Mortgage Banking Update - October 11, 2018
As we reported previously, in June 2018, Zillow Group (Zillow) announced that it is no longer under investigation by the CFPB for Real Estate Settlement Procedures Act (RESPA) and UDAAP compliance with regard to its co-marketing program. The CFPB investigation triggered a securities lawsuit filed in the United States District Court for the Western District of Washington (C17-1387-JCC). The plaintiffs alleged in a putative class action that they purchased Zillow shares at an inflated price and were damaged by alleged material misrepresentations by the defendants regarding the Zillow co-marketing program and the CFPB investigation of the program. The court noted that there was a decline in the price of Zillow stock in the two days after Zillow provided an update in August 2017 regarding the status of the CFPB investigation. Underlying the plaintiffs’ claims were alleged violations of RESPA with regard to the co-marketing program, which are the focus of this blog post.
The court noted that because the plaintiffs alleged securities fraud under section 10(b) of the Securities Exchange Act of 1934 and section 10b-5 of Securities and Exchange Commission rules, in order to survive a motion to dismiss the complaint must satisfy the general standard of setting forth sufficient factual matter, accepted as true, to state a claim for relief that is plausible on its face, and meet additional standards. One additional standard is that the complaint must state with particularity the circumstances constituting fraud or mistake.
With regard to RESPA, the plaintiffs asserted that the co-marketing program (1) acted as a vehicle to allow real estate agents to make illegal referrals to lenders in exchange for the lenders paying to Zillow a portion of the agents’ advertising costs, and (2) facilitated RESPA violations by allowing lenders to pay to Zillow a portion of their agents’ advertising costs that was in excess of the fair market value of the advertising services that the lenders received from Zillow. The court found that the plaintiffs failed to sufficiently plead either theory of RESPA liability.
In support of the theory that when lenders pay a portion of the real estate agent’s advertising costs to Zillow they are effectively paying to receive unlawful mortgage referrals from the agent, the plaintiffs cited the CFPB enforcement action against PHH Mortgage Corporation regarding mortgage reinsurance arrangements. We have extensively reported on the matter, in which the CFPB deviated from prior government interpretations of RESPA by effectively reading out of RESPA the section 8(c)(2) safe harbor that permits payments for goods and services between parties even when there are referrals of settlement services business between the parties. The U.S. Court of Appeals for the D.C. Circuit rejected the CFPB’s interpretation of RESPA. Summarizing the holding of the D.C. Circuit, the court in the Zillow case stated that the “D.C. Circuit held that RESPA’s safe harbor allows mortgage lenders to make referrals to third parties on the condition that they purchase services from the lender’s affiliate, so long as the third party receives the services at a reasonable market value.”
The court in the Zillow case determined that the plaintiffs’ assertion that the co-marketing program violates RESPA because it allowed agents to make referrals in exchange for lenders paying a portion of their advertising costs “is neither factually nor legally viable.” The court first noted that the complaint does not contain particularized facts demonstrating that real estate agents participating in the co-marketing were actually providing unlawful referrals to lenders. The court then stated that, even if it “draws an inference that co-marketing agents were making mortgage referrals, such referrals would fall under the Section 8(c) safe harbor because lenders received advertising services in exchange for paying a portion of their agent’s advertising costs.”
Addressing the plaintiffs’ second theory of liability—that the co-marketing program facilitated RESPA violations by allowing lenders to pay more the than fair market value for advertising services they received from Zillow—the court states that the plaintiffs failed to provide particularized facts that demonstrate that the lenders actually paid more than the fair market value of the advertising services they received from Zillow.
While the mortgage industry will welcome the favorable decisions on the RESPA issues, industry members should be mindful that the context is a securities fraud case with specific pleading standards.
On August 22, 2018, Commissioner Perez issued a Memorandum setting forth a no action position relating to the U.S. Office location requirement that went into effect on October 1, 2018. As it relates to mortgage activity, the referenced requirement can be found in Sections 8 and 79 of Public Act 18-173.
