CTIC

CFPB announces top TRID mistakes

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cfpb-logoWe’re learning for the first time what the CFPB considers the top mistakes being made by lenders in mortgage originations under TRID. CFPB’s September 2017 Supervisory Highlights reports on the Bureau’s first round of mortgage origination compliance examinations. Prior to these examinations, the Bureau refused to provide a grace period for lender compliance but stated publicly that it would be sensitive to the progress made by lenders who focused on making good faith efforts to comply with the rule.

Some of these mistakes may be attributed, at least from the viewpoint of the lenders who were pinpointed by CFPB, to settlement service providers (real estate lawyers in South Carolina), so we should pay close attention to this list. Failure to pay attention to it may place some of us squarely on lenders’ naughty lists.

This report indicates most lenders were able to effectively implement and comply with the rule changes, but the examiners did find some violations. The following list contains the most common mistakes:

  • Amounts paid by the consumers at closings exceeded the amounts disclosed on the Loan Estimates beyond the applicable tolerance thresholds;
  • The entity or entities failed to retain evidence of compliance with the requirements associated with Loan Estimates;
  • The entity or entities failed to obtain and/or document the consumers’ intent to proceed with the transactions prior to imposing fees in connection with the consumers’ applications;
  • Waivers of the three-day review period did not contain bona fide personal financial emergencies;
  • The entity or entities failed to provide consumers with a list identifying at least one available settlement service provider in cases where the lender permits consumers to shop for settlement services;
  • The entity or entities failed to disclose the amounts payable into an escrow account on the Loan Estimate and Closing Disclosure when consumers elected to escrow taxes and insurance;
  • Loan Estimates did not include dates and times at which estimated closing costs expire; and
  • The entity or entities failed to properly disclose on the Closing Disclosures fees the consumers paid prior to closing.

The report boasts that the CFPB examiners worked in a collaborative manner with one or more of the entities to identify the root causes of the violations and to determine appropriate corrective actions, including reimbursements to consumers.

The report also covered the Bureau’s supervisory activities outside the mortgage origination arena and indicated nonpublic supervisory resolutions have resulted in total restitution payments of approximately $14 million to more than 104,000 consumers during the review period (January through June, 2017). The CFPB also touted resolutions of public enforcement actions resulting in about $1.15 million in consumer remediation and an additional $1.75 million in civil penalties during the review period.

Despite the notion that the CFPB may be in disfavor in the Trump administration, it remains a powerful body in our industry. Compliance with its directives is crucial to remain in the residential closing business at this point.

What should dirt lawyers do about the Equifax data breach?

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Protect yourself! Advise your clients!

Everyone should have heard about the Equifax data breach at this point, but have you taken any action to protect yourselves and your clients in the face of it?

Equifax has created a website that allows individuals to determine whether their information has been compromised and allows them to sign up for a free year of credit monitoring. Originally, the fine print on this site indicated taking advantage of the free-year credit monitoring service would result in a waiver of legal rights against the company, but I understand the company folded under extreme pressure and removed this language. In any event, please read the fine print since it is apparently changing as this story unfolds.

This website indicated my information had been stolen as well as my husband’s and several colleagues at work. I recommend that you check here to find out whether you need to take further action.

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What action should you take?  I am already a member of a credit monitoring service, so I did not sign up for the free year with Equifax. Regardless, I prefer to keep my legal rights intact. I may need those rights! You may decide to take advantage of the service. You may decide to bite the bullet and sign up for an independent credit monitoring service, and you may decide to remain with that service for more than a year.

What else can be done? I have read many news articles and opinion pieces on this matter and decided to have my credit reports frozen with TransUnion, Experian and Equifax.  You may want to take that action, too, so I have linked those websites for you.

Consider this. If your name, address and social security numbers were compromised, this information is not going to change and the potential financial devastation is not going to resolve itself in the span of one year. Everyone who was compromised will need to be vigilant about checking and credit card accounts indefinitely.

As a real estate lawyer, you may want to advise your clients, as a service to them, about this conundrum and the actions they may be able to take to protect themselves. You may also want to reach out to your real estate agents and lender contacts to ask them to spread the word. Assuming a leadership role in this situation will serve those who rely on you well and will set you apart as a professional who works diligently to protect those who need protection.

