HOEPA Loan Proceeds

QUESTION

We are a lender that originated a HOEPA loan. We were asked if we could make a payment to a contractor under a home improvement contract from HOEPA proceeds. Is that permissible?

ANSWER

A creditor may not pay a contractor under a home improvement contract from the proceeds of a HOEPA loan, other than:

1.     By an instrument payable to the consumer or jointly to the consumer and the contractor (and if there are multiple consumers who are primarily liable each must be named as payee); or

2.     At the election of the consumer, through a third-party escrow agent in accordance with the terms established in a written agreement signed by the consumer, the creditor, and the contractor prior to disbursement. [12 CFR § 226.34(a)(I); 12 CFR Supp. I to part 226 – Official Staff Commentary §226.34(a)(I)(i)-I]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

TRID Disclosure Delivery

QUESTION

We are currently establishing system protocols for recording confirmation of receipt of disclosure delivery when not provided in person. We are concerned about receiving actual confirmation of receipt of disclosures from the borrower more than 3 days after they are placed in the mail. Are we still able to rely on the “mailbox” rule and delivery 3 days after being placed in the mail or do we need to work off the date the consumer provides an actual, albeit unsolicited confirmation?

ANSWER

TRID relies on the mailbox rule for purposes of determining when disclosures delivered by mail or electronically are considered received by the consumer. Disclosures placed in the mail or delivered electronically are considered received 3 business days after delivery.

The Commentary to section 12 CFR 1026.19(1)(iv) regarding mail delivery provides that if any disclosures required under § 1026.19(e)(1)(i) are not provided to the consumer in person, the consumer is considered to have received the disclosures three business days after they are delivered or placed in the mail. The creditor may, alternatively, rely on evidence that the consumer received the disclosures earlier than three business days. For example, if the creditor sends the disclosures via overnight mail and the consumer signs for receipt of the overnight delivery, the creditor could demonstrate that the disclosures were received on the day of signature. Additional commentary addresses electronic delivery and is similar to the above Comment.

The Commentary suggests the mailbox rule would supersede confirmations received more than 3 business days after disclosures were mailed or delivered electronically. It is important to ensure that your policies and procedures state whether you employ the mailbox rule or actual consumer confirmation as your method for determining when disclosures are received by the consumer. Also, make sure your system of record accurately reflects the date disclosures are placed in the mail or delivered electronically. And if for some reason you also retain consumer confirmations received after the mailbox rule expiration period, document for purposes of disclosure timing that you relied on the mailbox rule and not the date of the confirmation.

Michael Goldhirsh

Executive Director/Vendors Compliance Group

Director/Legal & Regulatory Compliance
Lenders Compliance Group

Right of Rescission for Multiple Borrowers

QUESTION

We have some questions about rescission that seem to come up all the time. First, on which transactions are rescissions permitted? Second, when there are multiple borrowers, does each one have a right to rescind? And, third, do all the borrowers on a transaction have to exercise the right to rescind for the rescission to be valid?

ANSWER

These questions do seem to come up often. With certain exceptions, rescission does not affect a “residential mortgage transaction,” which is a transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract or equivalent consensual security interest is created or retained in a consumer’s principal dwelling to finance the acquisition or construction of the dwelling. [12 CFR § 226.2(a)(24)]

The “residential mortgage transaction” is exempt from the right to rescind. Also exempt are refinancings or consolidations by the same creditor of an extension of credit already secured by the consumer’s principal dwelling – except to the extent that the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and any amounts attributed solely to the costs of the refinancing or consolidation. In other words, this means that the right to rescind, in such situations, applies only to the extent by which the new amount financed exceeds the sum of the items noted.) [12 CFR §§ 226.23(a)(1), (f), (l)]

If there are multiple consumers to a transaction, each consumer whose ownership interest in the property is or will be subject to the security interest has the fight to rescind. But, when more than one consumer has the right to rescind, any one of them may exercise that right and cancel the transaction, which is effective for all the consumers. [12 CFR § 226.23(a)(4)]

Jonathan Foxx

President & Managing Director 

Lenders Compliance Group

TRID Penalties

QUESTION: 

What are the potential consequences if I fail to comply with TRID?

ANSWER:

The penalties for closing even a single loan in violation of the TILA-RESPA Integrated Disclosure (TRID) regulations can far outweigh any costs incurred in ensuring compliance with the new requirements. By delaying or skimping on effective implementation of policies, processes, and training of personnel in the specifics of the new requirements, you may be inviting a “bet the bank” disaster.

Enforcement Authority Given to the CFPB

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Act) gave the Consumer Financial Protection Bureau (CFPB) broad authority to enforce compliance with nearly all federal consumer finance statutes. (12 U.S. Code § 5581). As a result, the Act arms the CFPB with a number of tools to ensure protection from violations of TRID by anyone engaged in the provision or offering of consumer financial products or services.

The Act also prohibits actions by any “related person” violating consumer products, including:

1. any director, officer, or employee charged with managerial responsibility for, or controlling shareholder of, or agent for, such covered person;
2. any shareholder, consultant, joint venture partner, or other person, as determined by the Bureau (by rule or on a case-by-case basis) who materially participates in the conduct of the affairs of such covered person; and
3. any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in any -
1. violation of any provision of law or regulation; or
2. breach of a fiduciary duty. 

These tools include civil penalties, actions for damages, restitution, injunctive relief, and, more recently, the provision of a private right of action by consumers directly against violators. [12 U.S. Code § 5565.  Enforcement of TRID includes private right of action provisions granted under TILA (Regulation Z)]

Penalties

The Act mandates that any person that violates, through any act or omission, any provision of Federal consumer financial law penalties set out in three separate tiers:

• First tier

For any violation of a law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues.

•  Second tier

For any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues.

•  Third tier

For any person that knowingly violates a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues. [12 U.S.C. § 5565(c)(2)]

Mitigating Factors

Perhaps some comfort for smaller institutions may be found in a number of mitigating factors that the CFPB must take into account in determining the appropriateness of the penalty, including:

• the size of financial resources and good faith of the person charged;
• the gravity of the violation or failure to pay;
• the severity of the risks to or losses of the consumer, which may take into account the number of products or services sold or provided;
• the history of previous violations; and
• such other matters as justice may require. [12 U.S.C. § 5565(c)(3)] 

However, these factors should not be relied upon as protection from the extremely punitive enforcement potential for failure to comply with TRID and other federal financial consumer protection laws and regulations. Only through complete preparation and flawless implementation and performance of the TRID requirements may lenders, brokers and others related to the provision of consumer financial products and services ensure such penalties will not be levied.

Brennan Holland

Director/Legal & Regulatory Compliance 

Lenders Compliance Group