As enacted, Public Act 18-173 requires mortgage activity subject to licensure to be conducted from an office located in a “state” as defined by Section 36a-2 of the Connecticut General Statutes. Section 36a-2(64) defines “state” to mean: “any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, the trust territory of the Pacific Islands, the Virgin Islands and the Northern Mariana Islands.”
The Department indicates in its Memorandum that it received several inquiries concerning the effect of this requirement on licenses presently held and otherwise valid through December 31, 2018, for offices in locations that do not meet the definition of “state.” The Memorandum provides that Connecticut is taking a “no action” position with respect to the conduct of activity by licensees from locations that do not meet the definition of “state” through December 31, 2018, provided that the person engaged in such activity is otherwise in compliance with the licensure requirements in effect prior to Public Act 18-173.
The Memorandum provides: “[t]he entity or individual engaging in business is deemed to have an otherwise valid license for such activity, effective through December 31, 2018, to conduct said business under the controlling statutes prior to the requirement that the licensed activities be conducted from an office located in a ‘state’, as defined in Section 36a-2(64) of the Connecticut General Statutes.”
The Memorandum can be located here: https://www.ct.gov/dob/lib/dob/consumer_credit_nonhtml/no_action_position-us_office_location_requirement.pdf
Presumably, the licenses for non-“state” offices will not be eligible for renewal. The provisions of the Public Act restricting activity subject to licensure to the U.S. and its territories are emblematic of state regulators’ concerns about how to appropriately vet foreign entities, foreign control persons, and foreign MLOs consistent with post-SAFE Act licensure requirements, as implemented by the states, coupled with available NMLS processes surrounding credit reports and criminal background checks.
The U.S. House of Representatives recently passed H.R. 6737 to amend the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act) to address a technical issue that prevented mortgage lenders from including certain VA refinance loans in Ginnie Mae securitizations.
As we previously reported, the Act includes provisions designed to protect veterans when refinancing a VA loan. Specifically, the Act prohibits the VA from guaranteeing or insuring a loan unless:
- The veteran will recoup the fees to refinance within 36 months of the date of the loan.
- There is a net tangible benefit to the veteran in the form of an interest rate reduction. If a fixed-rate loan is being refinanced with another fixed-rate loan, the rate reduction must be at least 50 basis points. If a fixed-rate loan is being refinanced with an adjustable-rate loan, the rate reduction must be at least 200 basis points. The rate reduction may be achieved through the payment of discount points, subject to limitations.
- The refinance loan is made the later of (1) the date that is 210 days after the date on which the first monthly payment is made on the existing loan, or (2) the date on which the sixth monthly payment is made on the existing loan. The seasoning requirement does not apply to a cash-out refinance loan when the principal amount of the new loan exceeds the amount of the loan being refinanced.
The Act includes a corresponding provision under which a VA refinance loan may not be included in a Ginnie Mae securitization unless the loan seasoning requirement in the third bullet point is satisfied. The Act did not provide for a specific effective date for the Ginnie Mae provision, and as a result the requirement became effective upon the Act being signed into law on May 24, 2018, and applied to existing refinance loans that were not already included in a Ginnie Mae securitization. This meant that lenders were unable to include in a Ginnie Mae securitization any of such existing loans if the loans did not satisfy the seasoning requirement.
H.R. 6737, entitled the Protect Affordable Mortgages for Veterans Act of 2018, would amend the Act to replace the sentence that added the seasoning requirement for Ginnie Mae securitizations with the following sentence: “The Association is authorized to take actions to protect the integrity of its securities from practices that it deems in good faith to represent abusive refinancing activities and nothing in the Protect Affordable Mortgages for Veterans Act of 2018, the amendment made by such Act, or this title may be construed to limit such authority.”
