be imposed but for the construction financing.

  • Currently, when a loan to finance the construction of a dwelling "may be" permanently financed by the same creditor, the creditor may elect to disclose the construction phase and permanent phase as one transaction or multiple transactions. Under the proposal, the "may be" permanently financed condition would be satisfied if the creditor generally makes construction and permanent financing available, and the consumer does not expressly state that he or she would not obtain permanent financing from the creditor. Thus, as proposed, the "may be" permanently financed condition would not be based on the creditor’s determination regarding the particular consumer. The CFPB expressly requests comment on this approach, including comment regarding a situation in which a consumer first states that he or she will not obtain permanent financing from the creditor, and then subsequently inquires about permanent financing from the creditor. 

  • If a creditor will collect, after consummation, inspection and handling fees for the staged disbursement of the construction loan proceeds, the CFPB proposes that the fees would be disclosed in an addendum to the Loan Estimate and Closing Disclosure, and would not be included in the calculation of the cash to close. 

  • For construction costs that the consumer will be obligated to pay, any payoff of existing liens secured by the property, and any payoff of unsecured debt, the CFPB proposes that the amounts be disclosed in the Other portion of the Other Costs section of the Loan Estimate and Closing Disclosure, unless the amounts are disclosed in the alternative calculating cash to close table.

  • If a portion of the construction loan proceeds will be placed in a reserve or other account at consummation, the CFPB proposes that, at the creditor’s option, the account may be disclosed separately from the other construction costs or may be included in the amount disclosed for constructions costs. When the creditor selects the option to disclose the account separately, the CFPB proposes that the creditor would need to disclose the amount as a separate itemized cost and label the amount with any accurate term that meets the clear and conspicuous standard. 

Per Diem Interest. Under Regulation Z, if a creditor estimates the per diem interest based on the information known to the creditor at the time the disclosure for consummation is prepared, the estimate is deemed accurate. The proposal would clarify that when a creditor estimates the per diem interest set forth in the Closing Disclosure based on the information known to the creditor at the time the disclosure is prepared, the creditor is not required to issue a corrected Closing Disclosure if the actual per diem interest differs from the estimated amount.

Separation of Consumer and Seller Information; Parties Receiving Closing Disclosure. In the preamble, the CFPB addresses inquiries from industry members regarding who may receive copies of the Closing Disclosure. The CFPB notes exceptions under the Gramm-Leach-Bliley Act (GLBA) that permit a financial institution to share a customer’s non-public personal information when the sharing is to comply with federal, state, or local laws, rules, and other applicable legal requirements or required, or is a usual, appropriate, or acceptable method, to provide the customer or the customer’s agent or broker with a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product. The CFPB then states:

"The Closing Disclosure, whether provided as a combined form containing consumer and seller information or separate forms reflecting each side of the real estate transaction conveying the real property from the seller to the consumer, is a record of the transaction (among other things), both for the consumer and creditor, of the transactions between the consumer, seller, and creditor, as required by both TILA and RESPA. Such records may be informative to real estate agents and others representing both consumers and creditors as part of both the consumer credit and real estate portions of residential real estate sales transactions, as they provide the consumer or the consumer’s agent with a record of the transaction. Based on its understanding of the real estate settlement process, the Bureau understands that it is usual, appropriate, and accepted for creditors and settlement agents to provide the combined or separate Closing Disclosure as a confirmation, statement, or other record of the transaction, to consumers, sellers, and their agents, or information on the status or value of the financial service or financial product to their customers or their customers’ agents or brokers."

Thus, in its own way, the CFPB appears to be stating that the second GLBA exception noted above applies to the sharing of the Closing Disclosure with the real estate agents and other parties representing the consumer and seller. The CFPB then addresses the removal of the consumer’s information from the Closing Disclosure provided to the seller and vice versa.  This suggests that when the CFPB is referring to the sharing of the Closing Disclosure with the agents and other representatives of the consumer and seller, it is referring to the sharing of the version of the Closing Disclosure provided to the consumer with the consumer’s agents and representatives, and the sharing of the version of the Closing Disclosure provided to the seller with the seller’s agents and representatives. Further clarification in this important area would be helpful.

