ECOA: Definitions of “Applicant” and “Application”

QUESTION

 I would like to know how to define an “applicant” and an “application” under the Equal Credit Opportunities Act (“ECOA”). Also, what is a “completed application,” according to the ECOA?

ANSWER

The Equal Credit Opportunities Act, and its implementing regulation, Regulation B, set forth guidelines for entities that extend credit with respect to preventing discrimination on the basis of sex, marital status, race, color, religion, national origin, age, applicant’s income derived from a public assistance program, and any right the applicant may have pursuant to the Consumer Credit Protection Act. [15 USC § 1691(a), Title 15, Ch 41, Sub IV]

Although it is believed that this ECOA requirement only pertains to the lender, as creditor, this notion is erroneous. Regulation B holds that a mortgage broker is considered a creditor, too, since the term “creditor” also “includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made.” [12 CFR 202.2(l), Title 12, Ch II, Sub A, Part 202]

Under ECOA, an “applicant” is any person (i.e., natural person, corporation, government agency, trust, estate, partnership, cooperative, association) “who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit.” [12 CFR 202.2(e), Title 12, Ch II, Sub A, Part 202]

The definition of an “application,” for the purposes of the ECOA, is “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.” (My emphasis.)

The term “application” does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit.

A “completed application” means an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested. This includes, but is not limited to, “credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral.” (My emphasis.) [12 CFR 202.2(f), Title 12, Ch II, Sub A, Part 202]

Jonathan Foxx
President and Managing Director
Lenders Compliance Group

Penalties for violating the Truth in Lending Act

QUESTION 
What are the penalties for violating the Truth in Lending Act? 

ANSWER 

While there are actually criminal provisions that set forth penalties for willful violations of TILA, such as a fine of up to $5000, one year in prison, or both [15 USC § 1611(3), 2006], most violations are associated with civil monetary penalties. Creditor liability is extensive in TILA and covers a wide range of potential violations, and may include any actual damage sustained by a person as a result of the creditor’s failure to comply with this statute.

Covered transactions include home equity plans, open-end transactions, closed-end transactions secured by real property or dwelling, consumer leases, HOEPA transactions, appraiser independence, and UDAAP.

The following is the range of civil monetary penalties [15 USC § 1640(a), 2006]:

• In the case of an individual action: twice the amount of any finance charge in connection with the transaction.
• In the case of an individual action relating to certain consumer leases: 25% of the total amount of monthly payments under the lease, minimum $200, and maximum $2,000.
• In the case of an individual action relating to an open-end consumer credit plan that is not secured by real property or a dwelling: twice the amount of any finance charge in connection with the transaction, minimum $500, and maximum $5,000 – which could be even higher where a violation is evinced by an established pattern or practice of such failures.
• In the case of an individual action relating to a closed-end transaction secured by real property or a dwelling: either minimum $400, and maximum $4,000, or, in the case of a class action, such amount as the court may allow, no minimum per each member of the class, and the total recovery in any class action (or series of class actions) arising out of the same failure to comply by the same creditor may not be more than the lesser of $1,000,000 or 1% of the net worth of the creditor.
• In the case of a failure to comply with many TILA requirements set forth in certain sections of Regulation Z: an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.

Any of the foregoing, where rescission applies, in a prevailing action the costs of the action itself is included, together with a reasonable attorney’s fee (viz., determined by the court); and, in the case of a failure to comply, an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.

In determining the amount of award in any class action, the following relevant factors, among other things, are considered by the court: the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor’s failure of compliance was intentional.

Regarding appraiser independence, certain violations lead to civil monetary penalties of up to $10,000 per day for each day a first violation continues, and $20,000 for all subsequent violations. [Pub. L. 111-203, 7/21/10, Sub F, 1472 § 129E(k)]

With respect to UDAAP, the Federal Trade Commission sets forth rules concerning unfair or deceptive acts or practices [15 USC § 57a, Section 18, FTC Act]. Violations of UDAAP are treated through various sections of TILA. [PUB. L. 111–8, 3/11/09, Omnibus Appropriations Act, Division D, Title VI, § 626(b)(D)] Under the FTC Act, civil monetary penalty for each UDAAP violation may reach to $16,000. [15 USC § 45(m), 2006; 16 CFR §§ 1.98(d) and (e), 2010 (Title 16, Ch. I, Sub A, Part 1, Sub L § 1.98]

Civil monetary penalties for violations of HOEPA are substantial. The authority to promulgate HOEPA rules [TILA § 129(1)(2)] is the same authority pertaining to loan originator compensation and higher-priced mortgage loans. In the case of HOEPA violations, penalties are equal to the sum of all finance charges and fees paid by the consumer, permitting only for an exception where the creditor demonstrates that the compliance failure is not material. [15 USC § 1640(a), 2006]

Jonathan Foxx
President and Managing Director
Lenders Compliance Group

MLO Compensation: Recouping Undisclosed or Uncollected Fees

QUESTION 

Does the MLO Compensation Rule specifically prohibits a lender from taking deductions from an MLO’s compensation to recoup undisclosed or uncollected loan fees, such as where the loan officer forgets to disclose or add mortgage insurance, transfer taxes, or other fees applicable to the transaction?