The Mortgage Bankers Association applauded the action by the House and urged the Senate to swiftly pass the legislation.- Richard J. Andreano, Jr.
Last week, the Connecticut Fair Housing Center, Inc. filed a complaint against Liberty Bank in Connecticut federal district court alleging that the Bank engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act. The complaint describes the Bank as “the eighth-largest conventional home purchase lender and eleventh-largest refinancer in Connecticut.”
The complaint alleges that the Bank violated the FHA by engaging in the following conduct:
- According to the complaint, the Bank deliberately drew its CRA assessment area so as to exclude and thereby avoid CRA scrutiny of its banking and lending activities in certain towns with racially diverse populations, and it generates a disproportionately low number of mortgage loans within its assessment area from non-white applicants, making “significantly fewer than expected loans than nearly all its peers in majority-non-white census tracks, even when controlling for underwriting criteria like income and whether the borrower will live in the property.” The Bank is also alleged to over-concentrate its branches in white census tracts and, compared to its leading competitors, to have an insufficient number of branches in majority-non-white and racially diverse census tracts. The complaint alleges that to test for redlining, the plaintiff “used a statistical measure called a shortfall.” This measure “assumes that the number of loans is constant across the region and then estimates what the distribution of loans would be if they were made solely according to the income of loan applicants rather than some other factor like composition of neighborhood or race of the applicant.” It then “allows a comparison between expected lending patterns and actual lending patterns for a single mortgage lender, and tests whether differences in origination volume are a result of applicant characteristics or variables such as discrimination against a protected class.”
- Discrimination in extending credit. The complaint alleges that the bank denies African-American and Latino loan applicants at a substantially higher rate than substantially similar white applicants after controlling for income and other neighborhood features.
- Discouraging applications. The complaint alleges that Bank representatives made statements that would discourage African-American and Latino applicants from applying for loans, provided significantly less information about the home-buying process to African-American and Latino applicants than white applicants, and offered loan terms to African-American and Latino applicants that were inferior to those offered to white applicants. In support of these allegations, the complaint describes six different tests in which African-American, Latino, and white testers were allegedly sent by the plaintiff to various Bank locations to meet with a loan officer or obtain copies of advertising materials for mortgages.
The complaint serves as a reminder that while fair lending enforcement may appear to no longer be emphasized by the CFPB under Acting Director Mulvaney, lenders should keep fair lending issues front of mind. In addition to private plaintiffs, state regulators continue to pursue initiatives to enforce fair lending laws.- Alan S. Kaplinsky
Less than three months after California passed the California Consumer Privacy Act of 2018 (CCPA), Governor Jerry Brown signed SB 1121 this week, making a number of technical and substantive changes to the law.
Of particular note: SB 1121 modifies the financial institution carve-out language in CCPA section 1798.145(e). While the change is a welcome development for entities subject to regulation under the Gramm-Leach-Bliley Act (GLBA), it does not grant full exemption from the CCPA. Therefore, GLBA-regulated entities that collect information online will need to analyze the CCPA’s requirements and how they apply to a specific business.
The original carve-out language provided that:
“This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, if it is in conflict with that law.”
As we have previously discussed, that language raised a number of issues, such as what would constitute a “conflict” between the GLBA and the CCPA and whether the language was even consistent with the GLBA insofar as personal information is not collected, processed, sold, or disclosed pursuant to the GLBA. The provision also failed to address the relationship between the CCPA and California’s Financial Information Privacy Act.
The new language tries to resolve some of those issues, stating:
“This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, or the California Financial Information Privacy Act … . This subdivision shall not apply to Section 1798.150.”
The new language removes the phrase “if it is in conflict with that law,” incorporates the California Financial Information Privacy Act, and adds a sentence providing that financial institutions are still subject to Section 1798.150. The preamble explains those changes as follows:
“The bill would also prohibit application of the act to personal information collected, processed, sold, or disclosed pursuant to a specified federal law relating to banks, brokerages, insurance companies, and credit reporting agencies, among others, and would also except application of the act to that information pursuant to the California Financial Information Privacy Act.”
