Consumer Financial Protection Bureau

CFPB Announces TRID Clarity in the Works

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Cordray signals notice of new rule expected late July

cfpb-logoIn an April 28 letter addressed to several industry trade groups and their members, Director Richard Cordray of the Consumer Financial Protection Bureau, said his agency has begun drafting a notice intended to provide “greater certainty and clarity” in the Know Before you Owe Rule.

The letter stated the CFPB is working hard to understand industry concerns and recognized there are places in the regulation text and commentary where adjustments would be useful.

In a press release, also dated April 28, American Land Title Association said its primary goal for the proposed adjustments is to insure consumers receive clear information about their title insurance costs on the Closing Disclosure. As we have all experienced, TRID requires a very odd negative number as the cost for owner’s title insurance in most situations. ALTA has been arguing against this strange result for many months.

The Director’s letter stated that the Bureau has begun drafting a Notice of Proposed Rulemaking (NPRM) that should be available for comments in late July. It also suggested that one or two meetings will be arranged with industry participants before the NPRM is issued. In the meantime, the letter encouraged continued feedback.

The text of the letter can be accessed here.

Lender Challenges CFPB’s Constitutionality

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cfpb-logoOn 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 July 30 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 Condray 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.

Good News From ALTA

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CFPB said lenders can’t “unilaterally” shift TRID liability

lane shiftIn news that will be well received by South Carolina residential closing attorneys, ALTA reported on April 8 that CFPB Director Richard Cordray stated that lenders may not unilaterally shift liability for errors on TRID mortgage disclosures to third parties.

The report indicates that U.S. Senator Robert Corker of Tennessee had written a letter to Director Cordray asking whether creditors, acting alone, may shift liability to settlement agents for Closing Disclosure errors. Director Cordray responded in writing, “While creditors may enter into indemnification agreements and other risk-sharing arrangements with third parties, creditors cannot unilaterally shift their liability to third parties and, under the Truth in Lending Act, alone remain liable for errors on the Know Before You Owe mortgage disclosures.”

ALTA’s report further states that Director Cordray wrote that lenders and settlement agents are free to decide how to divide the responsibility and risk when implementing the new requirements through contracts.

stay tunedWe have heard from closing attorneys across South Carolina that lenders are taking varying approaches in their attempts to shift or share TRID liability with closing attorneys. We caution closing attorneys to read letters and closing instructions carefully and to negotiate or strike objectionable provisions. Pay particular attention to provisions that would violate attorney ethical obligations. Don’t agree, for example, that client confidences will be revealed to creditors.

American Land Title Association is Working for Us

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Letter to CFPB asks for clarity.

mountain climbers helping handAmerican Land Title Association’s January issue of TitleNews reports that ALTA reached out to the Consumer Financial Protection Bureau by letter dated Nov.23, asking for clarity in three areas of the TRID regulations.

The first area of concern is generating a great deal of angst among South Carolina closing attorneys, that is, the attempt by lenders to shift liability to settlement agents for all compliance issues, including compliance with the new federal law.

Here in South Carolina, we are seeing modified closing instructions that explicitly shift this liability to closing attorneys and often include indemnity language. The attorney is being asked to indemnify the lender for the liability the federal law has clearly imposed on lenders.

By the way, I urge South Carolina real estate lawyers to become members of the South Carolina Bar’s Real Estate Section. The Real Estate Section provides its members with access to its Listserv, which can be found at realestatelaw@scbar.org. The forum is a great place for South Carolina real estate lawyers to share ideas and frustrations as well as a place to seek information and advice from peers.

The frustration of real estate lawyers regarding this issue is obvious in that forum. It is a great place for lawyers to share their ideas as well as their frustration.

Michelle Korsmo, ALTA’s Executive Director, said in the Nov. 23 letter to the CFPB, “These instructions are in contrast to the clear public policy underpinning this rule, as well as language in the rule stating that lenders bear ultimate liability for errors on the Closing Disclosure form.” According to TitleNews, ALTA provided the CFPB with several examples of the offending closing instructions.