Mortgages without appraisals?

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Fannie and Freddie are relaxing their rules!

Government-chartered entities Fannie Mae and Freddie Mac are relaxing their decades-old appraisal rules to allow some refinances and, more significantly, some sales to close without new appraisals. Both entities indicate they will only permit loans to close without appraisals in situations where they have substantial data on the properties in question as well as the local real estate markets.

How will the new plans work? Lenders will submit loan files to either Fannie or Freddie for underwriter analysis. The entities’ proprietary systems (automated valuation models) will be employed to determine whether sufficient valuation data is available to support the requested loan amounts.  These systems are said to be depositories of millions of prior appraisal reports and “proprietary analytics” that allow for computer-driven valuations of properties. If the system determines that no appraisal is required, the borrower will be given the choice of proceeding without an appraisal or coming out of pocket for an appraisal.

Should local residential contracts be tweaked? Should lawyers advise their purchaser clients to obtain appraisals?  We will have to cross those particular bridges.

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This seems reminiscent of the situation in the early 1990s where title insurance companies limited their requirements for current surveys. Residential lenders were given the survey coverage they required without the cost of updated surveys. Lawyers were left holding the bag, so to speak, to advise their purchaser clients of the benefits of surveys and to encourage them to incur the cost despite the fact that there was suddenly no lender or title company requirement.

Lawyers are not typically involved in residential transactions prior to loan approval, however, so it is entirely possible they will not be involved with the question of whether to obtain appraisals unless astute and cautious buyers specifically seek advice up front.

Fannie and Freddie have been quietly phasing in this new process for months and indicate appraisals will continue to be required for most loans. Fannie estimated that only ten percent of loans were eligible to close without appraisals at the inception of its program for refinances. That percentage is likely to be smaller for sales.

Both entities require at least twenty percent equity to qualify. Fannie’s program includes single-family homes, second homes and condominiums.  Freddie’s program is limited to single-family, single-unit primary residences. Homes in disaster areas, manufactured homes, and homes valued at more than $1 million will not qualify. The borrower’s credit scores and credit worthiness will also be considered.

Real estate agents are likely to love this new technology-based innovation. It will save money as well as time. Appraisers (like surveyors in the 1990s) will not be happy as this program is phased in.

What do you think? Are appraisals a good thing?  Will foregoing appraisals be akin to the “no doc” and “low doc” mortgages that helped lead us to the financial crisis of 2008? Are actual inspections by trained human beings of the interiors of residences necessary to establish value? Let’s see how this plays out!

Feds extend footprint of shell game again

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Will this obligation eventually extend to South Carolina?

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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.

In early 2016, 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.

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.

By order effective August 28, 2016, all title insurance underwriters, in addition to their affiliates and agents, were required to be involved in the reporting process, and the footprint of the project was extended.

The targeted areas and their price thresholds as of August 28, 2016 were:

  • 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.

By order effective September 22, 2017, wire transfers were included, and the footprint of the project will include transactions over $3 million in the city and county of Honolulu, Hawaii.

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. The current order extends through March 20, 2018.

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

Total eclipse of the heart….I mean sun

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What an experience! Millions were expected to descend upon beautiful and “famously hot” Columbia, S.C. for the total eclipse on Monday. Hundreds of events were planned to welcome the natives as well as the visitors. I thought it was an overly-hyped occasion, but I was mistaken. The eerie darkness descending on the otherwise bright day, the sounds of evening crickets; the brightening of streetlights in mid-afternoon; it was all surreal. And watching the main event was no less than dreamlike. No horror movie ever depicted an eclipse more vividly. A few clouds passed into our vision like inky smoke as we watched the moon chase and completely capture the sun. And two minutes later, the process reversed itself. I wouldn’t have missed it for the world!

A few people who had to miss the eclipse were described in an August 14 HousingWire story by Ben Lane entitled “Ringleader of elaborate mortgage fraud scheme gets 10 years in prison.” Mr. Lane described the complex New Jersey mortgage fraud scheme that involved fake everything, sellers, businesses, lawyers, title agents and notaries. The co-conspirators pled guilty to money laundering in a scheme that involved using stolen identities to pilfer more than $930,000 from lenders in at least eight fraudulent loan transitions.

