CTIC

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.

What’s That Terrible Smell?

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A Midlands landowner is forced to abandon his stinky property, and the SC Court of Appeals says Insurance Reserve Fund doesn’t need to pay.

The South Carolina Court of Appeals held on March 23 that the South Carolina Insurance Reserve Fund (the Fund) has no duty to defend or indemnify East Richland County Public Service District (the District) in connection with a claim by a property owner of inverse condemnation, trespass and negligence resulting from offensive odors*.stinky smell

In 2010, Coley Brown filed a complaint alleging the District had installed a sewage force main and air relief valve which released offensive odors on his property multiple times a day.

A District employee testified that a force main had been installed as a part of a larger project that included two nearby pump stations. The pump stations were designed to pump sewage through the force main when the sewage reached a certain level. Depending on the area’s water usage and weather, the pump stations might turn on as often as ten times per hour. The odor was a result of naturally occurring hydrogen sulfide-which smells like rotten eggs-and methane.

In response to the complaints, the District made several attempts to remedy the odors, including using a chlorine-based chemical, installing charcoal filters, and eventually using a granulated chemical media. When the District failed to cure the problem, Brown moved to a different location but was unable to sell the stinky property.

The District tendered Brown’s complaint to the Fund pursuant to its insurance policy, but the Fund denied coverage. Under the policy, the Fund is obligated to pay damages resulting from property damage caused by an occurrence, defined as an accident, including continuous or repeated exposure to conditions, which result in personal injury or property damage neither expected nor intended. The policy has a “pollution exclusion” that refers to gasses and fumes.

The Circuit Court found that the Fund had no duty to defend or indemnity the District in the underlying case, finding the policy’s policy exclusion to be valid despite the District’s argument that the exclusion conflicts the South Carolina Tort Claims Act. The Court of Appeals reviewed the Tort Claims Act and found no conflict. The Court also reviewed cases from other jurisdictions holding that foul odors are encompassed by such pollution exclusions.

The District then argued that an exception to the pollution exclusion applies if the discharge, dispersal, release or escape of pollutants is sudden and accidental. The Court was not persuaded by this argument, indicating the releases were not accidental and unexpected, but were a necessary function of the District’s normal operations.

* S.C. Insurance Reserve Fund v. East Richland Public Service District, Appellate Case No. 2014-000728, March 23, 2016)

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)

Who You Gonna Call?

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Even five months into TRID implementation, there is still confusion about
who is allowed to receive the CD and Closing Statement

paperwork confusionWe’re all crystal clear that the borrower must be provided with the new CFPB compliant Closing Disclosure. We’re clear that there are very specific rules about when that document must be delivered to facilitate the scheduled closing. We know that most of the large national lenders are preparing and delivering the Closing Disclosure themselves while many of the local and regional lenders are still relying on closing attorneys to prepare and deliver this document.

What remains uncertain in some areas is how to deliver the necessary closing numbers to real estate agents, sellers and, when it comes to seller numbers, to lenders.

Real Estate Agents: There is no doubt that real estate agents need the numbers. They typically provide valuable guidance to their buyer clients on the accuracy of the numbers in advance of and during closings. They are also required to retain copies of closing statements in their files. But the Closing Disclosure now contains much more information than the HUD-1 Settlement Statement, and it is a common belief that delivery by a lender or closing agent to a real estate agent violates the buyer’s right to protection of personal information.

What is the solution?  There are two lines of thought. Some believe the buyer should sign a waiver allowing the lender and settlement agent to provide the Closing Disclosure to the buyer’s real estate agent. Several lenders, however, have stated that they will not act on waivers of this type.

The other line of thought is that the real estate agents (both the buyer’s agent and the seller’s agent) can be provided with a closing statement without violating anyone’s privacy. All of the closing software programs have closing statements available for this purpose. American Land Title Association has created forms for this reason, and most lawyers also have versions they have previously used for commercial and residential cash transactions.

Real estate lawyers in South Carolina need to prepare separate closing statements regardless of this dilemma. Our Supreme Court has made it clear that all the numbers in a closing must be properly disclosed to the parties. It took many of us months to wrap our brains around the fact that a Closing Disclosure does not contain all the numbers. It is not a closing statement and it is not a replacement for the HUD-1. It is also not a document from which we can disburse. We need a settlement statement that balances to a disbursement analysis to assure that our numbers are correct.

