Banking

What’s in Store for Dodd-Frank and Seller Financing?

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The Washington Post and The New York Times are both reporting on potential restructuring of the financial system when the new administration takes over in January.

We all heard President-Elect Donald Trump call the Dodd-Frank Act a “disaster” during his campaign. The Washington Post article reports his transition team has a stated goal, “to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” What, exactly, does this mean?  At this point, we don’t know.

But The New York Times article states Representative Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee, has long been an opponent of Dodd-Frank and has introduced his idea for reform, the Financial Choice Act. “Choice”, according to the article, stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.

financial-systemIt seems clear that the Republican controlled Congress will work hard to make sweeping changes to this legislation that has basically rocked our collective worlds with the implementation of new forms and rules for closings. We promise to keep everyone up to date as this drama unfolds. We can only hope that, from a closing standpoint, the changes won’t be as sweeping as those we have just tackled!

In other CFPB news, the Bureau is investigating seller financing situations involving National Asset Advisors LLC, National Asset Mortgage LLC and Harbour Portfolio LLC. Orders involved in these investigations can be read on CFPB’s website.

We should pay attention to these enforcement proceedings because seller financing for residential owner-occupied residences has become a concern in South Carolina as a result of the interplay of the federal and state SAFE Acts, HUD’s final rule, released in 2011, and Dodd Frank’s Consumer Financial Protection laws.

The interplay between these laws appears to require licensing and registration of mortgage loan originators for mortgages of owner-occupied residences other than the sale of the seller’s residence. Clients who fail to become licensed as loan originators or fall into an exemption may find they are unable to close, and may, along with the attorneys who closed the transactions, be subject to claims and litigation.

The CFPB has broad enforcement powers, including the power to impose civil monetary penalties ranging from $5,000 to $1 million per day. South Carolina’s legislature could improve this situation greatly by addressing certain inconsistencies between our version of the SAFE Act and the federal version. Again, we will attempt to keep everyone up to speed on this issue as it develops.

New Settlement Agent Communication from Wells Fargo

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Seller CD must be provided to Wells prior to disbursement

Wells Fargo communicated with its settlement agents (closing attorneys in South Carolina) by memo dated September 22. In case you missed it, you can read it in its entirety here.

The biggest news is that Wells will now require a copy of the seller Closing Disclosure along with the other documents required prior to disbursement. Apparently, receipt of the seller CD has been a challenge, necessitating the procedural modification.

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Another challenge has been the process for handling changes to the borrower’s CD. The memo stated that any changes known prior to closing, including changes to the closing numbers, the closing date and the disbursement date, must be communicated to the Wells Fargo closer.  Wells Fargo’s closer will provide an updated borrower CD and any other updated documents for closing.

Any changes detected at or post-closing should be communicated to:  SAPostClosingCommunications@wellsfargo.com.

The memo also discussed the phased rollout in progress for delivering training materials and other support for the use of Closing Insight™.  We encourage closing attorneys to read and comply with this information to avoid being left out when this process is fully implemented.

Feds Extend Footprint of Shell Game

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Will this obligation eventually extend to South Carolina?

Secretly purchasing expensive real estate continues to be a popular method for criminals to launder dirty money. Setting up shell entities allows these criminals to hide their identities. When the real estate is later sold, the money has been miraculously cleaned.

Early this year, the Financial Crimes Enforcement Network (FinCEN) of the United States Department of the Treasurer issued an order that required the four largest title insurance companies to identify the natural persons or “beneficial owners” behind the legal entities that purchase some expensive residential properties.

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At that time, the reach of the project extended to the Borough of Manhattan in New York City, and Dade County, Florida, where Miami is located. In those two locations, the designated title insurance companies were required to disclose to the government the names of buyers who paid cash for properties over $1 million in Miami and over $3 million in Manhattan. The natural persons behind the legal entities had to be reported for any ownership of at least 25 percent in an affected property.

Now, all title insurance underwriters, in addition to their affiliates and agents, will be involved, and the footprint of the project is being extended effective August 28.

The targeted areas and their price thresholds will be:

  • Borough of Manhattan, New York; $3 million;
  • Boroughs of Brooklyn, Queens and Bronx, New York; $1.5 million;
  • Borough of Staten Island, New York; $1.5 million;
  • Miami-Dade, Broward and Palm Beach Counties, Florida; $1 million;
  • Los Angeles, San Francisco, San Mateo, Santa Clara and San Diego Counties, California; $2 million; and
  • Bexar County (San Antonio), Texas; $500,000.