While the CFPB proposes commentary revisions to address how information may be removed from the consumer’s or seller’s Closing Disclosure, the CFPB did not propose to change provisions of the rule itself that detail what information may be removed. Thus, it appears that the CFPB did not propose to broaden the seller information that may be removed from the consumer’s Closing Disclosure, such as the real estate agent commissions paid by the seller.

When a consumer will obtain both a first lien and second lien loan at the same time in connection with a purchase transaction, the CFPB proposes that if the Closing Disclosure for the first lien loan records the entirety of the seller’s transaction, then the seller may be provided with a Closing Disclosure for only the first lien loan.

Calculating Cash to Close. The CFPB proposes various changes to the cumbersome calculating cash to close sections of both the Loan Estimate and Closing Disclosure. A number of the changes appear to be designed to address assumptions made by the CFPB in connection with the design of the original TRID rule, such as there would never be a principal reduction with a purchase money loan, that do not reflect actual variations that exist in transactions. The CFPB did not propose to address the difference in closing costs that results from the aggregate accounting escrow adjustment being reflected in the Closing Disclosure but not the Loan Estimate.

Among the various proposed changes:

  • The CFPB proposes to address the issue of gift funds by revising the rule to provide that amounts paid to consumers before consummation by parties not involved in the transaction, such as family members, are not required to be disclosed in the calculating cash to close section of the Loan Estimate or Closing Disclosure. This will help to avoid understating the actual cash to close by treating such funds as amounts that the borrower must bring to closing, and not as amounts that will be received from a third party at closing (which is the construct of the current rule). 

  • With regard to the calculating cash to close table in the Closing Disclosure, the CFPB proposes to clarify that the amounts disclosed in the table are not subject to a tolerance, but are subject to the general standard that the amounts must be based on the best information reasonably available to the creditor.

  • The CFPB proposes to conform the calculation of closing costs financed for the Closing Disclosure with the approach used for the Loan Estimate. 

Model Versus Sample Forms. The CFPB advises in the preamble to the proposal that while the proper use of an appropriate a model TRID rule form in Appendix H to Regulation Z provides for a safe harbor, there is no safe harbor associated with sample forms in Appendix H, and that the sample forms are not a substitute for the text of Regulation Z sections 1026.37 and 1026.38 (which set forth the requirements for the Loan Estimate and Closing Disclosure, respectively), and the related commentary. The CFPB proposes a comment to Appendix H that would identify which forms are the model forms. The CFPB notes that it "has not conducted a systematic review of [the] accuracy [of the sample TRID rule forms, and that] should the Bureau undertake such a review in the future and identify errors, it will adopt appropriate revisions."

Miscellaneous. Among other proposed changes, the CFPB also proposes to clarify the rounding requirements, clarify that prepaid interest is included in the calculation of the total interest percentage, and clarify the calculation of the escrow payments that will be made in the first year following consummation.

- Richard J. Andreano, Jr.

FinCEN Expands Targeting of High-End Cash Real Estate Transactions

FinCEN has announced a major expansion and extension of its geographic targeting orders (GTOs) aimed at high-end cash buyers of real estate. This action reflects FinCEN’s continued efforts to prevent money laundering through the real estate industry that were highlighted in former FinCEN Director Calvery’s April 12, 2016, speech. The new GTOs cover all title insurance companies, rather than the handful of insurers subject to the initial orders issued in January 2016 that expire on August 27, 2016.

The new GTOs also expand the scope to a total of six separate metropolitan areas. The two narrowly drawn areas in the initial GTOs, the Borough of Manhattan and Miami-Dade County, Florida, have been expanded to include all five boroughs of New York City and Broward County and Palm Beach County, respectively. Four other markets—Los Angeles County, San Diego County, Bexar County (San Antonio), and three California Bay Area counties (San Francisco, San Mateo and Santa Clara)—have been added. Similar to the initial GTOs, each county has a separate dollar threshold for covered transactions. The new GTOs will be in effect from August 28, 2016, until February 23, 2017.