Sellers: The seller should be provided with the seller’s Closing Disclosure, which is prepared by the settlement agent and not the lender. But, again, this document does not reveal all of the numbers relevant to the closing, so the seller should also be provided with a settlement statement.

Lenders (as to Seller’s numbers): We have heard that lenders are having difficulty obtaining seller information from closing attorneys, but under TRID, settlement agents are obligated to provide the seller’s information to the lender. Lenders need this information to test the accuracy of the buyer’s information, for audit purposes and to be able to provide proper information to investors.hang in there

Five months out, we are all still working our way through TRID, and we will continue to work our way through the various issues as they arise. South Carolina lawyers can rely on friendly real estate lawyers on the Bar’s Real Estate Practices Section ListServ, which can be found here. And title insurance companies continue to obtain and disseminate information as issues arise. We’ll get through it!

E-mail Hacking Scams Hitting Buyers in SC

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Please get the word out to your clients!

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As closing attorneys, title insurance agents and business men and women, we receive daily warnings about a myriad of e-mail hacking scams. Many of these schemes involve wiring instructions and attempts to divert escrow funds to remote accounts. Piecing together the two words “wiring” and “instructions” in the subject line of an e-mail seems to entice the worst kinds of fraudsters.

Our own office was hit a year or so ago. We were escrowing funds for an agent’s large commercial transaction, and the agent received a bogus e-mail purportedly but not actually from us telling him to send the money in a different direction. Thankfully, our very astute agent had attended sufficient seminars and read enough fraud alerts to take the simple step of calling us.  Fraud averted!

American Land Title Association and others have written that fraudsters are now attacking buyers, not just businesses who hold escrow funds. And it is happening here!

Within the last few weeks we have heard of three email securityattempts of this nature in Charleston, at least one of which was successful. A buyer wired $150,000 to the wrong account on a Friday afternoon based on a bogus e-mail, spoofed to appear as if it came from the closing attorney. The e-mail said the firm was busy, and advised the recipient not to call but to respond by e-mail if there were questions. That should have been the first clue. The buyer and the banker both said they thought the e-mail and wiring instructions looked funny. But they sent the money out anyway.

Buyers have not attended the seminars nor read the fraud bulletins that have inundated all of us in the last few years. Closing attorneys and real estate agents may be the best line of defense in this situation.

Please communicate with your clients and let them know that a simple telephone call can prevent the diversion of their savings to criminals!

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!

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.

Creative Use of Google AdWords Gets SC Lawyer in Hot Water

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Supreme Court is not amused by timeshare attorney’s advertising technique


yellow card - suitThe South Carolina Supreme Court handed down a public reprimand last year against a Hilton Head lawyer for his resourceful use of Google AdWords.*

According to the Court, Google AdWords is an Internet marketing technique in which the advertiser places bids for “keywords”. When a Google search includes the advertiser’s keywords, the search results list may or may not include the advertiser’s ad. The advertiser pays Google for clicks on the ad from the search results.

The lawyer and his partner (the “law firm”) handled timeshare litigation and had filed numerous lawsuits against a particular timeshare company. The law firm bid on key words including the timeshare company’s name and the names of three lawyers who represented that company. The law firm’s ad appeared in some Internet search results when those names were used. The ad read:

“Timeshare Attorney in SC – Ripped off? Lied to? Scammed” Hilton Head Island, SC Free Consult”

Sometimes the law firm’s ad appeared as the first result and other times, it appeared later in the list. The law firm paid for its advertisement each time an Internet searcher clicked on the firm’s ad.

The Court held that the attorney violated the Lawyer’s Civility Oath by using the names of opposing parties and their counsel in this manner. By taking the oath, a lawyer pledges to opposing parties and their counsel fairness, integrity, and civility in all written communications and to employ only such means consistent with trust, honor and principles of professionalism.

Marketing is now virtually a necessity for successful lawyers. Attorneys are exploring many avenues in their marketing efforts, including numerous Internet marketing techniques. But, beware, this one is not a good idea!

 

*In the Matter of Naert, S.C. Supreme Court Opinion No. 27574, September 30, 2015.