Although the initial project was termed temporary and exploratory, FinCEN has indicated that the project is helping law enforcement identify possible illicit activity and is also informing future regulatory approaches.

We have no way of knowing whether or when this program may be expanded to South Carolina, but it is entirely likely that expensive properties along our coast are being used in money laundering schemes. We will keep a close watch on this program for possible expansion!

Buried in the Dirt

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Are you sure your IOLTA account was properly established?

A Charleston lawyer just shared a bit of an Interest on Lawyer Trust Accounts (IOLTA) horror story with us, and I’m passing it along for the benefit of all South Carolina practitioners to prevent at least one surprise in future certification attempts.

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This lawyer was being vetted by a third-party vendor for the purposes of staying on the good side of a lender. The vetting company advised that the lawyer’s IOLTA account had been set up incorrectly using his firm’s Taxpayer Identification Number (TIN).  The lawyer called The South Carolina Bar Foundation and learned that the account should have been set up using the Foundation’s TIN: 23-7181552. In order to make this change, the bank required the lawyer to open a new account…with all that entails.

As a review, here are some IOLTA facts.

  • These accounts must be used for client funds that are small in amount or expected to be held for a short time, so that the funds cannot practically be invested for the client because they won’t provide a positive net return.
  • Funds that do not meet the nominal or short-term fund requirements of an IOLTA account should be deposited in a separate demand account to earn interest for the benefit of the client, and the client’s TIN should be used.
  • Some financial institutions waive all fees for IOLTA accounts. If reasonable and customary fees are charged, those fees may be deducted from interest. Other fees and service charges are the responsibility of the attorney.
  • There should be no tax consequences for the attorney or client for IOLTA accounts.
  • The Bar Foundation maintains a list of eligible financial institutions on its website.
  • Rule 1.15(h) of the SC Rules of Professional Responsibility mandates that all lawyers with trust accounts must file a written directive with their bank requiring the bank to report any non-sufficient funds (NSF) transactions. This mandate applies to IOLTA accounts.

Check your IOLTA accounts and make sure you’re in compliance before the vetting companies arrive on the scene!

Another Win for MERS.

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South Carolina Supreme Court tosses case against it brought by five Counties

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County administrators in five South Carolina counties were told they have no statutory cause of action against MERS in a case our Supreme Court dismissed on March 30.* Allendale, Beaufort, Colleton, Hampton and Jasper Counties brought suits against MERS and numerous banking institutions claiming their fraudulent practice of recordings disrupted the integrity of the public records.

The Supreme Court consolidated the five suits and assigned them to Business Court Judge Lawton McIntosh. MERS and the banking institutions filed a joint motion to dismiss, arguing the suit was barred by SC Code §30-9-30. The trial court denied the motion to dismiss, indicating dismissal is improper for a novel question of law. The Supreme Court granted cert and dismissed the actions.

MERS is a member-based organization made up of lenders, investors, mortgage banks and others. When a MERS lender takes a promissory note and mortgage, MERS is shown on the face of the mortgage as the nominee for the lender. The mortgage is recorded in the county where the real estate is located, and the loan is registered in the MERS system.

This system allows lenders to retain priority with MERS as nominee. MERS provides convenient framework through which its members can transfer notes and mortgages without having to record each assignment. As a result, the public records may not accurately reflect the true owners of mortgages.

The lawsuits claimed fraud, misrepresentation, unfair trade practices, conversion, and trespass to chattels. It sought a declaratory judgment stating MERS and the lenders had caused damage to the public index system by recording false documents. It requested injunctive relief barring further recordings showing MERS as nominee and requiring corrections to the public records. The prayer demanded direct and consequential damages to remediate deficiencies in the records, as well as compensatory and punitive damages in the event the errors could not be fixed.

The crux of the matter was surely the loss of income for the assignment fees, although that thought is never mentioned in the published opinion.

Sale of a house. Object over whiteThe statute, §30-9-30, allows a recorder to refuse to accept or to remove any document believed to be materially false or fraudulent or a sham legal process. MERS and the lenders argued the statute does not provide the counties authority to bring the lawsuit, and the counties argued that the statute allows them to bring the suit by implication. They suggest that the statute provides, by implication, the power to commence litigation to remediate the public records and to seek guidance from the Court. The Supreme Court declined to imply language into deliberate legislative silence.

The Supreme Court held that the lower court erred in declining to dismiss the suit on the ground that this is a novel issue of law despite the fact that earlier cases had held to the contrary. The Court stated that where the case involves simple statutory construction, the trial court should not deny a meritorious motion simply because the question is one of first impression.

