CFPB

CFPB issues Advisory Opinion on contracts for deed

Standard

On August 13, the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion to remind all of us that contracts for deed (also called bonds for title, installment land contracts, land contracts, land sales contracts) on residential property are subject to the Truth in Lending Act (TILA), in the same manner as mortgage loans.

You can read the Advisory Opinion here and the accompanying press release here.  

The press release touts the action is intended to stop investors from setting borrowers up to fail. It states that the deals often have little oversight, and investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and extensive repairs, and at risk for losing their down payments and homes.

 The press release further argues that predatory lenders use contracts for deed to target low-income borrowers, particularly those in religious communities, and set them up to fail so the sellers can kick them out and repeat the process with a new family.

The houses are often sold at inflated prices, with high interest rates and balloon payments. The transactions often occur without the benefit of inspections required by mainstream lenders.

TILA applies only to creditors who make five or more loans per year, unless a particular loan is considered “high cost” credit. In that case, a single loan can trigger TILA. If TILA applies to a contract for deed:

  • The seller has a duty to access the buyer’s ability to repay;
  • The seller must provide interest rate and other disclosures required by TILA; and
  • In most cases, balloon payments are prohibited.

South Carolina real estate lawyers familiar with these issues have advised clients for years to avoid buying and selling residential real estate using contracts for deed. And the same lawyers have advised their fellow practitioners to avoid closing these transactions.

Be careful out there!

Supreme Court holds CFPB’s funding mechanism is constitutional

Standard

The Consumer Financial Protection Bureau’s funding mechanism is constitutional, according to CFPB v. Community Financial Services Association, decided May 16.

Justice Clarence Thomas authored the 7-2 decision. Justices Samuel Alito and Neil Gorsuch dissented.

A payday lender trade association sued the CFPB in 2017, seeking to overturn a rule prohibiting debits from bank accounts and arguing that the CFPB and all its actions since 2010 were unconstitutional because of its funding structure.

The agency is housed inside the Federal Reserve and draws up to $600 million from the Federal Reserve annually. Funding was set up in this manner to insulate the CFPB from industry influence. Normal funding would include the regular appropriations process. Article 1, Section 9 of the Constitution (the Appropriations Clause) states that no money shall be withdrawn from the Treasury “but in the consequence of Appropriations made by Law.”

The association’s argument was that this deviation from the normal appropriations process gave the agency “perpetual” funding. The opinion held, “Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”

In addition to the CFPB, the Customs Service, Postal Service and revenue officers are all funded through non-annual, standing appropriations.

The dissent stated, “Unfortunately, today’s decision turns the Appropriations Clause into a minor vestige. The Court upholds a novel statutory scheme under which the powerful Consumer financial Protection Bureau (CFPB) may bankroll its own agenda without any congressional control or oversight.

From a practical perspective, I can’t imagine how difficult it would have been to undo the many investigations, rulings, and fines during the CFPB’s tenure. This decision holds that the Bureau’s actions stand.

CFPB highlights actions to combat mortgage servicers’ “junk fees”

Standard

On April 24, the Consumer Financial Protection Bureau (CFPB) published an edition of its Supervisory Highlights that emphasizes the agency’s actions to combat “junk fees” charged by mortgage servicers. You can read the publication here.  

Examples of the illegal activities revealed by CFPB examinations included charging prohibited property inspection fees, sending deceptive notices to homeowners, and violating loss mitigation rules. The publication touts that in response to the agency’s findings, financial institutions refunded fees to borrowers and stopped illegal practices.

The agency also claims its examiners found some mortgage servicers failed to waive late fees and penalties that should have been waived because of COVID rules. Further, some servicers were cited for making late tax and insurance payments, causing borrowers to incur interest and penalties.

Last October, the agency announced its examination work from February to August of 2023 resulted in $140 million refunds to consumers for unlawful junk fees in the areas of bank account deposits, auto loan servicing, and international money transfers. Since that time, the agency states its work has resulted in an additional $120 million refunds to consumers in junk fees in the area of bank account deposits.

CFPB proposes overdraft fee limitation

Standard

This news is only real estate adjacent, but it should be of interest to all of us who represent consumer clients who attempt to qualify for loans.

