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Thursday, August 27, 2015

Down Payment Assistance Programs under TRID

QUESTION
We have a Down Payment Assistance Loan Program for low to moderate income borrowers in the form of a purchase money second mortgage. This second mortgage loan can be in an amount up to 20% of the purchase price. Are loans under this Program exempt from TRID compliance requirements? Also, does the down payment assistance loan need to be included on the Loan Estimate and Closing Disclosure for the first mortgage transaction?

ANSWER
Provided the down payment assistance program meets certain requirements as set forth below, the creditor does not have to provide a Loan Estimate, Closing Disclosure or Special Information Booklet with respect to that loan. [12 CFR 1026.3(h)]

With respect to the primary credit transaction, the down payment assistance should be included in the “Calculating Cash to Close” section on page 2 of the Loan Estimate under “Adjustments and Other Credits”.
Proceeds from subordinate financing or other source. Funds that are provided to the consumer from the proceeds of subordinate financing, local or State housing assistance grants, or other similar sources are included in the amount disclosed under § 1026.37(h)(1)(vii).” [Official Comment 37(h)(1)(vii)- 5]

On the Closing Disclosure, the amount should be included in the “Calculating Cash to Close” section under “Adjustments and Other Credits” and then detailed in Section L “Paid already by or on behalf of Borrower”.
Subordinate financing proceeds. Any financing arrangements or other new loans not otherwise disclosed pursuant to § 1026.38(j)(2)(iii) or (iv) must also be disclosed pursuant to § 1026.38(j)(2)(vi). For example, if the consumer is using a second mortgage or note to finance part of the purchase price, whether from the same creditor, another creditor, or the seller, the principal amount of the loan must be disclosed with a brief explanation. If the net proceeds of a second loan are less than the principal amount of the second loan, the net proceeds may be listed on the same line as the principal amount of the second loan. For an example, see form H–25(C) of appendix H to this part.”  [Official Comment 38(j)(2)(vi)]

In order to qualify for the partial exemption from TRID disclosure requirements, the down payment assistance program must meet the following criteria. [12 CFR 1026.3(h)]

1. The transaction is secured by a subordinate lien;

2. The transaction is for the purpose of: 
(i) Downpayment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies;
(ii) Property rehabilitation assistance;
(iii) Energy efficiency assistance; or
(iv) Foreclosure avoidance or prevention; 
3. The credit contract does not require the payment of interest;

4. The credit contract provides that repayment of the amount of credit extended is:
(i) Forgiven either incrementally or in whole, at a date certain, and subject only to specified ownership and occupancy conditions, such as a requirement that the consumer maintain the property as the consumer’s principal dwelling for five years;
(ii) Deferred for a minimum of 20 years after consummation of the transaction;
(iii) Deferred until sale of the property securing the transaction; or
(iv) Deferred until the property securing the transaction is no longer the principal dwelling of the consumer; 
5. The total of costs payable by the consumer in connection with the transaction at consummation is less than one percent of the amount of credit extended and includes no charges other than:

(i) Fees for recordation of security instruments, deeds, and similar documents;
(ii) A bona fide and reasonable application fee; and
(iii) A bona fide and reasonable fee for housing counseling services; and


6. The creditor complies with all other applicable requirements of this part in connection with the transaction, including without limitation the disclosures required by § 1026.18. 

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, August 20, 2015

Marketing Services Agreements

QUESTION
Are Marketing Services Agreements legal or are they no longer permitted?

ANSWER
There has been no specific ruling or order that prohibits Marketing Services Agreements (“MSAs”).  However, in recent months there has been much discussion over the legality of MSAs. This is primarily due to recent enforcement actions by the Consumer Finance Protection Bureau (“CFPB”) involving MSAs and alleged illegal kickbacks. In particular, in the 2014 Lighthouse Title, Inc. (“Lighthouse”) Consent Order, the CFPB indicated that Lighthouse violated the Real Estate Settlement Procedures Act (RESPA) when it entered into MSAs with the “agreement or understanding” that, in return, the counterparties would refer closings and title insurance business to them.  

Further, the Consent Order indicated that the parties did not determine a fair market value for the marketing services received, did not document how they valued the marketing services, and that Lighthouse did not monitor their counterparties to ensure the marketing services were actually being performed. [In the Matter of Lighthouse Title, Inc., Administrative Proceeding File No. 2014-CFPB-0015]  

More recently, the CFPB announced actions against Wells Fargo and JPMorgan Chase for engaging in illegal marketing services with a title company. The proposed Consent Order indicated the title company gave the banks’ loan officers cash, marketing materials, and consumer information in exchange for business referrals. [CFPB and State of Maryland, Office of the Attorney General v. Wells Fargo Bank, N/A, JPMorgan Chase Bank, N.A., et al, Case No. 1:15-cv-00179-RDB] 

Despite these and other actions, the CFPB has not indicated that MSAs are illegal. In fact, the CFPB has not provided any guidance regarding MSAs and continues to regulate through Consent Orders. Further, there has not been any blanket regulation or court decision banning MSAs. Although some lenders recently announced decisions to discontinue such arrangements with real estate brokers, MSAs can still serve as a viable marketing tool.  

