Pre-existing Business Relationships and Affiliate Marketing

QUESTION:

What is a “Pre-existing Business Relationship” and its effect on affiliate marketing? 

ANSWER:
At its core, the pre-existing business relationship is a relationship between a “person” or “persons” (i.e.,residential mortgage lender and originators) and consumers, based on these three rudimentary criteria:

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.

There are essentially two scenarios that come under scrutiny: (1) where there is a pre-existing business relationship, and (2) where there is no pre-existing business relationship. [16 CFR § 680.3(j)(i)-(iii); 16 CFR § 680.3(j)(2)-(3)]

A pre-existing business relationship is where a consumer:

• Has an existing loan account with a creditor - the creditor has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services. (A solicitation is the intent to encourage the consumer to purchase or obtain products or services.)

• Obtained a mortgage from a mortgage lender, but refinanced the mortgage loan with a different lender when the mortgage loan came due - the first mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date the outstanding balance of the loan is paid and the loan is closed.

• Obtains a mortgage, the mortgage lender has a pre-existing business relationship with the consumer.

• If the mortgage lender sells the consumer's entire loan to an investor, the mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date it sells the loan, and the investor has a pre-existing business relationship with the consumer upon purchasing the loan.

• If the mortgage lender sells a fractional interest in the consumer's loan to an investor but also retains an ownership interest in the loan, the mortgage lender continues to have a pre-existing business relationship with the consumer, but the investor does not have a pre-existing business relationship with the consumer.

• If the mortgage lender retains ownership of the loan, but sells ownership of the servicing rights to the consumer's loan, the mortgage lender continues to have a pre-existing business relationship with the consumer. (The purchaser of the servicing rights also has a pre-existing business relationship with the consumer as of the date it purchases ownership of the servicing rights, but only if it collects payments from or otherwise deals directly with the consumer on a continuing basis.)

• Applies to a creditor for a product or service that it offers, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the application.

• Makes a telephone inquiry to a creditor about its products or services and provides contact information to the creditor, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

• Makes an inquiry to a creditor by e-mail about its products or services, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor - the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

• Has an existing relationship with a creditor that is part of a group of affiliated companies, makes a telephone call to the centralized call center for the group of affiliated companies to inquire about products or services offered by the insurance affiliate, and provides contact information to the call center, the call constituting an inquiry to the insurance affiliate that offers those products or services - the insurance affiliate has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from its affiliated creditor to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

A pre-existing business relationship does not occur where a consumer:

• Makes a telephone call to a centralized call center for a group of affiliated companies to inquire about the consumer's existing account with a creditor - the call does not constitute an inquiry to any affiliate other than the creditor that holds the consumer's account and does not establish a pre-existing business relationship between the consumer and any affiliate of the account-holding creditor.

• Has a loan account with a creditor, makes a telephone call to an affiliate of the creditor to ask about the affiliate's retail locations and hours, but does not make an inquiry about the affiliate's products or services - the call does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate. (Also, the affiliate's capture of the consumer's telephone number does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate.)

• Makes a telephone call to a creditor in response to an advertisement that offers a free promotional item to consumers who call a toll-free number, but the advertisement does not indicate that creditor's products or services will be marketed to consumers who call in response - the call does not create a pre-existing business relationship between the consumer and the creditor because the consumer has not made an inquiry about a product or service offered by the creditor, but has merely responded to an offer for a free promotional item.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

When do “business day” periods apply?

QUESTION:
I know that a “business day” is a day when the lender’s offices are open to loan applicants. However, we are always debating here when the “business day” definition should be applied. So, when does the “business day” apply?

ANSWER:
Let’s be sure about our definition of “business day.” The term generally refers to a day on which a lender’s offices are open to the public for carrying on substantially all of its business operations. [12 CFR § 226.2(a)(6)] However, for purposes of rescission and most residential loan product originations, the term means all calendar days except Sundays and the legal public holidays, such as New Year's Day, the Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. New Year’s Day, Independence Day, Veterans Day, and Christmas Day, fall on specific dates; when their dates fall on a Saturday, federal offices observe them on the preceding Friday, which means that the preceding Friday is a “business day” and the Saturday is not a “business day.” [Official Staff Commentary § 226.2(a)(6)-2]

Generally, there are four cases in which the foregoing definition of “business days” applies. Caution should be exercised here, because there are some nuances to the applicable regulations.

The following constitute the four prevalent instances where “business days” apply:

1. The three business day rescission period, for loans subject to rescission.

2. Closed-end, dwelling-secured loan transactions:

a. Seven business days “waiting period” implemented when initial disclosures are provided and the consummation date.

b. Three business day “waiting period” between when corrected disclosures are received by the consumer and the consummation date.

c. Three business day period after which a consumer is deemed to have received the initial disclosures that were mailed (for purposes of imposing fees) and corrected disclosures that were mailed.

3. Under HOEPA, the three business day “waiting period” between when the special HOEPA disclosures are received by the consumer and the consummation date.