While the revised language is no doubt welcomed by GLBA-regulated entities, it should not be interpreted as a full exemption. Rather, GLBA entities will remain subject to the provisions and requirements of the CCPA if they engage in activities falling outside of the GLBA—which they almost certainly do.
By way of explanation, the GLBA regulates financial institutions’ management of nonpublic personal information, which is defined in 15 U.S.C. § 6809 as personally identifiable financial information: 1) provided by a consumer to a financial institution; 2) resulting from any transaction with the consumer or any service performed for the consumer; or 3) otherwise obtained by the financial institution.
The CCPA defines “personal information” much more broadly to include “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” The CCPA identifies numerous examples, such as online identifiers, Internet Protocol addresses, email addresses, browsing history, search history, geolocation data, and information regarding a consumer’s interaction with a website or online application or advertisement. Notably, the CCPA’s definition also includes any “inferences drawn” from any personal information that is used “to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes.”
Therefore, to the extent that GLBA-regulated entities are using targeted online advertising, tracking web page visitors, and/or collecting geolocation data—to name a few examples—either through their web pages or apps, they will need to analyze the CCPA’s requirements.
As for the new statutory language providing that “[t]his subdivision shall not apply to Section 1798.150,” the impact of that sentence cannot be overstated.
Section 1798.150 sets forth a private right of action for consumers to seek statutory damages of not less than $100 and not greater than $750 “per consumer per incident or actual damages, whichever is greater” if the consumer’s information “is subject to an unauthorized access, exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices.” In other words, GLBA-regulated entities will still be subject to millions of dollars of potential damages if they experience a data breach.- David M. Stauss, Kristen Poetzel & Malia K. Rogers
California Further Expands Protections to Servicemembers, Restricts Credit Reporting About Active Duty Status, Requires Written Responses to Requests for Relief under the Statute, and Enacts New Criminal PenaltiesOn September 19, 2018, California enacted AB-3212 (the Bill). The Bill amends the California Military and Veterans Code to expand the protections offered to qualifying servicemembers under state law and to impose new criminal penalties for certain violations of its provisions. Some of the key changes, which go into effect January 1, 2019, are as follows:
- Extends most protections to 120 days after military service ends (prior provision extended protections for 60 days after the end of military service).
- Expands the 6% interest rate cap to include student loans, with the 6% rate to remain in effect for one year after the period of military service ends.
- Extends the ability to defer payments on certain obligations to include student loans.
- Clarifies that interest in excess of 6% per year that would otherwise be incurred but for the interest rate cap is “forgiven” and periodic payments “shall be reduced by the amount of interest forgiven.”
- Extends the right to terminate leases after entry into military service to include vehicle leases.
- Clarifies that penalties may not be imposed on the nonpayment of principal or interest during the period in which payments are deferred on an obligation pursuant to a court order.
Written Response Required
- Requires a person receiving a request for relief from a servicemember to respond within 30 days acknowledging the request, setting forth any reasons the person believes the request is incomplete or the servicemember is not entitled to the relief requested, specifying the specific information or materials that are missing from the request, and providing contact information the servicemember can use to contact the person regarding the request. If, after receiving a request from the servicemember the recipient does not respond within 30 days, the recipient waives any objection to the request, and the servicemember is automatically entitled to the relief sought.
Prohibitions on Sales, Foreclosures, and Seizures of Property
- Extends the bar on sale, foreclosure, or seizure of property for non-payment to the period of military service plus one year (prior provision was for the period of nine months after the end of military service).
- Extends the bar on enforcing storage liens during the period of military service and for 120 days thereafter (prior provision was until three months after the end of military service).
- Requires a sworn statement of compliance by any person who files or completes a notice, application, or certification of lien sale or certificate of repossession.