The Consumer Financial Protection Bureau issued a press release on January 17 proposing to rein in excessive overdraft fees charged by large financial institutions. The agency estimates this rule change would save consumers $3.5 billion or more per year.

You can read the press release here. The press release includes relevant attachments that include the rule, a fact sheet and other documents that should provide the information you need on this topic.

The Truth in Lending Act, enacted in 1968, generally requires lending institutions to disclose the cost of credit to consumer borrowers. But the Federal Reserve Board created an exemption for banks honoring checks when their depositor “inadvertently” overdrew their account.

Originally, overdrafts were infrequent, and overdraft fees were modest. In the 1990s and 2000s, with the rise of debit cards, large banks began raising fees and using the exemption to generate overdraft loans, creating quite the income stream.

The proposed rule would require large financial institutions to treat overdraft loans like credit cards, with all the related disclosure requirements. Alternatively, banks may charge a small fee in line with their costs. The CFPB suggests these fees may be as low as $3.

According to the press release, the agency took action in 2022 against three of the largest financial institutions to curb these fees. As a result, many banks began to voluntarily revise their overdraft policies. This proposed rule is a continuation of the agency’s efforts to control junk fees.

The CFPB is accepting comments on the proposed rule through April 1.

CFPB says lenders must use specific and accurate reasons for credit denial

Standard

On September 19, the Consumer Financial Protection Bureau (CFPB) issued guidance to lenders using artificial intelligence and other complex models. The guidance indicates lenders must use specific and accurate reasons when taking adverse actions against consumers.

This means, according to CFPB’s press release, that creditors cannot simply use sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit.

“Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied,” said CFPB Director Rohit Chopra. “Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”

The press release indicates creditors that simply select the closest factors from the checklist of sample reasons are not in compliance with the law if those reasons do not sufficiently reflect the actual reason for the action taken. Creditors must disclose the specific reasons, even if consumers may be surprised, upset, or angered to learn their credit applications were being graded on data that may not intuitively relate to their finances.

You can read the entire guidance here.

Section 8 of RESPA is alive and well

Standard

CFPB imposes $1.75 million fine for giving “things of value” in return for referrals

This blog often recommends the DIRT Listserv and today is no exception. Professor Dale Whitman reported on August 22 that the CFPB issued an order against Freedom Mortgage Corporation, a residential mortgage loan originator and servicer headquartered in Boca Raton, Florida, for providing things of value—including subscription services, events, and monthly marketing services agreement payments—in exchange for referrals of mortgage loans in violation of the Real Estate Settlement Procedures Act and its implementing Regulation X. The order requires Freedom to stop its unlawful activities and pay a $1.75 million civil money penalty.

You can read the order in its entirety here.

Professor Whitman noted that since RESPA Section 8 has been around for 50 years, one might think that such practices are a thing of the past.

These specific violations were noted:

  1. Freedom entered into agreements with local real estate agents for the agents to provide marketing services for Freedom’s mortgage activities. CFPB said the payments were really referral fees for the agents to refer mortgage loan customers to Freedom. Apparently, no “marketing services” were provided.
  2. Freedom gave the agents free access to valuable industry subscription services, which provided information concerning property reports, comparable sales, and foreclosure data. These subscriptions, which were worth thousands of dollars per month, were provided in return for the agents referring mortgage loan customers to Freedom.
  3. Freedom provided entertainment, food, and drinks at parties and other events to the agents that were referring loan customers to it. They also provided free tickets to sporting and charity events. They didn’t make similar distributions to agents who were not referring customers.

Professor Whitman questions whether a lender really cannot throw a pregame party or provide a skybox at a game for real estate agents. He suggests that there must be a de minimus exception. But the order doesn’t give much guidance on the boundaries of Section 8.

I agree with the Professor. If you represent clients that provide settlement services and rely on referrals, you should advise them to be very cautious about providing free services and entertainment persons who make the referrals.

Congressional method for funding CFPB held unconstitutional

Standard

A three-judge panel of the United States Fifth Circuit Court of Appeals ruled on October 19 that the Consumer Financial Protection Bureau’s funding structure is unconstitutional. *

Rather than receiving its funding through periodic Congressional appropriations, the CFPB is funded directly from the Federal Reserve, which is funded through bank assessments. This funding method was intended to remove some congressional influence on the bureau.