4. In reverse mortgage transactions, the three business day “waiting period” between when reverse mortgage loan disclosures are received by the consumer and either when the consummation date for a closed-end credit transaction may occur or when the first transaction may occur under an open-end credit transaction.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Servicing Transfer – Avoiding Servicing Disruption

QUESTION:
We are a lender transferring servicing to a subservicer (the “Subservicer”). We send out our servicing transfer notice (“good-bye letter”) to our borrowers at least 15 days prior to the transfer. Among other items, the good-bye letter includes the new subservicer information and the effective date of transfer. The Subservicer advises that if a borrower chooses to mail his payment in early to the Subservicer, the Subservicer cannot process the payments or setup the loan until the date of the official date of transfer. The Subservicer also advises that their servicing transfer notice or “hello” letter cannot be sent out until the effective date of transfer or a few days later. This leaves our borrowers in a quandary as to what to do. What do you recommend?

ANSWER: 

The Subservicer is correct in that they cannot process a payment prior to the effective date of the transfer, as the servicing transfer has not occurred.  However, as detailed below, the balance of the concerns raised by you are valid as the practices result in the disruption of service to consumers, which the CFPB emphasizes must be avoided. There is nothing in the statute which prohibits a transferor from sending out a “hello” letter prior to the effective date; RESPA only mandates that the notice be sent out not more than 15 days after the effective date of the transfer. RESPA permits the transferor and transferee to issue a joint notice, which must be sent out at least 15 days prior to the effective date of the transfer. This may be an option to be considered. Additionally, the servicing rules require that payments be promptly credited.  [12 CFR 1024.33]

In February 2013, the CFPB issued a bulletin advising mortgage companies about the risks to consumers during the servicing transfer process. The CFPB reminded mortgage companies of their legal obligations with respect to protecting consumers during loan servicing transfer process. Among the complaints giving rise to the CFPB’s heightened scrutiny is service interruption when the loans are transferred during the loss mitigation process. In light of the number of homeowners that have been negatively impacted by servicing transfers, the CFPB is making servicing transfer related problems a focus of its supervisory activities.

The CFPB will assess the servicers’ policies, procedures, systems, and controls which address the risks to consumers in connection with servicing transfer. Among the areas highlighted by the CFPB as particular areas of concern are the following:

1. The transferor servicer’s plans in preparation for transfer, with an emphasis on the transfer of information to the transferee so as not to disrupt servicing to consumers.

2. The transferee’s plans for handling the files transferred to it, with an emphasis on the data transfer and the transferee’s verification of the accuracy of the information.

3. The transferor and transferee’s processes and procedures for dealing with loans in the process of loss mitigation so as avoid the negative effects servicing transfers often have on consumers in the midst of the process.  

With respect to servicers handling significant servicing transfers, in “appropriate cases”, the CFPB will require servicers to prepare and submit written plans to the CFPB detailing how they will manage the consumer risks associated with the transfers. [CFPB Bulletin 2013-01]

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Prefunding Quality Control Audits

QUESTION:
Our company recently commenced requiring prefunding quality control audits which requires substantial manpower. I have heard conflicting views on whether prefunding quality control audits are required by Fannie Mae and/or HUD. Can you clarify the prefunding requirement for me?

ANSWER:
HUD does not specifically require that prefunding audits be performed on FHA loans but it strongly suggests that prefunding reviews should be done. HUD's Handbook 4060.1 Rev-2 Section 7-5-B says, "mortgagees may want to sample cases prior to closing to evaluate the quality of processing and underwriting. Using such reviews, mortgagees may detect problems prior to closing while problems can still be corrected.”

As we all know, Fannie Mae requires prefunding reviews and they list the specific elements or audit steps that should be conducted. (And so does Freddie Mac.)

Even if your firm does not sell directly to Fannie Mae, it is still required to perform prefunding audits because its investors sell to Fannie Mae and the investors want their lenders to follow Fannie Mae guidelines. This is mandated because all the investors want the loans to be considered secondary marketable. Please check with your investors to confirm this requirement.

Lenders should perform prefunding audits, not just because it is a regulatory requirement, but because it is Best Practice. All lenders must have a strong system of internal controls to protect themselves. In any internal control system, there are primary control points and secondary control points. Primary control points are designed to prevent the problems or, in other words, find the problems before they occur. Prefunding Quality Control is an important primary control point. Secondary control points are designed to find the problems after they have occurred. Post-Closing Quality Control is a secondary control point. Any internal control system for any company in any industry should have a combination of primary and secondary controls.

Our quality control division has audited many Early Payment Default (EPD) loans through the years, and approximately one out of every 25 EPD loans audited, resulted in a finding that a borrower lost his or her job one to two weeks prior to loan closing. And of course the borrower failed to mention this to the lender, and therefore at closing, when the borrower signed the Final Application, s/he committed fraud - because by signing the Final Application the borrower is affirming that the information to originate the loan was true and correct. Approximately, 75% of the time these files did not have any evidence that a verbal verification of employment (VOE) was conducted a few days prior to closing. Had a verbal VOE been done, these EPDs would have been prevented.

Prefunding audits are important. If your firm is having trouble performing prefunding audits due to manpower, I would suggest that they consider outsourcing this task to us, Lenders Compliance Group.

Bruce Culp
Director/Loan Analytics & Quality Control
Lenders Compliance Group