Protections Related to Court Proceedings
- Extends the ability of courts to stay proceedings involving servicemembers as a plaintiff or defendant to 120 days after the end of the military service (prior provision was until 60 days after the end of military service).
- Permits a servicemember who is granted an initial stay to apply for an additional stay by showing there is a “continuing military effect” on the servicemember’s ability to appear. If the court refuses to grant an additional stay, the court shall appoint counsel to represent the servicemember in the proceeding.
- Requires courts to stay for a minimum period of 90 days any proceedings in which (a) there may be a defense to the action that cannot be presented without the presence of the servicemember defendant; or (b) counsel cannot after due diligence contact the servicemember defendant to determine if a meritorious defense exists.
- Limits the ability of a court-appointed attorney to waive defenses that a servicemember may have or to otherwise bind the servicemember whenever the attorney cannot locate the servicemember through a new statutory provision.
- Prohibits a creditor or consumer reporting agency from making an annotation in the servicemember’s record that the person is on active duty status. A violation of this provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
- Prevents a debt collector from falsely claiming to be a member of the military in attempting to collect any obligation. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
- Expressly prohibits a debt collector from contacting the servicemember’s military unit or chain of command in connection with the collection of any obligation unless the debt collector obtains written consent from the servicemember after the obligation becomes due and payable. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
Scope of Coverage
These provisions in the California Military and Veterans Code apply broadly to members of the Armed Forces (Army, Navy, Air Force, Marine Corps, and Coast Guard) who are on active duty as well as any member of the state militia (defined as the National Guard, State Military Reserve, and the Naval Militia) who are on full-time active state service or full-time active federal service. Creditors are advised to consult with counsel to determine whether these new provisions will apply to specific servicemember borrowers who have contacts with California.
On September 26, 2018, the Mortgage Bankers Association (MBA) together with eleven other mortgage industry groups submitted a letter to CFPB Acting Director Mick Mulvaney “to urge the Bureau. . . to make changes to its Loan Originator Compensation (LO Comp) rule necessary to help consumers and reduce regulatory burden.” The trade groups assert that because the current regulatory environment has significantly reduced the harm associated with steering through measures such as the Qualified Mortgage rule and the Bureau’s TILA-RESPA Integrated Disclosure rule, relaxation and clarification of the LO Comp rule “should be among the Bureau’s top priorities.”
The trade groups state that, as currently implemented, the LO Comp rule imposes strict and often ambiguous limits, which have the unintended consequences of increasing consumer costs and reducing product availability and competition. Accordingly, the trade groups encourage the Bureau to make three specific changes to the rule to address these problems.
First, the trade groups request that the LO Comp rule should be amended to “allow loan originators to voluntarily reduce their compensation in response to demonstrable competition in order to pass along the savings to the consumer.” The trade groups assert that because the rule currently prohibits a loan originator’s compensation from being increased or decreased once loan terms have been offered to a customer, a lender “must decide between lowering the interest rate, fees, or discount points to meet the competition (and thus originating an unprofitable loan with the fixed loan originator compensation) or declining to compete with other loan offers.” “The requirement to pay the loan originator full compensation for a discounted loan creates a strong economic disincentive for lenders to match interest rates,” which harms consumers by impeding competition in the marketplace.
Second, the trade groups claim that the prohibition on changes to a loan originator’s compensation after loan terms have been offered also has the negative consequence of preventing employers from holding their employees “financially accountable for losses that result from mistakes or intentional noncompliance with company policy.” Accordingly, the trade groups request that the LO Comp rule be amended to “allow [the] lender to reduce a loan originator’s compensation when the originator makes an error.” The trade groups assert that this change would encourage accountability on the part of loan originators and “incentivize them to reduce errors and [to] consistently comply with regulatory requirements and company policy.” The trade groups also maintain that such incentives would encourage better adherence to the regulations and policies designed to protect consumers and that, accordingly, alleviating the restrictions on changes to a loan originator’s compensation after loan terms are offered would benefit consumers and lenders alike by encouraging competition and increasing accountability.