Most federal agencies receive annual appropriations from Congress that are determined each year through legislative negotiations. Many agencies have separate funding sources like fees and assessments collected from the entities they regulate. The arrangement, like CFPB’s, which provides for a continuous funding source, is common among financial regulatory agencies like the Federal Reserve, the FDIC, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Many commentators have suggested that this opinion will not stand because nothing in the Constitution prevents Congress from funding agencies in a variety of ways. The case is expected to be appealed to the full Fifth Circuit and after that to the Supreme Court. But while this holding stands, it renders all CFPB actions from its inception vulnerable to challenge.

*Community Financial Services Association of America, Ltd. v. CFPB

CFPB issues proposed rule to ban foreclosures until 2022

Standard

The Consumer Financial Protection Bureau (CFPB) issued a notice on April 5 proposing an Amendment to Regulation X that would require a temporary COVID-19 emergency pre-foreclosure review period until December 31, 2021, for principal residences. This amendment would, in effect, stall foreclosures on principal residences until January of 2022. The press release, which can be read here, requests public comments on the proposal through May 10, 2021.

The press release states nearly three million borrowers are delinquent in mortgage payments and nearly 1.7 million will exit forbearance programs in September and the following months. The rule proposes to give these borrowers a chance to explore ways to resume making payments and to permit servicers to offer streamlined loan modification options to borrowers with COVID-related hardships.

Under current rules, borrowers must be 120 days delinquent before the foreclosure process can begin. Anticipating a wave of new foreclosures, the CFPB seeks to provide borrowers more time for the opportunity to be evaluated for loss mitigation.

Many provisions of the CARES Act apply only to federally backed mortgages, but the CFPB seeks, by this proposed rules change, to set a blanket standard across the mortgage industry.

Some news from the transition that may affect dirt lawyers

Standard

While we don’t all agree on politics, something we can all embrace from last week were the hilarious Bernie Sanders’ mitten memes. I saw friends from both sides of the aisle post one funny version after another. I even saw an interview that had Bernie himself laughing about them. He appears to be a good sport!  As a South Carolinian, my two favorites involved the Coburg cow and Cocky. I, for one, needed the comic relief.

There were a couple of real news items for real estate practitioners to consider.

First, the CFPB Director, Kathy Kraninger, stepped down at the request of the new administration. This blog has discussed several cases that have argued the CFPB was unconstitutionally organized as violating the separation of powers doctrine because it had a single director that could only be removed for cause. Last year, the Supreme Court held in Seila Law v. CFPB that the director can be removed at will by the president.

An interim director was named to take control until a permanent director can be confirmed. Rohit Chopra, a commissioner of the Federal Trade Association, is the choice to be the permanent CFPB Director. Stay tuned for changes that may be implemented under the new leadership. Speculation is that the bureau’s enforcement and oversight activities will be beefed up with an emphasis on COVID-related consumer relief.

Speaking of COVID relief, the Federal Housing Finance Agency has announced that Fannie Mae and Freddie Mac will extend their moratoriums on single-family foreclosures and real estate owned (REO) evictions through February 28. The moratoriums were set to expire at the end of this month.

The administration would also like to ease the current housing market pain of high home prices and low inventories by proposing a $15,000 first-time homebuyer tax credit which would serve as down payment assistance. There is also speculation that mortgage insurance premiums may be reduced.

On the other hand, mortgage rates appear to be on the rise, so it remains to be seen whether the new administration’s efforts to encourage development and home ownership will be successful.  As always, real estate practitioners will need to keep an eye on the news to assist them in predicting how 2021 will sort out on the housing front and in their businesses.

CFPB issues a factsheet on title insurance disclosures

Standard

Also updates disclosure FAQs

cfpb-logoThe Consumer Financial Protection Bureau (CFPB) has recently issued two documents that may help closing attorneys.

The first document is a factsheet on TRID title insurance disclosures. This document addresses differences between state disclosures and TRID disclosures for simultaneous issue rates. It also addresses the situation where the seller pays for title insurance.

The second document is an updated list of frequently asked questions (FAQs) on the TILA-RESPA Integrated Disclosures. The additions address seller paid costs, total payments on the closing disclosure, accounting for negative prepaid interest and whether a lender may require the consumer to sign and return the Loan Estimate and Closing Disclosure.