The criminals created all the aspects of legitimate closings by using stolen and fictitious identities to fill all the required roles. The homes were real, but the homeowners were totally unaware. Virtual offices and businesses were created by setting up dozens of phone numbers, email addresses, fax numbers, websites and mail drop addresses. Several lenders were deceived by the elaborate scheme. Once the loans were disbursed to the accounts of fictitious law firms and title agents, the criminals withdrew loan proceeds by visiting ATMS and bank branches for several months until the entire amounts were withdrawn.

The HousingWire story accurately states that mortgage fraud is an expensive drain on the lending agency which ultimately raises the cost of borrowing for consumers. The astute New Jersey and federal investigators who successfully apprehended these criminals benefited us all.

As the criminals report to jail, we will return to our normal lives but will remain in awe of the powerful occurrence we witnessed yesterday.

History repeats itself

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Fraudulent mortgage satisfaction schemes are back

We have heard recently that a group is engaging in a scheme to fraudulent satisfy mortgages (or deeds of trust) in California and Florida. We all know that trends in California and Florida eventually make it to South Carolina, so I wanted to make sure South Carolina dirt lawyers are aware of this scheme. This is not a new scheme, but we thought it had died down until we got this news last month.

Here are some good rules of thumb to assist you in avoiding losses and protect clients in this area:

  • Have your title examiners provide you with copies of mortgage satisfactions and releases. Two sets of eyes reviewing the documents should help with spotting issues.
  • Pay particular attention to satisfactions and releases within a year of your closings. The normal schemes involve satisfying mortgages in order to collect funds at subsequent closings.
  • Pay particular attention to satisfactions and releases that are not connected with a sale or refinance. Contact the lender for confirmation that the loan has been paid in full.
  • Don’t accept a satisfaction or release directly from a seller, buyer or third party without contacting the lender for confirmation that the loan has been paid in full.
  • Many of the fraudulent documents are being executed by an unauthorized party on behalf of MERS. Compare MERS satisfactions with others you have seen in connection with your closings.
  • Check spellings and compare signatures against those of genuine instruments.
  • Be wary of hand-written documents, unorthodox documents, cross-outs, insertions and multiple fonts.

The perpetrators of this fraud are sophisticated and will change aspects of the scheme as needed, so remain vigilant and discuss any suspected fraudulent documents with your title insurance underwriter.

The Episcopal Church case is out; It will take more than faith to deed, mortgage and insure church properties

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Today, I am thankful to be a real estate lawyer. As I attempt to decipher the South Carolina Supreme Court’s 77-page opinion involving the Episcopal Church published on August 2,* my mission is limited to the real estate issues.

I don’t have to solve the mystery of the rights of gays in churches. I don’t have to ascertain whether the “liberal mainline” members or the “ultra-conservative breakaway” members make up the real Episcopal Church.  I don’t have to delve into the depths of neutral principles of law vs. ecclesiastical law. I don’t have to figure out who will own the name “Episcopal Diocese of South Carolina.”

The real estate issues are sufficiently thorny to occupy our collective real estate lawyer brains, but I am attempting here to boil those issues down to a manageable few words for all of us.

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St. Philip’s and St. Michael’s Episcopal Churches, Downtown Charleston, SC 

 

News articles refer to the properties as being valued at hundreds of millions of dollars. The historic value of the properties, including St. Michael’s and St. Philip’s of Charleston, is also quite significant.  I assume a petition for rehearing will ensue as well as an appeal to the United States Supreme Court. Nothing is settled at this point. Let’s not try to insure these titles anytime soon.

The controversy began five years ago when 39 local parishes in eastern South Carolina left the Episcopal Church over, among other issues, the rights of gays in church. Since then, the two sides have been involved in a battle over the church’s name, leadership and real estate.

Interestingly, the national church had offered a settlement to the breakaway parishes that would have allowed them to retain their properties if they gave up the name and leadership issues. That settlement offer was apparently summarily rejected.

Wednesday’s ruling upholds the Episcopal Church’s position that it is a hierarchal church rather than a congregational church in which the vote of church membership can determine the fate of real property. It also orders the breakaway group to return 29 properties to the national church. Seven parishes may maintain their independence.