Third, the trade groups recommend that the Bureau amend the rule to allow lenders “to alter loan compensation in order to offer loans made under state and local housing finance agency (HFA) programs.” These programs provide important benefits and access to credit for first-time home buyers and low-to-moderate-income families, and the robust underwriting and related requirements make such loans more expensive to produce. The trade groups note that covering these expenses is a challenge, as HFA programs typically limit the interest rates and fees, and that lenders previously addressed the issue “by paying loan originators a smaller commission for an HFA loan than for a non-HFA loan.” According to the trade groups, the LO Comp rule’s prohibition of this solution has reduced the ability of companies to offer HFA loans at all, thereby reducing the availability of these important resources for consumers.
In its conclusion, the letter also suggests that the Board should broadly simplify the LO Comp rule by “specifying a clear ‘bright line’ list of impermissible compensation factors,” reversing course from the “current approach of providing a short list of permissible factors and a vague and complicated ‘proxy for a term’ analysis that serves to discourage everything else.” The trade groups assert that clear, bright-line rules create less ambiguity and are therefore easier to enforce, encouraging adherence to the law and better serving both consumers and the industry.
The MBA also addressed the LO Comp rule in its comments responding to the CFPB’s Request for Information Regarding the Bureau’s Adopted Regulations and New Rulemaking Authorities (RFI), which were submitted on June 19, 2018. The MBA comments addressed issues “in the order in which [the MBA] believe[s] they should be revisited by the Bureau,” starting with the three requests set forth in the recent trade group letter. Those comments, in combination with the recently submitted letter, demonstrate industry-wide agreement that the Bureau should prioritize its resources to implement revisions to the LO Comp rule.- Elisabeth R. Connell
The FDIC’s Center for Financial Research has issued a research paper that discusses the use of the information contained in a “digital footprint,” meaning the information that people leave online by accessing or registering on a website, for predicting consumer default.
The researchers considered ten digital footprint variables that included:
- The device type (e.g. tablet or mobile)
- The operating system (e.g. iOS or Android)
- The channel through which a customer comes to a website (e.g. search engine or price comparison site)
- Two pieces of information about the user’s email address (e.g. includes first and/or last name and includes a number)
According to the researchers, the results of their research suggest that “even the simple, easily accessible variables from the digital footprint proxy for income, character and reputation are highly valuable for default prediction.” For example, ownership of an iOS device was found to be one of the best predictors for being in the top quartile of income distribution, customers coming from a price comparison website were found to be almost half as likely to default as customers directed to the website by search engine ads, and customers having their names in the email address were found to be 30% less likely to default. The researchers also found that digital footprint information complements rather than substitutes for credit bureau information, suggesting that a lender that uses information from both sources can make superior lending decisions.
The researchers observe that “digital footprints can facilitate access to credit when credit bureau scores do not exist, thereby fostering financial inclusion and lowering inequality.” They indicate that their results “suggest that digital footprints have the potential to boost financial inclusion to parts of the currently two billion working-age adults worldwide that lack access to services in the formal financial sector.”
The researchers also comment that regulators are likely to closely watch the use of digital footprints, noting that U.S. lenders using digital footprint information “are likely to face scrutiny whether the digital footprint proxies for [borrower characteristics such as race and gender that may not be considered under the Equal Credit Opportunity Act] and therefore violate fair lending laws.”- John L. Culhane, Jr.
Did You Know?
NMLS Posts State-Specific Continuing Education Requirements for MLOs
The NMLS Resource Center has been updated to include state-specific MLO annual continuing education requirements and related information (state-specific education charts). As a reminder, the SAFE Act requires state-licensed mortgage loan originators to complete a minimum of eight hours of NMLS-approved continuing education annually, and a number of states impose additional continuing education obligations on MLOs.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.