The second area of concern is the disclosure of title insurance premiums on the Closing Disclosure and particularly the very odd negative number that appearing for the cost of owner’s title insurance. The calculation methods of the CFPB seem to be dictating this negative number in many cases, but in what world is that logical? And how does that negative number supply clarity to consumers?

The third and final area of concern expressed ALTA’s Nov. 23 letter is the confusion surrounding seller credits on the Closing Disclosure. Lenders and closing attorneys are struggling with whether to list seller credits as individual line items on the CD or to consolidate them and disclose them under a general “seller credits” heading.

All of us in the industry should be appreciative of ALTA’s efforts to assist in this push for clarity. I urge South Carolina lawyers to join ALTA and to pay attention to and support its efforts in our behalf.

So You Say Ninety Percent of TRID Loans Contain Violations?

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Worse than rocket science? Perhaps.

thumbs downAccording to a news report from American Land Title Association, Moody’s Investors Services has written that several third-party firms found TRID violations in more than 90% of the loans that were audited.

ALTA states that Moody’s report indicates that this “informal feedback” was based on reviews of around 300 mortgages from around a dozen unidentified lenders, and that many of the violations were “only technical in nature”, like spelling errors. But Moody’s is apparently concerned that the secondary market may be affected by the sheer number of violations.

There appears to be a disconnect between this reporting and the perception of Director Richard Cordray of the CFPB. In a speech at the Consumer Federation of America, Director Cordray recently said that the housing industry’s concerns about TRID appear to have been “overblown”. He said that reports from industry participants across the market seem to be indicating that implementation of the new rule is going “fairly smoothly”. He even stated that the anxieties in the market were much like the predictions of technological disasters stemming from Y2K, which never materialized.

What do we, as South Carolina attorneys, do with this information?

  1. Take some comfort in the fact that we are not the only ones struggling with TRID.
  2. Do the best we can to comply with TRID rules.
  3. Do the best we can to comply with South Carolina Supreme Court requirements that we fully disclose all funds involved in closings. I believe we must prepare and deliver closing statements, in addition to TRID required Closing Disclosures, to make the proper disclosures. ALTA’s closing statements, which should be available on all the closing software programs, are excellent forms to use.
  4. Talk to each other about the struggles. Collectively, we should be able to resolve some of the problems.
  5. If you need backup on a position, call your title insurance company lawyers. They are hearing it all these days and may be able to help with a particular lender or an odd position.
  6. Lenders are attempting to shift the burden of compliance to closing attorneys through indemnity
    language being inserted in closing instructions or by separate letter. Closing attorneys should resist
    agreeing to this additional liability if at all possible. Negotiate! Be strong!

And if all else fails, I understand that NASA is taking applications for the next class of astronaut candidates. Maybe alternative employment is possible.

astronaut

 

The Strange Appearance of Title Insurance Rates on the New Closing Disclosure

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calculator paperIs this what the CFPB intended?

South Carolina closing attorneys are in the throes of their first closings under the new CFPB rules. Title insurance company offices are fielding all kinds of unusual questions as everyone works through their first few sets of documents. And our collective eyes are having difficulty adjusting to the appearance of title insurance rates on the new Closing Disclosure.

Under the filed rates of the title companies in South Carolina, we have a simultaneous issue rate of $100 for a second policy in a transaction. Typically, the owner’s liability amount and premium are higher, so the simultaneous issue rate of $100 is the charge for the loan policy.

The South Carolina Department of Insurance (SCDOI) requires us to disclose the true cost of an owner’s policy over the cost of the loan policy. We have been accustomed to referring to this charge as the “difference plus $100” because we take the difference in the full cost of both policies and add the $100 simultaneous issue fee to arrive at the number the SCDOI requires.

