APR Errors – System Failures

QUESTION 

We are lenders and our Loan Origination System caused an error in the APR of a residential mortgage loan transaction. Given that this was not our error, but the error of the system itself, are we protected from liability? 

ANSWER 

Just because there is an error in an APR or a finance charge in a loan transaction does not constitute a violation per se. But this condition would only apply if (1) the error results from a correlative error in calculation of the Loan Origination System (LOS) used in good faith, and (2) when the error is discovered, the lender promptly discontinues use of the system for disclosure purposes. The lender should notify its Regulator in writing regarding the cause of the error. [12 CFR § 226.22(a)(1), Footnote 45d]

The dispositive feature of acting in “good faith” can be challenging to prove; therefore, the lender should demonstrate that it took steps to reasonably ensure that the LOS was functioning accurately before it was used to generate the disclosures containing APR or finance charge calculations.

Protection from liability is only available on the basis of being able to unarguably prove that the LOS, or any system used for disclosure calculations, caused the error. No protection from liability is available in instances where there is a misapplication of the law, or the lender manually causes this type of error, for instance through incorrect data entry. [12 CFR Supplement I to 226, Official Staff Commentary § 226.22(a)(1)-5]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Fee Splitting and Referral Fees

QUESTION:
What is RESPA’s fee splitting prohibition? Also, what is the definition of a “referral fee” and which referral fees are permitted?

ANSWER:
The provisions on prohibition of fee splitting and the definition of a referral fee are set forth in Section 8 of the Real Estate Settlement Procedures Act (RESPA). 

RESPA prohibits fee splitting. Specifically, the applicable section states that “no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” [12 CFR § 3500.14(c)] 

This prohibition has been clarified by the Department of Housing and Urban Development (HUD) a number of times over the years, and it has been the subject of considerable litigation. Essentially, HUD maintains that a fee for which no (or a nominal) service is conducted, or is duplicative of any other fee charged, is an unearned fee, which would therefore violate RESPA’s fee splitting provision. [For but one of numerous citations, see HUD’s Statement of Policy 2001-1]

Intrinsically, a “referral fee” is the giving or accepting of “any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” [12 CFR § 3500.14(b)] The litigation involving this subject is extensive.

Any referral of a settlement service, except for certain exemptions, between one settlement service provider and another, is not a compensable service.

The permitted exemptions are [12 CFR § 3500.14(g)(1)]:

1. A payment to an attorney at law for services actually rendered.

2. A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.

3. A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan.

4. A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.

5. A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (Only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.)

6. Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.

7. An employer's payment to its own employees for any referral activities.

Jonathan Foxx

President & Managing Director
Lenders Compliance Group

Reverse Mortgage Disclosures

QUESTION:

What are the additional disclosure requirements for originating a reverse mortgage loan? 

ANSWER:
Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), sets forth the disclosures that are required for reverse mortgage loan transactions. Indeed, Regulation Z requires additional disclosures reflective of the model form provided in its Appendix K, paragraph (d). 

These additional disclosure requirements are:

1. A disclosure that the applicant is not obligated to complete the reverse mortgage transaction, even if the applicant received specific reverse mortgage disclosures, and even if the applicant has signed an application for a reverse mortgage loan.

2. A Good Faith Estimate that provides the total cost of the credit extended, and expressed as a table of “total annual loan cost rates.” [see Regulation Z, Appendix K]

3. An itemization containing the loan terms, charges, age of the youngest borrower, and the appraised value of the property.

4. An explanation of the table of the “total annual loan cost rates” that are provided in the model form found in Regulation Z. [see Regulation Z, Appendix K, paragraph (d)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Power of Attorney

QUESTION: 

The borrower is not available to attend the closing. Besides state law, what are other requirements to consider if the borrower wants to use a power-of-attorney to permit an agent to sign the closing documents?

ANSWER: 

Recently, Fannie Mae announced changes to its Sellers Guide regarding the use of a Power of Attorney (POA). These new requirements are only applicable to loans sold to Fannie Mae, however it’s advisable to keep these rules in mind on all loans because many investors will adopt Fannie Mae’s rules as overlays on all transactions. In addition, the lender and title company must approve both the use of a POA and the actual POA to be used in the transaction. The most noteworthy changes enacted by Fannie Mae are as follows:

1) The name on the POA must match the name on the loan documents; it must reference the address of the subject property, it must be dated so it’s effective when the agent signs the document and it must be notarized. In addition, if the agent named in the POA executes the original 1003, the borrower must be actively serving in the US armed forced outside the US or the POA must expressly state an intention to secure a loan on a specific property.

2) Except as otherwise required by applicable law or unless the agent is the borrower’s relative, the following individuals may not sign the note or mortgage as an agent of the borrower pursuant to a POA: the lender, loan originator, title insurance company, or financially interested real estate agent. Additionally prohibited from acting as an agent are any of these entities’ employees, employers, relatives, or affiliates.

3) Except as required by applicable law, a POA may not be utilized to sign a note or mortgage if: i) no other borrower executes the note or mortgage in person in front of a notary public (this restriction does not apply if the designated agent is either the borrower’s attorney or relative); or (ii) it’s a cash-out transaction.

It is suggested that all lenders develop a policy regarding the use of POAs which incorporates agency guidelines, investor overlays, applicable law and its own Best Practices considerations.

The Consumer Financial Protection Bureau recently issued guidebooks to help the public better handle the responsibilities of acting as a financial caregiver. These guidebooks are posted to its website. One of these guidebooks addresses the use of a POA and a lender may find it advantageous to review this booklet when formulating its policy. Mortgage brokers also need to be aware of the policies of each of the lenders to which they place loans.

Most importantly, all parties to the loan transaction must make sure they are aware of the use of a POA as early as possible so its use does not suspend or abort a loan transaction.

Michael Barone
Director/Legal and Regulatory Compliance
Lenders Compliance Group