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Thursday, February 25, 2016

Promotional and Discounted Rates

QUESTION
We were recently cited because we did not distinguish between a promotional rate and a discounted rate in our advertisements. What is the difference between promotional and discounted rates?

ANSWER
A promotional rate, in connection with a variable rate plan, is an APR that is not based on the index and margin that will be used to make rate adjustments under the plan, if that rate is less than reasonably current APR that would be in effect under the index and margin which will be used to make rate adjustments under the plan. [12 CFR § 226.16(d)(6)(i)(A); 12 CFR Supplement I to part 226 – Official Staff Commentary § 226.16(d)-5.i]

The promotional rate is quite a bit different than a discounted rate, because a discounted rate is the initial APR that is not based on the index and margin used to make later rate adjustments in a variable rate plan. [12 CFR § 226.16(d)(2)]

So, a discounted rate encompasses only an initial rate, whereas a promotional rate encompasses a rate that could be in effect any time during the life of a credit transaction. A rate can be both a discounted rate and a promotional rate and subject to the disclosure requirements for both types of rates.

Jonathan Foxx
President & Managing Director 
Lenders Compliance Group

Thursday, February 18, 2016

Pre-existing Business Relationships in Affiliate Marketing

QUESTION
We have an affiliate marketing program. Recently, we had it evaluated by a risk management firm such as yours. In the findings, we learned that our policies and procedures did not account for how to establish and identify pre-existing business relationships. What is a pre-existing business relationship in an affiliate marketing program?

ANSWER
A “pre-existing business relationship” with a consumer is given an exemption in an affiliate marketing program, where the parties to the relationship are a person (i.e., entity) or a person’s licensed agent and a consumer, based on the following requirements:

1)    A financial contract between the person and the consumer that is in force on the date a solicitation covered by the affiliate marketing provisions is sent to the consumer;

2)   The consumer’s purchase, sale, or lease of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force or having another continuing relationship) between the person and the consumer during the eighteen-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer; or

3)   An inquiry or application by the consumer regarding a product or service offered by the person during the three-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer. [16 CFR § 680.3(j)]

Take note, also, that affiliate marketing program rules of the federal financial regulators, as well as the FTC, contain examples of when there is and when there is not a pre-existing business relationship. [Idem]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, February 11, 2016

Increasing Monthly Escrow Deposit after Annual Escrow Analysis

QUESTION
We are a lender, servicing our portfolio loans, and have a question regarding escrow accounts. We conduct our annual escrow analysis for residential mortgage accounts in September each year. Often, at some point during the escrow computation year, we receive a notice of an increase in taxes or insurance premium. If the increase is $200 or more, we recalculate the escrow, and spread the difference over the remaining months left in that escrow computation year, obviously resulting in an increased monthly mortgage payment for the customer. We do this to prevent a hardship by having a significant shortage in the customer’s escrow account at the time of the next annual analysis.   

For example, we conduct the escrow analysis in September 2015. In January 2016, we receive a customer’s insurance renewal that reflects a $350 increase in the annual premium. We then recast the escrow account, beginning with the February 1 payment, so that the customer’s account will be at the estimated cushion by the September 1, 2016 payment. 

We provide the customer with written notification of the change in the monthly payment and the reason for the increase. Are the foregoing procedures in compliance with RESPA’s escrow regulations?

ANSWER
While it is commendable that you do not want the customer to suffer a hardship by having a huge shortage at the next annual escrow analysis, the procedures you outline do not appear to be in compliance with the escrow regulations. Under Regulation X, a servicer is required to conduct an annual escrow analysis, which it appears you do, and establish the escrow cushion. The purpose of the escrow cushion is to cover unanticipated disbursements, such as increases in taxes and insurance, or disbursements made before the customer’s payments are available in the account. In your example, if the lender’s paying the additional $350 will result in a negative balance in the escrow account (a deficiency), you must conduct an escrow account analysis to determine the deficiency before seeking repayment of the funds from the customer. [12 CFR 1024(f)(1)(ii)] 

If there is a deficiency, you can take one of the following actions:

1.     If the deficiency is less than one month’s escrow account payment:
a.      Allow the deficiency to exist and do nothing to change it;
b.      Require the customer to repay the deficiency within 30 days; or
c.      Require the customer to repay the deficiency in 2 or more equal monthly payments.

2.     If the deficiency is greater than or equal to one month’s escrow account payment:
a.      Allow the deficiency to exist and do nothing to change it; or
b.      Require the customer to repay the deficiency in 2 or more equal monthly payments. [12 CFR 1024.17(f)(4)]

It is permissible to conduct an escrow analysis at other times during the 12-month escrow computation year. 