Mortgage and real estate professionals interested in entering into or continuing MSA relationships must act prudently and maintain a compliant MSA program that monitors all aspects of the MSA relationship. MSAs should only be entered into after careful evaluation of the structure of the relationship. MSAs cannot be a proxy for illegal referral or kickback payments, nor can the arrangement require exclusivity. Further, the services to be performed under an MSA must be clearly articulated and documented within the agreement between the parties. A qualified and independent third party should determine the fair market value for the proposed services and a party should not pay or receive a fee above this amount as it could be a potential violation of Section 8 of RESPA. Prior to making any payments, the parties must, therefore, verify that the services contracted for have actually been performed. If any of the services are not rendered, a regulator may determine that all or a portion of the fee paid as part of the MSA is a referral fee in violation of Section 8 of RESPA.

The CFPB could have chosen to state or infer that MSAs are not permitted in the above Consent Orders or in other industry guidance. While it has not done so, any party to a MSA must ensure that they have policies and procedures in place which adhere to the factors set forth above and in the Consent Orders.

Neil Garfinkel
Executive Director/Realty & Title Services Compliance Group
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, August 13, 2015

Business or Commercial Purpose

QUESTION
It is our understanding that TILA exempts extensions of credit primarily for a business, commercial or agricultural purpose. What is a business or commercial purpose loan? Are there any factors that we can use to determine if the loan is for a business or commercial purpose?

ANSWER
Regulation Z does not expressly define what an extension of credit for a business or commercial purpose is, though applicable Commentary does offer some guidance with respect to what is credit for a business or commercial purpose that is exempt from TILA and what is consumer credit that is subject to TILA.

In order to be exempt from TILA, the primary purpose of a credit transaction must be for a business or commercial purpose. Generally, there are determinative factors. As it pertains to residential mortgage lenders, these factors bifurcate into two types of credit extensions and special rules, one applying to non-owner occupied rental property and the other applying to owner-occupied rental property.

Certain factors must be considered in determining whether a credit transaction is for a business purpose or a consumer purpose. These are:
  1. The relationship of the borrower’s primary occupation to the acquisition. That is, the more closely related, the more likely it is to be business purpose.
  2. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
  3. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
  4. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
  5. The borrower’s statement of purpose for the loan. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.i]
Examples of business purpose credit are:
  1. Loans to expand a business, even if it is secured by the borrower’s residence or personal property.
  2. A loan to improve a principal residence by building into it a business office.
  3. A business account used occasionally for consumer purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.i]
Examples of consumer purpose credit are:
  1. Credit extensions by a company to employees or agents if the loans are used for personal purposes.
  2. A loan secured by a mechanic’s tools to pay a child’s tuition.
  3. A personal account used occasionally for business purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-3.ii]
Consider also the special rules. Credit extended to acquire, improve, or maintain rental property that is not owner-occupied is deemed to be for a business purpose. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner occupied and the special rule would not apply. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-4]

Furthermore, credit extended to acquire owner-occupied rental property is deemed to be for a business purpose if it contains more than two housing units; and credit extended to improve or maintain owner-occupied rental property is deemed to be for a business purpose if it contains more than four housing units. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-5]

Finally, a credit transaction involving real property that includes a dwelling, such as a farm with a homestead, is exempt from TILA if the transaction is primarily for agricultural purposes. [12 CFR Supp. I to Part 226, Official Staff Commentary § 226.3(a)-8]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, August 6, 2015

Spousal Signatures under Equal Credit Opportunity Act

Question
When is a mortgage lender permitted to require a non-borrowing spouse to sign loan documents?

Answer
The Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, prohibits creditors from discriminating against applicants on a number of prohibited bases including marital status. [15 USC § 1691 et seq., 12 CFR § 202]  

Under Regulation B, unless a spouse is a joint applicant, a lender may not require the signature of an applicant’s spouse on any loan document, except any loan document that is reasonably believed to be necessary under applicable state law, if the applicant qualifies for the amount and terms of the credit requested under the mortgage lender’s credit standards. This is the case even if the subject property securing the credit is jointly owned by the applicant’s spouse. [12 CFR § 202.7(d)(1)] 

If the applicant does not qualify under the lender’s credit standards, which may not include a requirement for a spousal guarantee, then the lender may condition approval on the addition of a guarantor or cosigner. However, a lender is not permitted to require that this individual be the applicant’s spouse. [“Common Violations and Hot Topics,” Outlook Live Webinar, July 29, 2015, FRB] 

Generally, this rule applies to all open-end and closed-end, secured and unsecured extensions of consumer credit and business credit. However, there are exceptions.

Taking into account state property laws, a lender may be permitted to require the signature of a non-borrowing spouse on loan documents under three circumstances: 

1) With regard to secured credit transactions, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to secure the credit under applicable state law and protect the mortgage lender in the event of default. [12 CFR. § 202.7(d)(4)] 

2)  With regard to unsecured credit transactions in community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, to make the community property available under applicable state law to satisfy the debt in the event of default if
a. applicable state law denies the applicant power to manage or control sufficient community property to qualify for the amount of credit requested; and 
b. the applicant does not have sufficient separate property to qualify for the amount of credit requested without regard to community property. [12 CFR § 202.7(d)(3)]
3) Third, with regard to unsecured credit transactions in non-community property states, a lender may require a non-borrowing spouse’s signature on any loan document necessary, or which the lender reasonably believes is necessary, under applicable state law to enable the lender to reach the property relied upon in the event of the applicant’s death or default. [12 CFR § 202.7(d)(2)] 

Michael Barone
Executive Director
Director/Legal & Regulatory Compliance
Lenders Compliance Group