The scope of "covered transactions" that must be reported on Form 8300 also has been significantly expanded by the addition of personal checks and business checks to the types of monetary instruments that trigger reporting. We expect that this change will lead to significantly more reported transactions than under the original GTOs.

FinCEN’s release announcing the expansion and extension of the GTOs highlights that the required reporting under the initial GTOs has been beneficial to law enforcement. According to FinCEN, "Federal and state law enforcement agencies have… informed FinCEN that information generated by the GTOs has provided greater insight on potential assets held by persons of investigative interest and, in some cases, has helped generate leads and identify previously unknown subjects."

In this latest release, FinCEN again noted the "assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors."

- Richard J. Andreano, Jr.Peter D. Hardy, and Beth Moskow-Schnoll


CFPB Outlines Future Principles for Loss Mitigation

Looking forward to a post-financial crisis and post-HAMP mortgage marketplace, the Consumer Financial Protection Bureau (CFPB) has issued a document outlining principles intended to "provide a framework for discussion about the future of loss mitigation. The four principles are accessibility, affordability, sustainability, and transparency. This release by the CFPB echoes the principles discussed in the recent white paper issued by the Treasury Department, Department of Housing and Urban Development, and the Federal Housing Finance Agency, titled "Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward."

According to the document, these principles build on, but are distinct from, the CFPB's mortgage servicing rules, supervisory authority and enforcement authority. The CFPB further notes that the document does not establish binding legal requirements, and is instead meant to "complement ongoing discussions among industry, consumer groups and policy makers on the development of loss mitigation programs." Notably, the document cautions that while the principles have applicability to most loss mitigation programs, certain recommendations may not align with government insured lending programs, such as those offered by FHA, VA, or Rural Housing Service. 

Many of the principles reflect positions the CFPB has taken in the past, through guidance bulletins, supervisory highlights, or more specifically in the mortgage servicing rules.  Notably, however, certain of these principles are aimed at the terms of loss mitigation options made available to borrowers. We note that the loss mitigation-related requirements under Regulation X give deference to the investor in terms of the loss mitigation options available.  Now, with HAMP's expiration upcoming, it appears that the CFPB and other regulators will further seek to influence the types of loss mitigation options offered by private investors in terms of "affordability" and "sustainability." 

The principles provided in the document are set forth below.

Accessibility

  • Consumers can easily obtain and use information about loss mitigation options and application procedures from their servicers.
  • Consumers can submit a request for loss mitigation using a common and readily available form of application in order to expedite consideration and to better enable housing counselors and others to support consumers in the loss mitigation process.
  • Consumers are asked to submit only documentation necessary to enable consideration for available options, and servicers make appropriate efforts to obtain and verify information within the servicer’s control.
  • Consumers have ready access to individuals, including housing counselors and others, who can help them seek loss mitigation and understand the effect of the terms they are being offered.
  • Consumers’ requests for loss mitigation assistance are responded to timely and effectively by servicers.
  • Consumers have access to clear and effective escalation options.
  • Consumers are considered for appropriate loss mitigation options from imminent default through late stages of delinquency.
  • Consumers who are similarly situated receive fair and equal consideration for loss mitigation options within similar timeframes.
  • Servicers should generally be aware of and consider how they will meet the needs of those with limited English proficiency.

Affordability

  • When repayment plans and modifications are offered, they are generally designed to produce a payment and loan structure that is affordable for consumers.
  • Modifications for consumers with hardships provide a meaningful payment reduction.
  • Loss mitigation options are flexible enough to assist special populations (e.g., pre-crisis subprime loans) or unique circumstances (e.g., disasters).
  • Consumers are not required to pay upfront costs or fees to obtain a loss mitigation option from their servicer.

Sustainability

  • The loss mitigation option offered is designed to resolve the delinquency.
  • Deficiency balances are not imposed on consumers experiencing hardship as a condition of a short sale or deed-in-lieu on their principal residence.
  • When modification options are used, they are designed to provide affordability throughout the remaining or extended loan term.
  • Where trial modifications are used, successful trials are converted to permanent modifications timely and efficiently.
  • Servicers and investors should consider modification options that reduce principal when doing so may benefit the investor, unless prohibited by statute.
  • Loss mitigation options are defined and made available for consumers who decline a loan modification offer.
  • Loss mitigation options are available for borrowers who re-default.
  • Loss mitigation outcomes are monitored by servicers and investors to determine their impact on re-default rates, and program terms are adjusted to achieve effective outcomes and respond to economic conditions.