However, if you discover a shortage (which appears to be the result in your scenario), you must take one of the following courses of action:

1.     If the shortage is less than one month’s escrow account payment:
a.      Allow the shortage to exist and do nothing to change it;
b.      Require the customer to repay the shortage amount within 30 days; or
c.      Require the customer to repay the shortage amount in equal monthly payments over at least a 12-month period.

2.     If the shortage is greater than or equal to one month’s escrow account payment:
a.      Allow the shortage to exist and do nothing to change it; or
b.      Require the customer to repay the shortage in equal monthly payments over at least a 12-month period. [12 CFR 1024.17f(3)]

Another alternative is to issue a “short year” statement, which would enable you to “recast” the escrow payments and establish a different beginning date of the new escrow account computation year. Any shortages would need to be paid as set forth above. [12 CFR 1024.17(i)(4)]

Still another alternative is for the customer to deposit funds in the escrow account in addition to what was calculated for the particular escrow computation year (so, allows for deposit of additional funds to cover the projected shortage), which is what it appears you are trying to do. However, in order to do so, the servicer and customer must “enter into a voluntary agreement” regarding same. The agreement may only cover one escrow accounting period; however, a new voluntary agreement may be entered into after the next escrow analysis is performed. Should you choose this route, it is not enough to merely send the customer a notice informing him of the increased payment. You must obtain the customer’s written voluntary consent to the arrangement. Should the customer fail to consent, then there should be no increase in payment and, at the time of the next escrow analysis, the shortage or deficiency should be treated as outlined above. [12 CFR 1024(f)(2)(iii)]

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

Thursday, February 4, 2016

Property Sold by Foreigners

QUESTION
I am a mortgage broker and I recently had a transaction adjourn at the closing because the seller of the property did not understand their obligations under the Foreign Investment in Real Property Tax Act. As this caused my client to lose their rate, I was hoping you could provide an explanation about this Act so that I could potentially avoid a reoccurrence of this situation.

ANSWER
The Foreign Investment in Real Property Tax Act of 1980, known by its acronym FIRPTA (“Act”), is a federal law enacted to ensure that "foreign persons" who sell property in the United States generally pay the same amount of federal taxes on the sale as a United States person would. For purposes of the Act, a foreign person is anyone who is neither a resident alien (i.e., a holder of a green card) nor a United States citizen. 

Towards this goal, the Act requires that whenever the seller of a real property interest in the United States (viz., a “United States Real Property Interest” or "USRPI") is a foreign person, the purchaser must withhold a certain percentage of the gross sale proceeds (generally the purchase price of the USRPI) upon disposition of the USRPI. The purchaser must then submit the withholding to the IRS. This all helps ensure that federal taxes are actually paid on the sale by the foreign seller. Pursuant to the Act, withholding has been imposed at a rate of 10% of the gross sales proceeds of a USRPI, notwithstanding the fact that the actual amount of tax may exceed (or be less than) the amount withheld.

Recently, the Protecting Americans from Tax Hikes Act of 2015 ("PATH") was passed which, among other things, made changes to the withholding requirements of FIRPTA. More specifically, for the sale of a USRPI exceeding $1 Million Dollars, PATH raises the withholding amount from 10% to 15% of the gross sales proceeds. USRPI that are (i) personal residences and (ii) have gross sales proceeds of $1 Million Dollars or less are not affected by PATH and remain subject to the 10% withholding rate set forth in FIRPTA (note that FIRPTA still does not require the 10% withholding under certain conditions where the gross proceeds are $300,000 or less and the buyer is an individual acquiring the property as a personal residence).

The new provisions under PATH affect the disposition of USRPI taking place after February 16, 2016.

Important Tip:

If the actual federal tax liability on the sale of a USRPI is less than the amount withheld, a foreign seller may be entitled to receive a refund from the IRS after filing a federal tax return. Alternatively, a foreign seller may seek to apply for a Withholding Certificate from the IRS prior to the closing that would instruct the purchaser to withhold an amount less than the required withholding amount of 10% or 15% (depending on the gross sales proceeds). In transactions where the seller is not a foreign person, the purchaser may request that the seller sign a certificate (viz., a FIRPTA Certificate) at the closing stating that the seller is not a foreign person and that there is no withholding obligation under the Act. If the seller signs a FIRPTA certificate, the purchaser will not be required to withhold a portion of the sale proceeds.

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