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Thursday, May 28, 2015

TRID: Disclosing fees not required by Lender

Question
Do services - and the fees for such services - that are not required by a lender need to be disclosed on the Loan Estimate once the TILA-RESPA Integration Rule becomes effective on August 1, 2015?

Answer
Yes, the CFPB has made it clear that fees paid by the borrower, even if not required by the lender or part of the loan transaction must be disclosed on the Loan Estimate. This would include the commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, engineer inspection fees and personal attorney fees.

Specifically, a creditor is required to itemize in the column titled “Other” in the Closing Costs Details provided on page 2 of the Loan Estimate “any other amounts in connection with the transaction that the consumer is likely to pay or has contracted with a person other than the creditor or loan originator to pay at closing and of which the creditor is aware”. [12 CFR 1026.37(g)(4)] 

The Official Commentary states:

Examples. Examples of other items that are disclosed under § 1026.37(g)(4) if the creditor is aware of those items when it issues the Loan Estimate include commissions of real estate brokers or agents, additional payments to the seller to purchase personal property pursuant to the property contract, homeowner’s association and condominium charges associated with the transfer of ownership, and fees for inspections not required by the creditor but paid by the consumer pursuant to the property contract.
[Official Commentary: 12 CFR 1026.37(g)(4)]

Further, Official Commentary provides additional guidance when discussing the good faith requirement for services chosen by the consumer that are not required by the creditor.
[Official Commentary: 12 CFR 1026.19(e)(3)(iii)-3]

The foregoing comment states, in pertinent part, that:

… if the subject property is located in a jurisdiction where consumers are customarily represented at closing by their own attorney, even though it is not a requirement, and the creditor fails to include a fee for the consumer's attorney, or includes an unreasonably low estimate for such fee, on the original estimates (Loan Estimate) then the creditor's failure to disclose, or under-estimation, does not comply with § 1026.19(e)(3)(iii).

As this is a big change from existing requirements, brokers, lenders and loan originators need to make sure that they have policies and procedures in place to comply with the foregoing requirements.

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, May 21, 2015

Disparate Treatment

QUESTION
We have been cited by our regulator for disparate treatment. The matter is with our attorneys. However, in our discussions with staff it seems that we do not know the difference between overt discrimination, disparate treatment, and disparate impact. From a regulatory perspective, what is overt discrimination, disparate treatment, and disparate impact?

ANSWER
Courts have held that there are primarily three classes of discrimination, each with its own proof requirements, under the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Going back to 1994, there was an Interagency issuance published in the Federal Register that affirmed this observation. The issuance was called Policy Statement on Discrimination in Lending (“Policy Statement”). [Federal Register, Vol. 59, No. 73, April 15, 1994, Notices, 18266-18274]

These three methods of discrimination are:
1. Overt evidence of discrimination, which occurs when a lender blatantly discriminates on a prohibited basis;
2. Disparate treatment, which occurs when there is evidence that a lender treats applicants differently based on one of the prohibited facts; and
3. Disparate impact, occurring when there is evidence that a lender applies a practice uniformly to all applicants but the practice has a discriminatory effect on a prohibited basis and is not justified by business necessity. [Supra, 18266, 18268] 
With respect to disparate treatment, the Policy Statement provides that disparate treatment ranges from overt discrimination to more subtle disparities in treatment and, importantly, does not require any showing that treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, May 14, 2015

Unintentional TILA Violations

QUESTION
We maintain good disclosure procedures, but sometimes we have a violation of TILA. The mistake is not intentional. It is systemic. Still, what do we say to a regulator when faced with a violation that was not in our control?

ANSWER
If a creditor (or assignee) can show by a preponderance of evidence that the violation was unintentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such errors, the creditor (or assignee) will not be held liable in a civil action for the violation.

Some examples of bona fide errors include, but are not limited to, clerical, calculation, computer malfunction and programming, and printing. However, an error of legal judgment with respect to a person’s obligations under TILA is not a bona fide error. [15 USC § 1640(c)]

Regulators have a view of errors that the ancient Stoics would appreciate. Epictetus, the great Stoic philosopher, said:

There are things which are within our power,
and there are things which are beyond our power.
(The Enchiridion, by Epictetus.)

Generally, when it comes to the regulators’ perspective, ‘things which are within our power’ are subject to higher liability and administrative action with respect to statutory penalties and remedies than ‘things which are beyond our power.’

Systemic errors may be controversial, given the complexity of system maintenance over a long period of time. Depending on the type of violation caused by this kind of TILA error, it is a good idea to notify the supervising regulator of the event or document the corrective action. Both responses would likely be viewed as acting in good faith.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, May 7, 2015

Requesting Medical Information

QUESTION
Recently, we were faced with the need to get medical information from an applicant in order for the underwriter to approve the applicant’s eligibility. Since we had never had to do this before, it set off a lot of alarm bells in our compliance department. We are hoping you could offer some guidance. Basically, what we need to know is this: what are the conditions that allow us to obtain and use an applicant’s medical information in order to determine the applicant’s eligibility for credit?

ANSWER
The rule of thumb is that a lender may not obtain or use medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility or continued eligibility for credit unless the use is authorized under the Fair Credit Reporting Act (FCRA). [15 USC §§ 1681b(g)(1), (2)]

With few exceptions, if the lender does not specifically request medical information a violation of this prohibition does not take place; that is, if the creditor receives medical information pertaining to a consumer in connection with any determination of the consumer’s eligibility or continued eligibility for credit without specifically requesting medical information, the information is not deemed to be a violation of the prohibition. [12 CFR § 334.30(c), 12 CFR § 222.30(c), inter alia]

With respect to use of medical information to determine borrower eligibility, the lender may use the consumer’s medical information in determining eligibility or continued eligibility for credit as long as:

(1)   The information is the type of information that is routinely used in making credit eligibility determinations, such as information relating to debts, expenses, income, benefits, assets, collateral or the purpose of the loan (including the use of loan proceeds);
(2)   The creditor uses the medical information in a manner and to an extent that is no less favorable than the creditor would use comparable information that is not medical information in a credit transaction; and,
(3)   The creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of the credit determination. [12 CFR § 334.30(d)(1), 12 CFR § 222.30(d)(1), inter alia]

This means that a lender may treat medical information of a type that is routinely used in credit eligibility determinations in the same manner that the creditor treats the same type of information that is not medical information.

It is worth mentioning that there are special exceptions that permit a creditor to obtain and use medical information. For instance, one exception is where a creditor uses medical information at the request of the consumer to determine if the consumer qualifies for a legally permissible special credit program or credit-related assistance program that is designed to meet the special needs of consumers with medical conditions, and other conditions are also satisfied. [12 CFR § 334.30(e)(1), 12 CFR § 222.30(e)(1), inter alia]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group