Transparency

  • All terms (e.g., deferred interest, future rate or term changes, and repayment of forbearance amounts) are clearly described in a manner consumers can understand. Plain language should be used to the extent reasonably feasible.
  • Key loss mitigation vocabulary, e.g., hardship, imminent default, streamlined modification, etc., and data standards are defined and used consistently by mortgage servicers and investors.
  • Consumers get clear, concise information and rationales about loss mitigation decisions.
  • Consumers are not required to sign broad waivers of rights as a condition of receiving loss mitigation assistance.
  • Key loss mitigation data is reported publicly on a regular basis to ensure that loss mitigation programs are effectively meeting consumer and market needs.

- Reid F. Herlihy


FHFA Will Exclude Language Preference Question From New URLA

The Federal Housing Finance Agency (FHFA) has updated the industry on its progress in making changes to the Uniform Residential Loan Application (URLA). FHFA restated that their goal has been to finalize the new URLA by the summer of 2016 and implement the new form in January 2018, coinciding with the new Home Mortgage Disclosure Act (HMDA) data collection requirements. 

More specifically, FHFA announced its decision to not include a question about language preference on the new URLA given the roll-out timeframe of the new URLA and existing unresolved issues. Instead, FHFA will take the following steps to gather data on language preferences:

  • Include additional questions about access to home financing and the servicing process for LEP borrowers on the National Survey of Mortgage Originations and the American Survey of Mortgage Borrowers;
  • Issue a Request for Input (RFI) to solicit feedback from stakeholders about the best ways to gather data about LEP borrowers and the languages they prefer and about the best ways for lenders and servicers to obtain the information necessary to be able to help LEP borrowers during mortgage origination and thereafter; and
  • Collaborate more extensively with stakeholders at other government agencies and with industry and consumer representatives to explore ways to improve the mortgage origination and servicing experience for LEP borrowers.

FHFA believes that these measures will allow them to determine whether the URLA should be revised further or whether there are alternative methods of capturing language preferences.  FHFA indicates that they will review the information gathered and keep the industry informed as to their next steps.

- Wendy Tran


Eleventh Circuit Weighs In on the FCRA’s Furnisher Investigation Requirement

The 11th Circuit has clarified that the Fair Credit Reporting Act (FCRA) requires furnishers of credit information—like their credit reporting agency (CRA) counterparts—to conduct "reasonable" investigations of consumer disputes. The decision also identifies various factors that determine whether a furnisher’s investigation is "reasonable."

The plaintiff in Hinkle v. Midland Credit Management, Inc., sued Midland for allegedly failing to investigate disputed information on her credit report. Her report included two accounts that she claimed were not hers. The two accounts had been charged off by the original creditor and, after their purchase by and sale to other debt buyers, were purchased by Midland with what appears to have been the then-standard limited warranties as to the accuracy of the account information. Midland did not receive any account-level documentation for either account. Consistent with a common practice at the time, it received only electronic information about the debt, such as the debt amount, the name of the original creditor, the charge-off date, and the personal information associated with the debt. The purchase agreements for the accounts, however, contained provisions that arguably obligated the debt seller to assist Midland in acquiring documentation from the original creditor to respond to consumer disputes.

The plaintiff disputed the accounts to the CRAs as well as to Midland, claiming that the accounts did not belong to her. Since Midland had already marked one account as paid and ceased reporting it to the CRAs, it took no action in response to her dispute. For the other account, Midland sent a response letter to the plaintiff in which it stated that "it would be helpful to have a copy of any documentation you may have that supports your dispute." In response to a dispute notice sent by one of the CRAs, Midland verified the debt by comparing the information reported to the CRA with the electronic account information in its internal records. It did not, however, request any account-level documentation from the debt sellers or the original creditors.