Let’s look at an example:

In a purchase transaction, the sales price is $455,000, and the loan amount is $409,500.  The full premium for the ALTA Homeowner’s policy is $1,290.60, and the full premium for the loan policy is $981.00. In the past, the title and software companies’ rate calculators would have shown:

ALTA Homeowner’s policy rate: $1,290.60 (full premium)
Loan Policy (standard rate): 100.00 (simultaneous issue fee)
$1390.60 (total)

For the SCDOI required disclosure, we would have shown:

ALTA Homeowner’s policy rate: $409.60 (difference plus $100)
Loan Policy (standard rate): 981.00 (full premium amount)
$1390.60 (total)

The total of the two calculations was always consistent.

Now, the CFPB requires that the total cost of the loan policy be disclosed and any simultaneous issue discounts must be shown against the owner’s policy. That’s ok with our South Carolina eyes because we can use our “difference plus $100” calculation to reach the same result.

The problem occurs where there is a reissue credit. While the CFPB never specifically addressed how to handle a reissue credit, the agency was clear that the loan policy premium had to be reflected in full. So most of the title and software companies have decided to take the reissue credit from the owner’s policy premium as well.

In our example, let’s assume that there was a prior ALTA Homeowner’s policy in the amount of $315,000. The reissue credit would be $468.90 (half the full premium for $315,000), so the new total cost would be $921.70 ($1,390.60 – $468.20), and this is where the problem becomes more challenging:

ALTA Homeowner’s policy rate: $ -59.30 ($409.60 minus the credit of $468.90)
Loan Policy (standard rate): 981.00 (simultaneous issue fee)
$921.70 (total)

The total is the same (and correct in our collective view), but notice the negative number as the cost of the owner’s policy.

We have decided in our office to think about it this way. The Closing Disclosure is not a replacement for the HUD-1, and it is not a closing statement. It is simply what it is entitled, a closing disclosure that the CFPB requires for the consumer borrower.

We are going to have to prepare other documents (closing statements, disbursement analyses) that will allow us to properly disburse and to completely disclose each disbursement as required by the SCDOI, not to mention the South Carolina Supreme Court! And our eyes are just going to have to adjust to those negative numbers!

Thanks to Cris Garrick, the IT guru in our office who figured this out and convinced me it’s correct!

Dirt Lawyers: Beware of Marketing Services Agreements

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beware pumpkinsThe Consumer Financial Protection Bureau (CFPB) is scrutinizing Marketing Services Agreements (MSAs) in a way that appears to be contrary to decades of HUD guidance. In addition to a significant number of enforcement actions involving MSAs, the agency issued Compliance Bulletin 2015-05 on October 8 which casts doubt about whether the CFPB would ever approve an MSA.

CFPB Richard Cordray was quoted:  “We are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks. Companies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law.”

The bulletin began with a seminar message: “The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefit either consumers or industry.”

The Bureau’s position appears to be that MSAs serve no useful purpose.

Let’s look at the background. First, the prohibition against kickbacks: Section 8(a) of RESPA prohibits giving or accepting “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a party of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Second, the carve out that MSA participants have relied upon: Section 8(c)(2) provides “(n)othing in this section shall be construed as prohibiting the payment of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

Based on years of HUD guidance and legal advice from industry authorities, many lenders, real estate agencies, law firms, title agencies and other providers have routinely entered into agreements to pay each other marketing fees. The entities often share office space as well as sophisticated marketing efforts.

The advice of HUD and the experts was, generally:

  • don’t tie the relationship or compensation to sales, referrals or productivity;
  • limit the services to marketing;
  • avoid exclusivity provisions;
  • value marketing services objectively. This requirement was often the sticking point because shared marketing campaigns are difficult to value. Some experts suggested hiring auditing or actuarial companies; and
  • track the services in the event proof is needed.

The bulletin suggested that the kickbacks and referral fees associated with MSAs may result in consumers paying higher prices for mortgages, and that the practice of steering business may indirectly undermine consumers’ ability to shop for mortgages.

Running afoul of the CFPB in this area has resulted in injunctive relief including bans on entering MSAs, bans on working in the mortgage industry for up to five years, and penalties totaling more than $75 million.