According to the Court, the statute already provides a remedy to government officials by allowing them to remove or reject any fraudulent records. Will the counties attempt to utilize this remedy?  Only time will tell.

*Kubic v. MERSCORP Holdings, Inc. (Appellate Case 2015-001366, March 30, 2016)

The Big Short: Required Reading (and watching) for Dirt Lawyers

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Super Bowl 50 was the big entertainment news of the weekend, but coming in at a personal close second were the book and movie The Big Short. I rushed to finish the former before dragging my husband to a Saturday matinee of the latter. Then, a friend pointed me to an NPR special “The Giant Pool of Money”, which provided a fascinating diversion for my Saturday afternoon walk.  (I confess to being easily entertained by all matters involving real estate.)

I encourage everyone involved with “dirt” to read the book, watch the movie and listen to the podcast. All relate to the 2008 financial crisis. At the center of the book (and movie) were several eccentric investors/money managers, who predicted the fall and brilliantly crafted a method to cash in on it. At the center of the podcast was the “giant pool of money”, the trillions of dollars in the economy that constantly need a place to be invested.

Locally, we heard the stories about real estate investors who lost properties and funds in the crash. In our office, we compared the crash to a game of musical chairs. The investors who sat in the chairs when the music stopped (the ones who held titles to the properties) were the ones who lost.

All areas of South Carolina were affected, but our coastal areas were hardest hit. Property values were phenomenal!  A contract on a yet-to-be-constructed residence might change hands several times at increasing prices before the final purchase. And loans were easy to procure at all income levels. No one thought property values would ever soften, and it didn’t matter if adjustable rate loans would reset in two years at staggeringly high fixed interest rates because refinances were readily available. Properties and mortgages churned like butter. There was apparently no end in sight.

The book’s author, Michael Lewis, who also wrote Moneyball and The Blind Side (back to football, which really is the center of the universe), said in explaining the mindset of the people who would borrow again and again, “How do you make poor people feel wealthy when wages are stagnate? You give them cheap loans”.

One of the money managers in The Big Short had his eyes opened by a story from his own household. His babysitter revealed she and her sister owned five townhouses in Queens. When he questioned asked how that possibly could have happened, she responded that after they bought the first townhouse, the value increased, and lenders suggested they refinance and take out $250,000, which they used to buy another townhouse. And so on….

The “giant pool of money” that at one time had been invested safely in boring assets like Treasury bonds, needed a place to land with higher interest rates. With mortgage rates being at 3.5% and higher, no better place could be found.

How did the money managers cash in?  They looked at pools of mortgages that were being sold on the secondary market, saw that the interest rates would collectively begin to reset in early 2007, and bet against the housing market.

They created a “credit default swap” market that bet against collateralized debt obligations. Huh?

One of the points of the book is that the financial markets created fancy terms that average individuals could not possibly understand. In this particular case, it turned out that that the big Wall Street firms, the people who ran them as well as their regulators, did not understand what was happening either.

“Credit default swap” is a confusing term because it is not a swap at all. It is an insurance policy, typically on a corporate bond, with semiannual payments and a fixed term. The money managers who predicted the subprime lending crisis bought credit default swaps that paid off, like insurance policies, when the market crashed.  These eccentric money men were able to predict that there would be a crash of the subprime mortgage market even if housing prices only stalled because borrowers would not be able to refinance or make payments.  When prices dropped, the money men were able to cash in at astonishing levels.

The most horrifying point of the book was that the government’s response to the crisis, the so-called bailout, will not prevent the crisis from happening again. We can only hope that we are all better educated the next time around. As I opened Outlook this morning, though, the first article that caught my eye was from Housingwire entitled “Risky home lending really on the comeback?”  Let’s collectively hope not!

Lender Challenges CFPB’s Constitutionality

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On July 30, this blog discussed State Bank of Big Spring v. Lew, a case in which the U.S. Court of Appeals for the District of Columbia ruled on that day that a small Texas bank had standing to challenge the constitutionality of the Consumer Financial Protection Bureau (CFPB).

The same court was asked on August 5 by mortgage lender PHH Corporation to stay a final decision of the CFPB on constitutionality grounds.

The latter case follows the CFPB’s final decision in an enforcement action against PHH requiring the lender to pay $109 million in disgorgement. The lender was accused of illegally increasing consumers’ closing costs by requiring them to pay reinsurance premiums to PHH’s in-house reinsurance company. The CFPB classified the reinsurance payments as kickbacks.

The court granted the stay, holding PHH “satisfied the stringent requirements for a stay pending appeal.”