In reversing the district court's grant of summary judgment for Midland on plaintiff's FCRA claim, the 11th Circuit made the following observations about a furnisher's obligation, under § 1681s-2(b), to investigate a consumer dispute:

  • The FCRA's structure suggests that a furnisher's duty under § 1681s-2(b) is part of the larger reinvestigation duty imposed on CRAs by § 1681i(a). Since § 1681i(a) requires CRAs "to make reasonable efforts to investigate and correct inaccurate or incomplete information," the 11th Circuit concluded that "reasonableness" also should be the "touchstone for evaluating investigations under § 1681s-2(b)."
  • The reasonableness of a furnisher's investigation varies based on the circumstances, including the furnisher's status (e.g., an original creditor, collection agency collecting for original creditor, debt buyer, or down-the-line debt buyer) and the "quality of documentation available to the furnisher."
  • If a furnisher decides to report disputed information as verified, "the question of whether the furnisher behaved reasonably will turn on whether the furnisher acquired sufficient evidence to support the conclusion that the information was true."
  • Furnishers can report disputed information as unverifiable "if they determine that the evidence necessary to verify disputed information either does not exist or is too burdensome to acquire." In such a case, "the question of whether the furnisher complied with § 1681s-2(b) will likely turn on whether the furnisher reasonably determined that further investigation would be fruitless or unduly burdensome."
  • The reasonableness of an investigation also depends on "what the furnisher knows about the dispute." The 11th Circuit explicitly rejected the argument that a furnisher may reduce its investigation simply because the CRA failed to exhaustively describe the dispute in its Automated Consumer Dispute Verification (ACDV) form. "When a furnisher has access to dispute-related information beyond the information provided by the CRA, it will often be reasonable for the furnisher to review that additional information and conduct its investigation accordingly.

Applying the above principles, the 11th Circuit concluded that a jury could find Midland did not conduct "reasonable" investigations for the two accounts because it made no attempt to obtain account-level information and because the electronic information that it did review was insufficient to "verify" the disputed information.

The 11th Circuit also rejected two defenses. In response to Midland's argument that it had no obligation to investigate an account because it stopped reporting the account to CRAs, the 11th Circuit suggested that a furnisher’s obligation to investigate under § 1681s-2(b) may continue even after the furnisher stops reporting the account to CRAs. Midland also argued that, by sending the plaintiff a letter requesting documentation to support her dispute, the burden shifted to the plaintiff to show the disputed information was false. The 11th Circuit found nothing in the FCRA that "permits a furnisher to shift its burden of 'reasonable investigation' to the consumer in the case of a § 1681s-2(b) dispute."

Hinkle instructs a furnisher to conduct a "reasonable" investigation of consumer disputes that accounts for the furnisher's status, the account information available to the furnisher, and the furnisher's knowledge of the dispute. Additionally, in cases where the furnisher elects to report information as "verified," the furnisher must have evidence that establishes a disputed fact is true.

- the Consumer Financial Services Group


CFPB Previews Debt Collection Rule in SBREFA Outline

The Consumer Financial Protection Bureau (CFPB) has moved a step closer to issuing a debt collection rule by releasing an outline of the proposals it is considering in preparation for convening a small business review panel. The Small Business Regulatory Enforcement Fairness Act and the Dodd-Frank Act require the CFPB to convene such a panel when developing rules that may have a significant economic impact on a substantial number of small businesses. While changes may result from input provided by the small entity representatives selected to meet with the panel, the outline is a strong indicator of the approach the CFPB is likely to take in a proposed debt collection rule.

Authority. While much of the proposals rely on the CFPB's rulemaking authority under the Fair Debt Collection Practices Act (FDCPA) (for which there are currently no implementing regulations), the proposals also rely on the CFPB's Dodd-Frank authority to issue rules prohibiting unfair, deceptive, or abusive acts or practices and require disclosures to permit consumers to understand the costs, benefits, and risks associated with consumer financial products and services such as debt collection.  