Wells Fargo, Bank of America and Prospect Mortgage have announced decisions to discontinue MSAs. The Mortgage Bankers Association, which had asked the CFPB for guidance on this topic, has now warned its members to take the bulletin very seriously because it appears to be a series of warnings rather than the requested guidance.

Because of the possibility of enormous potential liability, I urge South Carolina real estate lawyers to completely avoid MSAs in the current regulatory environment, at least until more guidance is provided either by the CFPB or court action.

New Penn Financial Announces Closing Portal

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October 3Lender announcements are coming at a fast and furious pace now that we are within days of TRID’s October 3 deadline. Blogging about all of the broadcasts seems to be less than beneficial since most of them are repetitive at this point and since many of the regional lenders making announcements at this late date don’t appear to do business in South Carolina.

A new announcement from New Penn Financial, however, seems noteworthy for two reasons:  (1) this lender advertises it has an office in Murrells Inlet; and (2) the announcement includes news of a new closing portal and “closing agent portal job aid”. You can read the announcement in its entirely here, and follow its link to the “job aid”.

The lender indicates it has implemented the use of SmartGFE and Closing.com to provide more accurate fees to borrowers, and encourages all settlement agents (closing attorneys in South Carolina) to register with Closing.com as soon as possible. The initial and final Closing Disclosures will be sent to settlement agents through the DocuTech Closing Collaboration Portal (ConformX) for review and approval. No advance set-up is required to use this portal.

Interestingly, New Penn indicates it will offer both an E-signature process and a “wet” signature process as delivery and signing methods for the Loan Estimate and the Initial Closing Disclosure.  The memo states the disclosures will be delivered in accordance with CFPB’s timing requirements and that the delivery methods will ensure proof of delivery.

As we have spoken to closing attorneys and real estate agents across South Carolina in preparation for the new rules, there has been much speculation about whether lenders will shorten the six-day requirement by using methods of proof of delivery as an alternative to mail. This indication of an E-signature process would guessingsuggest that it may be possible to shorten the six-day delivery requirement with this particular lender. If other lenders follow suit, real estate professionals will be delighted that the waiting period can be shortened, at least under certain some circumstances.

I’m just guessing here (along with the rest of you), but I anticipate that the last quarter of 2015 may prove to be an interesting transition to our new normal, but after the first of the year, those of us who decide to remain in the closing “game” will have settled into a different, but manageable routine. Best of luck to all of you for getting through the next few months!  And remember, we will get through this together!

National Association of Realtors® Reports on TRID Survey

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Real estate practitioners should expect changes in contracts

NAR

The Research Department of the National Association of Realtors® surveyed members in August about their awareness and preparation for the changes in residential closings being implemented by the Consumer Financial Protection Bureau in October of 2015. The most dramatic change is eliminating the current disclosure forms in favor of a Loan Estimate and Closing Disclosure, collectively called the TILA RESPA Integrated Disclosures (TRID).

The results of the survey were detailed in an Executive Summary entitled “TRID: REALTORS® and the New Closing Process”.

The best news from the report is that 71.2% of the respondent members rated their level of preparedness as average or better. Many stated they are taking action and working with their industry partners to prepare for a smooth transition. More than 80% of respondents indicated they have taken some form of TRID training.

Dirt lawyers should expect to see changes in residential form contracts. More than half of respondents indicated they will adjust contracts to reflect longer closing time frames, and almost a third indicated they plan to adjust contracts to include new contingencies.

Take a look at the following chart for more information on how Realtors® plan to deal with the new rules.

NAR Realtors Chart

Although it is anticipated that the changes may introduce new burdens on lenders, closing attorneys and REALTORS®, many of the respondents indicated the number of delayed closings has been low in the past, and they will continue to work with their industry partners to help make the transition smooth.

Real estate lawyers who have not reached out to their REALTOR® contacts should do so soon and often to assist with the transition!

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.