The position of the properties turns on whether the local parishes agreed to be bound by the “Dennis Canon” which was enacted in 1979 and provided, in effect, that real property of a parish is held in trust for the national church and the local Diocese, subject to the power of the local parish over the property, so long as the parish remains a part of the national church and Diocese. No evidence was found in the records of the seven parishes that those parishes ever agreed to be bound by the Dennis Canon. The other 29 properties were the subject of documentation to the effect that the local churches intended to hold the property in trust for the denomination. The opinion did not uphold the Dennis Canon in and of itself. Explicit recognition of the Canon was required.

That, in short, is the impact of the 77-page opinion on real estate lawyers. We will need to watch for a possible rehearing, appeal periods and a potential settlement. In the meantime, we will sit tight and not involve ourselves in sales and mortgages of these properties.

Now that I’ve had a chance to think about it, I am always thankful to be a real estate lawyer!

*The Protestant Episcopal Church in the Diocese of South Carolina v. The Episcopal Church, South Carolina Supreme Court Opinion 27731, August 2, 2017.

CFPB rules have been revised

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Are we now free to share Closing Disclosures with real estate agents?

cfpb-logoThe CFPB recently issued amendments to its rules governing residential loan closings, but it did not settle the debate about whether Closing Disclosures can be shared with real estate agents. Traditionally, real estate agents were provided settlement statements both before closings, to give them the opportunity to explain the numbers to their buyer and seller clients, and after closings, to enable them to close MLS listings.

Since we have been operating under the CFPB rules and generating Closing Disclosures, we have struggled with the insistence on the part of real estate agents to receive those documents and the reluctance on the part of lenders to share them.  Most of us have resolved this conflict by providing real estate agents with separate settlement statements, such as ALTA’s Settlement Statements, which are similar to our prior HUD-1 Settlement Statements. It took us awhile to figure out that Closing Disclosures are not traditional closing statements and do not facilitate disbursement. Once we realized separate settlement statements are actually needed to fully inform borrowers, sellers and real estate agents, this issue became less important.

The CFPB has indicated it has received many questions about sharing Closing Disclosures with third parties. The amendment says:

“(T)the Bureau notes that such sharing of the Closing Disclosure may be permissible currently to the extent that it is consistent with (the Gramm-Leach-Bliley Act) and Regulation P and is not barred by applicable State law. However, the Bureau does not believe that expansion of the scope of such permissible sharing would, in this rulemaking, be germane to the purposes of Regulation Z.”

Lenders will likely continue to refuse to allow sharing of Closing Disclosures in light of this clear-as-mud directive. Most lenders currently state that the consumer may provide the Closing Disclosure to real estate agents if he or she chooses to do so. That rule is not likely to change.

The Quicken decision is out

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It’s not what dirt lawyers wanted or expected

The South Carolina Supreme Court never ceases to amaze when it decides real estate cases. Dirt lawyers seldom know what to expect. We read the precedents. We attend the hearings. We listen to the Justices’ questions. We believe we get a glimpse of what they may be thinking. But we miss the mark. Last week, the South Carolina Supreme Court decided the much anticipated Quicken case*, and if I had predicted the top five possible outcomes, I would not have come close to the actual decision.

I fully expected a 3-2 decision in either direction. But it is a 5-0 strongly written decision. It is a decision that was written to dispose of the controversy. It is a decision that was written to deny the possibility of reconsideration.

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This is an unauthorized practice of law case brought in the Court’s original jurisdiction. The case was assigned to Circuit Court Judge Diane Goodstein as Special Referee to take evidence and issue a report. Judge Goodstein held a two-week trial and issued a report finding, essentially, that no South Carolina licensed lawyer quarterbacked (my word) the mostly Internet-based residential refinance closings. In the facts recited in Judge Goodstein’s report, lawyers were peripherally involved in all of the steps required by State v. Buyers Service Co.** and its progeny, but no lawyer was actually involved in a way that the interest of the borrower was protected.

(Summarizing the prior decisions, the steps requiring lawyers are: (1) document preparation; (2) title search; (3) closing; (4) recording; and (5) disbursement.)