Scope. Perhaps most surprising is the CFPB's decision to limit the proposals' coverage to "debt collectors" that are subject to the FDCPA. As a result, the proposals are not intended to apply to a first-party creditor collecting its own debts or to a servicer when collecting debts that were current when servicing began to the extent the creditor or servicer would not be a "debt collector" under the FDCPA. According to the CFPB, the proposals would apply only to businesses "in the following categories for debts acquired in default: collection agencies, debt buyers, collection law firms, and loan servicers." The CFPB states that it "expects to convene a second proceeding in the next several months" for creditors and others engaged in debt collection not covered by the proposals, noting that it believes a separate SBREFA process "is the most efficient way to proceed, particularly because it will allow participants to provide more focused and specific insights." Nevertheless, we believe that many of the requirements discussed in the SBREFA outline for "debt collectors" will also be applied to first-party collections.

Debt Substantiation. A collector (including a subsequent collector of a disputed debt) would be subject to the general requirement that it must have a reasonable basis for claiming that a consumer owes a debt and, to satisfy that requirement, would have to take specific actions before making an initial claim of indebtedness, during the course of collections generally, after a dispute generally, after receiving a dispute within 30 days of the FDCPA validation notice, and prior to filing a collection lawsuit. Highlights include the following:

  • A collector would have a "reasonable basis" to commence collection activity if, after reviewing specified items of "fundamental information," it found no account-specific or portfolio-wide "warning signs" that the information associated with the debt is inaccurate or inadequate and had obtained a written representation of accuracy from the prior debt owner. A collector could have a reasonable basis without reviewing each specified item of information or obtaining a representation of accuracy but would "bear the burden" of justifying its alternate approach. A collector would also be required to conduct an ongoing review to identify "warning signs" that arise during the course of collection. If such "warning signs" are detected, more investigation and review of underlying documentation would be needed.
  • After receiving an oral or written dispute, a collector could not continue collection activity until it had reviewed documentation establishing specified facts (which would vary depending on whether the dispute is generic or specific in nature) and concluded that such information provided a reasonable basis for resuming collection activity. (Such documentation would also have to be provided to the consumer to satisfy the FDCPA "substantiation" requirement for written disputes received within 30 days of the validation notice.) A collector that relied on other support for resuming collection activity would "bear the burden" of justifying its alternate approach.

Debt Transfers. A collector would be required to provide specified information to an entity to which it transfers a debt that would obligate a collector under the FDCPA or other federal consumer protection laws to take or refrain from taking certain actions or that indicates the consumer is entitled to certain rights, or may facilitate collector conduct beneficial to the consumer. The collector would also be required to forward to the transferee specified information it may receive from the consumer after the transfer that could indicate all or part of the debt may be uncollectible or is likely to lack sufficient support. The CFPB indicates that it is considering a supplemental proposal that would prohibit debt buyers from selling debts to certain entities (such as one lacking a required license) or selling certain debts (such as one that it knows or should know resulted from identity theft).

Validation Notice. The validation notice would be revised to contain "enhanced and clarified information about the debt and the consumer's rights," along with a tear-off portion to be returned to the collector identifying various types of reasons for disputes from which a consumer could select and containing an option for the consumer to request the original creditor's name and address. (Appendix F to the outline includes an example of a model validation notice.) A collector would have to include with the validation notice a new "Statement of Rights" (an example of which is included in Appendix G) and send an additional copy in the first communication made more than 180 days after the consumer receiving the initial statement. The outline describes two alternatives the CFPB is considering for providing the validation notice and statement in languages other than English. Also under consideration are a prohibition on furnishing information about a debt to a consumer reporting agency unless the collector has communicated directly with the consumer about the debt and a requirement to send a litigation disclosure containing specified information in all written or oral communications in which a collector expressly or implicitly represents its intent to sue. (The CFPB does not indicate in the outline what statements might be deemed implicit representations of a collector's intent to sue.)

Time-Barred Debts. A collector seeking to collect a time-barred debt would be required to include a "time-barred debt disclosure" in the validation notice, in the first oral communication in which it requests payment, and possibly in each subsequent communication seeking payment. The same disclosure requirement would apply to any subsequent collector and a subsequent collector could not sue on a debt as to which a prior collector had provided the disclosure. The CFPB is also considering whether to require an "obsolescence disclosure" informing the consumer whether a time-barred debt can appear on a credit report;  prohibit collection of a time-barred debt that can be revived under state law unless the right to sue is waived; and  prohibit a collector from accepting payment on a time-barred or obsolete debt until it has obtained the consumer's written acknowledgment of having received a time-barred debt and obsolescence disclosure.