PHH argues the CFPB is unconstitutional because Director Richard Cordray has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition states, “Never before has so much authority been consolidated in the hands of one individual, shielded from President’s control and Congress’s power of the purse.” The petition argues that the Director is only removable for cause, distancing him from the power of the President, and is able to fund the agency from the Federal Reserve System’s operating expenses, distancing him from Congress’s power to refuse funding.

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The court issued a one paragraph stay order, and it is not clear whether the motion was successful based on the constitutionality argument because PHH had also argued that Director Cordray misinterpreted settled law on mortgage reinsurance and on how disgorgements are calculated.

The stay is in place pending the appeal. It will now be interesting to see whether the Court of Appeals will reach the constitutionality issue or decide the case on the legal interpretation issues. And, of course, it will be interesting to see whether future constitutionality challenges continue with regard to this powerful agency that is changing the rules for residential closings.

Another TRID Lender Announcement

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This one has an interesting twist.

US-Bank-Home-MortgageU.S. Bank Home Mortgage (USBHM) recently announced that it, like other large lenders, will prepare and deliver the Closing Disclosure and any necessary revisions to the consumer once the TRID rules become effective on October 3. Settlement agents (closing attorneys in South Carolina) will be responsible for the seller’s Closing Disclosure.

Here’s the twist: USBHM stated that it will only require TRID documents for loans subject to TRID, which would include most closed-end consumer credit transactions secured by real estate, for applications taken on or after October 3. Then it stated, “One exception to this is that USBHM will require TRID disclosures for properties that are title vested in an LLC.”

On its face, this statement would mean that commercial loans involving properties vested in LLCs would be subject to the new Loan Estimate and Closing Disclosure forms. Since the name of this lender is U.S. Bank Home Mortgage, we can only assume this announcement means USBHM will consider any loan secured by residential property vested in a limited liability company to be a consumer loan. As an example, loan on a rental house (an investment property) titled in an LLC, would be subject to TRID rules, according to this lender. The announcement did not make a distinction between single- and multi-member LLCs.

The announcement indicated that USBHM will use various methods of delivery for the Loan Estimate and Closing Disclosure, including regular mail, electronic delivery and tracking through eLynx. (A quick look at eLynx’ website indicates this company provides a network for paperless document collaboration and distribution throughout the financial industry.)

USBHM indicated it will work with settlement agents to prepare the Closing Disclosure for delivery to the consumer, and that collaboration on the numbers will begin seven to ten days before the scheduled consummation date. The bank will continue to place the burden on settlement agents for the accuracy of the closing figures: “The settlement agent will continue to be responsible for ensuring that the Closing Disclosure provided at consummation is accurate to the terms agreed upon with USBHM.”

After the settlement agent and USBHM have agreed on the closing figures, USBHM will deliver the closing disclosure to the consumer and the settlement agent simultaneously through eLynx. The plan is to deliver the closing documents, including the final Closing Disclosure, to the settlement agent one day prior to closing.

surprised woman with bookLocally, we have been speculating that loan documents for various lenders will arrive ten minutes prior to closing despite the three-day rule for the Closing Disclosure. This announcement gives that speculation some credence. There is no requirement of early delivery of the closing documents to the closing attorney.

Locally, we have also been speculating that making changes to the closing figures will be difficult, particularly if the closing takes place outside of normal banking hours. This announcement provides some help by indicating that USBHM will have staff available for after-hours closings provided it has notice that a borrower will be signing outside normal business hours.

To read the entire announcement, follow this link.

Dirt Lawyers Will Like This Mortgage Satisfaction Case

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S.C. Supreme Court holds equity lines are subject to the timely satisfaction statute.

In an opinion written by Justice Beatty, our Supreme Court held on August 5 that open-ended mortgages are satisfied in the same manner as conventional mortgages and under the same statutory requirement for timely satisfaction by lenders.

Regions Bank v. Strawn involved a mortgage foreclosure against Robert and Nancy Borchers. The Borchers counterclaimed seeking to recover from Regions Bank under §§29-3-310 and 29-3-320 of the South Carolina Code based on the bank’s failure to satisfy the mortgage within the three-month time period required.

mortgage jengaThe home had been purchased from Cammie Strawn, who had taken title from her then-husband, Richard Strawn. Mr. Strawn had previously obtained the home equity line of credit. At the time of the Borchers’ closing, the balance of the mortgage was $32,240.42. Immediately after the closing, the Borchers’ attorney, James Belk, had an employee deliver a payoff check and a mortgage satisfaction transmittal letter to Regions Bank. The check had the words “Payoff of first mortgage” typed on it.