The Supreme Court somehow reviewed the same record and found that lawyers were involved and used their professional judgment in each step. The facts recited in the Court’s decision were not recognizable from the facts recited by Judge Goodstein’s report. The Court completely rejected the report and apparently decided that a finding of UPL under the circumstances would “mark an unwise and unnecessary intrusion into the marketplace”. “Simply put,” the Court stated, “we believe requiring more attorney involvement in cases such as this would belie the Court’s oft-stated assertion that UPL rules exist to protect the public, not lawyers.”

Most South Carolina dirt lawyers were hoping the Court would find a South Carolina licensed lawyer must be at the center of each closing, overseeing each step, and insuring that the consumer client’s interests were protected in each step. That is definitely not what we got.

There is, however, some good news in this decision. The Court made the clearest implication to date (without an explicit holding) that Buyers Service and its progeny may not apply in the commercial arena. The Court repeatedly stated that the context of this case is the residential refinance arena. I have discussed this case with several commercial lawyers to ascertain whether they are now comfortable to forego certifications that other South Carolina licensed lawyers are involved in the closing steps that are not under their control. They seem to feel slightly more comfortable, but not comfortable enough to let go of that step. Perhaps the passage of time will help.

Other good news is that, despite the facts recited by Judge Goodstein to the contrary, the Court clearly stated that lawyers were involved and used their professional judgment in each required step. The out-of-state entities who do business here should make sure their processes include this professional judgment in each step of the closing.

After reading this case a dozen times, I’ve decided that no law has changed. Nothing will change in our local processes. Nothing will likely change dramatically in the processes of the out-of-state entities who do business here. If I had not read Judge Goodstein’s report and if I had not attended the Supreme Court’s hearing, I would probably not be shocked with this result.

I would love hear what you think.

*Boone v. Quicken Loans, Inc., South Carolina Supreme Court Opinion 27727, July 19, 2017

** State v. Buyers Serv. Co., 292 S.C. 426, 357 S.E.2d 15 (1987)

It’s suitable to be a Lincoln Lawyer in SC

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…at least when it comes to using a PO Box address in lawyer advertising

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Ethics Advisory Opinion 17-07 fielded a question from a solo practitioner with a virtual law office. He practices wherever his smart phone and laptop are, which, at any given moment, may be his home, a coffee shop, a park, his car or his vacation spot. His practice generates very little paper, and he keeps that paper at his home. He meets with clients at their places of business or at third-party meeting spaces. He uses a post office box address for all business mail.

He does not actively advertise his practice beyond a single online directory listing, but he is considering increasing his web presence for advertising purposes, and he doesn’t want to disclose his home address. His question was whether the use of a post office box address in advertising materials satisfies the requirement in Rule 7.2 that advertising communications must include the office address of at least one lawyer responsible for its content.

The Ethics Advisory Committee looked North for authority and cited an opinion from North Carolina* which stated: “…(R)equiring a street address in all legal advertising has proved problematic, particularly as the number of lawyers working from home offices or operation in virtual law practices has increased. The requirement is no longer practical or necessary to avoid misleading the public or to insure that a lawyer responsible for the advertisement can be located by the State Bar.”

The Committee also noted that the Bar accepts post office addresses as lawyers’ addresses and the Supreme Court accepts post office addresses in its Attorney Information System (AIS) as a part of the “official contact information”.

The Committee stated that use of a post office address qualifies as an “office address” for the purposes of Rule 7.2(d) provided the post office address is on file at the lawyer’s current mailing address in the lawyer’s listing in the AIS.

Interestingly, though, the Committee noted that Rule 7.2(h) also imposes a geographic location disclosure requirement, which was not addressed by this opinion.  Here is the text of that portion of the Rule:

“(h) All advertisements shall disclose the geographic location, by city or town, of the office in which the lawyer or lawyers who will actually perform the services advertised principally practice law. If the office location is outside a city or town, the county in which the office is located must be disclosed. A lawyer referral service shall disclose the geographic area in which the lawyer practices when a referral is made.”

This Lincoln Lawyer may have to come back to obtain an answer to that issue!

*2012 N.C. Formal Eth. Adv. Op. 6 at 2.