Communication Limits. New limits and requirements would be imposed on the frequency and leaving of messages by collectors; time, place, and manner of collector contacts; and collection of decedent debts. Highlights include the following:

  • A "limited-contact message" from a collector that conveys only certain limited information would not be a FDCPA "communication" and therefore would not trigger the FDCPA "mini-Miranda" disclosure. To satisfy the FDCPA requirement that a collector must meaningfully disclose its identity in telephone calls, a collector would have to display a working, in-bound telephone number to appear on a consumer's ID screen. A collector could not contact any person using a communication method that would cause the person to incur an unavoidable charge.  
  • The frequency of collector contacts with debtors would be subject to weekly caps, which would vary based on whether there has been a "confirmed consumer contact" by a current or a prior collector. A "confirmed consumer contact" is one in which the consumer has answered when contacted that he or she is the debtor or alleged debtor and would generally pass from collector to collector. The contact would no longer exist if the collector reasonably believes that previously confirmed contact information for the consumer has become inaccurate. The caps would apply across all contact channels on a per-account basis and successful and attempted contacts as well as "limited-contact messages" would count as "contacts" to which the cap applies.

If it does not have a "confirmed consumer contact," a collector could have up to three contacts per week to each phone number or address it has for the consumer, up to a total of six contacts per week. A collector with a "confirmed consumer contact" could have up to two contacts per week to each phone number or address it has for the consumer, up to a total of three contacts per week only one of which could be a live communication. 

  • The frequency of third-party contacts to obtain location information would also be subject to weekly caps that would apply across all contact channels on a per account basis and include successful and attempted contacts. If it does not have a "confirmed consumer contact," a collector could have up to three contacts per week to each phone number or address it has for a third party, up to a total of six contacts per week. Live communications with a third party per account are limited to one in total (not weekly). Once a collector has a "confirmed consumer contact," any further location communications would be prohibited. However, if at a later time the collector reasonably believes that the confirmed contact information is no longer accurate, it could resume contacting third parties for location information, subject to these same limits. 

For both the debtor and third-party contact caps, the CFPB is considering whether to structure the caps as "hard caps" or general caps with limited exceptions or whether to establish a rebuttable presumption that contacts above the cap constitute harassing, oppressive or abusive conduct in violation of the FDCPA. 

  • If a consumer has a mobile phone number in one location and a street address in another, in the absence of knowledge to the contrary, a collector would be deemed to know (or should know) that it is convenient to communicate with the consumer only if it would be deemed convenient under the FDCPA in all of the locations the collector's information indicates the consumer might be. Certain categories of places would be deemed presumptively inconvenient for communications from collectors and if a consumer indicated either expressly or by implication that a particular communication method was inconvenient, the collector using that method would be deemed to have known (or to should have known) that such method was inconvenient. A collector could not use a consumer's work email address for collections communications without violating the FDCPA prohibition against disclosing debts to third parties unless it had the consumer's specific consent for such communications. However, unless its content indicated otherwise, an email sent to a collector by a consumer from his or her work address could constitute consent for future communications at that address.
  • After the death of a consumer alleged to owe a debt, a collector would have to wait at least 30 days before communicating with the consumer's spouse, parent, or guardian of a minor consumer, or an individual designated under state law as the personal representative of the consumer's estate. 
  • Each collector seeking to rely on a consumer's consent for communications that would otherwise be prohibited under the FDCPA would have to obtain such consent directly from the consumer and could not rely on consent obtained by a prior collector. A collector would be required to memorialize the consent and the consumer would have the right to revoke his or her consent. 

Together with the outline, the CFPB released a report, "Study of Third-Party Debt Collection Operations," which provides the results of the CFPB's survey of practices and procedures of businesses that would be considered "debt collectors" under the FDCPA. We will discuss the report in a posting on our blog, CFPB Monitor.