RESPONSE 

The MLO Compensation requirements under the Truth in Lending Act (“the Rule”), does not specifically prohibit a creditor from taking deductions to recoup undisclosed or uncollected fees, but such deductions, if taken, must comply with the Rule and other applicable laws.

In its Official Commentary to the Final Rule, the CFPB responded to an industry question that asked, whether an MLO’s compensation may be reduced to bear the cost of a pricing concession where the MLO assures the consumer that the interest rate is being locked but fails to actually lock the loan. 

The CFPB responded that, “This scenario is already covered by [the Rule] which allows reductions in MLO compensation to bear the cost of pricing concessions where there has been an unforeseen increase in a settlement cost above that estimated…or omitted” on the GFE.

While the CFPB’s response appears to treat the MLO’s conduct as an “unforeseen” event, repeated reductions for the “same categories of closing costs” could establish a pattern in violation of the Rule. The lender must retain appropriate records for proof of compliance in reductions.

Another industry question asked, whether a Lender could penalize the MLO for failure to comply with a creditor’s policies and procedures in the absence of a demonstrable loss to the creditor. In this scenario, there are no increases, changes or pricing concessions.

The CFPB responded that, “Unless the proxy analysis under [the Rule] applies, a reduction in MLO compensation as a penalty for the MLO’s failure to follow the creditor’s policies and procedures where there is no demonstrable loss to the creditor is outside the scope of § 1026.36(d)(1)(i) and thus need not be addressed by comment.” In other words, even where a reduction is not specifically prohibited or authorized by the Rule, such reduction cannot be based on the “terms and conditions” of the loan.

The CFPB also commented that, “Allowing reductions in MLO compensation to cover reduced, waived, or uncollected third-party fees may not result in any discernible benefit to consumers, and in any event the reduction, waiver, or collection of third-party fees is better addressed separately by the MLO and creditor outside the context of the transaction.”

As a final point to consider, state law may prohibit employer “self-help” cost recoupment measures, and may specifically prohibit deductions not otherwise authorized by law, or agreement. Wages and commissions may also be subject to varying protections under federal and state labor laws. 

Source: 12 CFR Part 1026: MLO Compensation Requirements under the Truth in Lending Act; (Regulation Z); AGENCY: Bureau of Consumer Financial Protection.

*Wendy Bernard
Director/Legal and Regulatory Compliance
Lenders Compliance Group

Home Equity Line of Credit (HELOC): Disclosures

QUESTION 

We are a broker that frequently takes applications for home equity lines of credit (HELOC) for a lender. Do we have a duty to make disclosures to the applicant? 

ANSWER

Your duty as a broker to make disclosures with respect to a HELOC depends on whether the lender has provided you with both the application and the disclosures. To the extent the lender has not provided the disclosures to you, you, as a third party broker, have no obligation to disclose. However, if the lender provided you with both the applications and disclosures, you do have a duty to disclose. In each instance, you have a duty to provide the consumer with the home equity brochure entitle “What You Should Know About Home Equity Lines of Credit” or a similar brochure.

Pursuant to the Real Estate Settlement Procedures Act (RESPA), with respect to a home equity plan covered under Regulation Z, “a lender or mortgage broker that provides the borrower with the disclosures required by 12 CFR 1026.40 of Regulation Z at the time the borrower applies for such loan shall be deemed to satisfy the requirements of this section”.  [12 CFR 1024.7(h)]

Section 40(c) of Regulation Z addresses the duties of third parties to disclose. “Persons other than the creditor who provide applications to consumers for home equity plans must provide the brochure required under paragraph (e) of this section at the time an application is provided. If such persons have the disclosures required under paragraph (d) of this section for a creditor’s home equity plan, they also shall provide the disclosures at such time.”

The Official Interpretation to Section40(c) makes it clear that a third party has no duty to obtain disclosures about a creditor’s home equity plan or to create a set of disclosures based upon what the third party knows about the creditor’s plan. However, if the creditor provides the third party with disclosures along with the creditor’s application form, the third party must provide those disclosures to the consumer together with the application. If the third party received the application via telephone, the third party may mail the disclosures and brochure within three business days of receipt of the application.  [12 CFR 1026.40(c)]

*Joyce Pollison
Director/Legal and Regulatory Compliance
Lenders Compliance Group