Instead of satisfying the mortgage, the bank applied the check to the balance, bringing it to zero, and provided Richard Strawn with new checks even though he had not owned the home for more than two years. Mr. Strawn spent more than $72,000 on the equity line.

When Regions Bank attempted to collect on Mr. Strawn’s debt by foreclosing on the Borchers’ home, the Borchers answered, counterclaimed and moved for summary judgment. The bank argued that a revolving line of credit should be handled differently than conventional mortgages, and this particular mortgage could not be satisfied without instructions from Mr. Strawn.

The trial court and Court of Appeals ruled in favor of the Borchers. On appeal to the Supreme Court, Regions Bank made two basic arguments: (1) open ended mortgages are an exception to the statutory satisfaction requirement because only the original borrower is authorized to request a satisfaction; and (2) the Borchers could not assert a violation of the mortgage satisfaction statutes because their attorney had the authority to satisfy the mortgage pursuant to the attorney satisfaction statute (§29-3-330).

The Court affirmed and held that the first argument failed because the mortgage itself contemplated that the property may be sold and specifically stated that it would be binding on the mortgagor’s successors and assigns. Also, the court stated that anyone with an interest in mortgaged property is allowed to request a satisfaction upon payment, and there is no exception for equity lines of credit.

Sale of a house. Object over whiteAs to the argument that the Borchers’ attorney could have satisfied the mortgage, the Court stated simply that this argument is without merit because the statutory framework does not exempt a mortgage holder of an equity line from the penalty provisions for failing to satisfy a mortgage within the required time frame.

This is a good opinion for South Carolina closing lawyers!

Small Bank Wins CFPB Challenge at the Appellate Level

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Eleven states, including SC, lose in the same case.

The U.S. Court of Appeals for the District of Columbia ruled on July 24 in favor of a small Texas bank in its constitutionality challenge of the Consumer Financial Protection Bureau (CFPB).

In State Bank of Big Spring v. Lew, the Court of Appeals reversed the District Court’s holding that the bank’s claims failed for lack of standing and ripeness. Eleven states, including South Carolina, had joined the lawsuit, but the states’ claims were held to fail on the issues of standing and ripeness.

Big dog little dog aThe bank first challenged the constitutionality of the CFPB on the grounds that all independent agencies must be headed by multiple members, while the CFPB is headed by a single Director.

The Court held that the Bank had standing to raise this challenge because the Supreme Court holds that there is ordinarily little question that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated. Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992).

On the issue of when the bank may bring its claim, the ripeness issue, the Court of Appeals again cited a Supreme Court case, Abbott Laboratories v. Gardner, 387 U.S. 136 (1967) for the proposition that regulated parties generally need not violate a law in order to challenge the law.

The bank then questioned the legality of President Obama’s recess appointment of CFPB Director, Richard Cordray. Mr. Cordray was nominated on July 18, 2011. When the Senate had not acted on the nomination by January 4, 2012, President Obama used his recess power to appoint Mr. Cordray during a three-day intra-session Senate recess. On July 16, 2013, after Mr. Cordray had been serving for 18 months, the Senate confirmed his nomination.

The bank alleges that the recess appointment and all the actions Cordray took before he was confirmed were unlawful because the appointment occurred during an intra-session recess of insufficient length. The Court held that the bank had standing on this issue, and that the issue is ripe.

pawn takes queenThe bank then argued that the Financial Stability Oversight Council created by the Dodd-Frank Act is unconstitutional. This council has authority to designate financial institutions as “too big to fail” and subject to additional regulation. The bank has not been designated as “too big to fail”, but its competitor, GE Capital Corporation, has. The bank argued that GE Capital receives a reputational subsidy as a result of its designation which allows it to raise capital at lower costs that it otherwise could, impacting the bank’s ability to compete for the same funds. The Court held that the bank does not have standing to assert this claim because the link between the enhanced regulation and any harm to the bank is too attenuated and speculative to support standing.

Eleven states challenged Dodd-Frank’s “orderly liquidation authority” which gives the Government broad power to liquidate failing financial institutions that pose a significant risk to the stability of the U.S. financial system. The states’ theory for standing and ripeness deals with the fact that the states and their pensions funds have invested in financial companies and their current investments may be worth less because of this authority.

The Court held that it is premature for a court to consider the legality of how the government might wield the orderly liquidation authority in a potential future proceeding. The states’ theory was held not to satisfy standing or ripeness requirements.

The case was remanded to the District Court on the bank’s challenges to the constitutionality of the CFPB and Director Cordray’s recess appointment.

It’s getting interesting out there!