On August 31, 2016, Ballard Spahr attorneys will hold a webinar, ''The CFPB's Debt Collection Rulemaking – A Review of the Bureau's SBREFA Outline and Where We Think It's Headed," from 12 p.m. to 1 p.m. ET. The webinar registration form is available here.

- the Consumer Financial Services Group


Appellate Court Holds HUD Regulations Don’t Provide Private Right of Action Unless Incorporated into Written Agreement

A federal appeals court recently decided that a plaintiff could not assert a claim against the issuer of a reverse mortgage for breach of regulations issued by the U.S. Department of Housing and Urban Development (HUD), when those regulations were not expressly incorporated into the parties’ written agreement. In a case of first impression, the Fifth Circuit Court of Appeals, in Johnson v. World Alliance Financial Corporation, affirmed the district court’s grant of summary judgment on the plaintiff’s claims for breach of contract and fraudulent inducement, which were based on the HUD regulations. 

The plaintiff’s late husband had entered into a reverse mortgage agreement, or home equity conversion mortgage (HECM), with one of two defendants, and the mortgage was subsequently assigned to the other defendant in the case. The loan was secured by the plaintiff’s home. When the HECM was originated, there were two liens on the property—a traditional mortgage and a $50,000 owelty lien, which had previously been awarded to the ex-wife of the plaintiff’s husband.  

The traditional mortgage was paid by the HECM issuer at closing, and the owelty lien was to be paid when the property eventually was sold. However, after closing, the ex-wife foreclosed on the property, believing (incorrectly) that the HECM had triggered a default provision in her lien. The assignee of the HECM sued the ex-wife in state court, challenging her right to foreclose. The case eventually settled, at which time title to the property went back to the plaintiff.  

Subsequently, the plaintiff sued the defendants, bringing claims of breach of contract and fraudulent concealment. She mainly argued that the foreclosure could have been avoided if the HECM issuer had not issued an HECM in violation of HUD guidelines. She cited a HUD Mortgagee Letter stating that it is the mortgagee's responsibility to "ensure that the first [private lender] and second [HUD] mortgages are the first and second liens of record, and that other liens do not intervene between the first and second mortgage."  

The district court had granted summary judgment in the defendants’ favor because HUD regulations were not expressly incorporated into the parties’ agreement, and thus could not form the basis of the plaintiff’s claims; and because under the express note and deeds of trust terms, it was the plaintiff’s burden to maintain lien priority. 

On appeal, the plaintiff again argued that the defendants had violated HUD regulations by failing to establish and maintain the priority of the HECM lien, and that those regulations formed part of the HECM agreement. The Court of Appeals rejected that argument, affirming the district court and explicitly holding that "HUD regulations govern the relationship between the reverse-mortgage lender and HUD as insurer of the loan. HUD regulations do not give the borrower a private cause of action unless the regulations are expressly incorporated into the lender-borrower agreement." Because defendants had not breached the parties’ agreements (and rather it was the ex-wife whose wrongful foreclosure made her the wrongdoer in this situation), defendants could not be liable for breach of contract or fraudulent inducement. 

This case provides federal appellate level support for mortgagees facing claims that they have violated HUD regulations when those regulations are not expressly incorporated into the written agreements between the mortgagee and mortgagor.

- Joel E. Tasca, Michele C. Ventura, and Jessica C. Watt


Did you know?

by Wendy Tran

Alaska Modifies Mortgage Lender and MILO Licensing Provisions

Alaska has made several changes related to mortgage lender and mortgage loan originator (MILO) provisions. An individual required to be licensed as a MILO can now work under "an exclusive contract for a registered depository institution" and be sponsored by a registered depository institution. As such, requirements for registered depository institutions has been incorporated throughout the Mortgage Licensing Act.

In addition, a federal, state, or local government agency, including an agency that arranges or provides financing for mortgage loans, is now exempt from the mortgage lender or mortgage broker licensing requirements.

These provisions are effective on January 1, 2017. Effective immediately, the Department of Commerce, Community, and Economic Development may adopt regulations as necessary to implement these changes.


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